Applicant/Grantee/PI False Certification

Published by the National Science Foundation, Office of Inspector General on 2003-04-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                           OFFICE OF INSPECTOR GENERAL
                                                            OFFICE OF INVESTIGATIONS

                                                   CLOSEOUT MEMORANDUM

    Case Number: 1-99090035                                                                                   Page I of3

                  In September 1999 we received an allegation that NYSERNet,' a regional network service
         provider, submitted proposals to ~SF contairi~g false statements .

                . NYSERNet was created as an independent non-profit organization with the assistance of a
         1986 NSF grant, and received' over $1 0 million in continuous NSF funding between 1986 and 2003.
         In 1989, several staff'members ofNYSERNet realized the possible commercial potential of the
         internet, and accordingly separated from NYSERNet to fonn a conunercial company. PSINet. In this
         first commercial spin-off, NYSERNet exchanged the network infrastructure for 10010 ownership of
         the new ' company. When PSINet went public, NYSERNet received stock which it sold for
         approximately $22 million.

                 For a period of time, NYSERNet contracted for network services with PSINet, and then other
         providers. In 1996, after building a new network operating"system with the assistance of NSF
         funding, a second group ofNYSERNet officials decided to"create another commercial company.
         However, in contrast to the PSINet spin-off, these individuals decided to cany out a complicated
         corporate "trifurcation." The trifurcation split the original"NYSERNet into three new entities:
         NYSERNet.com, later renamed AppliedTheory Corporation (ATe), a for-profit company that
         received the operating network infrastructure. and staff; NYSERNet.org (Org), a non-profit entity
         which continued as the nominal recipient of all NSF grants; and NYSERNet.net (Net), the non-profit
         parent compauy of ATC and Org, which held stock in ATC and controlled Org. · All three Boards of
         Directors contained several common members.

                  From the sale of the PSINet stock, NYSERNet possessed over $20 million in stocks and cash
         (the endowment). As New York state law prohibited the direct transfer of the endowment to ATe,
         NYSERNet transferred these proceeds to Net in the trifurcation. However, Net then provided
         $7.5 million to a bank as collateral to secure a loan for ATe. Net subsequently approved ATe's plan
         "for the transfer of the remainder of the endowment to ATe over several years, as payments to
•        "subsidize" the cost of the network service provided to Org's members by A TC-a subsidy that was
         available only to members who purchased their serVices through Org from ATe . In addition, Org
         was contractually required to procure all available services e~clusively from ATe.

         I   The New York Slate Education and Research Network comprises the following member institutions: Binghamton
         University, City University of New York, Clarkson University, Columbia University, Cornell University, New York
         University, Polytechitic University, Rensselaer Polytechnic Institute, University of Rochester, Rockefeller University,
         SUNY Stony Brook, Syracuse University, SUNY Albany; SUNY Buffalo, AT&T, Brookhaven National Laboratory,
         General Electric, mM, Coming, Grumman, Kodak, Xerox, the New York Slate Department of Education, the New York
         State Department of Science and Technology, and the New York Slate Development Corporation.


                                                  NATIONAL SCIENCE FOUNDATION
                                                   OFFICE OF INSPECTOR GENERAL
                                                    OFFICE OF INVESTIGATIONS

                                            CLOSEOUT MEMORANDUM

Case Number: 1·99090035                                                                          Page 2 of3

             In reality, Org and Net were corporate fictions: Net had no employees, and the staffmembers
     of Org were A TC employees 'Yho were assigned to perfonn tasks on behalf of Org. This corporate
     structure was called the «One Company Concept."

            ATC hired a president for Org and emphasized to him the importance of the One Company
     Concept. However, the new president raised concerns about Org's budget, particularly the absence
     of competitive procurement    and
                                  the high charges that Orgpaid to A TC for office rent, personnel, and
     expenses. Org tenninated the president, after which he presented these issues to us.

             NSF grant conditions require competition in procurement and avoidance of conflicts of
     interests. The relator alleged that the interrelated Boards of Directors, pervasive management control
    .by_ATC, .and.the..sol~.:.sOJlI'c_e_PJ_Q~m~~nt £Qn!r'!.~!,!1.!~4~H ~.!!1p.ossi~~_e for ~g_!o comply with these
     requirements. Drg did not disclose these facts to NSF following the trifurcation asreqiiiredpursuant
     to the current grant conditions; and failoo·t6reveal these·facts-in subsequent-proposals to NSF. -·The
     withholding of this infonnation enabled Org to receive grant funds it would otherwise be prohibited
     from receiving.

