FCC Allowed Sorenson 'Massive' VRS Overpayments, Former OIG Staffer's Report Contends

Scheiner isn't alone in his concerns about VRS overcompensation. Thomas Chandler -- a key FCC staffer in 2007 who cooperated with a 2008 congressional probe and report that helped spawn Scheiner's OIG investigation -- offered VRS overcompensation figures and estimates similar to Scheiner’s, in a 2010 email upon leaving the agency (for the DOJ) and in a recent interview with Communications Daily. The commission itself has acknowledged there was a problem, including in a court brief defending a 2010 order to “reduce spiraling VRS overpayments” and “rein in years of substantial overcompensation that have cost ratepayers hundreds of millions of dollars.” VRS is a telecom relay service that eases communication by those who are deaf and others, with general phone consumers ultimately paying for a TRS Fund that compensates providers.

The FCC says it has driven down VRS rates and reduced waste, fraud and abuse without imposing flash cuts that could jeopardize a highly valued service that grew out of the landmark 1990 Americans with Disabilities Act. “The Commission’s balanced approach to restoring integrity and fiscal responsibility to the VRS fund has guarded against any interruption of vital services for people with disabilities, and ensures the stability of the fund so that these services will be provided in the future,” said FCC Managing Director Mark Stephens in an agency statement. VRS is budgeted at $525 million for this year -- about half the total $1.14 billion TRS Fund -- down from previous years.

Scheiner says the OIG and FCC failed in their duties to inform Congress about his findings of VRS waste, as key lawmakers didn’t receive his report until this year -- when his lawyer delivered copies to them -- despite a previous congressional call for an investigation and a statutory mandate, which the parties interpret differently. Scheiner considers himself a whistleblower and has pursued his allegations inside and outside the agency in a personal crusade (he was dismissed in 2014).

FCC Inspector General David Hunt disputed Scheiner’s allegations that he improperly suppressed the report, which he called flawed. (Hunt was acting IG in 2010.) Hunt said that OIG has been conducting VRS audits and investigations that have resulted in criminal indictments and provided the commission and Congress with information critical to ongoing reforms to address concerns. “The results are clear: rates have dropped more than 40% since 2007 and exponential growth in the TRS Fund has been dramatically curtailed. Vigorous enforcement actions have eliminated participation by bad actors and helped restore integrity to the fund,” he said in an agency statement. Sorenson's Chief Marketing Officer Paul Kershisnik says the company hasn't been indicted or implicated in any FCC-related TRS/VRS criminal or fraud cases, which have targeted smaller providers and certain individuals. The FCC declined comment on this issue, and referred us to the DOJ, which declined comment.

Sorenson says it hasn't been overcompensated at all -- much less by $1 billion. “It’s 100 percent bogus,” Kershisnik told us. He said the commission has disallowed costs that are necessary to providing VRS, such as for marketing, sales, R&D, user equipment, debt service and some tax amounts. “Those are major, major categories of running a business that aren’t included in the allowable costs,” he said. He acknowledged Sorenson paid hundreds of millions of dollars in dividends to its previous private-equity owners, but added, “The idea is to give deaf people functionally equivalent service. That doesn’t happen unless investors take risks.”

This story is based on our monthslong review of Scheiner’s allegations, examining many hundreds of pages of FCC, court, congressional and other documents. Scheiner provided us with a copy of his 55-page report and many other documents. The FCC also pointed us to various orders and other documents. In addition, we interviewed Scheiner and talked to or contacted many current and former FCC officials (including all commissioners at the time of the 2007 rulemaking and his 2010 report), other involved parties and observers.

2007 Rulemaking

Scheiner’s OIG report built on the work of House Commerce Committee Democrats, who in 2008 issued a staff report, Deception and Distrust, generally critical of then-FCC Chairman Kevin Martin, a Republican. The report found Martin “ignored internal warnings” that his proposed VRS compensation rates in 2007 were way too high. It cited documents from Chandler, then-chief of the Consumer and Governmental Affairs Bureau's Disability Rights Office, who said Sorenson would continue to receive a $100 million annual “windfall.” Some VRS providers, including Sorenson, had been taken over by private-equity firms intent on generating returns, Chandler said. “I hate to say it, but the whole TRS (VRS) compensation regime has become a classic fleecing of America,” he wrote in a September 2007 email to a Martin adviser. The House report called on the FCC to “immediately initiate a full investigation and audit of Sorenson.”

