Complaint 2 to OIG - Lake County Fiber Project 02 07 11 (2)

8/7/2019 Complaint 2 to OIG - Lake County Fiber Project 02 07 11 (2)

http://slidepdf.com/reader/full/complaint-2-to-oig-lake-county-fiber-project-02-07-11-2 1/26

United States Department of AgricultureOffice of Inspector General

Washington, DC 20250

In the Matter of: ))

Easygrants ID 4538 )Lake County Fiber Network )Winter 2010 Broadband Initiatives Program Award )

COMPLAINT Absent immediate investigation by the Office of Inspector General (“OIG”), a $56

million Broadband Initiatives Program (“BIP”) taxpayer-funded loan is at risk of default and

conversion to an unlawful grant. Mediacom Communications Corporation (“Mediacom”)

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

rescind the award should the investigation confirm Mediacom’s concerns.

Briefly, this Complaint will highlight the following:



2

1. Because the Project is not financially viable, actual funding of the Project stands

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

converting that loan into an impermissible grant.

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

broadband system or make the necessary initial capital contribution.

3. Lake County’s retention of a third party, National Public Broadband, Inc.

(“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

awards of contracts to entities owned by officers of NPB.

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 MiddleMile 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 Countymunicipalities include: City of Beaver Bay, Town of Beaver Bay, City of Silver Bay, City of Two Harbors, Town of



3

“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

properly listed as “served” in the Application.5

Midcontinent Communications (“Midcontinent”) owns and operates cable television

systems in incorporated areas in the Project’s service area, including the Minnesota cities of

Babbitt and Ely (collectively “Midcontinent Served Communities”). Midcontinent provides a

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 LakeCounty officials over aspects of the broadband initiative, citing to a $4 million contribution by Lake County, ratherthan 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 additionalproviders simply bolster the points in this complaint but are not essential to establish the disqualification of theProject’s service area for funding.





5

Louis County were already served. Accordingly, there was no reason for Mediacom or

Midcontinent to comment on the maps.

An understanding of the geography and population distribution in the Project area is

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

homes have access to high-speed Internet service.

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 CountySubdivision, 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).



6

housing units in St. Louis County were added to result in 51% of the total housing units (whether

or not occupied) being unserved.

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

numbers at the time the Application was filed.

Classification

Number of Housing Units10

MediacomActual –201011

MidContinentActual –201012

Mediacom andMidcontinentActual - 2010

Census

2000

Served (service available) 5,443 3,162 8,605 7,304

Unserved (Incorporated

Communities)

5,955 5,955Unserved (UnincorporatedCounty)

13

440 1,741

Total Unserved 6,395 7,696

Total Housing Units Passed 15,000 15,000

Percent Unserved 42.6% 51.3%

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 percentserved would likelyincrease because Lake County has a vacancy rate of about 31% and St. Louis County about 15% and more of thosevacancies 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 wouldserve approximately 15,000 housing units. The number of served housing units and unserved housing units areknown. The sum of these was subtracted from the total housing units to derive the number of unserved housingunits in the unincorporated areas of the counties.



7

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

rescinded as the Project area fails to meet minimum eligibility requirements.

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&_geoContext=&_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&reg=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 reportby Hiawatha Broadband Communications to the Blue Ribbon Commission (see, fn 69, infra,at 4) concludes that “fartoo 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.



8

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

St. Louis counties.

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

encouragement of a default at the expense of the American taxpayer.

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 repaysome 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 instantcase, Lake County officials simply want a broadband system in their area and appear indifferent as to whether thecounty owns or controls the system. Thus, permitting a borrower of $56 million whose objectives can still be fullyachieved in the event of a default, coupled with the borrower’s belief that RUS will forego collection followingforeclosure sale, would establish a new and dangerous incentive for reckless borrowing by local governmental units.



9

Lake County officials’ statements suggest the following strategy:

1. Build a fiber-to-the-home system, regardless of cost;

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

(likely tens of millions of dollars);

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

never have been granted in the first instance.

III. LAKE COUNTY LACKS THE LEGAL AUTHORITY TO BUILD, OPERATEAND FINANCE THE PROJECT. A. Lake County Lacks the Authority to Build or Operate the Project.

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

Municipalities.24

An analysis of Minnesota statutory law confirms the lack of authority.

Lake County is a Minnesota county government. Counties lack statutory authority to be

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

service area before it has authority to begin construction of a cable system.

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 theCounty to fund and operate the Project. The second is a resolution for City of Silver Bay to approve the jointpowers 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.



10

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

referenda have been held or are scheduled to be held.31

Mediacom raised the necessity of supermajority electorate approval in each of the

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.





12

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

into the same joint powers agreement.