            We issued subpoenas to ATC, Org, and Net (collectively, the defendants) for relevant
    documents. Org's attorney accepted service of the subpoenas on behalf of all three entities, and
    documents were eventually provided by ATC' s attorney, on behalf of all three entities. Our review
    of these documents substantiated the allegations ofunresolved conflicts of interests, non-competitive
    procurement, and submitting proposals to NSF that failed to disclose material information.

            In addition, we found noncompliance with NSF requirements concerning program income.
    Program income refers to income earned by a grantee that is directly generated by the grant activity.
    NSF grant conditions require grantees to retain program income and use it to further the objectives of
    the grant project, subject to the same rules as the direct federal gnint funds. The documents provided
    by the defendants revealed that alJ of the money and assets in the endowment constituted program
    income, and accordingly the expenditure of these funds violated NSF grant conditions.

            Org's fonner president (the relator) subsequently filed a qui tam action under the False
    Claims Act (FCA) against the defendants. Qui tam actions are initially filed Wlder seal, while the
    Department of Justice (DOJ) assesses the evidence and the merits of the case, to decide whether DO]
    will intervene and prosecute the case. After we apprised DOJ of the evidence gathered in our
    investigation, DO] notified the defendants of an intention to intervene in the FCA case.

                                                     NATIONAL SCIENCE FOUNDATION
                                                      OFFICE OF INSPECTOR GENERAL
                                                        OFFICE OF INVESTIGATIONS

                                              CLOSEOUT MEMORANDUM

     Case Number: 1·99090035                                                                     Page 3 of3

                  In our view, the post-trifurcation proposals and all additional requests for payment submitted
          by the defendants (under the name of the original grantee, NYSERNet) failed to disclose the
          conflicted and non-competitive practices, rendering these proposals apd payment requests false
          claims under the FeA. In o~ opinion, if the truth had been disclosed, the NSF would not have
          awarded the new grants or made further payments pursuant to the extant grants. As a result. the
          damages to the government for these false claims totaled $2.4 million.

                  Besides the FeA, there were two additional grounds for recovery by the government. First,
          because the defendants' corporate structure caused intrinsic problems with the expenditure of the
          program income in the endowment, the government could recover those funds through the judicial
          imposition of a constructive trust. Second, the amount of grant funds and endowment funds paid by
         -Org 'and Net. tol\."'TC, in viulation-ofthe--grant-conliitiuns;-cQutd-be-recovered-byth"e-govemment. ---- - -
          Federal grant funds that are in the p.ossession of the grantee, .and.not_expended in_a manner consistent .
          with grant conditions, are considered to be federal funds held in trust by the grantee. Program
          income from federal grants, which are subject to the same restrictions on how they can be spent, can
          be viewed in the same way. When a grantee holding such federal funds wrongfully transfers these
          funds to another party, the federal funds are said to have been "converted" by the grantee, and the
          government can bring a conversion action against the grantee to recover those funds.

                  While this case was pending, Net and Org took affinnative steps to make themselves more
          independent, including the selection of independent Boards of Directors, and acquiring separate
          office space and employees. In April 2002, ATC entered into bankruptcy proceedings, and ATC's
          assets were sold to pay debts owed to secured creditors; because Net had no security interest in
          ATC's assets, the $7.5 million of the endow.ment encumbered to secure the bank loan to ATe was

                  In March 2003, Net and Org entered into a Consent Judgment with DOJ, which required
          these entities to pay $1.4 million to the United States govenunent. Pursuant to the Consent
          Judgment and the qui tam provisions of the FCA, the relator received 23% of the settlement amount;
          in addition, the Org and Net paid the relator's counsel's fees and expenses. On the basis of the
          Consent Judgment, DOJ filed a Notice of Election to Intervene and Notice of Dismissal (the Notice),
          and requested that the Notice, the Consent Judgment, and the First Amended Complaint be unsealed.
           The court's Order, the Notice, and the Consent Judgment are attached.

                 Accordingly, this case is closed.



                                                                  V_ _ A _
                                                                  Wut_ Oitrrkr ttfNw Yort

                                                                  Ftrltv J,.;r. (11d) SSI,.4,U

         PRESS RELEASE                                              ________       ~   __ • 2003

                        JUII '              PAYS $1.4 MXLLl:OR TO
                                 gsOLVlli cr.!11f8 BBLATBD TO THE
                                 PALS. SUBHISSrQH' Of A GIANT APPLICAtIqN
                                 AID '!'HI GI"'TVEP YiQLATl:ON OF G1tAl!'l' "CONprrXOHS

                United    Sta~ea     Attorney'                                       Western District of
         Sew    Yo~k.      announced       _   Pals.        Claims          Aet      and         admdnistrative
         aettlement with
                                           is a not-for-profit corporation created in

