The Race for Connectivity
|John Aloysius Farrell and Fred Schulte||July 25th 2011|
When the Federal Communications Commission granted LightSquared Inc. expedited approval to launch a new wireless Internet service, some powerful voices in Washington expressed alarm, including the Pentagon and one-third of the U.S. Senate.
LightSquaredâ€™s bold $14 billion plan, its detractors said, could cripple Global Positioning Satellite (GPS) systems and threaten aviation safety, disrupt military and rescue operations, and interfere with high-tech farming equipment and the everyday navigation devices used by millions.
LightSquared says it has pursued its case through official channels. But little gets done in the nationâ€™s capital without some kind of political connection, and in this regard, LightSquaredâ€™s bloodline is particularly rich. Its ties to President Obamaâ€™s supporters and the administrationâ€™s policy interests run deep, explaining the companyâ€™s ability to do battle with powerful entrenched interests.
- Several major Democratic campaign contributors and longtime Obama supporters have held investments in the company and its affiliates during its tangled decade of existence. They include Obamaâ€™s good friend and political donor Donald Gips, his former White House personnel chief, who now serves as U.S. ambassador to South Africa. Records show that Gips maintained an interest, worth as much as $500,000, as the FCC was weighing LightSquaredâ€™s request.
- Obama himself was an early investor and came to the presidency a firm believer in expanding broadband. He remains close to other early investors, like Gips and investment manager George W. Haywood, inviting some to luxe social events at the White House and more intimate gatherings like a night of poker and beer.
- Obama installed one of his biggest fundraisers, Julius Genachowski, a campaign â€œbundlerâ€ and broadband cheerleader, as chairman of the FCC, whose staff granted LightSquared a special waiver to operate.
- LightSquaredâ€™s current majority owner, hedge fund manager Philip Falcone, made large donations to the Democratic Party while his broadband request was pending before the FCC. He and LightSquared executives met with White House officials. Neither Falcone nor the White House would comment on what was discussed.
- LightSquared employs lobbying firms that wield formidable Democratic firepower: Ed Rendell, former governor of Pennsylvania and onetime chair of the Democratic National Committee, as well as the firm of former House Majority Leader Richard Gephardt.
- Jeffrey J. Carlisle, the companyâ€™s vice president for regulatory affairs, served with Genachowski and Gips on Obamaâ€™s transition team.
LightSquared insists it has found a way for its technology to coexist with GPS systems. But as lawmakers and technology experts wrestle over the conflicting claims, some in Congress suspect the FCC of favoritism in its haste to decide the matter.
â€œIt is a textbook example of Washington at work,â€ Ken Boehm , the chairman of the National Legal and Policy Center, said. The conservative public interest group is pressing Congress to investigate.
Sen. Charles Grassley , R-Iowa, said he has been trying, without success, to get the FCC to disclose basic information about LightSquaredâ€™s investors and their relationships to the White House. The agencyâ€™s â€œlack of transparency,â€ he says, has raised his suspicions.
â€œAre there ties between the investors and the administration that might lead to the perception that the administration is biased toward approval?,â€ Grassley asked. â€œIn the absence of transparency, the perception might be that the FCC is rushing the publicâ€™s business to help a friend in need, regardless of the consequences for the public and the economy.â€
LightSquared is a privately-held firm that does not have to publicly disclose its owners. The company says that none of the Obama friends and donors currently retain any financial interest in the firm, and regulatory affairs chief Carlisle dismissed the notion that the companyâ€™s success at the FCC resulted from political influence.
â€œLightSquared participates in numerous proceedings in front of the FCC and other regulatory authorities,â€ said Carlisle. â€œWe trust that regulatory decisions in these proceedings are made on the merits of the case, and believe that they have been.â€
White House officials echoed that. â€œThe Federal Communications Commission is an independent agency with its own standards and procedures for considering these types of decisions and we respect their process,â€ said White House spokesman Eric Schultz.
But the controversy draws attention to the sway of campaign donors on the administration, a sensitive topic given Obamaâ€™s campaign promise to limit the clout of special interests in Washington. As recently reported, nearly 200 of Obamaâ€™s bundlers have landed plum government jobs and advisory posts, won federal contracts worth millions of dollars for their business interests or attended numerous elite White House meetings and social events.
FCC chairman Genachowski, a friend of Obama since they attended Harvard law school, bundled more than $500,000 for the 2008 Obama campaign. He also has made dozens of trips to the White House, leading some Republicans in Congress to complain that the regulatory chief is too cozy with the administration.
The FCCâ€™s backing of LightSquared is especially controversial because of concerns that the new network could interfere with such a broad range of government, commercial, and personal GPS systems. GPS is a space-based technology that, since being adapted for civilian use in the 1990s, has allowed objects to be tracked in motion. Half a billion GPS devices are in use in North America, the industry says.
