Stop the Auction! Congress and the FCC Must Investigate D Block Allegations Before Proceeding.

This is a reprint of a piece I just posted on the Public Knowledge Policy Blog.

Yesterday, I broke a story on Wetmachine (subsequently confirmed by this Dow Jones story and consistent with this angry op ed by economist and former Frontline adviser Gregory Rosston that Morgan O’Brien, operator of Cyren Call, had killed Frontline’s financing and thus kept them out of the auction.

To review, the Public Safety Spectrum Trust (PSST), which holds the national 12 MHZ public safety license that makes up the “public safety” half of the “public/private partnership” with D Block, selected O’Brien’s Cyren Call to act as their exclusive agent and adviser for negotiations with the D Block winner and management of the network. As I wrote over a year ago when O’Brien was angling to get additional free spectrum for PSST without a private partner,

The promise to make the “Public Safety Trust” the real licensee and Cyren Call “only” a contractor is supposed to address this objection by leaving the “public safety community” the ones “in control.” But again, anyone with experience in telecom knows how that game works. Cyren Call, as the party most intimately involved with the proposal, will have huge influence over how the Public Safety Trust gets structured and who gets appointed to it first. Then it will get a bunch of favorable contracts signed that lock in Cyren Call as the company that actually runs things. The Public Safety Trust will have as much authority over Cyren Call as Queen Elizabeth II has over “her” Prime Minister Tony Blair.

Based on the allegations, this appears to have happened. PSST consists of a volunteer Board of representatives from the public safety community with full time jobs elsewhere and its contract with Cyren Call to manage everything else. O’Brien has apparently locked Cyren Call in as the “monopoly provider” to the public safety community. In other words, the D Block licensee must build the network for public safety, but will turn over that capacity to Cyren Call for Cyren Call to resell to the public safety community on its own terms. Cyren Call will get the public safety profit, but the D Block winner, as licensee, will actually be responsible for making sure public safety is well served.

As if this cozy arrangement were not enough, O’Brien purportedly told Frontline’s investors that it would cost $500 million over ten years as a flat fee to access the PSST spectrum. (Recall that the advantage to the D Block winner of using the network is it gets to use PSST spectrum when public safety entities aren’t using it.) Certainly the agreement calls for D Block winner to compensate PSST for use of the spectrum, but a flat fee of $50 million/yr? On top of giving Cyren Call the monopoly on reselling services to the public safety entities around the country that use the spectrum? Worse, from the perspective of Frontline and other potential bidders, the FCC will act as the ultimate arbiter if the D Block winner and PSST cannot reach an agreement. Because the Order was designed to protect the interests of the public safety community (who, it was believed, would not be negotiating to maximize profit), the FCC Order reserves the right to invoke heavy penalties against the D Block winner, but does not speak of penalizing the PSST or its representative. So Frontline (and now, any other D Block winner) face the specter of negotiating with a profit-driven Cyren Call under the threat of FCC sanctions if they do not agree to all of O’Brien’s terms.

If these allegations are proven, Morgan O’Brien has done more than betray his fiduciary trust to the public safety community. By driving out Frontline, O’Brien will have robbed the American people of hundreds of millions (possibly billions) in auction revenues. More importantly, O’Brien will have eliminated the best, clear chance for producing a wholesale spectrum provider in this band. As those who followed the regulatory proceedings last summer know, we in the Public Interest Spectrum Coalition (PISC) pushed hard for a wholesale open access condition because wholesale spectrum can bust open the wireless market and transform how we use wireless technologies. We didn’t get it as a mandatory condition, but Frontline vowed to operate as a wholesaler if it won. It appears that, thanks to O’Brien, they never even got the chance to play.

If it were just a question of punishing someone profiteering off public safety, we could wait until after the auction for investigations. Further, while driving Frontline out may well have robbed us all of real competition and innovation in wireless, nothing can be done to repair that damage. So these aren’t the reasons I think the FCC needs to stop the auction or, at the very least, pull D Block pending an investigation.

