Subject: [NEXTEL-1] Telecommunications Development Fund- FCC Chairman Michael Powell runs venture capital firm that claims its private

From: [email-masked]
Date: Thu, 19 Jun 2003 16:14:19 -0400

June 19, 2003

The FCC's Strange Non-Profit
FCC Chairman Michael Powell
runs venture capital firm that
claims it's private

By Bob Williams

WASHINGTON, 6/18/2003 &mdash; A
quasi-governmental corporation set up
to fund telecommunications company
start-ups is spending nearly as much on
executive salaries and overhead as it is investing in companies, a
Center for Public Integrity investigation has found.

The Telecommunications Development Fund was created by
Congress in 1996 to kick-start small communications firms in
hopes of spurring innovation and competition. Instead, the
six-year-old fund has paid more than $7 million in executive
salaries and other expenses while investing only $9.4 million of
seed money in start-ups.

"It may be totally legal, but it smells to high heaven," says Stuart
Gilman, president of the Ethics Resource Center, a Washington
group that advises businesses and non-profits on ethics issues.
Gilman was a top official at the federal government's Office of
Government Ethics from 1988 to 2001.

The fund itself is the bizarre offspring of government and industry.
There's even dispute among government officials as to whether it
is a government entity subject to public scrutiny or a private
company.

The fund gets its money from interest on deposits paid by large
telecommunications companies that bid for licenses in spectrum
auctions.

There are a number of reasons why the fund is the subject of
some concern:

FCC Chairman Michael Powell appointed himself to the
board, raising questions as to whether it is a good idea to
put the top FCC regulator in charge of a venture capital
fund in the same industry he regulates.

The fund's CEO, who earned $245,000 in 2001, was
involved in the John Huang China-gate campaign finance
scandal during the Clinton administration.

The fund, which considers itself a private entity, actively
lobbies Congress for money.

Despite owing its existence to federal legislation and
auctions on the publicly owned spectrum, there is virtually
no public oversight of its activities.

Created in 1996

TDF was actually a creation of Congress, authorized by a
last minute addition to the Telecommunications Act of 1996.
That legislation established TDF and funded it on an
ongoing basis with the interest on up-front deposits paid by
telecommunications companies participating in FCC
spectrum auctions. Those auctions sometimes involve
billions of dollars; the deposits can earn millions in interest.

Under its congressional mandate, the board of the fund is
supposed to include a representative each from the FCC,
the Department of the Treasury and the Small Business
Administration, as well as four members from the private
sector.

The Treasury Department seat has been vacant since
January 2001. The SBA seat was also vacant from January
2001 through September 2002, meaning that during that
time Powell was the only public sector representative on the
board.

Powell recuses himself
from receiving any specific
information on investments
by the fund due to
concerns about a possible
conflict of interest. That
means the fund was
effectively operating
without any public
oversight of its investment
decisions for the first 20
months of the George W.
Bush administration.

Critics say the fund lacks any of the independent oversight
that would normally be expected for an organization created
and bankrolled by the federal government. They also say
Powell potentially could be engaging in a gross conflict of
interest, even if his actions in operating the fund fall within
the specific letter of the law, since the fund invests in
companies that the FCC regulates.

"This is clearly Michael Powell's show, plain and simple,"
said Gilman, of the Ethics Resource Center. "There is no
independent oversight. It smacks of conflict of interest at
almost every turn."

Powell did not respond to repeated requests to be
interviewed for this report, but Jane Mago, the head of the
FCC's Office of Strategic Planning and Policy Analysis,
says she doesn't "have any qualms about the way that TDF
is operating in any way, shape or form."

Mago says she attends most of TDF's board meetings
instead of Powell and reports back to him about what takes
place.

She says she has no worries about a conflict of interest,
even though Powell can appoint all the board members and
the companies being invested in are all in the
communications business, which is regulated by the FCC.

"The chairman is not in charge of making any of the specific
investment decisions," Mago said. "We've specifically
removed ourselves from that and don't have any ability to
affect the investments one way or another."

Instead, she says, she and Powell receive "generic"
information about specific investments from the fund's
management. She and Powell concentrate their efforts on
making sure TDF operates within the letter of the legislation
that created it, Mago says.

Some of the companies in which TDF has invested are
listed on the fund's Web site, complete with a link to their
Web sites.

