Académique Documents
Professionnel Documents
Culture Documents
COMPLAINT
million Broadband Initiatives Program (“BIP”) taxpayer-funded loan is at risk of default and
respectfully requests that the OIG expeditiously investigate whether a BIP $66 million plus
loan/grant combination awarded to Lake County, Minnesota (“Lake County”) to construct a last-
mile broadband network in portions of Lake and St. Louis Counties, Minnesota (“Project”) was
improperly obtained. Mediacom further requests that OIG investigate statements made by local
officials that RUS personnel have provided assurances that RUS will not seek repayment of its
$56 million loan should the County default. If true, such collection forbearance would covert the
BIP loan into an unlawful grant. To maintain the status quo pending its investigation, Mediacom
respectfully requests that OIG immediately direct RUS to hold the award in abeyance and
to result in default of the loan portion of the Project award. Lake County has
made statements that it believes that RUS will forgive the loan, effectively
2. At the time of its application, Lake County lacked, and continues to lack, the legal
authority necessary to enter into the loan/grant award; build and operate the
(“NPB”), to not only prepare the application but to build and operate the system
for Lake County raises a number of compliance issues, including the fact that
Lake County has agreed to pay an impermissible success fee that was contingent
upon the grant of the award as well as the likelihood of future impermissible
I. BACKGROUND
On September 13, 2010, RUS announced that it would fund a Round 2 application
(Easygrants ID 4538 -“Lake County Fiber Network”) (“Application”).1 The Project would
provide voice, video and data services2 to “all of Lake County and a portion of Saint Louis
County including the cities of Ely, Babbitt, Aurora, Hoyt Lakes and the townships of Basset,
Colvin, Duluth, Embarrass, Morse, Waasa and White.”3 The proposed network will serve about
1
Rural Utilities Service Broadband Initiatives Program, Round Two Application Directory, Last Mile and Middle
Mile Infrastructure Applications, at 388 (June 2, 2010), attached as Exhibit 1.
2
Id.
3
Lake County Fiber Optic Project – Fact Sheet, October 15, 2010,
http://www.co.lake.mn.us/index.asp?Type=B_PRGSRV&SEC={3098D1D8-0AFD-4D47-BDD5-EF5CA66878C4}
(last visited January 13, 2011), attached as Exhibit 2. The Project includes the St. Louis County municipalities of
City of Ely, City of Babbitt, City of Aurora, City of Hoyt Lakes, and the Town of Basset, Town of Colvin, Town of
Duluth, Town of Embarrass, Town of Morse, Town of Waasa, and the Town of White; and the Lake County
municipalities include: City of Beaver Bay, Town of Beaver Bay, City of Silver Bay, City of Two Harbors, Town of
2
“15,000 homes, 1,000 businesses and 100 ‘critical community facilities’ (schools, hospitals,
libraries, etc.).” The Project funding consisted of approximately $56.4 million in loans,
approximately $10 million in the form of a grant and $3.5 million in funding to be provided by
Lake County – funds that it will procure from the sale of revenue bonds.4
Mediacom, through its affiliates, owns and operates cable television systems in
incorporated areas in the Project’s service area, including the Minnesota cities of Beaver Bay,
Silver Bay, Two Harbors, Aurora and Hoyt Lakes (collectively “Mediacom Served
Communities”). Mediacom provides a full array of services, including video, broadband phone
and Internet access with speeds of up to 20 Mbps throughout these communities. Based on its
review of the published service area maps, Mediacom believes that these communities were
systems in incorporated areas in the Project’s service area, including the Minnesota cities of
full array of services, including video, broadband phone and Internet access with speeds of up to
50 Mbps throughout these communities. Based on its review of the published service area maps,
Midcontinent believes that these communities were properly listed as “served” in the
Application.6
Crystal Bay, Town of Fall Lake, Town of Silver Creek and Town of Stony River (individually “Municipality” and
collectively “Municipalities”).
4
Exhibit 1; see also Lake County Fretting Over Internet Link, Star Tribune,
http://www.startribune.com/business/112285054.html (December 21, 2010) (discussing the concerns of Lake
County officials over aspects of the broadband initiative, citing to a $4 million contribution by Lake County, rather
than the $3.5 million contribution listed in the Round Two Application Directory).
5
Declaration of Thomas Larsen attached as Exhibit 3.
6
Declaration of W. Tom Simmons attached as Exhibit 4. Other providers of service that meet the BIP definition of
“broadband,” such as Frontier Telephone and Qwest, also exist within the Project’s service area. These additional
providers simply bolster the points in this complaint but are not essential to establish the disqualification of the
Project’s service area for funding.
3
II. THE PROJECT IS NOT FINANCIALLY VIABLE AND IF RUS FORGIVES THE
LOAN UPON DEFAULT, THE LOAN WILL BE UNLAWFULLY CONVERTED
INTO A GRANT.
The Project is not financially sound, and Lake County already anticipates defaulting on
the loan. The high cost per housing unit passed due to large sparsely populated areas and the
current availability of high-speed service in the few population clusters where more than half of
the housing units are located makes the Project a risky venture likely to result in default of the
RUS loan.
Several of these communities are already served by broadband speeds of 20–50 Mbps.