My worries are twofold. First, I do not know how many parties O’Brien may or may not have talked to other than Frontline. If O’Brien made the same outrageous demands of everyone, that will certainly depress demand for D Block. Worse, if O’Brien made these demands of Frontline alone but not from other potential bidders, than this amounts to nothing less than an attempt to rig the most important auction in FCC history. After the fact remedies will not address these concerns. Even if D Block goes for less than the $1.3 billion reserve price, the FCC will come under intense pressure to close the books on the matter and move forward without a reauction – especially if the public safety community (on advice of Cyren Call) push to leave things alone and stop making delays. And if the D Block does get its reserve, it will be effectively impossible to undo what may prove afterwards to have been a rigged auction.

The FCC has the authority to stop the auction at any time, for any reason, and need not disclose the reason. Given the interconnected nature of all blocks of licenses in this complex auction, the best thing would be for the FCC to stop the auction pending an investigation into the allegations. The FCC could call witnesses under a grant of anonymity in an expedited process and resume the auction if it is satisfied – or remove Cyren Call as the agent of PSST if it finds sufficient evidence of auction rigging or (in the words of the auction statute) “unjust enrichment.”

This process would be intense, but it could be done in a few weeks. Alternatively, the FCC can simply pull D Block and investigate the D Block allegations while conducting the rest of the auction on schedule. This may disrupt some bidder strategies, but that risk must be balanced against the very real possibility that the D Block public/private partnership will fail or be irreparably corrupted without immediate action. Bluntly, the future of our nation’s critical public safety infrastructure is worth taking the trouble to check into these allegations, even if it disrupts the current auction.

At the very least, the FCC should clarify that the requirement for D Block and PSST to reach an agreement is not an invitation to extort endless concession from the D Block winner for the private gain of the PSST representative. Further, the FCC should make plain that under 47 U.S.C. § 309(j)(4)(E) (prevention of unjust enrichment) it has the authority to act directly against the PSST (as a licensee) or its chosen representative if the Commission discovers that any party associated with the PSST has used this process to feather their own nest rather than honor their fiduciary duty as a public trustee of the license. I also hope that members of Congress, such as Representative Waxman and Representative Harmon, who have expressed concerns about the possibility of “sweetheart deals” and private interests corrupting the D Block/public safety partnership, will likewise publicly reassure bidders that Congress is watching and will act vigorously to protect the public from any attempts to profiteer from the public safety network.

Given the nature of this piece, I feel I should stress that the opinions herein are my own, and do not necessarily reflect those of Public Knowledge or of my employer, Media Access Project.

Stay tuned . . . .

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7 Comments

  1. JohnMc says:

    Harold,

    The FCC reserves the right reconsider the bids of any component of the auction that does not exceed the strike price right? With Frontier Wireless out of the ‘D’ block bidding the chances of a winner reaching strike place is pretty low.

    If that is what occurs, then the FCC redoes that part of the auction. What am I missing here? Continue with the auction.

  2. Shun says:

    JohnMc:

    I think you’re missing the point. If the auction was gamed from the start, then there is no way that it can go forward, without some sort of “restoring the faith” move by the FCC or Congress.

    At the very least, FCC should investigate these allegations that Cyren Call broke the law. Not that I have much faith in the FCC actually doing any investigating, but hey, the laws are on the books. Might as well use them.

    Harold: Your Wetmachine piece has slightly different html from your Public Knowledge piece. I don’t think this was intentional, but I believe that you are missing a “</a>” after the “47 U.S.C. § 309(j)(4)(E)” here on wetmachine. As of now, it looks like the US Code section and “Representative Waxman” all link to the same site. That’s all I got.

    Keep plugging away, Harold. This is fascinating from someone who’s managed to stay far, far away from Washington politics.

