Subject: [NEXTEL-1] Watchdog Group Takes FCC, Powell To Task

From: [email-masked]
Date: Fri, 27 Jun 2003 13:03:55 -0400

Watchdog Group Takes FCC, Powell To Task

Jun 23, 2003

Charges Involvement In Telecom
Development Fund Is Conflict Of Interest

A new report from the Washington, D.C.-based Center for Public Integrity (CPI)
raises serious questions about the FCC's participation in and oversight of the
Telecommunications Development Fund (TDF), a non-profit quasi-governmental entity
that serves as a source of venture capital for start-up telecom businesses.  But
FCC officials as well as congressional sources who closely follow the TDF,
staunchly defend the TDF and its management.

The Center's report on the TDF's activities is rife with suggestions of
impropriety and possible conflicts of interest. In fact, some observers believe
the report could spark a full-blown congressional investigation. If that happens,
it certainly will not be the first time a CPI report so inspired federal lawmakers
to action.

Earlier this year a CPI report on fraud in the FCC's E-Rate Program prompted
congressional hearings on the subject. More recently, a CPI probe of private
funding for FCC travel led to Sen. John McCain (R-Ariz.) introducing legislation
that would ban the practice.

As the report's author, Bob Williams, points out in the document, the TDF was
created by Congress in 1996 as part of the Telecommunications Act. The measure was
intended to help small communications firms with start-up costs. The idea was to
spur 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," Williams wrote.

The TDF receives its funding from interest paid on deposits that telecom firms
make to the FCC in connection with their participation in spectrum auctions. And
those interest payments are substantial in that a spectrum auction can - and
sometimes does - generate billions of dollars. For example, one broadband PCS
auction, which began Dec. 12, 1994, and ended March 13, 1995, generated nearly $8
billion. The simple interest paid on the deposits in that one auction likely would
have amounted to many millions of dollars.

With so much money at stake, CPI's Williams is concerned about who's minding the
store at TDF.
'Stumbling Along Foolishly'

The authorizing language of the Telecom Act dealing with the TDF requires the
fund's board to include a representative from the FCC, the Treasury Department,
the Small Business Administration (SBA), and four members from the private sector.
But as Williams noted, the Treasury Department seat has been vacant since January
2001.

The SBA seat was vacant from January 2001 through September 2002, "meaning that
[FCC Chairman Michael] Powell was the only public sector representative on the
board," Williams said. "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."
Well, not really, TDF spokesman Frank Howard tells TPR. In fact, he thinks CPI's
report is heavily laced with innuendoes, if not downright falsities.

"They [CPI] would have you believe that we've just been stumbling along, foolishly
squandering money, and getting virtually nothing accomplished. And they would have
you believe that all of that has been going on without any public oversight.  That
simply isn't true," Howard said.

Howard and other proponents of the TDF point out that the CPI report's implied
allegation of financial squandering is, at best, a gross exaggeration. It took a
couple of years to get the TDF up and running, to staff it with full-time
employees, and to put its government/private sector board in place. During its
start-up phase, the TDF also embarked on a lengthy due diligence study to
determine where best to focus its efforts and what other funding sources might b
available to help it complete its mission. The fund didn't actually begin
functioning as intended until it was nearing its third year anniversary.

Even so, Williams' report questions the actions of FCC Chairman Powell who, upon
ascending to the chairmanship, appointed himself to the TDF board. CPI says that
decision raises 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 is supposed
to be regulating. But Howard and FCC spokesman David Fiske note that Powell really
didn't have much choice in the matter. Powell's reading of the Telecom Act led him
to believe that he - or his designated representative - is supposed to be on the
board.

As it turns out, Powell has never actually attended a single TDF board meeting.
His designated representative, Jane Mago, former FCC general council and now head
of the agency's Office of Strategic Planning and Policy Analysis, attends the
meetings and then promptly provides Powell with a detailed rundown of what takes
place at them.

In Defense Of The FCC

Fiske told TPR that Mago spent the better part of an hour talking with Williams,
and that interview is in fact reflected in the CPI report. Mago made clear that
neither she nor Powell are concerned about possible perceptions of conflicts of
interest. But the CPI report would not leave the issue alone. Its clear
implication is that a conflict exists inasmuch as Powell appoints all the board
members, and the companies in which the TDF invests are all in the communications
business, which is regulated by the FCC. Fiske notes that there is no conflict
because that is exactly what the Telecom Act requires.

Mago told Williams that Powell is not in charge of making any of the specific
investment decisions, and that the FCC has not involved itself in any way that
would or could affect the TDF investments. The chairman does, however, receive
regular updates from the TDF's management team as to what investments are being
made. But the purpose of those reports, Fiske said, is to help ensure that the TDF
is being administered in accordance with federal law.