Lake County has improperly attempted to game the application process to overcome its first
round application’s failure. Initially, Lake County applied for funding solely for the entirety of
Lake County, Minnesota, indicating that the entire county qualified as “unserved.” Mediacom
provided comment on the proposed maps submitted by Lake County and noted that much of the
“unserved” territory was, in fact, already served by Mediacom. Lake County’s request for
In its second round application, Lake County standing alone was ineligible given that
well more than 50% of its housing units in the Lake County service area had access to Internet
speeds of 20 – 50 Mbps (all of which is rural). Thus, Lake County added sparsely inhabited
portions of neighboring St. Louis County to the Project area to attempt to meet the requirement
that fewer than 50% of the households had access to high-speed broadband.7 The map submitted
with the Application included “donut holes” indicating that portions of Lake County and St.
7
In the second round, an “unserved household” is a household with no existing access to facilities-based, terrestrial
broadband service, either fixed or mobile, at the minimum broadband transmission speed of 768 kbps downstream
and 200 kbps upstream. Notice of Funds Availability (NOFA) and Solicitation of Applications, 75 FR 3825 (January
22, 2010); Broadband Initiatives Program (BIP), Round Two Application Guide, pp. 6, 8 (Feb 1, 2010).
4
Louis County were already served. Accordingly, there was no reason for Mediacom or
important. Much of the Project area is sparsely populated, not because of lack of infrastructure,
but because it is part of Superior National Forest. It is not intended to be anything but a natural
preserve. Yet, as the basis of the JPA, Lake County justifies the project by stating that it will
“encourage the development of economically sound industry and commerce” and that the project
will “assist in the prevention of the emergence of blighted and marginal land.”8 Many would
argue that pristine land that is part of a large national forest would not be considered “blighted
and marginal land.” Lake County has included vast portions of this national forest in an attempt
to dilute and mask the fact that where the majority of the year-round population resides, all
By virtue of being the governmental body for the county, Lake County should have been
aware of the number of housing units which have high-speed broadband available, at least by
franchised cable operators. It should have known exactly how many unserved housing units it
needed to include when drawing the St. Louis County Project area boundary in order to offset the
increased number of housing units since the 2000 Census. Yet, Lake County’s contractor that
prepared the application ignored information that it must have known and used the 2000 Census
numbers when it gerrymandered the Project area’s boundaries.9 As a result just enough unserved
8
Resolution Approving a Joint Powers Agreement with Lake County with Respect to a Fiber-Optic Network Project
at Section 4(b), attached as Exhibit 5.
9
See correlation between the numbers listed in the following sources: Lake County Fiber Optic Project – Fact
Sheet, October 15, 2010, http://www.co.lake.mn.us/index.asp?Type=B_PRGSRV&SEC={3098D1D8-0AFD-4D47-
BDD5-EF5CA66878C4} (last visited January 13, 2011); United States Census 2000, Minnesota – Place and County
Subdivision, http://factfinder.census.gov/servlet/GCTTable?_bm=y&-geo_id=04000US27&-_box_head_nbr=GCT-
PH1&-ds_name=DEC_2000_SF1_U&-format=ST-7 (last visited January 17, 2011).
5
housing units in St. Louis County were added to result in 51% of the total housing units (whether
Lake County, however, ignored data as of the Application date that reveals that a very
significant number of housing units already have access to Internet at speeds of 20 – 50 Mbps.
Taking into account just the number of housing units in the Mediacom Served Communities and
the Midcontinent Served Communities, the percent of unserved housing units in the funded
service area drops to under 43%. The number would drop even further if other terrestrial
providers of high-speed broadband such as Qwest and Frontier Communications were included.
The following chart shows the disparity in the numbers presented by Lake County and actual
10
Mediacom has prepared this analysis conservatively using the number of housing units. Although the RUS
unserved threshold is measured in terms of households, the information most readily available is the number of
housing units. If the number of housing units were to be converted to households, the percent served would likely
increase because Lake County has a vacancy rate of about 31% and St. Louis County about 15% and more of those
vacancies are likely outside of the area of year-round residents that are served by either Mediacom or MidContinent.
11
Exhibit 3.
12
Exhibit 4.
13
These amounts were derived based on the disclosures made by the Rural Utilities Service that the Project would
serve approximately 15,000 housing units. The number of served housing units and unserved housing units are
known. The sum of these was subtracted from the total housing units to derive the number of unserved housing
units in the unincorporated areas of the counties.
6
Because well more than 50% of the housing units – at least 57.4% - in the project area
already have broadband Internet access available at speeds of 20 – 50 Mbps, the award should be
B. The Low Population Density and High-Per Housing Unit Cost Make the
Project Economically Prohibitive.
The funded service area is largely comprised of the vast but sparsely populated Superior
National Forest, with the majority of the housing units concentrated in a handful of
municipalities that are already served by existing broadband providers. As a result, Lake
County has an average population density, even including the Served Municipalities, of about 5
persons per square mile14 and far fewer if the populations and square mileages of the population
of municipalities already served by broadband providers were removed from the calculation.
This ultra-low density results in a high cost per housing unit passed of $4,700 per housing
unit15 and about $6,772 per occupied housing unit.16 By comparison, these amounts are 3.9 to
5.6 times higher than the $1,200 per housing unit passed cost for a fiber-to-home system that was
recently determined to be an appropriate cost for such a system in a more populated area.17
14
Lake County has approximately 2,132 square miles and a current population of 11,160 resulting in about 5.36
persons per square mile. See Lake County website,
http://www.co.lake.mn.us/index.asp?Type=B_BASIC&SEC={139EED71-5801-4382-B2FA-9C9BDA223FD2},
(last visited January 30, 2011).
