NEC subsidiary will pay $20 million to settle qui tam case and criminal charges

Company participated in scheme to cheat technology program for poor children

May 27, 2004 – A subsidiary of NEC Corp. has agreed to pay $20.5 million to settle a whistleblower lawsuit and related criminal charges for its role in a bid-rigging scheme that drained millions of dollars from a federal program that funds Internet connections for schools with poor children.

The settlement includes a $4.6 million criminal fine. Under the terms of the settlement agreement, NEC Business Network Solutions Inc., a wholly owned subsidiary of NEC, will plead guilty to two felony counts for wire fraud and conspiracy to suppress and eliminate competition for bids for certain school contracts around the country.

The NEC subsidiary will pay the remaining $15.9 million to the federal government to settle the "qui tam" (whistleblower) lawsuit, which was brought by San Francisco City Attorney Dennis J. Herrera on behalf of the San Francisco Unified School District in 2002 in federal district court in San Francisco.

The San Francisco School District's lawsuit alleges that the NEC subsidiary defrauded the federal government's "E-rate" program, which has provided $12 billion in grants to schools in poor and rural areas to obtain access to the Internet. The intent of the program is to bridge the "digital divide" between the haves and the have-nots. The program has been plagued by fraud, and the Federal Communications Commission is currently monitoring 40 criminal investigations, according to news reports.

The whistleblower lawsuit claims NEC and four smaller companies engaged in backroom deals, bribes and kickbacks to ensure they would win the school contracts to supply the necessary services and computer hardware, such as routers and switches, at inflated prices.

The companies targeted schools with large numbers of impoverished students and enticed them with the promise of doing all of the work involved in applying for the grants and paying the school's share required under the program. Video Network Communications, Inc., a small Delaware company, wrote the grant applications and set up the rigged bidding process for the schools. It would invite only those companies that were in on the scheme to bid on the contracts, or it would disregard bids from companies that weren't in on the deal, according to the lawsuit.

In San Francisco, the lawsuit said, the companies bribed city employees to apply for the federal funding using information the companies supplied, even though the employees had no authority to apply for the funding and didn't inform the school district or the city board of education about the application. In exchange, one company agreed to back the city employees in a private business venture and provided a company credit card for one employee's personal use.

The federal government approved a $49 million grant for the San Francisco school district in 2000 based on the bogus application. But School Superintendent Arlene Ackerman, who had just started in the position, rejected the grant after she reviewed the application and became suspicious about the bidding and application process.

The grant would have funded Internet access in schools where there were no computers and a phone system where there were no phones. The federal program doesn't pay for computer purchases.

"Using a grant to pay for Internet access when the school system doesn't have enough money to put computers in those classrooms would have been ludicrous,", a San Francisco attorney whose firm, Phillips & Cohen LLP, represents the city school district in the qui tam case. "It would have been like buying a car without an engine."

Ackerman referred the matter to the City Attorney's office. An investigator for that office, George Cothran, unraveled the scheme and figured out school districts elsewhere in the country had been defrauded. As part of his investigation, he interviewed more than 50 witnesses and worked with other investigators to analyze cell phone records and computer hard drives.

"NEC and the other companies might have succeeded in their scheme if it hadn't been for Superintendent Ackerman's diligent review and George Cothran's aggressive investigation," Herrera said. "These companies count on the fact that even though most schools need every penny they can get, they are too understaffed to notice when they are being fleeced."

Other school districts that were affected by the scheme include those in Jasper Country, S.C.; Lee County, Ark.; Ecorse, Mich.; and Covert, Mich. Ceria M. Travis School in Milwaukee, Wis., also was taken in by the fraud.

A former San Francisco employee, Desmond McQuoid, pled guilty last year to one count of mail fraud stemming from the investigation and was sentenced to 21 months in prison. A court ordered a Freemont, Calif., computer company involved in the fraud, U.S. Machinery, to pay $200,000 in restitution to the San Francisco school district.

The False Claims Act allows individuals and entities to sue companies that defraud the federal government and recover funds on the government's behalf. Under the False Claims Act, whistleblowers (known as "relators") are awarded 15 percent to 30 percent of the amount the government recovers as a result of their qui tam lawsuits. The San Francisco school district, which was the relator in this case, will receive 21 percent of the $15.9 million qui tam settlement, or $3.35 million.

Phillips & Cohen specializes in representing whistleblowers in qui tam lawsuits.

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

For more information, see the following news stories:

  • "NEC unit admits it defrauded schools," Matt Richtel and Gary Rivlin, The New York Times, 5/28/04.
  • "Firm to plead guilty to defrauding E-rate $20 million settlement approved," Ken Foskett, The Atlanta Journal-Constitution, 5/28/04.
  • "Guilty plea is school grant fraud; SF district blew whistle – will get $3.3 million," Heather Knight, San Francisco Chronicle, 5/28/04.
  • "NEC to pay $20.5 million to settle San Francisco suit," Bloomberg News, 5/27/04.
  • "Texas company pleads guilty to school scam," Associated Press, 5/27/04.