NYSERNet pays government $1.4 million to settle whistleblower lawsuit involving AppliedTheory

March 26, 2003 – NYSERNet.Net Inc. has agreed to pay the federal government $1.4 million to settle a whistleblower lawsuit that charged it misused millions of dollars from federal grants and program income.

The "qui tam" (whistleblower) lawsuit, which was filed "under seal," was made public today when the settlement was announced by the U.S. attorney's office in Buffalo.

The lawsuit alleged that NYSERNet, a non-profit consortium of New York universities, was secretly passing on grant money from the National Science Foundation to AppliedTheory Communications, a related for-profit corporation. This was a violation of federal grant conditions.

NYSERNet also disregarded the competitive selection process required by federal grant conditions and rigged its bidding process to award lucrative contracts for services specified in the grant to AppliedTheory, according to the lawsuit.

In another violation of grant conditions, NYSERNet sold assets developed and produced with federal grant awards and failed to disclose the proceeds as program income in its audit reports or use the program income in compliance with the grant conditions, the lawsuit said.

"NYSERNet got greedy with the government's money," said Bonny Harbinger, a Washington, DC, attorney with Phillips & Cohen LLP, which is representing the whistleblower.

The U.S. attorney's office in Buffalo joined the qui tam lawsuit after investigating the allegations. The case also was supported by the National Science Foundation Office of Inspector General. The National Science Foundation provided grants to NYSERNet to build a high-performance networking connection for higher education institutions.

The whistleblower lawsuit was filed against NYSERNet and AppliedTheory in 2000 in federal district court in Buffalo by a former president of NYSERNet, David Lytel. AppliedTheory filed for Chapter 11 bankruptcy reorganization last year and parts of the company have since been sold.

Lytel, now a resident of Washington, D.C., was fired from his job in 1998 after raising questions about some of NYSERNet's practices involving AppliedTheory. Previously he was an advisor to the White House Office of Science and Technology Policy during the Clinton administration.

"David Lytel persevered in trying to stop this fraud," said Harbinger. "Without him, the government would have been unaware of how the federal grant money was really being used."

NYSERNet (the New York State Education and Research Network) was created in 1985 to serve the networking needs of member universities in New York. It is credited with being one of the first regional Internet service providers. Members of the consortium include the City University of New York, Columbia University, Rensselaer Polytechnic Institute, New York University, State University of New York - Buffalo, the University of Rochester and the University of Albany.

In 1995, NYSERNet created a for-profit commercial corporation that later was named AppliedTheory Communications. NYSERNet spun-off AppliedTheory in 1996 and transferred assets that were created with funds from National Science Foundation grants. Three years later AppliedTheory went public. NYSERNet and some of its executive officers and directors eventually made millions of dollars from the sale of their stock in AppliedTheory.

The whistleblower lawsuit was brought under the federal False Claims Act, which allows individuals to sue companies that are defrauding the government. Liable defendants may be required to pay as much as three times the government's losses plus $5,500 to $11,000 for each false claim. Whistleblowers, or relators as they are known, are entitled to 15 percent to 25 percent of the funds recovered as a result of their lawsuit if the government joins the case.

Phillips & Cohen's practice is devoted to representing whistleblowers in qui tam cases.

For more information about Phillips & Cohen's record, see P&C's Successful Whistleblower Cases.

The case referred to above is: U.S. ex rel. David Lytel v. NYSERNet.Net, Inc., NYSERNet.Org, Inc., AppliedTheory Communications, Inc. and Applied Theory Corp,. Inc., case no. 00 CV 0039 (EF)

For more information, please see the following news stories:

  • "Salina nonprofit settles lawsuit," Tim Knauss, The Post-Standard, 3/27/03.
  • "New York consortium agrees to pay $1.4 million in federal lawsuit alleging fraud," Chronicle of Higher Education (www.chronicle.com), 3/27/03.
  • "NYSERNet agrees to pay $1.4 million to settle whistleblower lawsuit," Associated Press, 3/26/03.