15
Fn 3, supra, ($70.5 million divided by 15,000 housing units).
16
The United States Census Bureau website lists Lake County’s vacancy rate for housing units at 30.6%. These
homes could either be vacant or vacation homes. Even those that are vacation homes are important as they may be
seasonal and would not subscribe full-time to services offered by the Project,
http://factfinder.census.gov/servlet/ACSSAFFFacts?_event=ChangeGeoContext&geo_id=05000US27075&_geoCo
ntext=&_street=&_county=lake+county&_cityTown=lake+county&_state=04000US27&_zip=&_lang=en&_sse=on
&ActiveGeoDiv=&_useEV=&pctxt=fph&pgsl=010&_submenuId=factsheet_1&ds_name=ACS_2009_5YR_SAFF
&_ci_nbr=null&qr_name=null®=null%3Anull&_keyword=&_industry=, (last visited January 30, 2011).
17
In Burlington, Vermont, Burlington Telecom invested approximately $33.5 million to build a system passing
about 15,000 housing units, which averages $2,200 per passing (see, fn 64, infra, at 48). However, an expert report
by Hiawatha Broadband Communications to the Blue Ribbon Commission (see, fn 69, infra,at 4) concludes that “far
too much was spent constructing the fiber-to-the-home (FTTH) plant (roughly $1,000 too much per passing). Thus,
the cost per housing unit passed should have been about $1,200.
7
To compensate for this hugely expensive capital cost, Lake County estimates that it needs 60 –
65% penetration of all housing units passed.18 Because of the high vacancy rate, virtually every occupied
housing unit in the funded service area must subscribe to all of the services offered, at an average monthly
charge of $133.19 By way of comparison, this amount is almost 30% higher than Mediacom’s average
monthly revenue per subscriber company-wide.20 The level of penetration and average monthly revenues
upon which Lake County bases its projections of financial viability are simply not realistic in Lake and
Mediacom has been perplexed as to why Lake County would undertake RUS debt of $56 million
– an amount equal to almost 2.5 times its annual budget – when the project was virtually unviable on its
face.21 In a January 27, 2011 meeting with Lake County officials, Mediacom raised concerns that the
Project would likely fail economically and that the terms of the loan documents with RUS made the
taxpayers of Lake County liable for the $56 million owed to RUS. County officials were completely
unconcerned and informed Mediacom that RUS had assured them that neither Lake County nor its
taxpayers would owe a penny in the event of default.22 Such conduct would represent a radical departure
of mostly conservative and distinguished lending practices by RUS over its more than 75-year history.23
Moreover, Lake County officials’ statements implicate RUS in enabling reckless spending and actual
18
Lake County offers good look at broadband’s public-private divide, MPRnews, January 10, 2011
http://minnesota.publicradio.org/collections/special/columns/ground-level/archive/2011/01/lake-county-offers-good-
look-at-broadbands-public-private-divide.shtml, (last visited February 2, 2011).
19
Declaration of Thomas Bordwell attached as Exhibit 6.
20
United States Securities and Exchange Commission, Form 10-K 2009, Mediacom Communications Corporation at
42 showing an average of $95 per subscriber, http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9NDAwNzg3fENoaWxkSUQ9NDA3OTI3fFR5cGU9MQ==&t=1.
21
Moreover, Lake County seemed to think nothing that slightly more than half the debt was being incurred for the
sole benefit of residents of another county – St. Louis County. If the Project failed and the taxpayers had to repay
some or all of the debt, Lake County taxpayers would be paying for the system in St. Louis County.
22
Exhibit 6. In the context of this discussion, Lake County Commissioner Paul Bergman claimed to have had a
telephone conversation directly with RUS Administrator, Jonathan Adelstein on January 26, 2011.
23
In the past, default and foreclosure by a borrower meant that the borrower forfeited its entire business. Whether a
privately owned provider or a cooperative, this meant a loss of other investment and future business. In the instant
case, Lake County officials simply want a broadband system in their area and appear indifferent as to whether the
county owns or controls the system. Thus, permitting a borrower of $56 million whose objectives can still be fully
achieved in the event of a default, coupled with the borrower’s belief that RUS will forego collection following
foreclosure sale, would establish a new and dangerous incentive for reckless borrowing by local governmental units.
8
Lake County officials’ statements suggest the following strategy:
2. Do not worry if the revenues are sufficient to pay back the debt;
3. At worst case, RUS forecloses on the system and auctions it off to another provider;
4. RUS walks away from the short sale and does not require Lake County to make up the difference
5. Lake County has a fiber system for its residents and did not have to pay a penny for it.
Matters become even more suspect when one considers, as described below, that the application should
Under Minnesota law, Lake County lacks the necessary authority to build or operate the
Project absent a grant of authority from each of the nineteen Municipalities served by the project,
a point admitted by Lake County’s outside legal counsel in a letter written to the
direct providers of high-speed Internet or telephony services.25 With respect to video services, a
county must obtain cable franchises from each franchising authority with jurisdiction in the
Minnesota counties lack inherent powers and possess only such powers as are expressly
conferred by statute or implied as necessary in aid of those powers, which powers must be
24
Letter of Mary Frances Skala to Lana Fralich, City of Silver Bay dated October 29. 2010 attached as Exhibit 7.