The Department of Defense and Federal Aviation Administration have invested more than $38 billion in the technology and expect to spend billions more in coming years, while private industry has sunk at least $2 billion more in the systems. The defense department argues that the FCC did not give adequate consideration to its concerns over possible GPS interefence.
In two rulings, the FCC gave its blessing to Falconeâ€™s purchase of the company on March 26, 2010, and for a waiver of FCC rules on Jan. 26, 2011, which will allow the firm to transform what was originally conceived as a satellite-based network to one that relies primarily on some 40,000 radio towers. The signals from towers are far more powerful than space-based ones, and could dot the country with dead zones for GPS users, unless some sort of filtering system can be designed and deployed.
GPS proponents were dismayed. â€œThe whole process has been highly unusual,â€ said Dale Leibach, a spokesman for the industry group Coalition to Save Our GPS. â€œThe FCC typically doesnâ€™t act quickly on matters before them, and they acted with great haste and lightning speedâ€ on LightSquared.
The FCC rulings came even though the potential downside was well known in the telecom industryâ€”and was especially worrisome to aviation interests. One of LightSquaredâ€™s lobbyists, Gephardt Group Government Affairs, has focused its efforts on â€œpotential aviation communications interference,â€ according to lobbying reports filed with the Senate.
In all, seven Washington lobbying firms it retains reported $240,000 in fees during the first three months of this year.
Critics of LightSquared have marshaled their forces. â€œGPS is integral to the functioning of our economy, and is essential for public safety,â€ wrote 33 senators, including eight Democrats, in a letter to Genachowski on May 19. Until the company can prove that its wireless system does not affect GPS use, â€œwe request the Commission rescind LightSquaredâ€™s waiver.â€ (A 34 th senator has since joined them.) On June 23, the House Appropriations Committee passed a resolution to halt FCC expenditures on the LightSquared project until there are assurances it wonâ€™t disrupt GPS signals.
Grassley noted that Falcone is facing an ongoing investigation by the U.S. Securities and Exchange Commission over some of his hedge fund dealings. Falcone has publicly denied any wrongdoing. But Grassley asked Genachowski in an April 27 letter why the FCC did not â€œproceed with caution rather than step on the gas.â€
â€œShould the government cede a valuable public resource to a hedge fund thatâ€™s subject to multiple SEC investigations?â€ Grassley said. Grassley, the ranking Republican on the Senate Judiciary Committee, also has asked the FCC for a list of all contacts between LightSquared or Falcone and the White House or FCC.
In a May 31 letter, Genachowski replied: â€œThe FCC has proceeded in an open, thorough, and fair way. The Commission â€¦ will not permit LightSquared to provide commercial service until it is clear that potential GPS interference concerns have been resolved.â€
The evolution of LightSquared
LightSquaredâ€™s roots go back more than a decade, when a broad group of investors anticipated the skyrocketing demand for wireless communication and broadband coverage, and acquired FCC licenses for slices of radio spectrum. Over the years, the corporate structure underwent many changes, with investors joining or dropping out, and companies merging and changing names.
Under FCC rules, LightSquared, as a privately-held company, is not required to publicly disclose all of its investors and the value of their holdings, though it has identified Falconeâ€™s Harbinger hedge fund as the current majority owner. But several investors in the company and its affiliates have had ties to Obama.
According to SEC records, Falcone was an early investor in the company. So was Haywood, who helped steer Obama toward investing in the firm, which was then known as SkyTerra. Obama briefly held up to $50,000 in stock in the company, according to his 2005 Senate financial disclosure form. The dealings surfaced during the 2008 presidential campaign.
â€œAfter I got my ($1.9 million) book contract, I had money to invest,â€ Obama said in 2007. He purchased a home and invested in mutual funds, and set up a blind trust, designed to take â€œa more aggressive strategy than the normal mutual funds.â€
â€œI thought about going to Warren Buffett and I decided it would be embarrassing with only $100,000 to invest to ask his advice,â€ Obama told reporters. Instead, Haywood recommended a UBS stockbroker, who bought more than $50,000 in stock in SkyTerra.
Another investor was Jared Abbruzzese, a partner of John J. Gorman, an early Obama donor and a â€œbundlerâ€ of at least $200,000 in donations in the senatorâ€™s 2008 campaign for the presidency. Gorman is bundling again for the presidentâ€™s 2012 re-election effort, the campaign revealed last week.
Abbruzzese got caught up in a messy New York political scandal and, in 2009, he was a witness in the corruption trial of New York state Sen. Joseph L. Bruno, the Senate majority leader. On the stand, Abbruzzese described how Bruno had been paid $20,000 a month in 2005 to serve as a consultant to SkyTerraâ€™s corporate affiliates, Motient and TerreStar, and build â€œcredibilityâ€ for the satellite scheme in Washington and at the FCC.