Public or private?

From its beginning in 1996, the fund and its supporters have
had a hard time figuring out if the organization is a
government or a private entity.

Though TDF claims it is a completely private corporation,
officials from the FCC, the Small Business Administration
and the Treasury Department have sat on its board of
directors. Federal statutes prohibit sitting government
officials from serving on corporate boards. Violations of
those rules can carry a penalty of as much as five years in
jail and $50,000 in fines for each count.

Yet in some ways, TDF acts more like a private entity than a
part of the government. For example, it has hired two
different Washington firms to lobby Congress on its behalf.

TDF officials say their source of funding comes from the
private sector, since the interest money they receive on the
FCC auction deposits are paid to the fund by a bank.

Gilman, the ethics expert, says that argument strains
credulity.

"It's somebody's money before it goes to the fund," says
Gilman. "I believe it is clearly taxpayer money, no matter
what loophole they might have come up with."

TDF incorporated in 1997 in the District of Columbia as a
non-profit, tax exempt organization under Section 501 C (4)
of the IRS code, which is supposed to cover entities with a
"social welfare" purpose. For example, volunteer fire
departments regularly use that section of the tax code to
qualify for tax exempt status.

TDF reincorporated in Delaware in 2001.

The fund maintains its main office in Washington, but also
has a satellite office in Chicago.

TDF Chief Executive Officer Ginger Lew contends the fund
is private because it does not receive appropriations
directly from Congress.

"We don't receive any taxpayer funds," says Lew. "The
interest is paid directly from Mellon Bank. It's coming out of
Mellon Bank's account."

Mago says TDF is, in fact, a "quasi-government" agency,
with parts that are public and other parts that are private.

"There is a statute that tells us what it is we are supposed to
be doing," says Mago. "They (Congress) wanted them to
make private investment decisions, like a venture capital
organization. That is exactly what the group is."

But according to the U.S. Department of Justice, the fund is
a government entity; it is not a private corporation, as TDF
officials contend.

Soon after TDF was created by Congress in 1996, then
FCC Chairman Reed Hundt asked the Justice Department if
he could legally appoint the agency's general counsel to
serve on the fund's board of directors.

In an opinion issued in June 1997 the Justice Department
said the appointment would be legal because TDF was "a
federal government entity."

"TDF is a non-profit entity wholly owned by the federal
government," said the opinion. "It also receives the vast
majority of its funds from the federal government, although
not from yearly appropriations. Its policy and operations will
be governed by directors appointed by the FCC Chairman."
See the entire Justice Department opinion.

Officials at the General Accounting Office, the investigative
arm of Congress, say they have never conducted any sort of
study of the fund.

But legal experts say TDF cannot be both a government
entity and a private corporation.

"They seem to be cherry picking the best parts of being
public and being private," said Nell Minow, editor of The
Corporate Library, a business accountability group. "They
cannot just be a government entity when it serves their
purposes and then turn around and be a private corporation
when they want to do something else."

Why Does TDF Claim to be Private?

Lew, the TDF CEO, runs the fund's day-to-day operations.

She often says that TDF is a completely private corporation.

In February 2002, she told Telecommunications Reports
"One of the things that has made TDF successful is that we'
re a private company with private money and we have no
connection to the government."

She then went on to explain one reason why it was so
important for TDF to maintain it is a private corporation.

"If you invest with public money, you have the issue of how
much information has to be disclosed about your
technology," she told Telecommunications Reports. "If you'
re working on some patent pending technology, the last thing
you want to do is disclose publicly any information about it
because it would be a huge competitive disadvantage."

Washington attorney Robert Schwaninger is general counsel
to a telecom industry group called Small Business in
Telecommunications. He says the argument that TDF is a
private corporation is dubious, at best.

"The TDF has claimed to be a private corporation, but that is
impossible," said Schwaninger. "Not only does the Justice
Department disagree, but it does not fulfill any of the
qualifications for being considered private."

He points out that TDF has gotten all of its funding from the
government, even if it isn't part of a yearly appropriation; its
entire board is appointed by the FCC chairman; and it has
no shareholders.

Another reason TDF might want to claim it is private is to get
around government salary rules.

For example, Lew drew a salary of $245,057 in 2001, the
latest year for which the company has filed its income tax
return. She also received another $16,112 in retirement fund
payments.

