Phoenix Company Prepares License Applications for Not-Yet-Available Spectrum

Smartcomm was cofounded in 2007 by the late Pendleton Waugh after he served time in prison and while he was under an FCC investigation. An FCC order dated July 20, 2007, provides a summary of Waugh’s violations (http://xrl.us/bmpahu). Earlier, in 1995, the U.S. District Court in Dallas sentenced Waugh to 21 months in prison after he pleaded guilty on a count of conspiracy to structure financial transactions to evade securities and banking reporting requirements. In 1997, the U.S. District Court in Washington ruled against Waugh in a lawsuit by the SEC and ordered him to disgorge $13 million in illegally acquired funds. The SEC subsequently suspended him from appearing or practicing before the commission (http://xrl.us/bmpb7f). In 1999, he was convicted of securities fraud in a case brought by the state of Texas and put on probation. Later that year he was determined to have violated probation by traveling to Puerto Rico for business related to cellphone securities. Waugh was sentenced to four years in state prison and six months in federal prison.

In 2007, the FCC Enforcement Bureau opened a proceeding before an administrative law judge to determine if Waugh, two others and their company, Preferred Communication Systems, should remain FCC licensees. The FCC said that, among other things, they engaged in unauthorized transfers of control of commission licenses, misrepresented material facts, “lacked candor” and failed to disclose that Waugh and another company official were convicted felons. The FCC and the parties, except for Waugh, agreed to a settlement in 2009. Waugh appealed and the matter remained pending at the time of his death. His estate asked to keep the proceeding going, but on Dec. 15, 2011, the Enforcement Bureau responded that Waugh’s death “moots his appeals and they should not proceed.” Waugh died last August of a heart attack at age 61, Smartcomm said. The company’s website says: “Mr. Waugh’s brilliant vision continues to pave the way for Smartcomm and its clients, and is being carried out by Smartcomm’s team."

Smartcomm charged up to $42,000 per application for 800 MHz licenses, copies of their contract agreements show. FCC-certified frequency coordinators offer the same service for $150-$200 per application. The FCC is not accepting applications for that spectrum and has no prediction on when it will start doing so. The spectrum, located in the expansion and guard bands, will not work for broadband because each channel is only 25 kHz, and is most attractive to private businesses like pizza restaurants that might use it to communicate with delivery drivers, industry experts said.

A Smartcomm spokeswoman declined to comment, saying: “At this time, our company is not advertising our opportunities and do not wish to make this information available in a public forum.” Smartcomm does appear to have stopped selling the applications service last year, about the time of founder Waugh’s death, said a former Smartcomm employee. However, it continues to market its services on its website -- www.smartcommlicenseservices.com/opportunities.aspx. Since we first contacted Smartcomm, the company has deleted specific information about the 800 MHz spectrum for which it sold applications.

Before Waugh’s death, the company held weekly webinars and twice-a-month seminars around the country advertising its service, the former employee said. It targeted people who years ago made millions of dollars from spectrum won in FCC lotteries, the former employee said. Smartcomm had independent marketing representatives across the country and also sent mailers into affluent neighborhoods, the former employee said.

The FCC doesn’t regulate fees companies may charge to prepare applications, an FCC official said. The commission therefore does not have a standard for what the cost should be, nor does it have any data on what companies may be charging, the official said. The FCC has not made any predictions about when the agency will begin accepting applications for the 800 MHz expansion or guard bands, the official said.

The Federal Trade Commission has never looked into Smartcomm or its cofounders, CEO Carole Downs and Waugh, an FTC spokesman said, though in past decades it has investigated other application preparation services for making unsubstantiated claims. The spokesman couldn’t say if there had been any complaints. The FTC can review application preparation firms under its general authority under the FTC Act to review potentially unfair or deceptive practices, he said. The FTC determines violations of the Act’s prohibition on such practices on a case-by-case basis, he said: “Anyone who feels that may be the case is encouraged to file a complaint with the FTC.”

Smartcomm charged between $24,000 and $42,000 to prepare each application for spectrum in the 800 MHz expansion band, according to an order form attached to a copy of a contract dated January 2011. The Utilities Telecom Council charges $150, said UTC Spectrum Services Director Donald Vasek, saying Smartcomm’s price “sounds pretty outrageous.” The Enterprise Wireless Alliance charges about $200 for preparation, said EWA President Mark Crosby. EWA’s price is based largely on costs for maintaining a database of all the incumbents in the spectrum, he said. UTC and EWA are FCC-certified frequency coordinators.

Smartcomm, EWA and UTC all charge additionally for the FCC’s $460 filing fee and frequency coordination service. Under the rules, applications must be approved by a certified frequency coordinator before they can be submitted to the FCC. Smartcomm is not certified and must submit applications to a certified coordinator like EWA or UTC before filing them with the FCC, Crosby and Vasek said. For frequency coordination, Smartcomm charges $300 per channel per site, its contract said. The company’s order form says one application includes six channels, so the company charges $1,800 per application for coordination. EWA charges $275 and UTC charges $250 per channel per site, their officials told us.