â€œYou employ â€˜em to stand there and lend credibility, the halo effect, and â€¦ you know, make a phone call,â€ Abbruzzese testified. â€œJoe provided good aura.â€
Bruno was convicted on two felony counts of fraud.
Abbruzzese eventually left the satellite group.
Of early investors, Haywood and Gorman have remained close to the president. They and their wives were guests at Obamaâ€™s first state dinner, which the president hosted for the prime minister of India, on Nov. 24, 2009. Haywood and his wife also joined the president at the Super Bowl party at the White House this year.
And on the evening of Feb. 20, 2011, Haywood and Genachowski arrived at the White House for an event set up earlier that day. First lady Michelle Obama and the coupleâ€™s two daughters were away in Colorado on a ski trip, and a White House spokesman said the two men watched the NBA All-Star game with Obama and some of his staff in the White House residence quarters.
â€œThat was a poker game,â€ said Haywood. â€œIt was poker, pizza, beer and the â€¦ game.â€ It was a gathering of friends, and a night for the president to relax, said Haywood. â€œTrust me, there is no business discussed at the poker game,â€ he said.
The FCC agreed. "The social gathering on Feb. 20 was just that, an informal gathering among friends and acquaintances. No issues relevant to the LightSquared proceeding before the FCC was ever discussed, directly or indirectly," according to an FCC statement.
Haywood, who according to SEC records, owned 400,000 shares of SkyTerra as recently as September 2008, said in an interview that he has since sold all his interest.
â€œI have had zero to do with itâ€ since Falcone bought the company, said Haywood. â€œNo one has, or would have any reason, to ask me to lobby anybody.â€
Haywood added that the number of Obama campaign donors involved in LightSquaredâ€™s history was coincidental. â€œWhen you raise money from loads and loads of people there are bound to be some who have an interest in something,â€ he said.
Gips is another major Obama campaign donor and adviser who was an investor in the SkyTerra plan. He is a Harvard-educated Illinois native who, along with Genachowski, worked at the FCC during the Clinton administration. At the FCC, and as a domestic policy adviser for then Vice President Al Gore, Gips acquired an expertise in spectrum issues.
Gips left government during the Bush years, and worked in private industry at a Colorado telecommunications firm known as Level 3 Communications. But he kept his hand in politics, donating to Obamaâ€™s 2004 Senate campaign and signing up as a bundler for the 2008 presidential race. Gips and two other Level 3 executives bundled more than $650,000 for the Obama campaign.
After the election, Gips was named to the Obama transition team, along with Genachowski, another $500,000 bundler. Carlisle worked as a consultant for the transition team on broadband issues, but not with Gips and Genachowski, he said.
When Obama took office, Gips went to work at the White House as director of presidential personnel. Genachowski was named to chair the FCC, an independent regulatory agency. Carlisle was hired by LightSquared.
In June 2009, Obama named Gips ambassador to South Africa. In his financial disclosure forms, Gips said at that time that he owned stock options in SkyTerra worth between $250,000 and $500,000.
According to Genachowskiâ€™s office calendar, obtained via a Freedom of Information Act request, Gips met with the FCC chairman at the State Department on November 3, 2010â€”two weeks before LightSquared formally applied for a waiver. On Nov. 5, according to the calendar, Genachowski had an appointment to talk by telephone with the LightSquared CEO, Sanjiv Ahuja.
In its statement, the FCC said the LightSquared matter was not discussed when Gips met with Genachowski, and that the FCC chairman was not lobbied by White House officials on behalf of LightSquared.
Gips said that he recently disposed of the stock options, and that he spoke to no one in the FCC or the administration about LightSquared.
â€œI never communicated with anyone in the administration or at the FCC at any point about LightSquaredâ€™s plans or plans of its predecessor companies. I do not own the options anymore. I have never met Phil Falcone and have no knowledge of any visits he made to the White House,â€ Gips wrote in an email response to questions.
â€œI am not aware of any contact,â€ between LightSquared and Gips, said Carlisle. â€œI didnâ€™t even know he had an ownership interest until you brought it up.â€
The big LightSquared player
Falcone, a Minnesota-born one-time hockey player, joined the SkyTerra investors in 2006. Over the years, he acquired a controlling interest.
Falcone is a Harvard graduate whose decision to take a short position on the housing bubble earned him and his investors billions of dollars in the wake of the financial crisis in 2007 and 2008. Through a spokesman, he declined comment for this article.
At two points during the LightSquared regulatory process, according to the White House visitor logs, Falcone was cleared to meet with members of Obamaâ€™s staff. In the months before and after those meetings, he and his wife and the CEO for LightSquared donated more than $90,000 to Democratic Party committees.