(“Two important documents are enclosed with this letter. The first is a joint powers agreement that authorizes the
County to fund and operate the Project. The second is a resolution for City of Silver Bay to approve the joint
powers agreement and permit Lake County to fund, construct and operate the project in your jurisdiction.”)
25
Letter from Anthony S. Mendoza, Esq. to Mike Martin dated January 20, 2011, attached as Exhibit 8.
9
expressly conferred by the Legislature.26 No Minnesota statute or case law provides authority to
a county to provide high-speed Internet services. The Minnesota Statute, §237.19,27 that permits
government entity ownership and operation of a “telephone exchange within its own borders”
grants such powers only to “municipalities.” There is no statutory or judicial authority that Lake
County can rely upon to claim that a county is a “municipality.”28 In fact, a thorough statutory
construction analysis confirms that a county is not a municipality for purposes of §237.19. Thus,
Lake County lacks the authority to construct and operate the Project to provide telephony
services anywhere.29 Even assuming the incorporated towns and cities can delegate such
authority to Lake County, which they cannot unless they possess such authority themselves, that
leaves vast unincorporated sections of the funded service area where no such authority exists.
In all events, the authority under §237.19 is contingent upon prior voter approval: “in no
case shall a municipality construct or purchase such [telephone] plant. . . until such action by it is
authorized by a majority of the electors voting upon the proposition at a general election or a
special election called for that purpose.”30 Moreover, because all of the Municipalities are
already served by at least one local exchange provider, §237.19 further requires that the
authorization vote be approved by at least “65 percent of those voting thereon. . . .” No such
nineteen Municipalities during its January 27, 2011 meeting with Lake County officials. The
attorney representing Lake County conceded that Lake County lacked the authority to provide
26
Id.
27
M.S.A. §237.19, attached as Exhibit 9 .
28
Exhibit 8.
29
Exhibit Id.
30
Exhibit 9.
31
Exhibit 3.
10
voice services and sought to avoid electorate approval by having a “third party” – not the county
or any of the Municipalities – own the telephone switch.32 Placing ownership of such a key
component of the Project outside of Lake County constitutes a radical change from the Project as
Independent of the regulatory status of telephony services, the Project will also operate
as a “cable communications system” providing video services. This separately requires the
approval and grant of a franchise by each incorporated municipality in the Project’s service
area.33 Again, Lake County cannot build or operate the Project without the express grant of
Apparently ignoring the foregoing, Lake County is nonetheless actively soliciting consent
and authority from the nineteen Municipalities through a joint powers agreement (“JPA”). 34 A
JPA is a legal prerequisite to Lake County having authority to issue revenue bonds to finance the
The JPA that Lake County drafted confirms that it lacks the necessary legal authority to
build the Project and operate the system. The JPA plainly attempts to make an express grant of
authority to Lake County to construct and operate the system within the boundaries of each of
32
See Exhibit 3.
33
M.S.A. §238.08 attached as Exhibit 10.
34
Lake County originally circulated a Joint Powers Agreement (“Original JPA”), attached as Exhibit 11, and later
circulated a revised Joint Powers Agreement (“Revised JPA) attached as Exhibit 12. Both the Original and Revised
JPAs list the potential parties as the Minnesota cities of Two Harbors, Beaver Bay, Silver Bay, Ely, Aurora, Babbitt,
and Hoyt Lakes; the Minnesota towns of Basset, Beaver Bay, Colvin, Crystal Bay, Duluth, Embarrass, Fall Lake,
Morse, Silver Creek, Stony River, Waasa and White; and the Minnesota county of St. Louis.
35
Exhibit 11, Section 6(a).
11
However, like Lake County, the Municipalities themselves do not possess authority to
construct the network or provide voice, video, or high speed services. Neither a county nor a
municipality can agree to exercise power jointly that the other does not itself possess.36
Moreover, the outside counsel for Lake County has advised that absent an express grant
of authority via a joint powers agreement, Lake County cannot “expend any of its loan or bond
money to install its fiber network in [municipality name].”37 Thus, Lake County does not have
authority to borrow money, even from RUS, to spend in the nineteen municipalities and St. Louis
County absent not only their express consent, but that all parties grant such consent by entering
As part of its Application, Lake County was required to list all required agreements or
(e.g., certificates of public convenience and necessity).38 Lake County also was required to
submit as part of its Application an opinion of legal counsel that stated in relevant part “[Lake
County] has corporate power: . . . to perform all acts required to be done by it under said
agreement.”39 Moreover, Lake County would have been required to update and reissue this
If Lake County had completely and accurately completed its application40, RUS should
not have made the award to an entity that lacks legal authority to build and operate a project and
36
Exhibit 8.
37
Email from Mary Frances Skala to Johnson-Morris Law Office dated November 3, 2010, 4:46 PM, attached as
Exhibit 13.
38
Attachment 16, Licenses and Agreements, Broadband Initiatives Program Application, Round 2 attached as
Exhibit 14.
39
Exhibit 15, Attachment 1, Legal Opinion, Broadband Initiatives Program Application, Round 2.
