WASHINGTON-The Justice Department last week filed a slew of documents with a New York federal court in support of a request to join the auction fraud lawsuit against Wall Street telecom titan Mario Gabelli, a belated move in the five-year-old case that followed a nasty legal skirmish between Gabelli’s lawyers and the Federal Communications Commission over documentation sought from the agency.
Indeed, it was not until after the FCC document production controversy went to a federal appeals court in Washington that FCC lawyers struck a deal with Gabelli’s legal team on what information telecom regulators would turn over. The issue is far from settled, however.
If U.S. District Judge Paul Crotty allows the Justice Department to become a plaintiff in the Gabelli litigation, the FCC no longer will be left hanging to fend off defense efforts to drag the agency further into a case it would rather avoid.
The Justice Department claims it was obliged to enter the lawsuit after the court ruled Nov. 4 that profits from the sale of wireless licenses by Gabelli and other defendants may only be recovered by the United States, not the original plaintiff, R.C. Taylor III. Still, it is clear the FCC would benefit significantly from the Justice Department being involved in the case.
In filings last week with the U.S. District Court for the Southern District of New York, the Justice Department vigorously defended FCC efforts to comply with defense requests for information.
The lawsuit-filed under the Fair Claims Act-accuses Gabelli of defrauding the U.S. government of at least $85 million by hiding his firm’s control of winning applicants in mobile-phone and paging auctions during the 1990s. Those applicants received bidding discounts and other benefits limited to small businesses known as “designated entities.” The FCC is considering tightening DE rules in a way that could restrict the ability of large cell-phone operators and possibly other large telecom firms to partner with smaller players.
Gabelli, through his Lynch Interactive Corp. firm, has denied any wrongdoing. His lawyers assert Gabelli’s connection to DE applicants was explicit on applications and approved by FCC officials.
As such, Gabelli may not be the only one on trial. FCC auction oversight is apt to be put under the microscope if the case reaches trial later this year.
Lanny Breuer, a Gabelli lawyer who was special counsel to the White House during the Clinton administration, already is calling into question the FCC’s behavior and motives in response to document requests.
“What has really been happening is that the FCC, despite the fact they made representations to the contrary, has slow walked the production in this case. I believe that they have slow walked the production for their litigation advantage,” said Breuer, according to a transcript of a March 6 status conference in Manhattan.
Breuer continued: “They have had time to bring in and, in some sense, we believe, compel former FCC people to come to the FCC so that they could begin to build their litigation strategy at the same time that they have prevented us from getting the very documents … they knew we needed to take meaningful deposition which we had hoped to do.”
Breuer said the case against Gabelli is being fabricated.
Crotty himself has expressed dismay over FCC and Justice Department lack of cooperation in the case. Whether Crotty permits the Justice Department to jump into the case may depend on how willing the U.S. is to providing documents the defense is entitled to receive.
“If your point is that you have provided all of the discovery to which the defendants are entitled, I think you have an uphill battle … the tactics that the Department of Justice has engaged in on behalf of the FCC over the last several years are not going to be tolerated,” Crotty told U.S. attorney David Kennedy. “It is going to be open and full discovery of all maters so that the defendants have an opportunity to prepare its defense, and I don’t think that the defendants had an adequate opportunity.”
The Justice Department contends the FCC performed its review of auction applications in a transparent manner based on information supplied by Gabelli. The U.S. alleges Gabelli simply hoodwinked telecom regulators.
“While the FCC rules and regulations applicable to the auctions were publicly available, and the applications at issue filed by the defendants are available on the FCC’s website,” Justice told the court last week, “the facts that go to the heart of the case are uniquely in the possession of defendants themselves: namely, whether the designated entities that bid for the licenses were sham corporations created to hide from the FCC the control and financial involvement of Gabelli and the Lynch entities so that they could obtain the licenses and use them as speculative investment vehicles to benefit themselves.”
Justice said depositions and discovery of directors and officers of DEs connected to Gabelli reveal the following:
-Contrary to statements defendants made on FCC applications, the DEs were not small businesses. None that bid on DE wireless licenses had any written business plan, independent control of finances, or ever offered telecom services.
-Contrary to FCC rules and regulations regarding de facto control, the DE directors were recruited and organized directly by Gabelli. None of the DEs, according to the U.S., engaged in arms-length negotiation over the terms of the financing offered to them by Gabelli and the Lynch entities.
-Contrary to statements Gabelli defendants made on FCC applications, the DE bidders did not actually engage in bidding. Justice said one such bidder, Fortunet Wireless Communications L.P., did not know what spectrum was, nor what a business could do with a spectrum license. Fortunet also did not know what “FCC” stood for, according to Justice. U.S. attorneys said other Gabelli DEs did not have control over bidding, either.
-Justice said documents secured through discovery show two directors of High Country Communications L.P did not contribute their own equity, but rather used a risk-free loan provided by a business associate of Gabelli. RCR
