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Published in Print: June 9, 2004, as Company Pleads Guilty To E-Rate Abuses

Company Pleads Guilty To E-Rate Abuses

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A U.S. affiliate of Tokyo-based NEC Corp. has pleaded guilty to abuses of the federal E-rate program, including a canceled project to give needy students in San Francisco access to the Internet. The company agreed to pay the government $20.6 million in criminal and civil penalties. The wrongdoing allegedly involved numerous other companies and consultants still under investigation.

In the plea deal with the U.S. Department of Justice, NEC Business Network Solutions Inc.—an Irving, Texas-based subsidiary of NEC America Inc.—also accepted responsibility for violating federal antitrust laws by allocating contracts to avert competition and rigging bids for E-rate projects in five different school districts in Arkansas, Michigan, South Carolina, and Wisconsin.

"We’ve made mistakes with the E-rate," Gerald P. Kenney, a lawyer for NEC America, said in a statement. "We’ve acknowledged and accepted responsibility for those mistakes, cooperated fully with the government, and taken action to ensure that those problems can’t happen again."

The Business Network Solutions division, which has since been renamed NEC Unified Solutions Inc., has worked on about 40 E-rate projects, according to the company.

Even with the settlement late last month, the case is certain to be examined as part of an ongoing congressional probe of waste, fraud, and abuse in the E-rate program, which Congress passed as part of the Telecommunications Act of 1996. The program has awarded a total of more than $8 billion for telecommunications services and equipment in schools and libraries. The money is raised from a surcharge on telephone services.

The investigations subcommittee of the Energy and Commerce Committee of the U.S. House of Representatives probably will hold hearings on the E-rate within the next few weeks, according to a committee aide.

Although the E-rate has been hailed for providing Internet access and telecommunications services for many classrooms that otherwise would not have such access, some projects have raised questions about the management of the program. The Federal Communications Commission oversees the program, which is administered by the nonprofit Universal Services Administrative Co. ("E-Rate Audits Expose Abuses in the Program," Feb. 12, 2003.)

Last year, for instance, two executives of New York City-based Connect2 Internet Networks Inc. were convicted of fraud in providing E-rate- financed Internet services to schools; those executives have been prohibited from taking part in the program for three years.

Last month, The Atlanta Journal-Constitution reported that the Atlanta public school system, using E-rate funds, has bought more equipment than it needed, overpaid for goods and services, and maintained vague or incomplete records on its E-rate projects.

The 51,000-student district is currently conducting an internal audit of its E-rate projects, which federal officials will examine as they consider the district’s request for $20.4 million in E-rate money for the 2004- 05 school year, according to Mel Blackwell, a spokesman for the Universal Services Administrative Co.

Mr. Blackwell said the Connect2 convictions and the NEC settlement show that the systems to provide "oversight and program integrity of the E-rate" are effective.

"Although with some of these things, once you get to law enforcement, they take longer than you would like, the result is good," he said. "We are happy to see the [NEC] case solved."

Spotting Red Flags

In announcing the settlement with NEC Business Network Solutions on May 27, Justice Department officials said the company has been charged with wire fraud by "entering into a scheme to defraud the E-rate program and the San Francisco Unified School District by inflating bids, agreeing to submit false and fraudulent documents to hide the fact that it planned on installing ineligible items, agreeing to donate ‘free’ items that it planned to bill E-rate for, and submitting false and fraudulent documents to defeat inquiry into the legitimacy of the funding request."

"This conduct deprived the E-rate program of fair and competitive prices, caused the program to pay for unnecessary and ineligible items, and as a result, prevented the funding of projects at other needy schools," R. Hewitt Pate, the assistant U.S. attorney general in charge of the antitrust division of the Justice Department, said in a statement.

The 60,000-student San Francisco schools will receive $3.3 million of the fine for alerting authorities to the abuses.

Arlene Ackerman

"I absolutely feel vindicated," said district Superintendent Arlene Ackerman, who helped initiate the three-year investigation by federal and local law-enforcement agencies. "I feel I did the right thing."

In 2000, when Ms. Ackerman had just arrived in San Francisco, she halted the district’s largest E-rate project, forgoing $48 million in federal money, because of "red flags" she saw—notably millions of dollars in unanticipated costs that the district was expected to cover.

"There were serious questions [that] I saw when I looked at the [district’s E-rate] application; it didn’t even describe San Francisco," she said in an interview last week.

At the time, she was criticized for passing up resources needed by San Francisco students.

Ms. Ackerman overhauled the district’s facilities department, where the E-rate project was organized, and fired two school officials who were involved in the project. Both were subsequently convicted of related crimes.

Vol. 23, Issue 39, Page 3

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