Scheiner and an OIG colleague were authorized to investigate the matter in depth. Scheiner submitted a report in March 2010 after about six months of examination and interviews of key players (Martin declined to talk, the report says). Scheiner's report concluded that Martin oversaw a rulemaking that left VRS rates well above the compensation standard -- reasonable costs plus an 11.25 percent return on capital investment (a relatively small part of VRS) -- and didn’t fully inform other commissioners. Responding to many complaints about FCC rate-cut proposals that consumers who are deaf said they feared would harm service, Martin directed staff to give consumers what they wanted, even though staff found providers were behind the pressure, Scheiner wrote. The resulting 2007 FCC order “does not reflect integrity of process” as the rates “were not arrived at through reasoned decision-making, but were chosen in disregard of the facts and contravention of the law,” he wrote.

“The normal regulatory process was interrupted and undermined” because of Martin’s decisions, Scheiner wrote. “Initial audit results from OIG, and facts, analysis, and proposed rulings developed by the Consumer and Governmental Affairs Bureau (CGB) to address the problem of overcompensation of VRS providers were all entirely disregarded. CGB was directed to use the rates the VRS providers themselves had requested, which resulted in a massive giveaway to providers; to the largest provider in particular,” said the report. It said staff also was told to scrap a proposed “true-up” mechanism to ensure proper compensation by reconciling overstated projected costs used to set rates with actual allowable costs -- with no explanation in the order. Using fund administrator data on actual costs and distributions, Scheiner said, providers’ excess “profit” (above what the cost-based standard would allow) over two years, starting March 1, 2008, was $460 million -- $430 million of which was estimated to have gone to Sorenson -- and continuing at a rate of $21 million monthly, almost all of which went to Sorenson (with four months left in the rate period). Sorenson earned almost twice as much as what it would have earned under an FCC staff "true-up" estimate of its costs, he told us.

Scheiner's report recommended actions to conform VRS rates to the cost-based standard and halt the overcompensation, including through an audit of Sorenson. OIG’s “quintessential role” under the Inspector General Act “is to report waste, fraud and abuse,” Scheiner wrote. “The 2007 Order has caused nearly unprecedented waste, in the form of massive overpayments contrary to law, especially to the largest provider.” Given the excessive rates, audit issues, and criminal fraud under investigation (not involving Sorenson), “it is likely that half, or over half of all VRS disbursements constitute some form of waste, fraud, and abuse,” he wrote.

Three FCC Office of General Counsel attorneys who reviewed the 2007 order -- two in draft form before it was released (but with the rates as ultimately adopted) and one in 2009 -- found the FCC rates and justifications raised serious legal concerns, the report said. The draft would “undoubtedly overcompensate” Sorenson and the rate tiers “don’t make sense on their face,” said one; the draft is “internally inconsistent” and would put the FCC “at risk for having evaded its obligation to protect the integrity” of the fund, said another; and the order’s rate basis was “inherently flawed,” said a third, according to the report.

Martin, now at Facebook, didn’t comment for this story, but previously disputed the House Democratic allegations and defended his actions to ensure VRS communications for the deaf. “I make no apologies for my commitment to ensuring that deaf and hearing impaired Americans have equal access to communications services,” he wrote in a January 2009 response, calling the VRS controversy a “policy difference” over cost compensation intricacies. He also said other commissioners in 2007 were fully informed. Those commissioners didn't comment.

IG Act

Scheiner alleges his report was suppressed by then-Acting IG Hunt and others who apparently prevented the report from being delivered to then-Chairman Julius Genachowski and then to Congress, as Scheiner says was required by Section 5(d) of the IG Act. It says: “Each Inspector General shall report immediately to the head of the establishment involved whenever the Inspector General becomes aware of particularly serious or flagrant problems, abuses, or deficiencies relating to the administration of programs and operations of such establishment. The head of the establishment shall transmit any such report to the appropriate committees or subcommittees of Congress within seven calendar days, together with a report by the head of the establishment containing any comments such head deems appropriate.” Genachowski didn’t comment.

“The Scheiner report was not improperly suppressed,” Hunt told us in a statement. “My office had provided the Commission, Congress and the FBI extensive information, investigative materials and program audits dealing with fraud, waste and abuse in the TRS program since 2008. This information resulted in numerous criminal convictions and FCC policy reforms, including significant reduction of VRS rates. Consequently, I had no further obligation, pursuant to the IG Act, to disseminate the Scheiner report, particularly because it contained serious substantive inadequacies and lacked evidentiary support.” OIG research also found Section 5(d) 7-day letters are “exceedingly rare,” according to the agency.

