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U.S. v. GABELLI

July 29, 2004.

U.S. EX REL. R.C. TAYLOR III, Plaintiffs,
v.
MARIO GABELLI, LYNCH CORP., LYNCH INTERACTIVE CORP., LYNCH PCS COMMUNICATIONS CORP., LYNCH PCS CORPORATION A, LYNCH PCS CORPORATION B, LYNCH PCS CORPORATION C, LYNCH PCS CORPORATION D, LYNCH PCS CORPORATION E, LYNCH PCS CORPORATION F, LYNCH PCS CORPORATION H, LYNCH PAGING CORP., FORTUNET WIRELESS COMMUNICATIONS CORP., AER FORCE COMMUNICATIONS, INC., AER FORCE COMMUNICATIONS LP, NEW ENGLAND WIRELESS COMMUNICATIONS, LP, NEW ENGLAND WIRELESS COMMUNICATIONS, CORP., SOUTHEAST WIRELESS COMMUNICATIONS, LP, SOUTHEAST WIRELESS COMMUNICATIONS CORP., FORTUNET WIRELESS COMMUNICATIONS, LP, FORTUNET COMMUNICATIONS LP, HIGH COUNTRY COMMUNICATIONS, LP, HIGH COUNTRY COMMUNICATIONS CORP., AER FORCE COMMUNICATIONS B, LP, AER FORCE COMMUNICATIONS II, LP, RIVGAM COMMUNICATORS, INC., GAMCO INVESTORS, INC., GABELLI FUNDS, INC., BAL/RIVGAM LLC, RIVGAM COMMUNICATORS, LLC, GABELLI GROUP CAPITAL PARTNERS, INC., ARF COMMUNICATIONS B, INC., EAST/WEST COMMUNICATIONS INC., ABC-LMDS LLC, BCDJMS LLC, BCK/RIVGAM LLC, RIVGAM LMDS LLC, BETA COMMUNICATIONS LLC, THETA COMMUNICATIONS LLC, THETA COMMUNICATIONS I, LLC, THETA COMMUNICATIONS II, LLC, THETA COMMUNICATIONS IA LLC, PTPMS COMMUNICATIONS LLC, PTMPS II COMMUNICATIONS LLC, BETAPAGE COMMUNICATIONS LLC, SUNSHINE PCS CORP., ALFRED ANGELO, KAREN JOHNSON, VICTORIA KANE, JAMES BALITSOS, MARIE BALITSOS, T. GIBBS KANE, NARA CADORIN, CLARENCE DAVIS, KATHLEEN SUGARMAN, GARY SUGARMAN, KATHERINE STAFFORD, TRENT TUCKER, KEITH MANTLE, KUNI NAKAMURA, JENNIFER CAIATI, NANCY VANNECK, and THOMAS WILSON, Defendants.



The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

R.C. Taylor brings this qui tam action pursuant to the federal False Claims Act ("FCA" or the "Act"),*fn1 alleging a conspiracy to defraud the United States (the "Government") through abuse of the Federal Communication Commission's ("FCC") public bidding procedure for wireless telecommunications licenses.*fn2 Defendants are accused of participating in a scheme whereby numerous "sham entities [] held themselves out as legitimate `small' telecommunications businesses," but were actually "fronts for [] Gabelli and Gabelli-related entities, and vehicles for them to acquire valuable spectrum licenses at substantial federal discounts."*fn3 Various corporate and individual defendants*fn4 now move to dismiss the action against them for failure to state a claim and/or plead fraud with the requisite particularity.*fn5 The "Rivgam defendants" and Mario Gabelli join in that motion.*fn6 For the reasons set forth below, the CWT defendants' motion to dismiss is granted in part and denied in part; and the Rivgam defendants' and Gabelli's motions to dismiss are denied.

  I. BACKGROUND*fn7

  A. The Moving Parties

  1. The Individual Defendants

  Gabelli is (or was) an officer of several of the corporate defendants, and the alleged mastermind of the fraudulent scheme underlying this action.*fn8 He drew friends, family members, and social and professional acquaintances into this fraud to pose as the "owners" of the sham entities.*fn9 In some cases, playing this part required them to certify "false" information about these companies to the FCC.*fn10 Other defendants were recruited to serve as officers in the various sham companies.*fn11

  2. The Corporate Defendants

  At the center of the fraudulent scheme are Gabelli and the so-called Gabelli-related entities, which are alleged to have created "sham" bidding entities as well as direct and indirect owners of these bidders.*fn12 The following entities were purportedly established to participate in the FCC auctions as "bidders": (1) Fortunet Wireless, (2) High Country, (3) New England Wireless, (4) Southeast Wireless, (5) Aer Force, (6) Aer Force B, (7) BAL/Rivgam, (8) BCK/Rivgam, (9) Rivgam Communicators, (10) Beta, (11) BCDJMS, (12) ABC-LMDS, (13) Betapage, (14) PTPMS, (15) PTPMS II, and (16) Theta.*fn13

