Gabelli Settles FCC Auction Charges

By Brooke A. Masters
Washington Post Staff Writer
Friday, July 14, 2006

NEW YORK, July 13 -- Money manager Mario Gabelli and companies affiliated with him agreed yesterday to pay $130 million to settle allegations that he used sham companies to buy cellphone licenses under a federal program for small and minority-owned businesses.

The federal government alleged that 38 individuals and companies backed by Gabelli's money improperly participated in eight wireless spectrum auctions under special Federal Communications Commission rules reserved for small businesses. The Gabelli-backed entrepreneurs included his relatives, a former aerobics instructor, the caretaker of his vacation home and a retired professional basketball player, the government alleged. Gabelli was not eligible.

"The FCC and all government agencies should be able to trust companies which certify information about eligibility to participate in government programs," Assistant Attorney General Peter D. Keisler said in a statement announcing the deal. "This settlement is an example of the government's determination to ensure that valuable federal resources are protected from fraud and abuse."

The settlement stems from a five-year-old private lawsuit filed under the federal False Claims Act by a whistle-blower, Rufus C. Taylor III, who will receive $32.2 million for his efforts to expose problems with the Gabelli-backed bidders.

At the time of the auctions, in 1995 to 2000, Taylor was a lawyer representing a rival bidder, and he thought the Gabelli-backed companies were improperly taking advantage of special credits and financing designed to help entrepreneurs. Under the rules, small companies were allowed to take loans from larger ones but had to be actively involved in running their companies. "The issue was whether these small businesses were true small businesses or whether Gabelli really had control of them," said Yale University law professor Jonathan Macey.

Under the terms of the settlement, Gabelli and his affiliates did not admit wrongdoing, and they continued to assert that they complied with all the relevant FCC rules and procedures. Gabelli's money management firm, Gamco Investors Inc., which has more than $25 billion under management in the Gabelli Funds and other accounts, was not implicated in the lawsuit.

Lawyers for Gabelli and his affiliates did not return phone calls and e-mails seeking comment.

The wireless spectrum case was unusual because it focused on a government sales program. Most False Claims Act cases involve government purchasing and contractors that fail to deliver what they owe.

Taylor took his concerns and his evidence to John R. Phillips, a Washington lawyer who specialized in the False Claims Act, a statute from the Civil War era that explicitly rewards whistle-blowers who expose government fraud by giving them a share of any money recovered. The Justice Department initially declined to join Taylor and Phillips's lawsuit, but federal officials announced in March that they had changed their mind after reviewing the evidence uncovered by Phillips and the firm of Williams & Connolly LLP.

Lawyers for Gabelli, who had fought the lawsuit zealously before then, quickly changed their tactics and sought a settlement.

Taylor has since left the legal profession and has been studying in England, his lawyers said. "It's a great result for the taxpayer. We're very satisfied," said Paul B. Gaffney, one of Taylor's attorneys.

In April, the FCC tightened the rules for its wireless spectrum auctions to screen out sham companies fronting for big telecommunication firms. Small-business bidders can no longer turn around and immediately resell spectrum they have just acquired. The next auction begins Aug. 9.

"This settlement protects the integrity of the FCC auction program and reminds all those who seek to benefit from the use of public resources that they must turn square corners when dealing with the government," said Michael J. Garcia, U.S. attorney for Southern New York, whose office handled the case. "Mr. Taylor performed a true public service by blowing the whistle here."

Shares of Gabelli's Gamco Investors closed at $34.90, down 33 cents, or 0.9 percent.

© 2006 The Washington Post Company