The FCC’s strange non-profit

Introduction

A quasi-governmental corporation set up to fund telecommunications company start-ups is spending nearly as much on executive salaries and overhead as it is investing in companies, a Center for Public Integrity investigation has found.

The Telecommunications Development Fund was created by Congress in 1996 to kick-start small communications firms in hopes of spurring innovation and competition. Instead, the six-year-old fund has paid more than $7 million in executive salaries and other expenses while investing only $9.4 million of seed money in start-ups.

“It may be totally legal, but it smells to high heaven,” says Stuart Gilman, president of the Ethics Resource Center, a Washington group that advises businesses and non-profits on ethics issues. Gilman was a top official at the federal government’s Office of Government Ethics from 1988 to 2001.

The fund itself is the bizarre offspring of government and industry. There’s even dispute among government officials as to whether it is a government entity subject to public scrutiny or a private company.

The fund gets its money from interest on deposits paid by large telecommunications companies that bid for licenses in spectrum auctions.

There are a number of reasons why the fund is the subject of some concern:

• FCC Chairman Michael Powell appointed himself to the board, raising questions as to whether it is a good idea to put the top FCC regulator in charge of a venture capital fund in the same industry he regulates.
• The fund’s CEO, who earned $245,000 in 2001, was involved in the John Huang China-gate campaign finance scandal during the Clinton administration.
• The fund, which considers itself a private entity, actively lobbies Congress for money.
• Despite owing its existence to federal legislation and auctions on the publicly owned spectrum, there is virtually no public oversight of its activities.

Created in 1996

TDF was actually a creation of Congress, authorized by a last minute addition to the Telecommunications Act of 1996. That legislation established TDF and funded it on an ongoing basis with the interest on up-front deposits paid by telecommunications companies participating in FCC spectrum auctions. Those auctions sometimes involve billions of dollars; the deposits can earn millions in interest.

Under its congressional mandate, the board of the fund is supposed to include a representative each from the FCC, the Department of the Treasury and the Small Business Administration, as well as four members from the private sector.

The Treasury Department seat has been vacant since January 2001. The SBA seat was also vacant from January 2001 through September 2002, meaning that during that time Powell was the only public sector representative on the board.

Powell recuses himself from receiving any specific information on investments by the fund due to concerns about a possible conflict of interest. That means the fund was effectively operating without any public oversight of its investment decisions for the first 20 months of the George W. Bush administration.

Critics say the fund lacks any of the independent oversight that would normally be expected for an organization created and bankrolled by the federal government. They also say Powell potentially could be engaging in a gross conflict of interest, even if his actions in operating the fund fall within the specific letter of the law, since the fund invests in companies that the FCC regulates.

“This is clearly Michael Powell’s show, plain and simple,” said Gilman, of the Ethics Resource Center. “There is no independent oversight. It smacks of conflict of interest at almost every turn.”

Powell did not respond to repeated requests to be interviewed for this report, but Jane Mago, the head of the FCC’s Office of Strategic Planning and Policy Analysis, says she doesn’t “have any qualms about the way that TDF is operating in any way, shape or form.”

Mago says she attends most of TDF’s board meetings instead of Powell and reports back to him about what takes place.

She says she has no worries about a conflict of interest, even though Powell can appoint all the board members and the companies being invested in are all in the communications business, which is regulated by the FCC.

“The chairman is not in charge of making any of the specific investment decisions,” Mago said. “We’ve specifically removed ourselves from that and don’t have any ability to affect the investments one way or another.”

Instead, she says, she and Powell receive “generic” information about specific investments from the fund’s management. She and Powell concentrate their efforts on making sure TDF operates within the letter of the legislation that created it, Mago says.

Some of the companies in which TDF has invested are listed on the fund’s Web site, complete with a link to their Web sites.

Public or private?

From its beginning in 1996, the fund and its supporters have had a hard time figuring out if the organization is a government or a private entity.

