On November 4, the FCC issued a Notice of Apparent Liability for Forfeiture (“NAL”) against Network Services Solutions, LLC (“NSS”) and its CEO, Scott Madison, alleging multiple and egregious violations of the Commission’s program rules pertaining to the federal Universal Service Fund’s (“USF”) Rural Health Care (“RHC”) Program.  An accompanying press release stated that the charges include “forgery, bribery, bid rigging and fraud.”  NSS is a Nevada-based telecom reseller that provides services to rural health care providers (HCPs), primarily in the southeastern U.S., and which the FCC calls one of the largest recipients of RHC program funding, receiving more than $38 million in program payments since 2006.  The NAL proposes a penalty of $21,691,499 against the company, plus recovery of another $3.5 million in RHC fund disbursements resulting from the violations.  The NAL is the result of an investigation by the FCC Enforcement Bureau’s new USF “Strike Force,” created to uncover waste, fraud and abuse by USF program participants.  It charges NSS with systematic violations of the RHC program’s competitive bidding rules, presenting forged and false documents to defraud the program, and violating the federal wire fraud statute.  The FCC heralded this enforcement action as its first involving the RHC program, and the first FCC allegation of wire fraud in the USF program.

NSS will have an opportunity to contest the proposed forfeiture.  But irrespective of the merits of the allegations or proposed penalty, the NAL is worthy of close attention by participants in the RHC and the other three federal  universal service programs (i.e., the Lifeline, E-rate, and Connect America Fund programs) in at least two important ways:  (1) it indicates increased and aggressive investigative activities toward USF participants by the FCC’s Enforcement Bureau and its USF Strike Force, and (2) it provides an instructive “road map” for practices that RHC and (to varying extents) other USF program service providers must not engage in.   In brief, the NAL alleges that NSS and its CEO actively defrauded the RHC program in multiple ways by violating its competitive bidding rules, inflating the rates assessed to HCPs and claims submitted to USAC, and forging and falsifying documents to support its claims , including:

• entering into service agreements with HCPs before and during the 28-day bidding period mandated under RHC program’s “fair and open” competitive bidding rules;
• interacting improperly with HCPs before, during and after the bidding period, including providing HCPs with phony bid matrices after the bidding period and otherwise “coaching” HCPs in responding to inquiries by USAC about the bidding process;
• violating the program’s prohibition on providing gifts and other financial inducements to HCPs, in this case by giving an HCP a server valued at $10,000;
• obtaining and using confidential bid information, in this case by essentially bribing an account manager of its underlying carrier and would-be competitor, and using that improperly obtained information in formulating its own bids;
• significantly inflating the rural rates for services, in some cases by over 800 percent, in violation of RHC program methodologies;
• simply providing the underlying carrier’s service without adding any value and at significantly marked-up rates, which were claimed and recovered in RHC program funding;
• falsifying the “urban rate” upon which the rural rate must be based, either by presenting forged and falsified invoices that were presented as evidence of other carriers’ urban rates, or by simply claiming an urban rate that had no basis in fact; and
• transmitting such forged documents by interstate wire to USAC, in violation of federal wire fraud statutes.

In addition to the proposed $21.7 million forfeiture, the FCC stated that it would order NSS to repay the overpaid amounts it received from USAC in RHC program disbursements, amounting to an additional assessment of $3.5 million against the company.

In a partial dissent to the NAL, FCC Commissioner Ajit Pai agreed with the Commission’s effort to penalize NSS but asserted that the FCC could only assess the wire fraud element of the penalty (for $189,361) because the other proposed forfeitures would violate the one-year statute of limitations on the agency’s initiation of forfeiture proceedings.