40
Again, Mediacom does not believe that Lake County’s application would have been granted had its lack of
authority absent numerous governmental consents and votes of electorate been properly disclosed. The January 27,
2011 meeting with Lake County officials was held in the offices of the Lake County Coordinator where a copy of
the application resides. Mediacom asked during the meeting for Lake County officials to pull the application out of
the file cabinet and show Mediacom Attachment 16 as filed. Lake County officials repeatedly refused to produce
12
that required the consent of nineteen other governmental entities and the approval of a
supermajority of the electorate in each of those nineteen governmental entities – none of which
had occurred prior to the Application’s approval or the award’s closing. The Office of Inspector
General should promptly investigate whether Lake County’s Application failed to fully disclose
(as required by the Notice of Funds Availability)41 the extent of governmental consents and voter
approvals upon which the ability to proceed with the Project was contingent.
B. Lake County Lacks Legal Authority to Borrow from RUS and Make its Capital
Contribution
The Application was awarded and will be funded with a $9,955,359 grant, a $56,413,705
loan and $3,500,000 of applicant funding (“Applicant Funding”).42 Applicant Funding in the
amount of $3,500,000 will be paid by revenue bonds issued by the Lake County Housing and
Redevelopment Authority.43
Lake County’s outside legal counsel admits that under Minnesota law, Lake County lacks
authority to sell revenue bonds, borrow money from another governmental entity and borrow
funds from RUS absent a grant of authority from each of the nineteen municipalities and St.
Louis County served by the project.44 An analysis of Minnesota statutory law confirms the lack
of authority. Because Lake County lacks the underlying authority to construct the network and
provide voice, video and high-speed Internet services, Lake County also lacks legal authority to
borrow money, including issuing the bonds to generate this capital contribution.45 Under
that attachment. Mediacom has requested a copy of the entire application from Lake County pursuant to Minnesota
law, however, its request as well as follow-up communications have been met with silence.
41
Notice of Funds Availability (NOFA) and Solicitation of Applications, 75 FR 3828, January 22, 2010.
42
Exhibit 1.
43
This is confirmed by Lake County’s own website that lists the revenue bond funding at $4 million
http://www.co.lake.mn.us/index.asp?Type=B_LIST&SEC={92E95A0B-63CC-459F-9E40-9E2226C282CF} (last
visited January 14, 2011) attached as Exhibit 16; see also County Moves to OK Broadband Builder, Lake County
News-Chronicle, December 9, 2010 attached as Exhibit 17; see also Exhibits 11 and 12.
44
Exhibits 7 and 13.
45
Exhibit 8.
13
Minnesota law, where a local government lacks the requisite authority from the electorate to
engage in an activity to be funded with bonds, the local government has no authority to issue
As part of its Application, Lake County was required to list all required agreements or
Lake County was also required to submit as part of its Application an opinion of legal counsel
that stated in relevant part “[Lake County] has corporate power: . . . to perform all acts required
to be done by it under said agreement.”49 Moreover, Lake County would have been required to
update and reissue this opinion as of the date that it closed on the award.
If Lake County had completely and accurately completed its application, RUS would
have made and closed the award to an entity that lacks legal authority to issue the bonds
necessary to provide the Applicant Funding and that required the consent of nineteen other
governmental entities in order to issue the bonds which was not obtained prior to the
Application’s approval or the award’s closing. The Office of Inspector General should promptly
investigate whether Lake County’s application fully disclosed (as required by the Notice of
Funds Availability)50 the extent of governmental consents upon which the ability to secure the
Following grant of the award, in its attempt to justify the issuance of revenue bonds, Lake
County attempted to procure outright fraudulent representations from the Mediacom Served
46
Exhibit 8.
47
Id.
48
Exhibit 14.
49
Exhibit 15.
50
Notice of Funds Availability (NOFA) and Solicitation of Applications, 75 FR 3828 at 3829, January 22, 2010.
14
Communities and the Midcontinent Served Communities. Initially, Lake County circulated a
JPA that some Municipalities executed (“Original JPA”) that required a specific “recital of the
benefits to” the Municipality “from the issuance of the Obligations.”51 Each Municipality was
The Parties hereby find that the facilities composing [sic] the
Project are necessary to make Internet and other communications
services that are not and will not be available through other
providers or the private market accessible and available on an
equal basis to the residents of each of the Parties.52
Lake County cannot simply be mistaken in requiring this statement. Lake County
correctly listed the Mediacom Served Communities and the Midcontinent Served Communities,
as well as communities served by other providers, as “served” when it completed the Mapping
Tool that generated the proposed funded service area map that became part of the Application.53
Rather, Lake County’s efforts appear to solicit coordinated and fraudulent statements in an effort
to be able to issue and sell the revenue bonds for the sole purpose of securing more than $66
After Mediacom raised concerns with several municipalities about signing the Original
JPA that contained a number of patently false findings of fact, a new JPA54 materialized
Importantly, the Revised JPA contained another critical distinction from the Original
JPA. Likely in recognition of the fact that Lake County lacks authority to issue the revenue
bonds to pay for construction of the Project55, the legal entity that would issue the revenue bonds
changed from Lake County itself to the Lake County Housing & Redevelopment Authority
51
Exhibit 11 at Section 2(c).
52
Exhibit 11 at Section 2(c).