On Sept. 22, 2009, as he was completing the takeover of SkyTerra, Falcone and LightSquared CEO Ahuja met with James Kohlenberger, chief of staff for the Office of Science and Technology. On Sep. 30, 2009, Falcone and his wife Lisa each gave $30,400 to the Democratic Senatorial Campaign Committee, the maximum allowed. On Sept. 23, 2010, Ahuja gave $30,400 to the Democratic National Committee; on Oct. 28, 2010, he gave the same amount to the National Republican Congressional Committee.
Falcone has previously written checks mainly to Republicans, or split his donations. For instance, in June 2008, he and his wife, Lisa, each gave $28,500 to both the Republican and Democratic Senate campaign committees. That was the maximum allowed at the time.
Falcone and LightSquared attorney Henry Goldberg were cleared for a Jan. 21, 2010, White House complex appointment made through the Office of Science and Technology directorâ€™s office, according to White House logs. A White House spokesman said the meeting did not occur.
The National Legal and Policy Center has called on the House Committee on Oversight and Government Reform to investigate LightSquared and its White House ties.
â€œThe ramifications of the FCCâ€™s favoritism are enormous,â€ Boehm, the groupâ€™s chairman, wrote, in a Feb. 2, 2011 letter to the committee. â€œMr. Falcone â€¦ gained access and influence to the Obama administration and Democrats through well-timed White House visits and contributions.
â€œSince then, at virtually every step of the way, Mr. Falcone has received favorable treatment and expedited consideration for his plans,â€ Boehm wrote.
The dueling priorities
LightSquared hopes to capitalize on the Obama administrationâ€™s push to extend broadband coverageâ€”and especially wireless broadband coverageâ€”to more than 200 million people throughout the country. In its advertisements, the company cites Obamaâ€™s goal of providing 98 percent of Americans with access to a 4G high-speed Internet network. With the explosion of smart phones, tablet computers and other devices that rely on wireless broadband for messaging, video and other data services, demand is climbing and expected to soar.
Genachowski, has led the charge for the president. â€œIf we want to lead the world in the 21st century, we must put broadband at the top of our agenda,â€ he said, in a speech in March. â€œThe clock is ticking.â€
In his May 31 letter to Grassley, Genachowski wrote, â€œI remain focused on ensuring that the Commission takes full advantage of the incredible economic opportunities that underutilized spectrum presents. This includes the opportunity presented by LightSquared, which if successfully realized would result in billions of dollars of new private investment and the creation of tens of thousands of jobs.â€
Given the Obama administrationâ€™s interest in promoting broadband, said Carlisle, it should come as no surprise that LightSquaredâ€™s requests won quick approval from Genachowskiâ€™s staff.
The stakes were high. â€œWe very explicitly asked for expedited treatment,â€ Carlisle explained. â€œIf we didnâ€™t funding was going to dry up and this company was going to blow away.â€
â€œI donâ€™t think that was a result of favoritism, donâ€™t think this was a result of anything untoward,â€ said Carlisle. â€œThis is something the FCC has been very clear it supports.â€
Carlisle notes, as well, that the interference problem with GPS systems has been known for years by the navigation industry, and stems from the fact that highly-sensitive GPS instruments pick up signals from outside the GPS spectrum. LightSquared has offered to move its signal within its allotted spectrum, away from the GPS band, and to help pay the cost of filtering to protect GPS devices.
But critics argue the price could be too high if it comes at the expense of GPS, especially industrial or military applications, which demand great precision.
â€œWe have substantial concerns that LightSquaredâ€™s proposal places an unacceptable risk to public safety,â€ the senators wrote to Genachowski in May. LightSquaredâ€™s signal could interfere with GPS receivers used in aviation, public safety, agriculture, construction, maritime navigation, and national defense systems, the senators said.
LightSquared has responded with a public relations counterattack, buying full-page ads in The Washington Post and banners and billboards in the Washington, D.C., subway system. The company says it will invest $14 billion building a high speed national wireless broadband network, and promises to create 15,000 jobs in each of the next five years.
But pot-boiling criticism at the June 23 hearing of two House Transportation and Infrastructure subcommittees suggests the plan faces an uphill climb unless it can lay to rest myriad concerns over its impact on GPS systems.
â€œBillions of dollars of public and private funds have been invested in these sectors,â€ Roy W. Kienitz, under secretary for policy with the U.S. Department of Transportation, testified at the hearing. â€œTheir challenges may be the most difficult to resolve.â€
Teresa M. Takai, Department of Defense chief information officer, noted that the Pentagon had â€œraised concernsâ€ with the FCC prior to the agencyâ€™s decision to grant the wavier. In her testimony, she said the defense department â€œtakes it stewardship role for GPS very seriously. We do so for the sake of our soldiers, sailors, marines and airmen who use the system daily and rely upon its essential military capabilities for our national defense and preparedness.â€
Clarification: The Genachowski-Gips meeting took place just before LightSquared filed for a waiver, not while it was pending.