  These bidders were organized as limited partnerships, held by "indirect" (49.9%) and "direct" (50.1%) owners. The "indirect" owners include: Lynch PCS A (holds or held interests in Aer Force, Fortunet Wireless, High Country, New England Wireless, Southeast Wireless, and Fortunet); Lynch PCS B (New England Wireless); Lynch PCS C (High Country); Lynch PCS D (Southeast Wireless); Lynch PCS E (Fortunet Wireless); Lynch PCS F (Aer Force B); Lynch Paging (Betapage, PTPMS, and PTPMS II); Rivgam LLC (BAL/Rivgam); Rivgam LMDS (BCK/Rivgam); and Theta II (Theta). Among the "direct" owners are: Aer Force, Inc. (owns or owned Aer Force and Aer Force B and is co-owner of Theta I and Theta); FWCC (Fortunet Wireless); HCCC (High Country); NEWC (New England Wireless); SWCC (Southeast Wireless); Theta I (Theta); and Theta IA (co-owner of Theta I and Theta).*fn14

  B. The FCC Auction Process

  The Omnibus Budget Reconciliation Act of 1993,*fn15 amending the Communications Act of 1934, granted the FCC authority to award spectrum licenses "through a system of competitive bidding."*fn16 Notably, Congress directed the FCC, in designing auction procedures, to "promot[e] economic opportunity and competition and ensur[e] that [] innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses."*fn17

  Pursuant to this congressional mandate, the FCC established a multiple-round auction process to award broadband personal communications services ("PCS") licenses.*fn18 To promote the distribution of licenses among a diverse group of businesses, auction procedures provide various incentives for small business participation. For instance, bidding in some auction blocks (e.g., Blocks "C" and "F") is restricted to "small businesses and other designated entities with total assets and revenues below certain levels."*fn19 In addition, certain small and very small businesses are eligible to receive "bidding credits" in the form of "percentage discount[s] applied to the high bid amount[s] for a license."*fn20

  Although both the percentage discounts offered and definition of "small business" vary by auction, the FCC uses substantially similar procedures for all auctions. First, the potential bidder must file a "short-form" application ("Form 175"), certifying, among other items, the applicant's eligibility for a federal discount and status as a qualified entity.*fn21 The WTB then determines whether each application is "`accepted,' thereby entitling the applicant to participate in the auction, `rejected,' such that the applicant is not eligible to bid in the auction, or `incomplete.'"*fn22 Second, following the close of each auction, winning bidders are notified and have ten days to submit a "long-form" application — the Form 600 series. This form requires applicants to provide detailed information, including their entitlement to bidding credits and any agreements into which they have entered relating to the licenses.*fn23 Any applicant who fails to submit a timely long form or is otherwise defaulted or disqualified from receiving the license is subject to penalties under section 24.704(a)(2) of the federal regulations.*fn24

  For purposes of both forms, applicants must comply with the disclosure requirements set forth under section 1.2112 of the federal regulations, directing applicants to list:
(1) [T]he real party or parties in interest in the applicant or application, including a complete disclosure of the identity and relationship of those persons or entities directly or indirectly owning or controlling (or both) the applicant;
* * *
(3) [I]n the case of a limited partnership, the name, address and citizenship of each limited partner whose interest in the applicant is 10 percent or greater . . .;
(4) [I]n the case of a general partnership, the name, address and citizenship of each partner, and the share or interest participation in the partnership;
(5) [I]n the case of a limited liability company, the name, address, and citizenship of each of its members whose interest in the applicant is 10 percent or greater;
(6) [A]ll parties holding indirect ownership interests in the applicant as determined by successive multiplication of the ownership percentages for each link in the vertical ownership chain, that equals 10 percent or more of the applicant, except that if the ownership percentage for an interest in any link in the chain exceeds 50 percent or represents actual control, it shall be treated and reported as if it were a 100 percent interest; and
(7) [A]ny FCC-regulated entity or applicant for an FCC license, in which the applicant or any of the parties identified in paragraphs [(1) through (5)], owns 10 percent or more of stock. . . . This list must include a description of each such entity's principal business and a description of each such entity's relationship to the applicant. . . .*fn25
A bidder seeking the benefits associated with "small business" status must also provide the following information:
(i) [T]he names, addresses, and citizenship of all officers, directors, affiliates, and other controlling interests of the applicant. . . .;
(ii) [A]ny FCC-regulated entity or applicant for an FCC license, in which any controlling interest of the applicant owns a 10 percent or greater interest or a total of 10 percent or more of any class of stock, warrants, options or debt securities. This list must include a description of each such entity's principal business and a description of each such entity's relationship to the applicant; and
(iii) [S]eparately and in the aggregate the gross revenues . . . for . . . The applicant, its affiliates, its controlling interests, and affiliates of its controlling interests; and if a consortium of small businesses, the members comprising the consortium.*fn26 C. Defendants' Alleged Fraud
  Taylor alleges that, beginning in 1995, Gabelli and the Gabelli-related entities created several dozen companies to bid on licenses and/or to serve as owners of these bidders. These organizations were purportedly established for the purpose of "acquir[ing] federally discounted licenses as investments to be later sold for profit in the after-market," and not for the legitimate objective of "develop[ing] or offer[ing] spectrum services under the acquired licenses, or to operate actual business operations."*fn27

