Tech companies charged with E-rate fraud

A federal grand jury issues a 22-count indictment over fraud in the program, which funds Internet connections for schools and libraries.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
2 min read
A federal grand jury has indicted six companies and five individuals on charges of defrauding the E-rate program, which helps schools and libraries nationwide get connected to the Internet.

Some of those named in the 22-count indictment, issued in San Francisco on Thursday, are accused of submitting fraudulent documents to the government, which led to their being overcompensated for equipment that was supposed to be deployed in schools. Others are said to have rigged bids and charged the government for goods, such as video equipment, that are not covered by the program.

The activities allegedly took place in school districts in several states, including California, Arkansas, Michigan, New York, Pennsylvania, South Carolina and Wisconsin.

The E-rate program, created as part of the 1996 Telecommunications Act, provides technology funding for public and private schools as well as for public libraries. It pays up to 90 percent of technology costs, such as wiring and connection fees. Consumers pay for the program through a "universal service" fee on their monthly long-distance telephone bills. Since it began, more than $8 billion has been disbursed from the E-rate fund.

Congress has been looking into the program for more than a year amid accusations of poor oversight, a situation said to have spawned fraud, waste and abuse. Last month, a report by the Government Accountability Office said the Federal Communications Commission, which oversees the program, has been slow to respond to problems uncovered by auditors and that it has not tracked the effectiveness of the program.

No court date has been set in connection with the San Francisco indictments. The investigation, which is ongoing, is being handled by the U.S. Attorney's Office for the Northern District of California, along with the Antitrust Division, with the help of the San Francisco, Los Angeles, Fresno and Detroit offices of the Federal Bureau of Investigation.

Several criminal investigations linked to E-rate are under way, and many others have been concluded. A subsidiary of NEC pleaded guilty to fraud charges in May 2004, and the company has agreed to pay $20.7 million to settle the charges. The largest scandal involving E-rate erupted in 2000, after officials discovered that Victor Fajardo-Velez, the former secretary of education for Puerto Rico, had mismanaged nearly $100 million in E-rate subsidies. Fajardo-Velez was eventually sentenced to three years in prison and fined $4 million for irregularities associated with the use of U.S. Education Department funds.

Companies named in the most recent indictment include Howe Electric, Sema4, Digital Connect Communications, Expedition Networks and ADJ Consultants, all based in California. Video Network Communications of Portsmouth, N.H., was also named in the indictment.