As part of its Application, Lake County was required to list all required agreements or

government authorizations, including cable television franchises and telephony authorizations

(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

opinion as of the date that it closed on the award.

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 asExhibit 13.38 Attachment 16, Licenses and Agreements, Broadband Initiatives Program Application, Round 2 attached asExhibit 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



13

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 CapitalContribution

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 Minnesotalaw, 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 millionhttp://www.co.lake.mn.us/index.asp?Type=B_LIST&SEC={92E95A0B-63CC-459F-9E40-9E2226C282CF} (lastvisited January 14, 2011) attached as Exhibit 16; see alsoCounty Moves to OK Broadband Builder, Lake CountyNews-Chronicle, December 9, 2010 attached as Exhibit 17; see also Exhibits 11 and 12.44 Exhibits 7 and 13.

45 Exhibit 8.



14

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

such bonds.46 Such bonds are void ab initio.47

As part of its Application, Lake County was required to list all required agreements or

government authorizations, including authorizations necessary to obtain its capital contribution.48

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

Applicant Funding was contingent.

C. Lake County Attempted to Procure Fraudulent Representations from Some of the Municipalities.

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.



15

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

required to find that:

The Parties hereby find that the facilities composing [sic] theProject are necessary to make Internet and other communicationsservices that are not and will not be available through otherproviders or the private market accessible and available on anequal 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

million of BIP funding.

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

replacing the false statements with vague public interest language.

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.



16

(“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.

IV. LAKE COUNTY IMPROPERLY CONTRACTED WITH ITS PRIMARYSERVICE PROVIDER. 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



17

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

no infrastructure to effectively act as a subrecipient of almost $60 million of BIP funding.

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

RUS ban on awarding self-dealing contracts.63

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 noexperience 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 ,



18

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

November 2010, by the Federal Bureau of Investigation.65

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

November 2007.

67

Importantly, an independent review by BT finalized in December 2007

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 withCondition No. 60 of its Certificate of Public Good , Vermont Public Service Board Docket No. 7044, Submitted byLarkin & 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.



19

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 –

many almost identical to BIP/RUS requirements. These included the following:

1. No compliance controls. Despite its obligation to comply with the conditions of theCPG, “BT lacked sufficient monitoring controls to maintain compliance with theCPG.”

70As 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 compliancewith the CPG conditions.

2. Willfully failing to report non-compliance. The PSB auditors found that “BT notonly withheld the fact that it was not in compliance from the DPS and the Board, butappears 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, 2007

72and that it knew

of the non-compliance in 2007.

73

3. Failure to complete construction within 36 months - Condition No. 17 – BT was

unable to “build its network to serve all of the City of Burlington within 36 months of the CPG issue date.”74

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 September2005.”

75Moreover, 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 thecash account. Today, BT has borrowed $16.977 million from this account that itcannot repay and which “default will fall upon the city’s general fund and ultimatelythe 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 monthsof 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.



20

losses or costs incurred by BT, in the event of the enterprise being abandoned orcurtailed, 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 controlweaknesses throughout the system.”82

Among other things, the lack of accountingcontrols caused inflated and duplicate invoices to be paid83 and resulted in “BTexercis[ing] only limited oversight of its construction expenditures. This lack of oversight contributed to BT experiencing improper classification of payments andvery limited review of expenditures which may have resulted in an overpayment forservices during the construction and purchases of equipment that appear to be inexcess 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 inexcess of the number of customers.”84 As a result, BT has no physical asset recordsto identify assets purchased with the construction funds.

85

7. Pattern of delaying recording expenses to enhance financial statements –Condition No. 58. Over the years, including in 2007 when Mr. Nulty was still incharge, BT would not record some significant expense items until months or a yearlater, if then. These costs included payroll and interest expense.86

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

“acknowledgment of BT’s then-current cash-flow-negative situation and inability to turn a profit,

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.



21

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

NPB should therefore be carefully examined.

V. LAKE COUNTY FAILED TO MEET STANDARD CLOSING CONDITIONS

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.

A. Conditions Precedent to Closing the Grant/Loan Agreement Could NotHave Been Met.

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

today satisfy several key requirements:

1. Subpart (b) – Authority –

a. Requirement – “The . . . performance by [Lake County] of this Agreement and theperformance of the transactions contemplated hereby have been duly authorizedby all necessary actions and do not violate any provision of law. . . .”

b. Fact – The performance described includes the construction and operation of theProject and depositing the funds representing the Applicant Funding.88 Asdetailed previously in this complaint, Lake County simply lacks the legalauthority to build and operate the broadband system as described in theApplication. Moreover, even assuming it were so authorized, Lake County hasfailed to obtain the requisite consents from the Municipalities to sell the revenuebonds that it will use for its Applicant Funding.