Though TDF claims it is a completely private corporation, officials from the FCC, the Small Business Administration and the Treasury Department have sat on its board of directors. Federal statutes prohibit sitting government officials from serving on corporate boards. Violations of those rules can carry a penalty of as much as five years in jail and $50,000 in fines for each count.

Yet in some ways, TDF acts more like a private entity than a part of the government. For example, it has hired two different Washington firms to lobby Congress on its behalf.

TDF officials say their source of funding comes from the private sector, since the interest money they receive on the FCC auction deposits are paid to the fund by a bank.

Gilman, the ethics expert, says that argument strains credulity.

“It’s somebody’s money before it goes to the fund,” says Gilman. “I believe it is clearly taxpayer money, no matter what loophole they might have come up with.”

TDF incorporated in 1997 in the District of Columbia as a non-profit, tax exempt organization under Section 501 C (4) of the IRS code, which is supposed to cover entities with a “social welfare” purpose. For example, volunteer fire departments regularly use that section of the tax code to qualify for tax exempt status.

TDF reincorporated in Delaware in 2001.

The fund maintains its main office in Washington, but also has a satellite office in Chicago.

TDF Chief Executive Officer Ginger Lew contends the fund is private because it does not receive appropriations directly from Congress.

“We don’t receive any taxpayer funds,” says Lew. “The interest is paid directly from Mellon Bank. It’s coming out of Mellon Bank’s account.”

Mago says TDF is, in fact, a “quasi-government” agency, with parts that are public and other parts that are private.

“There is a statute that tells us what it is we are supposed to be doing,” says Mago. “They (Congress) wanted them to make private investment decisions, like a venture capital organization. That is exactly what the group is.”

But according to the U.S. Department of Justice, the fund is a government entity; it is not a private corporation, as TDF officials contend.

Soon after TDF was created by Congress in 1996, then FCC Chairman Reed Hundt asked the Justice Department if he could legally appoint the agency’s general counsel to serve on the fund’s board of directors.

In an opinion issued in June 1997 the Justice Department said the appointment would be legal because TDF was “a federal government entity.”

“TDF is a non-profit entity wholly owned by the federal government,” said the opinion. “It also receives the vast majority of its funds from the federal government, although not from yearly appropriations. Its policy and operations will be governed by directors appointed by the FCC Chairman.” See the entire Justice Department opinion.

Officials at the General Accounting Office, the investigative arm of Congress, say they have never conducted any sort of study of the fund.

But legal experts say TDF cannot be both a government entity and a private corporation.

“They seem to be cherry picking the best parts of being public and being private,” said Nell Minow, editor of The Corporate Library, a business accountability group. “They cannot just be a government entity when it serves their purposes and then turn around and be a private corporation when they want to do something else.”

Why Does TDF Claim to be Private?

Lew, the TDF CEO, runs the fund’s day-to-day operations.

She often says that TDF is a completely private corporation.

In February 2002, she told Telecommunications Reports “One of the things that has made TDF successful is that we’re a private company with private money and we have no connection to the government.”

She then went on to explain one reason why it was so important for TDF to maintain it is a private corporation.

“If you invest with public money, you have the issue of how much information has to be disclosed about your technology,” she told Telecommunications Reports. “If you’re working on some patent pending technology, the last thing you want to do is disclose publicly any information about it because it would be a huge competitive disadvantage.”

Washington attorney Robert Schwaninger is general counsel to a telecom industry group called Small Business in Telecommunications. He says the argument that TDF is a private corporation is dubious, at best.

“The TDF has claimed to be a private corporation, but that is impossible,” said Schwaninger. “Not only does the Justice Department disagree, but it does not fulfill any of the qualifications for being considered private.”

He points out that TDF has gotten all of its funding from the government, even if it isn’t part of a yearly appropriation; its entire board is appointed by the FCC chairman; and it has no shareholders.

Another reason TDF might want to claim it is private is to get around government salary rules.