The FCC hasn’t actually begun accepting applications prepared by Smartcomm or anyone else for the 800 MHz expansion or guard bands. It first has to make rules and release a public notice, and it’s unclear when that will happen, said Alan Tilles, a Shulman Rogers attorney who is counsel for PCIA and helped write the consensus plan for 800 MHz rebanding that was adopted by the FCC. While likely to be made available site-by-site for licensing, it’s not a sure thing until the FCC makes its rules, Tilles said. Vasek and Crosby said they have no idea when the FCC will open up the expansion band. “The whole 800 MHz rebanding [process] has gone on longer than anybody thought it would, and so I think everybody is loathe to make any predictions about when” it will happen, Vasek said.

The 800 MHz spectrum being abandoned by Sprint Nextel will be available to a variety of services depending on the frequency, Tilles said. Expansion band spectrum (860.0125 through 860.9875 MHz) and all the 861 MHz frequencies will be available for commercial services, “but we don’t know how and we don’t know when,” he said. Someone who invests in an application now “is betting on future rules,” he said. Vasek and Crosby have seen few applications for the 800 MHz expansion band so far, they said. “It’s possible” people are preparing applications for expansion band spectrum, “but it’s not something anyone is talking to us about,” Vasek said. EWA prepared fewer than 50 applications for 800 MHz spectrum last year, Crosby said.

"There will be at some point a way to apply for these frequencies,” Tilles said. “The better question, though, is why would you apply for them?” The rules for the 800 MHz rebanding plan were written to “prevent cellularized systems from operating below 862 MHz,” he said. “They can [operate], but only with a limited number of frequencies. The idea was not to recreate the problem of interference that caused rebanding in the first place.” That limitation makes the spectrum less desirable for broadband, Tilles said. There’s also “not a ton of spectrum being released here,” and it’s a question if there’s enough to make a business case, he said.

Paying $30,000 per application doesn’t make approval a sure thing. “The likelihood is extremely remote” that the applicant will get the spectrum, Crosby said. “There’s no room [in the expansion band] because everybody’s moving in there.” The guard band will also become available, but commercial entities won’t get it because the point of a guard band is to keep commercial away from public safety to prevent interference, he said.

The Smartcomm contract says there are no guarantees “that either the Frequency Coordinator or the FCC will approve any Application,” and “no assurance can be given that the Commission will grant the license for which the Application was filed.” The company’s marketing, however, promises that in the case of rejection, the company will refile applications in a comparable market for no cost or refund the “application service fee portion of your payment.” We couldn’t find any similar refund provision in the contract agreement we obtained, and Section 14 of the contract says: “This Agreement and the schedules attached hereto constitute the entire understanding and agreement between the parties."

"We're the ones who are going to get the spectrum because we're the ones who thought of it first,” Waugh told clients at a January 2011 seminar in Ft. Lauderdale, six months before he died. “Most people think [the spectrum] is relatively worthless,” he said. But in five years those same people will think Smartcomm clients were “geniuses,” he said.

Hazy Business Case

"Your goal is to make 50 to 100 times your money ... in five to 10 years,” Waugh told clients at the seminar. People who won spectrum in lotteries back in the 1980s made 100 times their money in 10 years, he said. When Waugh was asked at the seminar about the value of an application for the San Francisco market, he said if the owner entered a joint venture with other Smartcomm customers, he would probably make over 100 times his investment. Asked when that would happen, Waugh told the Ft. Lauderdale attendees, “You'll get your license probably in a year to a year and a half. And then within three years you'll start getting checks."

Crosby and Tilles said they get many calls from Smartcomm clients asking for advice, and the customers rarely have any experience or expertise with spectrum. Some of the Smartcomm clients are doctors who don’t know anything about spectrum, Crosby said, and the callers don’t always listen to experts’ warnings. “They don’t want to hear it,” Crosby said. It’s unusual that people with no spectrum experience would apply, said Vasek.

It would be difficult for a person without spectrum expertise to develop a valid business case for investing in the 800 MHz guard or expansion bands, Vasek said. “Sure, a doctor may want to invest some money, but unless he knows somebody” who can build and run the system for him or “wants to quit being a doctor and become a radio operator,” he probably shouldn’t buy, he said. The 800 MHz expansion band spectrum is most valuable to manufacturers, utilities and similar companies that want to use the spectrum for internal purposes that require little bandwidth, Crosby said. For example, a manufacturing facility might use the spectrum for security, product handling or communicating with its trucks, he said.