         1986 -t o connect New York State member universities and. research

         institut10~         to     the    national         network          that      evolved        into . the
         Internet . There are 21 educational and. research members of the

         consortium which          ~      the State ,and include che State University of
         New York-Buffalo, the University of Rochester. and the University
         of Albany.                       was one of first regional network service

         provider,.       The $1.4 milli.on settlement resolves aI"legations that
                                                       ."    ..
         in    1998                  submitted     a    false            grant       application        to   the

         National Science Foundation (,"NSF"").                      NSF is a federal agency.                The

         set~le1'nent    alao resolves         all~e.c ·ions                            procured services

         from                                                                 w~chout       -c ompetition and


de8piea        conflic~.   of intereat between                                   in violation

of NSF grant conditione .
         The     government    investigation          \Ita.   primarily          baaed , on   a

whistleblower ccmplaine filed pursuant to the False Claims Act, 31

u.s.c.     "II 3129 AS; US!.       NSF award.d "                    _ ·grants to provide
computer         network      service.      for        educational           and     research
institution••          The    c~l~int       alleged           the    grant . applications                   •
                ..w:m1tt.ed to NSF were false since                                 ta.iled. to

disclo.e it. affiliation with the related for-profit                                corporate

                    The complaint       t~her     alleged                      select.ed

the    Atfiliated for-profit            entity,       to provide           certain      network
aexv1ces in the absence of a competitive bi.dding process.                                 NSF

grant conditions require grant rec.i pients eo procure goods. and

service. in a conflict-free, competitive manner .                              In its grant

applicatione and other eubmi.s aions to NSF,                                   certified the
inform&tion provided. was         erut:hfu~     and that                       complied with
NSF   sr&ne condieiona.                                  , che U.S.
                                                                           Attorney,    stated

"a grantee or any recipient of federAl dollars must provide correet
and complete certifications to the United Stat:e. in exchange for

taxpayer dollars.-                                                                                          "

         In fiscal year 2002,           the government's recoveries in civil

fra.ud    clai. .    reached nearly $1..2             billion.           False     Claims Act
reeoverie.a since the law was eubstantially amended in 1986 have now ·

topped $10 billion--aver $6 billion of which                         WAS   recovered under
the      eo-called     wh1stleblower&       provisions              of   the     Act.      The
I    , ....

I   '~


                  whi.tlablower or -mU,        ~.      provieiona of the False ClaiTU Ace allow

                  individual ... knOWn &. arelator.,· to · file suit on behalf of the
                  united        Stat..   agai""t ' those         who    have    allegedly    falSely    or

                  fraudulently cla1 ... d federal ,funds. including Medicare. Medicaid.

                  d.ia ••t;er     a.sistance, · suba1d1e....          grants; - - loana,   and   contract
                  payment..        Peraaa. who file gy1          ~      suies_can recover        15 to 2S
                  percent of any, settlement or judgment after intervene ion by the
                  UAitecl 'State. :
                        The -, relator in this ca._ ia --                                              "'as-

                  Pre81dent of                  from April 1998 to August 1998.
                  became ' concerned about . what he perceived to be the inter-related-
                                                       during hie tenure aa                  President.
                                   was f1.reci from'·                   and    subsequently filed      the .
                  whlatleblower -action. "l _._ _                    viII receive a 15 to 25 percent
                  .hare of the recovery.         Assistant United Scates Attorney

                                 who   bandled ' the    case..       praised   the   assiatance of     the

                  relator.                     stated, -the recovery in this ca.e and other

                  vhistleblower auits detlOIlStratea the public-private partnership

                  encouraged by the False Claims Act works and is an effect1 ve tool

                  in the government'. continuing ef.fort to recover !Scarce taxpayer


                           While agreeing t:o settle chis matter to avoid costly and

                  lengthy litigation;                       denies       any wrongdoing.

                  worked with the government to achieve the mutually agreeable reeult

                  reflected in the Consent Judgment.                             ha& provided network


                                           4 .

ettrvieee partially su.pported with NSF grant funds                        since 1986.

            and    NSF       look    forward     to · maintaining     a     producti~e

relationship for the benefit of the New York State                  ~ducational     aDd
reaearch coamunitY--Q         re1at::i.ons~p   J:>ased on. the continued provision

of quality aerv1c.. from                         and the submiss10n of complete
and   correot grant applicationa to NSF .

      united      States      Attorney                                 praised.     the

out'. tanding and tireless efforts of the NSF Office                   o~    Inspector

General ("OIO"). inelwUng NSF OIG actorneys.

and                t.   a8   well as the atcorney for the , whistleblower,
                                                 ,. Washington,    D. C.     The   U.S"

Attorney .tated, -the recovery in this ea.. would not have                         be~n

achieved    without        the      federal-private         cooperation     mani~eated

throughout this     matter.~