2. Subpart (e) – Approvals –a. Requirement – “RUS shall have received satisfactory evidence that [Lake County]

has duly registered when and where required by law with all state, Federal andother public authorities and regulatory bodies and obtained all authorizations,

88 For example, see Grant/Loan Agreement Section 5.7, Obligations with Respect to the Construction, Operation andMaintenance of the Project and Section 5.8, Service Obligation with respect to the obligation to build and operate abroadband system. Also see, Section 4.2(d) regarding the requirement to deposit the Applicant Funding.



22

certificates, and approvals necessary for, or required as a condition of, the validityand enforceability of this Agreement.”

b. Fact – As described earlier in this complaint, Lake County simply lacks the legalauthority to construct and operate the Project. The only authority that it couldprocure 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 operatingagreements, in form and substance acceptable to RUS, which shall be inaccordance with fees or rates presented in the pro forma financial statementssubmitted to RUS in the RUS approved Application.”

b. Fact – Prior to submitting the Application, Lake County selected a third party toprepare its application, design, build and operate the Project.

89That third party,

NPB, is not yet apparently under contract for construction and operation of theProject as evidenced by news reports of at least one recent contentious publicmeeting at which the contract was discussed by the Lake County Board that

included a NBP representative storming out of the meeting saying “this isbullshit.”90 Not only could this contract not have been submitted to RUS, therelationship should be of key importance to RUS given that if NPB is treated as acontractor and not as a subrecipient under the Office of Management andBudget’s A-133 auditing rule,91 the Office of Inspector General might not haveauthority to review the books and records of the entity that may take over primaryresponsibility for building and operating the Project. In that case, the Countybecomes 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 staffingthe Project to NPB.

92Thus, 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 obtainits Applicant Funding until it has entered into a JPA with the nineteen otherMunicipalities and St. Louis County. Again, this condition precedent to closinghas 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 athttp://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 $70Million 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 awardedthe 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.



23

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, thatform of opinion requires an opinion that the applicant “has corporate power: . . .toperform all acts required to be done by it under said agreement.”93 Clearly, if thisopinion 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

advances can be funded by RUS.

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 tocomplete 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 todeposit in the required account. Lake County should not be permitted to receive anyadvances 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.



24

February 7, 2011

Mediacom Communications CorporationThomas Larsen, Esq.Group Vice President, Legal and PublicAffairs100 Crystal Run RoadMiddletown, NY [email protected]

_________________________________ Womble Carlyle Sandridge & Rice, PLLCEric E. BreisachRebecca E. Jacobs1401 Eye Street, NW, 7th FloorWashington, DC 20005(202) [email protected]

Attorneys for Mediacom Communications

Corporation



25

INDEX OF ATTACHMENTS

Exhibit 1 - Broadband USA, Broadband Initiatives Program, Application Directory Exhibit 2 – Lake County Fiber Project Fact Sheet

Exhibit 3 – Declaration of Thomas Larsen Exhibit 4 – Declaration of W. Tom Simmons Exhibit 5 - Resolution Approving a Joint Powers Agreement with Lake County with Respect to a

Fiber-Optic Network Project Exhibit 6 – Declaration of Thomas Bordwell 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 9 – Minnesota Statutes §237.19 Exhibit 10 – Minnesota Statutes §238.08 Exhibit 11 – Joint Powers Agreement (“Original JPA”) Exhibit 12 – Joint Powers Agreement (“Revised JPA”) Exhibit 13 – Email from Mary Frances Skala to Johnson-Morris Law Office dated November 3,

2010, 4:46 PM Exhibit 14 – Attachment 16, Licenses and Agreements, Broadband Initiatives Program

Application, Round 2 Exhibit 15 – Attachment 1, Legal Opinion, Broadband Initiatives Program Application, Round 2 Exhibit 16 – Lake County Website – Frequently Asked Questions

http://www.co.lake.mn.us/index.asp?Type=B_LIST&SEC={92E95A0B-63CC-459F-9E40-9E2226C282CF} (last visited January 14, 2011)

Exhibit 17 -County Moves to OK Broadband Builder , Lake County News-Chronicle, December

9, 2010 Exhibit 18 – BIP/BTOP Frequently Asked Questions 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



d/b/a/ Burlington Telecom’s Non-Compliance with Condition No. 60 of itsCertificate of Public Good , Vermont Public Service Board Docket No. 7044,Submitted by Larkin & Associates, PLLC, December 10, 2010 (“PSB AuditReport”),

Exhibit 20 - Burlington Telecom,A Report to the Blue Ribbon Commission, HiawathaBroadband Communications, January 21, 2010 (“HBC Report”).

Documents

Complaint 2 to OIG - Lake County Fiber Project 02 07 11 (2)