That is more than double the $115,700 she was making
when she left the U.S. Small Business Administration to
become CEO of the fund in 1998.

Put another way, Lew's 2001 salary was 58 percent more
than the salary of a current member of Congress, which is
$154,700.

And Lew is not the only employee of the fund who made
more in 2001 than current members of Congress.

Chief Investment Officer Darrell Williams made $205,000.
Vice President Charles Ross made $185,000. In addition,
the fund set up a satellite office in Chicago for Williams so
he could continue to live there. He commutes to Washington
every couple of weeks.

Neither Powell nor any of the other five current members of
the TDF board receive a salary.

Congressional "Father" of TDF is
Disappointed

The congressman who conceived and championed TDF
says he is extremely disappointed with how it has turned out.

Rep. Edolphus Towns, a Democrat from Brooklyn, N.Y.,
says he pushed through the legislation forming TDF in
hopes it would primarily provide loans to small and
disadvantaged entrepreneurs trying to break into the
telecommunications industry. See the legislation that
created TDF.

Even though it has an estimated $50 million, TDF does not
make loans. In fact, the fund tells businesses who ask about
a loan to see their banker.

Instead, TDF functions like most venture capital funds. It
gives money to companies in exchange for an equity
position. Like most venture capital funds, TDF demands a
seat on the company's board and offers advice on how it
should be run.

Lew says TDF has invested in 12 companies, although the
fund declines to provide any specific figures on its
investments. More information on the companies TDF has
invested in.

One of the companies TDF has invested in, newMedia
Technologies Inc., is owned by former National Basketball
Association stars Charles Smith and Rolando Blackman.

On its Web site TDF says newMediaTechnologies "markets
its products and services to broadcasters, sports teams and
other entities with a need to effectively capture, catalogue,
store, retrieve, send and otherwise manage digital
content-primarily video."

When asked about the newMedia investment, Mago said
she could not comment.

"We were simply not involved in that decision," she said.

Judging from its financial disclosures, TDF is not a
particularly efficient venture capital firm.

Since it began operations in 1998 through the end of 2001,
the fund spent $7.25 million in salaries and other
administrative costs, while investing $9.4 million in seven
companies.

TDF says it makes initial investments of $375,000 to $1
million, and then may provide additional funding in
subsequent years. The fund doesn't disclose exactly how
much it has invested in each of the companies in its portfolio
or whether those companies have made any money. Lew
told the Center that none of the companies TDF has
invested in have ever turned a profit.

Towns says his original concept for the fund was for it to be
a private entity, separate from the FCC, even though it would
be under the control of the FCC chairman. He also says he
envisioned the fund would be able to make loans to small
businesses owned by women and minorities, not just act as
a venture capital firm.

"Yes, I wanted something private," said Towns. "The money
came from the interest on the deposits from the spectrum
auctions, which wasn't being used at the time. I didn't want
the fund to be part of the FCC."

Towns says there have been major problems with TDF, in no
small part due to its desire to function as a private
corporation. He says he has floated the idea of making
some technical corrections to the legislation that created
TDF-including changes that might allow the fund to more
easily make loans-but fund officials have asked him not to.

In addition, Towns said he would like to get more money to
TDF by tapping into the actual spectrum auction funds,
rather than just the interest. But he said that would open the
fund up to a whole new level of scrutiny that he and fund
officials want to avoid.

"If the language is changed, then they are required to follow
all of the other government rules," said Towns. "There were
obviously some errors in the drafting of the bill and I want to
correct them-spell things out a little better. But I am really
backed into a corner."

Lew confirms that she does not want to become a part of the
congressional appropriation process.

"We can accomplish our mission through the funding
mechanism that was established," says Lew. "In this day and
age, there is more than enough competition for funds that
are appropriated. In this day and age, would you like to try
and get an appropriation?"

She says the goal and focus of TDF is to make investments
in small telecommunications and "not to spend time on the
Hill."

Both TDF CEO Lew and Chief Investment Officer Darrell
Williams have made political contributions to Towns in
recent years.

Lew has contributed a total of $2,000 since 2001. Williams
has also contributed $2,000 to Towns, all of it in 2002.

TDF Board Chairman W. Don Cornwell gave Towns $500 in
1994. TDF Board Member Thomas Hart gave Towns $250
in 1997.