53
Exhibit 3.
54
Exhibit 12 (note that this Exhibit contains both a copy that was marked with changes and clean copy).
55
See discussion in section III(B), supra.
15
(“Lake County HRA”).56 The Lake County HRA has a separate board with only one member in
common with the Lake County Board.57 Thus, now not only is the ability for Lake County to
obtain the Applicant Funding contingent on the sale of municipal revenue bonds in a bad
municipal bond market, but it is contingent on a third party deciding to and actually selling those
bonds.
Because of this last-minute switch of bond issuers, it is unlikely that RUS was aware that
the issuance of the bonds was out of Lake County’s direct control. Moreover, the fact that a
third-party would issue the bonds may also cause a conflict of asset securitization priorities with
the first secured position required by RUS. In any event, the manner in which Lake County is
attempting to find some way for someone to issue the revenue bonds should cause RUS to at
least take notice and scrutinize the propriety of Lake County’s actions.
Lake County retained an outside entity, National Public Broadband, Inc. (“NPB”), to
prepare its application, build and operate the system. Lake County seemingly selected NPB
because it was willing to accept a reduced fee prior to the award in exchange for a contingent
success fee to be paid out of the Award. Contingent success fees are expressly prohibited by
RUS.58
Under the arrangement, NPB would have sole responsibility for the construction and
operation of the system59. With respect to operations, NPB employees would be solely
56
Exhibit 12.
57
Lake/Cook County Housing Program,
http://www.co.lake.mn.us/index.asp?Type=B_PRGSRV&SEC=%7B09F2EF4C-59A2-4C95-AF91-
54A557838F1E%7D (last visited January 17, 2011).
58
BIP/BTOP Frequently Asked Questions at 15, attached as Exhibit 18.
59
OIG should also investigate whether NPB’s experience (from which its lack of relevant experience would have
obvious) was fully disclosed as required in the application. For example, NPB’s chairman’s served as the chief
16
responsible without participation of Lake County employees.60 Mediacom strongly urges RUS
to closely examine the contractual relationship with NPB as well as NPB’s ability to comply
with all BIP requirements. Today, NPB is little more than a company on paper with a website,
four named managers (and possibly owners),61 all of whom currently own and are active in other
service businesses and a corporate office located within the home of one of its principals. It has
In the January 27, 2011 meeting, Mediacom raised the concern that NPB was essentially
a company on paper only. Lake County officials responded that each of NPB’s officers had full-
time ventures that they owned, and that these ventures had the requisite experience.62 Based on
the statements made during this meeting, Mediacom is concerned that NPB will award the
contracts for the construction and operation of the Project to entities that are either owned by
NPB principals and/or officers or in which they have a financial interest, in contradiction of the
Especially troubling is the fact that one of NPB’s founders, Tim Nulty, who serves as its
CEO, has a questionable recent track record. Mr. Nulty served as the General Manager of
Burlington Telecom (“BT”) and oversaw construction and operation of a broadband system in
Burlington, Vermont. A forensic audit ordered by the Vermont Public Service Board and issued
in late 2010 shows that BT was woefully ill-prepared to build and operate a broadband system
executive over a failed fiber-to-the-home project in Burlington, Vermont and NPB’s chief financial officer has no
experience with RUS or telecommunications accounting (see Exhibit 6).
60
County Closes In On Broadband Contract, Lake County News Chronicle,
http://www.twoharborsmn.com/event/article/id/21643/ (last viewed January 17, 2011).
61
National Public Broadband, http://www.nationalpublicbroadband.org/index.html (last visited January 19, 2011).
62
Exhibit 6. Moreover, both NPB’s CEO and CFO have consultancy businesses. The COO and CTO are believed
to be owners of U-reka Broadband Ventures, Inc., an entity that claims to build and operate broadband systems.
63
Rural Utilities Service, Broadband Initiatives Program Contracting, Work Order, and Advance Procedures Guide
at 5, http://www.broadbandusa.gov/BIPportal/files/BIP_Contracting_and_Advance_Procedures_Guide_3-4-10.pdf,
17
and that it engaged in patterns of conduct to hide its true financial condition.64 Investigations
into possible illegal conduct are underway by the Vermont Attorney General’s office and, as of
Although he was the General Manager of BT, Mr. Nulty has attempted to distance
himself from the scandal by claiming that he had nothing to do with the financial problems at BT
where he was general manager from 2001 until he resigned in October 2007.66 According to the
PSB Audit Report, that is simply untrue. BT had arranged for financing totaling $43.5 million to
cover the construction and operating losses. BT had “effectively exhausted” those funds by
observed that BT would exceed its remaining borrowing capacity in March 2008.68 Unless he
was entirely disengaged from the enterprise he was running, based on the findings of the PSB
Audit Report, Mediacom believes that Mr. Nulty must have known that the clock was ticking
and that he needed to exit before BT imploded. Moreover, the fact that BT burned through so
much cash in operations and spent too much to build the system ($1,000 too much per home
passed)69 during Mr. Nulty’s tenure should cause RUS to take serious issue with the material
involvement of any entity associated with Mr. Nulty in the BIP program.
