A nonprofit corporation that provides a high-speed computer network to colleges in New York State agreed last month to pay the federal government $1.4-million in a lawsuit alleging that it had misused a federal grant, the U.S. attorney’s office in Buffalo announced.
The lawsuit, brought under the federal False Claims Act, accused Nysernet.net, which operates the New York State Education and Research Network, of secretly funneling money obtained through a federal grant to a for-profit corporation it had created.
That corporation, AppliedTheory Communications, eventually went public, and some of its executives -- who also worked for Nysernet -- allegedly made millions of dollars by selling their stock in the company. Nysernet agreed to pay the settlement but denied any wrongdoing.
The $2.45-million grant, from the National Science Foundation, was intended to build a high-performance network for colleges in the state. Bill Noxon, a spokesman for the foundation, said that “settlements are never for the entire amount” in fraud cases. Although the settlement is $1-million less than the grant, he said, some of the grant money may have been used legitimately.
The lawsuit’s settlement does not automatically disqualify Nysernet from future grants, Mr. Noxon said. However, knowledge of the fraud allegations among those who review grant applications for the agency may influence their decisions, he said.
The lawsuit was filed by David Lytel, former president of Nysernet, in 2000. He says he was fired in 1998 for questioning the company’s relationship with AppliedTheory Communications, which has since filed for bankruptcy and sold off some of its operations. Alan Towers, a spokesman for Nysernet, said Mr. Lytel had been fired “due to performance.” Under the False Claims Act, private citizens who believe that the U.S. government has been defrauded, and who have direct knowledge of the alleged illegalities, may bring a lawsuit on the government’s behalf and share in any damages awarded.
Rigged Bidding?
Mr. Lytel, an adviser to the White House Office of Science and Technology Policy in the Clinton administration, accused Nysernet of rigging its bidding process so that AppliedTheory won lucrative contracts. The for-profit corporation had access to the proposals from other companies because its chief financial officer, who held the same position with Nysernet, helped evaluate them for the nonprofit corporation.
Nysernet employees who evaluated the proposals felt they “would be threatened if they performed their jobs professionally and did not recommend AppliedTheory Communications,” according to the lawsuit. The suit also alleged that Nysernet had violated the terms of the science foundation’s grants by not disclosing its affiliation with AppliedTheory Communications. “It was an issue of greed,” said Bonny Harbinger, a lawyer with Phillips & Cohen, the Washington law firm that represented Mr. Lytel, who will receive 15 to 25 percent of the settlement.
Nysernet representatives said the settlement was made to avoid costly and lengthy litigation. “With a small organization like ours that is not-for-profit, it became a drain on our resources,” said Jim Brennan, director of external programming. “It became a business decision to move on and continue to serve the State of New York.”
The company’s Web site indicates that the 25 participating institutions include Columbia, Cornell, Hofstra, New York, and Polytechnic Universities, and the State University of New York campuses at Albany, Binghamton, Buffalo, and Stony Brook. Among its services, Nysernet provides institutions with links to the Abilene high-speed backbone operated by Internet2.
Four executives of Nysernet were also executive officers of Applied-Theory Communications and held stock in the company. Mr. Lytel charged that Richard Mandelbaum, James D. Luckett, George Sadowsky, and David A. Buckel had personally benefited from the alleged fraud. Nysernet’s Mr. Brennan said he did not believe they had gained from dealings with the for-profit company.
http://chronicle.com Section: Information Technology Volume 49, Issue 31, Page A45