  A "cornerstone" of this fraudulent scheme was Gabelli's use of various individual defendants — "all of whom had ties of loyalty to [him]" to serve as "owners" and/or officers of these bidding entities.*fn28 These bidders began participating in the auction process in the mid-1990s — taking part in Auctions 5 and 11, during which they are alleged to have established a "template" for their future fraudulent conduct.*fn29 1. Auctions 5 and 11 (1995-1996)

  a. Auction 5

  In Auction 5, the FCC conducted bidding for broadband PCS Block C licenses among bidders with gross revenues and total assets of less than $125 million and $500 million, respectively. The FCC offered a 25% discount to qualified "small" businesses with gross annual revenues not exceeding "$40 million averaged over the preceding three years."*fn30

  The first step in the fraudulent bidding scheme involved the creation of a series of indirect owners in June and July of 1995.*fn31 To that end, Gabelli, Gabelli-related entities, and/or their agents prepared and submitted the legal documents necessary to incorporate these corporations under Delaware law. Next, a few days before the submission deadline, various partnerships were created to serve as bidders — Fortunet Wireless, New England Wireless, Southeast Wireless, and High Country. A fifth Gabelli-related bidder, Aer Force, also filed a short-form application for this acution.*fn32

  Gabelli and Gabelli-related entities helped to prepare and file the short and long-form applications on which the sham bidders "made numerous fraudulent statements and omissions to the FCC."*fn33 For instance, these applications: (1) certified that the applicants were qualified to "participate in the restricted-eligibility auctions" and to receive the federal discounts for small businesses; (2) provided "dummy addresses" corresponding to the private residences of the various individual defendants; (3) "knowingly" failed to "attribute the assets and revenues of [] Gabelli and Gabelli-related entities," which exercised de facto control over the bidders; and (4) presented individuals as "owners" of the bidding partnerships who lacked "experience or ability to contribute meaningfully to the [] application or bidding process."*fn34

  On September 17, 1996, the PCS licenses from Auction 5 were awarded. Each of the Gabelli bidders acquired discounted Block C licenses. The total value of these licenses and discounts is about $285 million and $65 million, respectively.*fn35 Within a year, the licenses were transferred to Fortunet, a successor to the assets and liabilities of Fortunet Wireless, High Country, New England Wireless, Southeast Wireless, and Aer Force; 49.9% owners NEWC, SEWC, and HCCC merged into and with FWCC; and 50.1% owners Lynch PCS B, Lynch PCS C, Lynch PCS D, Lynch PCS E, and Lynch PCS F merged into and with Lynch PCS A.*fn36

  b. Auction 11

  In 1996, the FCC conducted Auction 11, offering Broadband PCS licenses in Blocks D, E, and F. Two levels of federal discounts were made available to qualifying "very small" and "small" businesses. Applicants claiming "gross annual revenues of not more than $15 million averaged over the preceding three years," qualified for the "very small" business discount of 25%.*fn37 "Small" businesses, or companies "with gross annual revenues of not more than $40 million averaged over the preceding three years," were entitled to a 15% discount.*fn38

  The Gabelli company involved in this auction, Aer Force B, was 50.1% owned by Aer Force Inc. (which was, in turn, wholly owned by Victoria Kane) and 49.9% owned by Lynch PCS F.*fn39 Aer Force B was a thinly capitalized company that derived its financing as debt from Gabelli Funds Inc.*fn40 and "fraudulently claimed and certified that it was a `very small' business."*fn41 Aer Force B successfully bid for licenses in various markets and because it qualified as a "very small" business, was given a 25% discount on these licenses. Within approximately one year, Aer Force B was merged into East/West Communications Inc. (previously named ARF Communications B, Inc.), which was later acquired by Omnipoint Corp.*fn42

  2. Auctions 14, 17, 22, 23, 26, 30, 33, and ...


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