WASHINGTON-The Justice Department last week asked U.S. District Judge Paul Crotty for permission to join the auction fraud lawsuit against Wall Street telecom magnate Mario Gabelli, upping the stakes of the litigation at a time when federal regulators are scrambling to enact reforms that could ban national wireless carriers and others from partnering with small firms eligible for bidding discounts during this June’s sale of advanced wireless services licenses.
Charles Miller, a Justice Department spokesman, said a formal motion requesting to intervene in the five-year old case is expected to be made by March 20. Gabelli’s attorneys are expected to reply by April 3, and the government is set to respond to Gabelli’s pleading by April 10.
Gabelli is accused of defrauding the U.S. government of at least $85 million by hiding his company’s control of winning applicants that qualified as small businesses and received discounts-some 25 percent-in mobile-phone and paging auctions during the 1990s.
A hearing on whether the U.S. government can become a plaintiff in the Gabelli suit is expected to be held in mid-April. The new developments could delay the trial, which was scheduled to begin in June.
“The government’s entry into this case was essential to protect our ability to recover taxpayer funds in the event fraud is proven. Given the evidence, this was the right decision,” said Jonathan Adelstein, a Democratic Federal Communications Commission member.
Adelstein and Commissioner Michael Copps, the other Democrat on the Republican-controlled FCC, have been outspoken in closing what they see as huge loopholes in rules governing the 25-percent small business bidding discounts in government auctions of mobile phone licenses. Both FCC members also have been critical of the agency’s delay in launching a rulemaking to tighten small business, or “designated entity,” auction rules. The FCC agreed Feb. 3 to consider changes to the DE program, seven months after FCC Chairman Kevin Martin agreed to do so.
The national news coverage given to the Gabelli suit could weigh heavily on FCC commissioners as they decide how to reform the DE program. As a result, top mobile phone carriers, which have been closely aligned with DE’s in past auctions, may not have the luxury of hedging their bets in the upcoming auction. They could have to go it alone.
The Justice Department’s decision to pursue the case against Gabelli was made public last week when Crotty held a status conference on the False Claims Act lawsuit filed by Russell Taylor in February 2001 against Lynch Interactive Corp., a telecom firm chaired by Gabelli. Much of the case was kept under seal until recently. Taylor alleges Gabelli and his affiliates were illegal fronts for small business applicants who successfully bid on wireless licenses and later sold them for many millions of dollars more than they originally cost.
Gabelli, who has denied any wrongdoing in the small-business mobile phone auction of 1996 or in subsequent auctions, was not available for comment. But on Lynch’s Web site, Gabelli again defended himself.
“Our roles in these auctions were those of a service provider as well as an investor. We are considering entering Auction 66 in similar capacities for others as well as for our own account,” Gabelli claims on the Web site. Auction 66 is the AWS auction, set to begin June 29.
Lanny Breuer, a lawyer for Gabelli and a former Clinton administration special counsel, said Gabelli’s relationship to DE bidders was explicitly disclosed to the FCC on applications and the agency approved all sales of DE licenses.
“The notion that this [Gabelli’s participation} is some surprise in ludicrous,” said Breuer. “What this is is a manufactured case.”
Breuer said the FCC and Justice Department have dragged their feet in turning over documents that he claims show telecom regulators grappled with the very same issues raised in the lawsuit, but ultimately did not object to Gabelli’s association with DE applicants. Breuer said he also suspects FCC documents he is seeking have been destroyed.
Breuer said Lynch’s outside communications attorney, James Barker of the Latham & Watkins L.L.P. law firm, held numerous communications with FCC staff on auction matters tied to his client.
The FCC, which referred questions to the Justice Department, suddenly finds itself in a precarious situation if Justice is allowed to pursue the suit against Gabelli and Lynch. Indeed, the lawsuit could prove highly embarrassing for the FCC in the same way that it was for the agency when it went up against NextWave Telecom Inc. in another high-profiled auction suit ultimately decided by the Supreme Court-and lost. The trial is not only expected to examine Gabelli’s relationships with DEs, but also put FCC auction rules and their enforcement under the microscope.