The key problems noted by the Vermont PSB auditors – problems that occurred while BT
was under Mr. Nulty’s control as general manager -- all related back to the failure to monitor
64
To amend Condition No. 17 of its Certificate of Public Good, enlarging the date by which it must complete its
system building out, Investigation into City of Burlington d/b/a/ Burlington Telecom’s Non-Compliance with
Condition No. 60 of its Certificate of Public Good, Vermont Public Service Board Docket No. 7044, Submitted by
Larkin & Associates, PLLC, December 10, 2010 (“PSB Audit Report”), attached as Exhibit 19.
65
FBI Joins Criminal Probe of Burlington Telecom, Burlington Free Press, November 30, 2010.
66
Lake County Fretting Over Internet Link, Star Tribune, http://www.startribune.com/business/112285054.html
(December 21, 2010).
67
Exhibit 19 at 13.
68
Id. at 20 (citing the Shanahan Report).
69
Burlington Telecom, A Report to the Blue Ribbon Commission, Hiawatha Broadband Communications, January
21, 2010 (“HBC Report”) at 4, attached as Exhibit 20.
18
compliance with Certificate of Public Good (“CPG”) requirements. Like the BIP program, the
Vermont PSB issued BT a CPG that required compliance with a wide variety of conditions –
1. No compliance controls. Despite its obligation to comply with the conditions of the
CPG, “BT lacked sufficient monitoring controls to maintain compliance with the
CPG.”70 As noted below, many of the conditions related to financial compliance.
Simply put, BT did not put any systems into place to ensure that it was in compliance
with the CPG conditions.
2. Willfully failing to report non-compliance. The PSB auditors found that “BT not
only withheld the fact that it was not in compliance from the DPS and the Board, but
appears to have been aware of the violation earlier than it claimed.”71 Importantly,
BT has admitted that it was out of compliance as of April 30, 200772 and that it knew
of the non-compliance in 2007.73
4. Improper draw on and failure to repay city funds - Condition No. 60 – BT was
required to repay funds borrowed from a city cash account within 60 days of
borrowing. “BT has not been in compliance with Condition No. 60 since September
2005.”75 Moreover, BT was only permitted to draw on these funds when certain
liquidity criteria were met.76 Despite failing to meet those criteria, BT still raided the
cash account. Today, BT has borrowed $16.977 million from this account that it
cannot repay and which “default will fall upon the city’s general fund and ultimately
the taxpayers of the City of Burlington.”78
5. Taxpayers will have to cover some or all of BT’s $50.4 million of debt –
Condition No. 58. The fact that the auditors conclude that BT cannot repay all of its
$50.4 million of debt79 also violates Condition No. 56 that “in no event shall any
70
Exhibit 19 at 8.
71
Id. at 5.
72
Id. at 6.
73
Id. at 8.
74
Id. At 6, fn 1 (“We note that BT has also admitted violation of Condition No. 17 of its CPG which relates to the
build-out of its network to serve every residence, building and institution in the City of Burlington within 36 months
of the date of the CPG.”)
75
Id. at 5.
76
Id. at 6.
77
Id. at 5.
78
Id. at 18.
79
Id. at 4, 21 and 23.
19
losses or costs incurred by BT, in the event of the enterprise being abandoned or
curtailed, be borne by the City of Burlington taxpayers.”80
6. Lack of accounting and internal controls – Condition No. 58. Beginning in 2007,
the BT auditors “uncovered material weaknesses and other significant deficiencies in
internal control.”81 The PSB auditors also found “significant internal control
weaknesses throughout the system.”82 Among other things, the lack of accounting
controls caused inflated and duplicate invoices to be paid83 and resulted in “BT
exercis[ing] only limited oversight of its construction expenditures. This lack of
oversight contributed to BT experiencing improper classification of payments and
very limited review of expenditures which may have resulted in an overpayment for
services during the construction and purchases of equipment that appear to be in
excess of the system needs based on the BT customer base. Also, this lack of
sufficient oversight contributed to BT’s purchase of substantial quantities of units in
excess of the number of customers.”84 As a result, BT has no physical asset records
to identify assets purchased with the construction funds.85
Moreover, the City of Burlington appointed a Blue Ribbon Committee to assess what
happened and what options the City had for BT and its associated $50.4 million in debt. This
Committee noted that BT’s typical response to concerns was to hire consultants who would make
then make[] rosy projections of BT’s becoming profitable in some future period, typically by
adding more customers and increasing revenue, and/or by obtaining larger amounts of
financing.”87
80
Id. at 4.
81
Id. at 40 (also note list of deficient controls identified at 41).
82
Id. at 5.
83
Id. at 42-47.
84
Id. at 47.
85
Id. at 34.
86
Id. at 9-10,12-13 and 18-19.
87
Id. at 20.
20
BT, as operated under Mr. Nulty’s tenure, was simply devoid of the management
accounting and control systems necessary to operate a viable enterprise. His involvement in
The Broadband Initiatives Program has established standard documents that it uses to
close the grant portions of its BIP awards (“Grant/Loan Agreement”). Lake County could not
have met and today cannot meet various closing conditions and representations required by the
Grant Agreement.
Article II of the Grant/Loan Agreement contains representations and warranties that are
conditions precedent to closing. As outlined below, Lake County could not earlier and cannot
88
For example, see Grant/Loan Agreement Section 5.7, Obligations with Respect to the Construction, Operation and
Maintenance of the Project and Section 5.8, Service Obligation with respect to the obligation to build and operate a
broadband system. Also see, Section 4.2(d) regarding the requirement to deposit the Applicant Funding.