For example, Lew drew a salary of $245,057 in 2001, the latest year for which the company has filed its income tax return. She also received another $16,112 in retirement fund payments.

That is more than double the $115,700 she was making when she left the U.S. Small Business Administration to become CEO of the fund in 1998.

Put another way, Lew’s 2001 salary was 58 percent more than the salary of a current member of Congress, which is $154,700.

And Lew is not the only employee of the fund who made more in 2001 than current members of Congress.

Chief Investment Officer Darrell Williams made $205,000. Vice President Charles Ross made $185,000. In addition, the fund set up a satellite office in Chicago for Williams so he could continue to live there. He commutes to Washington every couple of weeks.

Neither Powell nor any of the other five current members of the TDF board receive a salary.

Congressional “Father” of TDF is Disappointed

The congressman who conceived and championed TDF says he is extremely disappointed with how it has turned out.

Rep. Edolphus Towns, a Democrat from Brooklyn, N.Y., says he pushed through the legislation forming TDF in hopes it would primarily provide loans to small and disadvantaged entrepreneurs trying to break into the telecommunications industry. See the legislation that created TDF.

Even though it has an estimated $50 million, TDF does not make loans. In fact, the fund tells businesses who ask about a loan to see their banker.

Instead, TDF functions like most venture capital funds. It gives money to companies in exchange for an equity position. Like most venture capital funds, TDF demands a seat on the company’s board and offers advice on how it should be run.

Lew says TDF has invested in 12 companies, although the fund declines to provide any specific figures on its investments. More information on the companies TDF has invested in.

One of the companies TDF has invested in, newMedia Technologies Inc., is owned by former National Basketball Association stars Charles Smith and Rolando Blackman.

On its Web site TDF says newMediaTechnologies “markets its products and services to broadcasters, sports teams and other entities with a need to effectively capture, catalogue, store, retrieve, send and otherwise manage digital content—primarily video.”

When asked about the newMedia investment, Mago said she could not comment.

“We were simply not involved in that decision,” she said.

Judging from its financial disclosures, TDF is not a particularly efficient venture capital firm.

Since it began operations in 1998 through the end of 2001, the fund spent $7.25 million in salaries and other administrative costs, while investing $9.4 million in seven companies.

TDF says it makes initial investments of $375,000 to $1 million, and then may provide additional funding in subsequent years. The fund doesn’t disclose exactly how much it has invested in each of the companies in its portfolio or whether those companies have made any money. Lew told the Center that none of the companies TDF has invested in have ever turned a profit.

Towns says his original concept for the fund was for it to be a private entity, separate from the FCC, even though it would be under the control of the FCC chairman. He also says he envisioned the fund would be able to make loans to small businesses owned by women and minorities, not just act as a venture capital firm.

“Yes, I wanted something private,” said Towns. “The money came from the interest on the deposits from the spectrum auctions, which wasn’t being used at the time. I didn’t want the fund to be part of the FCC.”

Towns says there have been major problems with TDF, in no small part due to its desire to function as a private corporation. He says he has floated the idea of making some technical corrections to the legislation that created TDF—including changes that might allow the fund to more easily make loans—but fund officials have asked him not to.

In addition, Towns said he would like to get more money to TDF by tapping into the actual spectrum auction funds, rather than just the interest. But he said that would open the fund up to a whole new level of scrutiny that he and fund officials want to avoid.

“If the language is changed, then they are required to follow all of the other government rules,” said Towns. “There were obviously some errors in the drafting of the bill and I want to correct them—spell things out a little better. But I am really backed into a corner.”

Lew confirms that she does not want to become a part of the congressional appropriation process.

“We can accomplish our mission through the funding mechanism that was established,” says Lew. “In this day and age, there is more than enough competition for funds that are appropriated. In this day and age, would you like to try and get an appropriation?”

She says the goal and focus of TDF is to make investments in small telecommunications and “not to spend time on the Hill.”

Both TDF CEO Lew and Chief Investment Officer Darrell Williams have made political contributions to Towns in recent years.

