NATIONALSClliNCEFOUNDATION OFFICE OF INSPECTOR GENERAL OFFICE OF INVESTIGATIONS CLOSEOUT MEMORANDUM Case Number: 1-99090035 Page I of3 111 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. ~l/o2) • NATIONAL SCIENCE FOUNDATION OFFICE OF INSPECTOR GENERAL OFFICE OF INVESTIGATIONS CLOSEOUT MEMORANDUM Case Number: 1·99090035 Page 2 of3 III 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 2 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 lost. 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 • .I .' 2 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 '~ J 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 dollars.- 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 J • 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.~ .'
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)