    The reality-distortion field around Washington puts Steve Jobs’ to shame.

  3. Harold says:

    Shun:

    Thanks both for the kind words and for the editing pointer.

    I admit I am conflicted on balancing holding up the entire auction with just pulling D Block. There are arguments on all sides. I think that the blocks are sufficiently interrelated that you would really need to reset everything and start again if it turned out there was funny business going on (remember, all we have are allegations, that’s why we need an investigation).

  4. Ike Elliott says:

    Harold:
    These are troubling allegations, for sure, but I don’t think we have enough solid facts yet to stop the auction. Maybe some investigation of the allegations will change my opinion of the matter, though. Sounds like O’Brien was out of line, but until it is proved, I think the auction should proceed. More at http://ikeelliott.typepad.c

  5. John1 says:

    Harold,

    The PSST may be one of the biggest scams in American history. Public safety is being used by Morgan O’Brien, who was stuck with a multi-billion dollar tab when he owned Nextel in re-banding, when Nextel cellular was interfering with public safety communications.

    The consultant who straitened this out for O’Brien was none other than Harlin McEwen, who is not a public safety official. McEwen is a consultant with a public safety background. McEwen has become a confidence man, convincing and controlling the PSST process. The real trick is that he is the chair of the PSST and the commercial provider is Cyren Call, largely owned by none other than Morgan O’Brien. If I read this right, this relationship is being investigated by Congressman Waxman’s committee.

    With McEwen lobbying the public safety community, supported by Police Chiefs, Fire Chiefs, Sheriffs and APCO, to believe that the PSST will force a hardened national broadband network, he has convinced the FCC go give the PSST and his closest friends, (the leadership of the PSST), control of $5-10 billion dollars worth of open-auction spectrum. With the requirements McEwen espouses for the build, the cost could be $20-40 billion to build, reducing the auction value to almost nothing. In fact it is this over engineering that helps McEwen’s perspective wind fall, driving out legitimate bidders and leaving only a company which knows that McEwen and the PSST will not hold them accountable. The difference is the perspective scam value.

    The trick is that Harlin McEwen, O’Brien’s consultant, will be in control of the PSST and will be the one holding the winning bidder accountable. This leaves McEwen and company on the PSST to walk away when the actual Public Safety National Network ‘fails’ and is built to common commercial standards, making O’Brien and his friends billions and leaving first responders paying into an outdated Nextel era commercial backbone.

    If anybody in public safety needs to use this national network and they think that the PSST is a good project, they might think again, or am I missing something?

  6. JohnMc says:

    Shun, to consider that some 200+ entrants are all in collusion for the auction(s) is very hard to believe. Or even a small subset. Conspiracy is a very hard thing to maintain in a ‘prisoners dilema’ scenario. To think that the ‘D’ block is tainted based on what Harold is relating is plausible. But I don’t see that as the clarion call to stop the entire process.

    Investigate the issue? Sure especially the ‘D’ block situation. If it is found that there was collusion or bad faith the FCC holds all the cards. They can rebid the whole thing and eject/refuse any rebids from the perpetrators.

    I do have concerns with the ‘D’ block for the very nature it is an agent for the public good. But until something rises to the level of unimpeachable evidence, let the auctions continue. It is only one of many steps before licenses are issued. There is plenty of time to impale the guilty and reward the innocent.

  7. Harold says:

    JohnMc: It is not a question of collusion. It is a question of the interlinked bidding strategies. By that I mean that the startegies of any major bidder (such as a Google or a Verizon) are nested and interlinked with the various blocks. Eliminating one block thus — somewhat unfairly and to the detriment of the auction as a whole — throws off the bidding strategies of the major auction participants.

    Nevertheless, I concede that it is a close call here on whether to stop the whole thing for a few weeks, pull D Block, or just issue some kind of warning. In a game as large, complex and important as this, we run into a very serious problem of not knowing which course of action is the most disruptive.

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