The expansion band is not appealing for a communications network, Crosby said. A commercial entity wanting to put up a regional communications system that’s not interconnected with the public switched telecom network would need about 10 channels, he said. “To make any money, you have to have a lot of” devices on the network, raising costs, he said. At the same time, the commercial entity would have to compete with the prices of major carriers. Broadband is not an option because each channel is only 25 kHz, Crosby said. Even with ten channels, “you got a quarter of a meg, and you have to be lucky to get them all in a line,” he said. One could get more with smart radios, but they're not yet available, he said. Minimum bandwidth for 4G LTE is 1.4 MHz, said Issam Toufik, a technical officer at 3GPP and the European Telecommunications Standards Institute.

A Smartcomm marketing pamphlet titled “A Rare Opportunity” suggests leasing or selling the spectrum to major carriers like Sprint, Verizon Wireless and AT&T. Smartcomm’s marketing also says new spectrum owners can sign joint venture agreements with large wireless or regional carriers, creating “considerable monthly cash flow."

Clients’ licenses will be even more valuable if combined with Sprint Nextel’s spectrum holdings and the 700 MHz D-block, which was then required by law to be reauctioned, Waugh said at the Ft. Lauderdale seminar. Sprint has “14 megs, you're going to have 14 and a half and then you look at the D-block reauction for another 10. That’s 38 and a half megs,” Waugh said. “Verizon averages 32, AT&T averages 30 across the country. As a group, if you joint venture with the holder of the eastern block, and together you happen to win the D-block reauction, which you probably will, you're looking at having 38 and a half megs.” Under spectrum legislation passed Feb. 17, Congress cancelled the D-block reauction, reallocating that spectrum instead to public safety.

But major carriers are unlikely to come knocking at the doors of Smartcomm clients, the wireless officials said. “Do you honestly think that Verizon, who spent billions in broadband auctions, will be interested in your single 25 kHz channel that is nowhere near the spectrum that they bought for billions?” asked Crosby. The technology doesn’t align with major carriers’ LTE systems, he said. Vasek said he “can’t imagine” top carriers making a play for spectrum in either the 800 MHz expansion or guard bands. Major carriers like Verizon are likely to be interested only in areas where they can “amass a chunk of spectrum,” but that can’t happen anymore in the 800 MHz band, he said. “There’s not enough spectrum grouped together."

The other problem is that FCC rules prohibit selling a license before making an investment. Under the rules, a winning applicant must build out the spectrum within a year. The FCC “doesn’t want trafficking in licenses,” Crosby said. Vasek agreed: “You have to demonstrate construction and usage before you can flip the license.” It can cost an additional $10,000 to $40,000 to put in place an operational system, Crosby said. Smartcomm informs clients about the one-year construction requirement in promotional materials and again in the contract, but in the marketing advises applicants to install “frequency scanning repeaters” as “an economical way to preserve your licenses.” That’s legal, Crosby said, but the applicant would still need to pay site costs for the repeaters. “You can build a system within your one-year limit and send out one radio transmission and then you're good for another year,” Vasek agreed. “But you've still got to build the system, and you've still got to buy a repeater box."

There is some value to application preparation services, Tilles said. “While anyone could apply for spectrum, it takes telecom expertise to do it correctly,” he said. But besides ensuring everything is in order, there is no advantage to applying through a firm that handles many applications, Crosby said. “The FCC doesn’t know and doesn’t particularly care who prepared the application,” he said. “They care that the frequency advisory committee does its job that it has been certified to perform."

Lawsuits

Smartcomm has taken to court former employees who have publicly condemned the company’s practices. The company has a lawsuit against two former employees (http://xrl.us/bmoi9y), Tina Ellis and Kent Maerki, in the state superior court of Arizona. Maerki started a website advocating against Smartcomm that the lawsuit said was illegal. The suit alleged that Maerki and Ellis’s actions were a misappropriation of trade secrets, breach of contract and violations of common law obligations.

In a comment last year responding to a complaint online (http://xrl.us/bmoi98), Waugh said Smartcomm was pursuing another lawsuit against a client named Chris Kay after a dispute over whether he should be allowed a refund. Waugh said Kay had filed complaints with the Phoenix Better Business Bureau and the Arizona Corporations Commission. The Phoenix BBB website shows that it received one complaint against Smartcomm -- a BBB-accredited business -- but indicates that the company resolved it. Smartcomm’s updated website now highlights that it has an “A” rating from the BBB. An Arizona Corporations Commission spokeswoman said she “cannot confirm or deny whether there have been any complaints filed or if there is any investigation under way.” Smartcomm also threatened legal action against Communications Daily, saying “You should also be aware that the information you are intending to publish is confidential, proprietary information. ... It is no defense to claim you found it on the Internet. ... Even if factually accurate, publishing your story would result in a lawsuit by Smartcomm."

Smartcomm is a member of major telecom associations, including CTIA, NAB, the Association of Public-Safety Communications Officials, the Rural Cellular Association, the Radio Club of America and the Arizona Technology Council.