NEC-Business Network Solutions: E-Rate Bid Rigging and the School District’s Reward

The NEC E Rate bid rigging case led NEC-Business Network Solutions to agree to a $15,985,263 civil settlement over allegations of false claims for school technology funding. In its guilty plea, the company admitted helping inflate a San Francisco funding application far above the vendors’ bids while reducing the number of schools the project would serve. The San Francisco Unified School District brought the whistleblower case. The district’s knowledge of its own finances helped expose what the application concealed.

NEC sold and installed computers, servers, routers, switches, telephone systems and cabling. A subsidiary of NEC America based in Irving, Texas, it supplied the equipment that schools needed to connect. The Justice Department announced the bid-rigging and wire-fraud case on May 27, 2004.

E-Rate Funding and the School’s Share

E-Rate helped schools and libraries obtain internet connections, with the greatest financial help directed to the neediest schools. The program was funded by money collected from telephone users. Schools applied for equipment, cabling and connectivity services, and had to contribute part of the cost themselves.

The payment arrangement put vendors directly in the process. As the civil agreement explains, E-Rate reimbursed providers for discounts they gave schools and libraries buying internet and telecommunications services.

The program rules described in NEC’s plea explain why the bid documents mattered. Applications exceeded the available funding. Only approved equipment and services qualified, and districts had to follow state and local competitive-bidding procedures. The school’s application was supposed to carry the selected vendors’ actual bid amounts, recorded in contracts.

That process tied the public funding request to a purchase the school had competitively priced. NEC’s admissions show how people working on both sides of that purchase broke the connection.

The Consultants Helped Choose Their Own Vendors

In its guilty plea, NEC admitted that the consultants helping school districts design networks and choose vendors also worked as sales representatives for a video-teleconferencing equipment company. NEC agreed to pay that company for business opportunities it brought in and to include its equipment in E-Rate proposals.

Those overlapping roles reached into the San Francisco bidding process. The consultants worked with a district official to assemble the request for proposals, and one consultant ran the bid opening. They then made NEC the prime contractor, with a local computer company and a cabling company as subcontractors.

The plea’s separate bid-rigging admissions describe the broader arrangement. NEC and other vendors agreed in advance who would lead projects and who would receive subcontract work. They submitted fraudulent, noncompetitive bids. The consultants helped eliminate or disqualify outside bidders and steer awards to the designated contractors.

An honest bidder was competing against businesses that had already divided the work and had help from the people shaping the selection. The agreement reached beyond the prices on the bid sheet to who would get a chance to win.

Form 471 Asked for More and Covered Less

In its guilty plea, NEC admitted helping turn the San Francisco bids into a funding application with approximately $26 million added to the vendors’ prices. Form 471 was the district’s E-Rate funding application, and a consultant told NEC employees which totals to enter before directing them to prepare false spreadsheets to justify those totals.

Cabling rose from $13,697,838 to $21,875,698. The application reduced the number of schools from 50 to 46 and falsely described NEC as the winning bidder for the entire project. More money was requested for fewer schools.

The plea also described false equipment descriptions intended to obtain funding for the video-teleconferencing company’s ineligible products. When NEC learned that the inflated application had been submitted, it did nothing to tell the program administrator, the Universal Service Administrative Company, that the prices exceeded the bids.

A later program review brought another set of false spreadsheets. According to the plea, those documents misrepresented the bidding process, the participants, the winners and the amounts.

The same paperwork pattern appeared in the criminal charges against Inter-Tel Technologies announced in December 2004. Prosecutors charged that company with inflated San Francisco bids, documents concealing ineligible equipment and false information submitted to defeat scrutiny of the funding request.

The Donation Was Going on the Program’s Bill

In its guilty plea, NEC admitted planning to use expected E-Rate funds to cover the cost of computer workstations it would present to the district as a donation. The money for the supposed gift was coming from the program being asked to fund the project.

A district official suggested using inflated cabling estimates to pay for the computers. NEC later agreed to buy 2,250 workstations from the local computer company for $10,292,000 and donate them to the district. It planned to pay for that purchase with E-Rate funds.

The plea also admitted that NEC never disclosed the increased funding requests or inflated estimates to the superintendent or school board. People working inside the project knew about the changes. The officials overseeing the district were being shown a different account.

The District Recognized Its Own Finances

The superintendent’s account to Congress shows how ordinary knowledge of the district exposed the application. In testimony at the July 22, 2004 hearing, she said former staff members brought her a copy. It claimed the district had set aside the required matching funds. She knew it had not.

She also questioned an equipment plan that did not reflect the district’s instructional needs. Some of the application’s claims did not even describe the city where the schools stood:

The superintendent took her concerns to the City Attorney’s office. The district subsequently brought a False Claims Act qui tam case, and the United States joined it. A school system that was supposed to benefit from the project became the whistleblower exposing it.

The Civil Settlement Included Cash, Work and Maintenance

The civil agreement resolved allegations that NEC submitted or caused false E-Rate claims through noncompetitive bidding, payments to Video Network Communications while it helped select suppliers, ineligible equipment, false information, disregard of schools’ required contributions and inflated invoices.

The settlement assigned value to different things:

• Cash. NEC agreed to pay $10,300,000 to the United States.
• Work already performed. The agreement valued uncompensated E-Rate work at $3,803,053. NEC released the government from obligations to pay for it.
• Maintenance still to come. NEC agreed to provide designated school districts with maintenance at no charge. The agreement valued that work at $1,882,210.

How Is Bid Rigging Detected?

Bid rigging can be detected through procurement records, communications and people who know how the purchasing process actually worked. Here, the admitted conduct connects the request for proposals, bid opening, subcontract decisions, funding application and later explanations to the program administrator.

The plea describes an instruction to create spreadsheets supporting predetermined totals, then communications discussing inflated estimates. An employee who knows who ordered a change can explain something the changed number cannot explain by itself.

A school finance employee may recognize matching funds that were never budgeted. A vendor employee may recognize a bid price that changed after selection or equipment described differently on the funding request. Those are different views of the same project. Our whistleblower experts connect those school and vendor accounts with the funding representations and the E-Rate money requested.

The School District’s Whistleblower Reward

The civil settlement set the San Francisco Unified School District’s whistleblower share at 21% of the amount actually recovered by the United States. The agreement directed payments to the district and addressed the cash, work and maintenance parts of the settlement.

In his congressional testimony, the City Attorney said the district would receive nearly $3.4 million. The school district was the whistleblower entitled to that reward. Its employees’ knowledge of the school system had helped expose a funding request that the district itself had submitted.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the School Actually Ordered

Our whistleblower experts can connect school matching-fund claims, equipment descriptions and revised vendor prices to the E-Rate money requested.