Lew Was Implicated in China Gate
scandal

Prior to joining TDF, Lew was Chief Operating Officer of the
U.S. Small Business Administration, where she provided
day-to-day management and oversight of the agency's $42
billion loan portfolio. Before joining SBA, Lew served as the
general counsel at the U.S. Department of Commerce.

Lew left the Commerce Department following the death of
Commerce Secretary Ron Brown in a plane crash in April
1996.

She was subsequently caught up in the 1996 political
fundraising scandals.

She was identified by the FBI as a confidant of John Huang,
a former Commerce official and Democratic National
Committee fund raiser who was at the center of the
investigation. The scandal involved allegations that the
Clinton administration used trade missions to help raise
Democratic campaign contributions.

The investigation revealed that Lew's confidential assistant
at Commerce, Ira Sockowitz, removed classified documents
involved in the investigation from a safe in her former office
at the Commerce Department. Those documents later
turned up in a safe at SBA.

In a deposition in a lawsuit brought by watchdog group
Judicial Watch, Lew said she was unaware that the
documents had been moved.

Lew says she finds questions about her involvement in the
scandal "kind of amusing."

"Huang and I worked at Commerce, which had thousands of
employees," she said. "We never worked together. I think
that whole thing was pretty bogus from the beginning."

No Small Business Representatives

Despite the fact that it was formed by Congress to help
small businesses, there are no representatives of small
business on the fund's board of directors, management or
its advisory board.

Chief Investment Officer Darrell A. Williams and Vice
President Charles E. Ross, who along with Lew appear to
handle the lion's share of the fund's investment decisions,
both came from Ameritech, a huge telecommunications
company. See the biographies of TDF employees.

Besides Powell, the board of directors includes W. Don
Cornwell, chairman and CEO of Granite Broadcasting, a
$194 million broadcasting conglomerate based in New
York.

Also on the board is Debra L. Lee, President and Chief
Operating Officer of BET Holdings Inc., a multimedia
entertainment corporation and the parent company for Black
Entertainment Television; Richard L. Fields, Managing
Director of Allen & Company Inc., an investment banking
firm; and Thomas A. Hart, Jr., an attorney with Shook, Hardy
& Bacon. See the biographies of TDF Board of Directors.

Towns says Hart worked closely with him in drafting the
legislative language that created the fund and helped to
push it through Congress. In addition, Shook, Hardy &
Bacon was hired to lobby Congress on behalf of the fund,
although Hart's name does not appear on lobbyist
registration forms.

In 2001, Hart's firm disclosed that TDF paid it $20,000 to
lobby Congress for the six month period from January 1 to
June 30 of that year. The firm "assisted client in drafting and
introducing legislation to obtain a minor, technical
amendment to its enabling statute," that would direct
additional money to the fund. The disclosure notes that
"Congressman Edolphus Towns (D-NY) introduced the
legislation on May 3, 2001," and adds that Shook, Hardy
"assisted in efforts to move the legislation to passage."

On the disclosure form, the firm noted one contact with a
member of Congress: Towns.

TDF's advisory board is made up entirely of executives from
such large companies as Verizon, AOL Time Warner and
Goldman Sachs. See the biographies of TDF advisory
board.

Schwaninger, the small business association general
counsel, says the lack of small business representative
among TDF's board of directors and board of advisors is
inexcusable.

"To appreciate the needs of small business from a practical
perspective, the TDF requires someone on its board that will
act as an advocate for the very group it was formed to help,"
said Schwaninger.

"The private sector representation on the board lacks that
input or voice," he said. "Let's face it, the private members of
the board aren't exactly struggling to pay their bills. They
represent the wealthiest segment of society."

------------------------ Yahoo! Groups Sponsor ---------------------~-->
Wireless Video Surveillance
http://us.click.yahoo.com/jWIEhC/90OGAA/ySSFAA/61FxlB/TM
---------------------------------------------------------------------~->

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/

---

From: [email-masked]
Date: Thu, 19 Jun 2003 18:50:09 -0400

> salaries and other expenses while investing only $9.4 million of

Hmmm $1.16 Million in salaries per year  

They gave just  a $1.5 M per year.

> telecommunications companies that bid for licenses in spectrum

I wonder what the did with the interest from the Nextwave money auction.
They returned the principle but what about the interest?