City Attorney’s E-Rate Investigation, Whistleblower Suit Yields Second Major Settlement for S.F. Schools

Inter-Tel’s $7 Million Settlement with U.S. Justice Dept. Nets Additional $1 Million Reward for SFUSD, for $4.4 Million Total Whistleblower Recovery To Date

City Attorney Dennis Herrera today announced a second major settlement in the whistleblower lawsuit he filed two-and-a-half years ago against multiple technology vendors and consultants for conspiring to defraud the federal E-Rate Program of millions intended for technology purchases for disadvantaged public schools. The settlement entered in U.S. District Court here this afternoon requires Inter-Tel Technologies, Inc. (NASDAQ:INTL), a Tempe, Ariz.-based telecommunications provider, to pay the federal government $7 million to settle civil charges of false claims, bribery and bid-rigging. Approximately $6.74 million of the settlement will be paid in cash, with the remaining $260,000 representing waivers of federal obligations to Inter-Tel under the E-Rate Program.

As “qui tam” whistleblower in the case, the San Francisco Unified School District is entitled to a 21 percent share of the federal settlement, for a net recovery after attorney’s fees of $1,029,000. An earlier settlement with NEC Business Network Solutions, Inc. from the same lawsuit resulted in a $3,356,905 payment to the school district in May. To date, the total recovery for the S.F. Unified School District for the whistleblower action approaches $4.4 million.

Apart from the civil settlement, Inter-Tel today pled guilty to two criminal felony counts: one for mail fraud and another for conspiracy to suppress and eliminate competition in violation of the Sherman Antitrust Act. The company also agreed to cooperate with both the U.S. Department of Justice and the San Francisco City Attorney’s Office in their ongoing investigations involving E-Rate fraud.

“I’m very proud of an investigation and civil action that blew the whistle on a nationwide scam to defraud disadvantaged school districts,” Herrera said. “But in a year of difficult local budget cuts, it is especially gratifying to secure a settlement that will make a real difference to public school kids right here in San Francisco. Today’s settlement further vindicates Superintendent Arlene Ackerman’s decision to refuse suspect funding early on, and it is testimony to the continuing good work of U.S. Attorney Kevin Ryan and his office as well as the investigators and attorneys of my office’s Public Integrity Team — City Attorney Investigator George Cothran, in particular. Phillips & Cohen LLP lent its False Claims Act expertise as our outside counsel on this whistleblower action, and I’m grateful to attorneys Eric Havian and Mary Inman for helping achieve such a successful outcome for our schools.”

“For a second time, my profound gratitude goes out to the City Attorney’s office and all of the local and federal authorities involved in this case who worked tirelessly on behalf of more than 56,000 public school students and their families.” said Superintendent Arlene Ackerman. “In all of my years in education, I have never known of such an egregious act as the one conducted by former employees of this district intended to defraud the United States of more than $40 million. One of my highest priorities when I accepted this job was to put the SFUSD in strong working order, and this additional settlement will go along way in accomplishing that goal.”

“With their lawsuit, School Superintendent Arlene Ackerman and City Attorney Dennis Herrera stopped criminals from stealing money that schools desperately need to help their students,” said Mary A. Inman, a San Francisco attorney with Phillips & Cohen LLP, which specializes in qui tam lawsuits and worked with the San Francisco City Attorney’s Office to represent the school district in the case. “These companies were seemingly helping schools while picking their pockets.”

The whistleblower action, which Herrera originally filed on May 16, 2002, included allegations that Inter-Tel and five other companies made backroom deals and paid bribes and kickbacks to ensure them of winning school district contracts. Video Network Communications, Inc., a Delaware company now known as Talkpoint Communications Inc., set up the application and bidding process on behalf of schools in such a way that only those companies that were in on the scheme could get the contracts, according to the lawsuit. The companies would then supply services and computer hardware — at allegedly inflated prices — paid for through federal grants and school funds.

The City Attorney’s Office first learned of the scheme when investigating a bogus E-Rate application submitted on behalf of the San Francisco Unified School District. When Superintendent Arlene Ackerman learned of the fraudulent applications, she declined to accept the funding and requested that the City Attorney’s Office investigate. Following a lengthy investigation led by Investigator Cothran, Herrera filed the false claims case under seal on behalf of the school district and the People of the State of California, turning the results of its investigation over to the U.S. Department of Justice, which started a nationwide criminal and civil investigation into related conspiracies surrounding the E-Rate program.

The pattern of E-Rate fraud has since emerged as a national phenomenon, with the U.S. House of Representatives holding a series of investigative subcommittee hearings entitled, “Problems with the E-rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nation’s Schools to the Internet.” Herrera and Cothran were joined by Ackerman and former Unified School District General Counsel Louise H. Renne in presenting testimony to Subcommittee on Oversight and Investigations of the U.S. House Energy & Commerce Committee on July 22, 2004.

Criminal and civil investigations into E-Rate fraud remain on-going, and additional indictments or settlements with other co-conspirators may be reached in the future. The case is United States ex rel. San Francisco Unified School District v. Inter-Tel Technologies, Inc., U.S. District Court for the Northern District of California Case No. C02-2398 CRB. Inter-Tel’s criminal guilty plea is entered in the matter captioned, United States of America v. Inter-Tel Technologies, Inc., U.S. District Court for the Northern District of California Case No. CR-04-399 CRB.