By Aaron Pressman
October 19, 2017

The U.S. Federal Communications Commission is under fire for letting Verizon get off easy by settling a high-profile over-billing investigation.

FCC chairman and former Verizon lawyer Ajit Pai agreed to close the case with the carrier repaying $17 million to the government’s E-rate program that subsidizes Internet connections for schools and libraries. Though the FCC won’t publicly explain how the amount was calculated, it relates to excess payments Verizon received under the program in New York City schools thanks to a crooked consultant who was later imprisoned for fraud and theft. Verizon says it wasn’t aware of the fraud but concedes that it received some payments “in error.”

While Pai also had the support of fellow Republican commissioner Michael O’Rielly for the $17 million deal, Democrat Mignon Clyburn voted against the settlement in May (although the decision was not made public until this week). Based on prior settlements by the FCC, Clyburn says Verizon should have returned at least $50 million it was previously paid in New York City from the E-rate program, which is funded from universal service charges on consumer phone bills.

“When faced with an egregious set of facts that causes over $50 million of harm to the universal service fund, the Commission is content to settle for a fraction of that harm and imposes no penalty whatsoever,” Clyburn wrote in a dissent from the settlement. “This is a missed opportunity and a waste of consumer dollars.”

Pai defended the Verizon settlement as “an important measure that both enforces our rules and restores critical taxpayer dollars to the Universal Service Fund.” And in addition to the $17 million, Verizon also agreed to forgo rights it may have had to seek more than another $100 million in new reimbursements from the E-rate fund, Pai’s office noted.

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The Trump-appointed chairman says his predecessor, Democrat Tom Wheeler, oversaw negotiations with Verizon and Clyburn didn’t object last year when she was initially briefed on the settlement. “If the terms of a settlement that were just fine under a Democratic chair are now unacceptable under a Republican chair, FCC enforcement becomes little more than political caprice,” Pai said in a statement.

Clyburn’s office said the settlement was not finalized until 2017 under Pai. And Clyburn sought to alter the deal earlier this year after seeing a draft text. “She negotiated in good faith and was told that no modifications would be made,” a spokesman said.

In criticizing the Verizon settlement, Clyburn pointed to a case last year under former chairman Wheeler involving fraud by a small company called Total Call Mobile that collected $39 million from the universal service fund. At the time, Pai dissented from an FCC order seeking $51 million from Total Call and said $84 million would be an appropriate penalty.

“The Commission proposes a forfeiture of only $51,070,322,16 which is not even a third more than the $38,933,139 that Total Call Mobile has collected from the Universal Service Fund since its misdeeds were exposed by USAC,” Pai wrote in an April, 2016, dissent. “That’s hardly the type of justice the American people deserve given the sheer magnitude of misconduct at issue, and I accordingly dissent in part.”

The commission ultimately settled for $30 million.

Long-Running Fraud

The Verizon E-rate payments go back over a decade to when consultant Willard “Ross” Lanham oversaw the New York City Department of Education’s “Project Connect,” an effort to wire hundreds of public schools with high speed Internet connections with E-rate funds. Instead of helping the country’s largest school district install broadband for the lowest cost, from 2002 to 2008, Lanham padded his own pockets. The consultant was convicted of stealing $1.7 million through inflated invoices, which he spent on luxury cars and Long Island real estate, while secretly favoring Verizon and undermining the competitive bidding process required by E-rate rules.

After being found guilty in a 2012 jury trial on theft and mail fraud charges, Lanham was sentenced to three years in prison.

Verizon (vz) says it didn’t know about Lanham’s fraud and notified an FCC program administrator more than 10 years ago that it had received some E-rate funding in error. “Like the New York school system, Verizon was a victim of that fraud and five years ago helped to convict Lanham,” a spokesman for the carrier said. “The jury agreed that Lanham lied to Verizon to conceal his fraud.”

But an earlier 2011 New York City investigation of the incident, which included interviews with multiple Verizon officials who worked on the E-rate project, put more of the blame on the carrier and another contractor, IBM. According to the investigation, Lanham demanded that Verizon use a firm called Custom Computer Specialists, or CCS, for part of the New York City work or he would reduce the carrier’s role in the project. Verizon went along, even though it could have done the work for less, but did not know that CCS had hired consultants who worked for Lanham as part of a scheme to skim money off the project.

“IBM and Verizon, by their silence, facilitated this fraud,” Richard Condon, special commissioner of investigation for the city’s schools, concluded in the report. “Verizon concealed from the (Department of Education) and law enforcement that they got millions of dollars in contracts through Lanham only after agreeing to hire CCS as a subcontractor.”

Verizon says it doesn’t agree with Condon’s findings, pointing to testimony that came out at the subsequent criminal trial. “Nearly a decade of investigation and Lanham’s trial have shown that Verizon was not responsible for Lanham’s fraud,” a spokesman says.

New York City settled with the FCC in 2015, agreeing to repay $3 million, forgo pursuing $120 million of pending E-rate reimbursement requests, and implement safeguards to prevent future abuses. The city has received a total of more than $1.3 billion from the E-rate fund since 1998.

As part of Verizon’s settlement it is also paying about $355,000 to the U.S. Treasury and withdrawing a challenge to the FCC-New York City agreement while the Justice Department will end a False Claims Act investigation.

FCC chairman Pai worked for the Justice Department on telecommunication issues in the late 1990s, when the E-rate program was being developed, and then served as associate general counsel at Verizon from 2001 to 2003 working on regulatory issues. Pai never worked on E-rate matters at those jobs, his spokesperson said. He later worked on Capitol Hill and at the FCC, before being appointed as a commissioner in 2012.

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