The House Committee on Energy and Commerce

Prepared Statement of The Honorable Greg Walden

Problems with the E-rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nation's Schools to the Internet

Subcommittee on Oversight and Investigations
July 22, 2004

Good morning. The Subcommittee will come to order. Last month, we opened our hearing on E-rate with a close look at the Puerto Rico Department of Education's experience with the program. That case, in which a large and needful district, and its vendors, literally wasted more than $100 million of E-rate funds, shed light on a range of problem areas in the program's set-up.

The problems extended from the front to the back of the E-rate funding process. The Puerto Rico case illustrated weaknesses in the competitive bidding process and the requirements that applicants certify they actually have the resources necessary to make effective educational use of E-rate funds. In Puerto Rico, tens of millions of dollars were being billed while few if any children actually connected to the Internet. We saw problems in implementing the goods and services purchased with E-rate funds -- as the $20 million of dusty, shrink-wrapped gear in a warehouse highlighted. And we saw weaknesses in oversight and the audit process.

This morning we will focus directly on the front-end of the E-rate process -- the application and processing of applications in the E-rate program. This is the part of the program where many problems begin and where many problems can be caught, if done right. This is where the planning and competitive bidding -- the keystone to the program -- takes place, and where E-rate's administrators can catch applicants that run afoul of program requirements. Failure here, at the front end, assures wasteful spending and opens the way for fraud and abuse.

Today, we'll take a hard look at some very troubling actions on the part of vendors and consultants and how those actions were stopped - at least in one large school district. We'll look at the facts and circumstances surrounding the application for E-rate funds by the San Francisco Unified School District in the 2000 E-rate funding year.

San Francisco's experience is a story in which bad actors put the E-rate application process to the test. We'll learn that the program didn't pass the test. As we'll hear today, the E-rate administrator, USAC, approved more than $58 million in funding, including the District's share, based on fraudulent applications. Each procedural safeguard then set up by USAC failed -- competitive bidding, application certification, application review, and selective review.

Fortunately, a final check, a newly arrived Superintendent, whom we'll hear from this morning, had suspicions that led to uncovering program fraud and abuse not only in San Francisco, but also around the country.

Today's hearing focuses primarily on the San Francisco Unified School District experience. We are continuing to examine the broader details of the conspiracy in other states. Questionable activity by the vendors and individuals who exploited the process in San Francisco has been identified in Arkansas, Michigan, and South Carolina for example. One district, with the help of these bad actors, allegedly built a $750,000 television studio with E-rate funds -- something, be assured, that clearly should not have happened. We will address these details in due course.

Today's hearing, nevertheless, will shed light on the integrity of the E-rate application process. Equally important, today's hearing will also let us focus a bright light on the very troubling behavior surrounding the bid-rigging conspiracy and fraud underlying this particular school district's experience. We have before us today some of the key players in the San Francisco story. So this light should serve, not only to illuminate where there are problems in program structure, but also to display clearly the kind of actions that cannot be allowed to occur in the program or to escape public scrutiny.

The actions we will examine were made public when NEC Business Network Solutions, now doing business as NEC Unified Solutions, pleaded guilty this past May to wire fraud and to a conspiracy to suppress and eliminate competition for E-rate program projects. NEC BNS also confirmed, among other facts, that as part of the conspiracy it assisted in submitting inflated prices to USAC -- $26 million more than vendors had bid on the San Francisco project. NEC BNS admitted that it had informed USAC that it planned to "donate" ineligible equipment, but in fact intended to buy that equipment with $10 million of excess E-rate receipts. And this was just in San Francisco. As part of the plea deal, NEC BNS agreed to pay $20.7 million in fines and restitution.

At this point I should note that four of the witnesses before us this morning are not appearing voluntarily, in large part (they maintain) due to ongoing criminal and civil cases into the matters we will be examining. We issued subpoenas last week to command their presence and testimony. Among them today are the President and CEO of NEC BNS, Mr. Thomas Burger, as well as its former Vice President of sales, Mr. William Holman.

I look forward to learning from Mr. Burger what he can say about his company's behavior, especially as he was the man in charge at the time of this activity to which his company pleaded guilty. And Mr. Holman, according to numerous documents, should have information that will help us understand how this situation developed.

We also have an individual -- Mr. George Marchelos -- who San Francisco investigators suggest has direct knowledge of what happened in that school district and elsewhere. I hope he will help us understand this story.

We also subpoenaed a Ms. Judy Green, another E-rate consultant, who, according to the U.S. Marshals Service has effectively avoided service for the past week. Given that the Committee continues to investigate this conspiracy, let me just note that we will provide her another opportunity to testify.

The story of San Francisco is a story of corrupt school employees, E-rate consultants controlling the process, and vendors conspiring to completely undercut competition. We will ask some probing questions of these people. But I also expect we will ask tough questions of other players. We have hard questions to ask of USAC, which set up the procedures for policing E-rate applications for problems, and in the case of San Francisco inexplicably neglected several red flags. And, of course, we have the FCC, the agency in charge of this whole program. They have to answer to this story too, and explain where they are leading this program now, after cases like this.

Let me conclude by extending a welcome to our witnesses, particularly those from the San Francisco City Attorney's Office and from the San Francisco Unified School District. Superintendent Ackerman, who joins us via videoconference, has been most accommodating to assist us today. Thank you.

With that, let me recognize the Ranking Member, for an opening statement.