Lew has contributed a total of $2,000 since 2001. Williams has also contributed $2,000 to Towns, all of it in 2002.

TDF Board Chairman W. Don Cornwell gave Towns $500 in 1994. TDF Board Member Thomas Hart gave Towns $250 in 1997.

Lew Was Implicated in China Gate scandal

Prior to joining TDF, Lew was Chief Operating Officer of the U.S. Small Business Administration, where she provided day-to-day management and oversight of the agency’s $42 billion loan portfolio. Before joining SBA, Lew served as the general counsel at the U.S. Department of Commerce.

Lew left the Commerce Department following the death of Commerce Secretary Ron Brown in a plane crash in April 1996.

She was subsequently caught up in the 1996 political fundraising scandals.

She was identified by the FBI as a confidant of John Huang, a former Commerce official and Democratic National Committee fund raiser who was at the center of the investigation. The scandal involved allegations that the Clinton administration used trade missions to help raise Democratic campaign contributions.

The investigation revealed that Lew’s confidential assistant at Commerce, Ira Sockowitz, removed classified documents involved in the investigation from a safe in her former office at the Commerce Department. Those documents later turned up in a safe at SBA.

In a deposition in a lawsuit brought by watchdog group Judicial Watch, Lew said she was unaware that the documents had been moved.

Lew says she finds questions about her involvement in the scandal “kind of amusing.”

“Huang and I worked at Commerce, which had thousands of employees,” she said. “We never worked together. I think that whole thing was pretty bogus from the beginning.”

No Small Business Representatives

Despite the fact that it was formed by Congress to help small businesses, there are no representatives of small business on the fund’s board of directors, management or its advisory board.

Chief Investment Officer Darrell A. Williams and Vice President Charles E. Ross, who along with Lew appear to handle the lion’s share of the fund’s investment decisions, both came from Ameritech, a huge telecommunications company. See the biographies of TDF employees.

Besides Powell, the board of directors includes W. Don Cornwell, chairman and CEO of Granite Broadcasting, a $194 million broadcasting conglomerate based in New York.

Also on the board is Debra L. Lee, President and Chief Operating Officer of BET Holdings Inc., a multimedia entertainment corporation and the parent company for Black Entertainment Television; Richard L. Fields, Managing Director of Allen & Company Inc., an investment banking firm; and Thomas A. Hart, Jr., an attorney with Shook, Hardy & Bacon. See the biographies of TDF Board of Directors.

Towns says Hart worked closely with him in drafting the legislative language that created the fund and helped to push it through Congress. In addition, Shook, Hardy & Bacon was hired to lobby Congress on behalf of the fund, although Hart’s name does not appear on lobbyist registration forms.

In 2001, Hart’s firm disclosed that TDF paid it $20,000 to lobby Congress for the six month period from January 1 to June 30 of that year. The firm “assisted client in drafting and introducing legislation to obtain a minor, technical amendment to its enabling statute,” that would direct additional money to the fund. The disclosure notes that “Congressman Edolphus Towns (D-NY) introduced the legislation on May 3, 2001,” and adds that Shook, Hardy “assisted in efforts to move the legislation to passage.”

On the disclosure form, the firm noted one contact with a member of Congress: Towns.

TDF’s advisory board is made up entirely of executives from such large companies as Verizon, AOL Time Warner and Goldman Sachs. See the biographies of TDF advisory board.

Schwaninger, the small business association general counsel, says the lack of small business representative among TDF’s board of directors and board of advisors is inexcusable.

“To appreciate the needs of small business from a practical perspective, the TDF requires someone on its board that will act as an advocate for the very group it was formed to help,” said Schwaninger.

“The private sector representation on the board lacks that input or voice,” he said. “Let’s face it, the private members of the board aren’t exactly struggling to pay their bills. They represent the wealthiest segment of society.”

Morgan Jindrich, Alicia Oman and Katharine Widland contributed to this report.