21
certificates, and approvals necessary for, or required as a condition of, the validity
and enforceability of this Agreement.”
b. Fact – As described earlier in this complaint, Lake County simply lacks the legal
authority to construct and operate the Project. The only authority that it could
procure is cable television franchises, which it has not yet done.
3. Subpart (g) – Management, Service, and Operating Agreements.
a. Requirement – “RUS shall have received all management, service and operating
agreements, in form and substance acceptable to RUS, which shall be in
accordance with fees or rates presented in the pro forma financial statements
submitted to RUS in the RUS approved Application.”
b. Fact – Prior to submitting the Application, Lake County selected a third party to
prepare its application, design, build and operate the Project.89 That third party,
NPB, is not yet apparently under contract for construction and operation of the
Project as evidenced by news reports of at least one recent contentious public
meeting at which the contract was discussed by the Lake County Board that
included a NBP representative storming out of the meeting saying “this is
bullshit.”90 Not only could this contract not have been submitted to RUS, the
relationship should be of key importance to RUS given that if NPB is treated as a
contractor and not as a subrecipient under the Office of Management and
Budget’s A-133 auditing rule,91 the Office of Inspector General might not have
authority to review the books and records of the entity that may take over primary
responsibility for building and operating the Project. In that case, the County
becomes a mere conduit for the award funds. Moreover, as evidenced by the JPA,
Lake County intends to turn over all operations of the Project, including staffing
the Project to NPB.92 Thus, the contract with NPB is a very material operating
agreement that is clearly not in place. Moreover, as also detailed in the foregoing
complaint, Lake County apparently believes that it cannot build, operate or obtain
its Applicant Funding until it has entered into a JPA with the nineteen other
Municipalities and St. Louis County. Again, this condition precedent to closing
has not been met and is not near completion.
4. Subpart (h) – Opinion of Counsel.
a. Requirement – RUS shall have received an opinion of counsel for [Lake County]
(who shall be acceptable to RUS in form and substance acceptable to RUS.)
89
See Lake County Fiber Network Project Frequently Asked Questions, Lake County Website at
http://www.co.lake.mn.us/index.asp?Type=B_BASIC&SEC=%7B3189F593-E715-4480-B21A-
49F484C4BEDA%7D (last visited January 17, 2011) (citing to RFP process) and Lake County to Receive $70
Million for Broadband Project, Duluth News Tribune at http://www.duluthnewstribune.com/event/article/id/178786/
(last visited January 17, 2011) (an article published on September 13, 2010, the day that Lake County was awarded
the grant, announced that NPB had already been selected for the Project).
90
County Closes In On Broadband Contract, Lake County News Chronicle,
http://www.twoharborsmn.com/event/article/id/21643/ (last viewed January 17, 2011).
91
Office of Management and Budget Circular A-133 at §___.205.
92
Exhibits 11 and 12.
22
b. Fact – RUS requires that the opinion of counsel include the contents of
Attachment 1 to the BIP application. As noted previously in this complaint, that
form of opinion requires an opinion that the applicant “has corporate power: . . .to
perform all acts required to be done by it under said agreement.”93 Clearly, if this
opinion was rendered, it overlooked Lake County’s lack of authority to build,
operate or finance the Project.
B. General Conditions Precedent to RUS’ Obligations to Release Funds for
Advance Have Not Been Met.
Section 4.2 of the Grant Agreement contains requirements that must be met before any
a. Requirement – “RUS has received from the Grantee, evidence satisfactory to RUS,
verifying that the Grantee has maintained on deposit in an account, funds sufficient to
complete the Project as specified on Schedule 1.”
b. Fact – As described previously in this complaint, Lake County needs the consent of
19 Municipalities to be able to issue the revenue bonds to have the proceeds to
deposit in the required account. Lake County should not be permitted to receive any
advances prior to the successful sale of the revenue bonds.
VI. REMEDIES SOUGHT
In light of the significant allegations contained in this Complaint, many of which are
substantiated by Lake County’s own actions and admissions, Mediacom respectfully requests
that the Office of Inspector General immediately commence an investigation into these
allegations and suspend advance of any funds to Lake County until the investigation can be
completed.
93
Exhibit 15.
23
February 7, 2011
_________________________________
24
INDEX OF ATTACHMENTS
Exhibit 5 - Resolution Approving a Joint Powers Agreement with Lake County with Respect to a
Fiber-Optic Network Project
Exhibit 7 – Letter of Mary Frances Skala to Lana Fralich, City of Silver Bay dated October 29.
2010
Exhibit 8 – Letter by Anthony S. Mendoza to Mike Martin dated January 17, 2011
Exhibit 13 – Email from Mary Frances Skala to Johnson-Morris Law Office dated November 3,
2010, 4:46 PM
Exhibit 19 - To amend Condition No. 17 of its Certificate of Public good, enlarging the date by
which it must complete its system building out, Investigation into City of Burlington
25
d/b/a/ Burlington Telecom’s Non-Compliance with Condition No. 60 of its
Certificate of Public Good, Vermont Public Service Board Docket No. 7044,
Submitted by Larkin & Associates, PLLC, December 10, 2010 (“PSB Audit
Report”),
26