CPI appears particularly interested in the TDF's administration, and the report
focuses a good deal of attention on the TDF's chief executive, Ginger Lew, the
former chief operating officer of the Small Business Administration (SBA). But
before joining SBA, Lew served as the general counsel at the Department of
Commerce. And it is that part of her resume that appears to most interest CPI.

Lew left Commerce following the death of then-Commerce Secretary Ron Brown, who
was killed in a plane crash in April 1996. Nevertheless, she briefly found herself
embroiled in the 1996 political fundraising scandal linked to the Clinton
Administration. An FBI probe of the affair identified her as a close associate of
John Huang, a former Commerce official and Democratic National Committee
fundraiser who was a target of the investigation. At issue in the probe were
allegations that the Clinton White House used trade missions to help raise
Democratic campaign donations.

Among the investigation's subsequent revelations was that Lew's confidential
assistant at Commerce, Ira Sockowitz, had removed classified documents about the
investigation from a safe in Lew's former office. Those same documents later
turned up in a safe at SBA. Lew later swore under oath that she was unaware the
documents had been removed.

What the CPI report does not say is that John Huang in August 1999 pled guilty to
a felony violation of campaign finance laws. Huang, who had been cooperating with
the FBI and prosecutors, was sentenced to one year of probation, 500 hours of
community service, a $10,000 fine and directed by the judge to continue
cooperating with the investigation as a condition of his probation.

Huang was one of 19 people prosecuted by the Campaign Financing Task Force, which
was established by then-Attorney General Janet Reno to investigate allegations of
campaign financing abuses in the 1996 election cycle. He pled guilty to charges,
filed in U.S. District Court in Los Angeles, that the former executive of the
Jakarta, Indonesia-based Lippo Group conglomerate conspired with other employees
to defraud the Federal Elections Commission by causing fellow employees to make
campaign contributions and reimbursing the employees with corporate funds or with
funds from Jakarta.

The conspiracy lasted from about 1992 through June 1994. During that period, the
conspirators engaged in numerous acts to further the conspiracy. As for Huang's
role, the government alleged that he was responsible for arranging approximately
$156,000 in illegal campaign contributions from the Lippo Group overseas to
various Democratic and Republican political committees.

Beyond being his associate at Commerce, Lew was not entangled in Huang's web of
fraud and deceit, a critical piece of information that CPI neglected to include in
its report.

A Question Of Public Oversight

CPI charges that there is no public oversight of the fund. However, Howard
strongly rebuts that contention, and points to the TDF's annual reports, which are
routinely posted on the Web and include the findings of the fund's independent
auditors. In fact, in its 2001 annual report - which was made public a year ago
this month - TDF said its accountants, PriceWaterhouseCoopers, found the fund
"compliant in all respects and accepted the financials without change."
Howard said the 2002 annual report, which is only now being completed, will soon
be posted on the Web - probably by the end of this month or in early July.

CPI also took issue with TDF's status. Lew apparently has, in the past, told
reporters that the TDF is a private, non-governmental entity. And in fact the TDF
has been granted non-profit status by the Internal Revenue Service.
Indeed, according to the fund's own records, TDF incorporated in 1998 as a private
"C" corporation in the District of Columbia and subsequently received a ruling
from the IRS recognizing it as a 501(c)(4) tax-exempt corporation. After receiving
the IRS ruling, TDF was also recognized as a tax-exempt corporation by the
District of Columbia. In 2001, TDF re-incorporated in the state of Delaware.

In this regard, it would appear that CPI's questions about the propriety of having
federal employees sitting on TDF's board are, at a minimum, reasonable.

Nevertheless, TDF is a creation of a federal law. And the law requires that the
TDF have a seven-member board of directors appointed by the chairman of the FCC.
By statute, the TDF board consists of four private-sector members and three
public-sector members representing the FCC, the Small Business Administration and
the Department of the Treasury, respectively. Members of the board serve for
five-year terms. It may be that the time has come for Congress to reassess how
involved the federal government should be in the day- to-day management and
oversight of the TDF. The fund was set up as a kind of miniature mirror image of
the SBA, except that its focus - in terms of capitalization efforts - is start-up
telecom companies. It also may be appropriate for Congress to rethink how - or
whether - the federal government should participate in financially underwriting
the TDF. As an IRS-designated non-profit corporation, it could be argued that the
TDF's primary source of funding - interest on federal spectrum auction deposits -
is inappropriate, if not downright unlawful, according to numerous sources in the
D.C.  legal community.

TDF Investment Activity For 2001
New Investments
Number of Companies
$2,340,000
4
Follow-On Investments
Number of Companies
$1,851,000
4
Note: Figures reflect most recent data available from TDF

http://www.telecomweb.com/index.html

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