Hunt didn’t elaborate on his criticisms, but he had asked Austin Schlick, FCC general counsel in 2009-2012 and now at Google, to weigh in on Scheiner’s basic allegations in February 2010, and Schlick had disagreed with Scheiner’s legal conclusion regarding the 2007 order’s rates. It was Schlick’s view that Scheiner “did not establish a legal violation because, even accepting that VRS rates were high, providers were being compensated at the rates set forth in the FCC rules,” said an OGC June 15, 2012, letter to Scheiner responding to his allegations. Schlick didn’t comment to us. The OGC letter also said other OIG staffers voiced concerns about the report, including its evidentiary support.

2010-16

The FCC in 2010 did reduce VRS rates somewhat, but Scheiner contends that because Sorenson’s effective rate was in part based on the "inflated" 2007 rate, the company still was being overcompensated by at least $10 million monthly, which from mid-year 2010 to mid-year 2013 would add up to $360 million or more. Scheiner believes the withholding of his report contributed to the FCC 2010 order, which continued to bolster Sorenson’s profit. The 2010 FCC brief to the 10th U.S. Circuit Court of Appeals, citing The Deal Magazine, said Sorenson passed along as much as $800 million in dividends to its previous private-equity owners, GTCR and Madison Dearborn Partners. Sorenson’s Kershisnik said he believes it was “a little bit less.” He said Sorenson’s current owners haven’t received such dividends. The company challenged the 2010 order but a 10th Circuit ruling sided with the FCC, giving the agency deference. Scheiner says that deference was undeserved because the 2010 Sorenson rate was based partially on the 2007 rate he believes his report showed was unjustified.

Hunt released an audit of Sorenson for calendar year 2011 on Sept. 27, 2012. “TRS funds received by [Sorenson] for VRS did not compensate for only the reasonable costs of providing access to VRS,” said the audit from the firm CliftonLarsonAllen, in the first of three conclusions. It noted Sorenson disagreed with that first conclusion. Responding to a draft version of the audit report, Sorenson called the draft “so misleading that the OIG and FCC must disregard it entirely.” It was “irrelevant for the audit to examine Sorenson’s financial structure,” said the company, which defended its dividends to investors who took risks.

The FCC pushed VRS rates down further toward actual costs in a 2013 order, setting a four-year glide path through 2017. Sorenson’s profit was cut, but some overcompensation continued, Scheiner says.

Sorenson disagrees with the 2013 order, but the FCC’s glide path at least recognized the need to balance its cost-based methodology with ensuring service to people with hearing and speech disabilities. “If you set rates the way [Scheiner] says they should be set, there would be no VRS,” said John Nakahata, a Harris Wiltshire attorney who represents Sorenson. He said strict application of the FCC cost formula would allow a total return of only 1 percent or so: “It’s just the wrong formula.” Sorenson challenged the FCC’s 2013-2017 rates and its cost-based rationale, this time in the D.C. Circuit, but it lost again except on one targeted issue. The court explicitly rejected Sorenson’s arguments that the FCC’s allowed capital return was insufficient and that the order’s end result was arbitrary and capricious because providers would be driven out of business or into bankruptcy. “It is not unreasonable for the Commission to allow a provider to go bankrupt if that provider has incurred costs far in excess of what is necessary,” said the court opinion. Sorenson in 2014 negotiated a Chapter 11 reorganization plan that allowed it to restructure its debt and quickly emerge from bankruptcy without curtailing service (see here and here).

House-FCC Exchange

Key House Commerce Committee members asked the FCC about its decisions in a June 27, 2013, letter, including why it was bringing VRS compensation rates “closer” to provider costs instead of just setting them at their actual costs. A commission response said certain large VRS providers stated they couldn't continue providing service if rates were cut immediately to costs, partly due to the need to make debt payments that aren’t reimbursable from the TRS Fund. While not condoning provider financing, the FCC recognized a flash cut could have “negative consequences for VRS consumers,” CGB said in its Sept. 27, 2013, response, which called VRS ratemaking an “inherently contentious, complicated, and imprecise process” (see letter and response here).

The lawmakers also asked for all FCC documents on internal reviews and assessments of VRS compensation issues, including working papers. OIG staff provided documents and a briefing to House staff, but we could find no record of Scheiner’s report being delivered. A House Commerce Committee spokesman had no comment.

Scheiner says he has suffered retaliation because of his whistleblower efforts, which the FCC denies. He has pursued his allegations, including work grievances, at the commission and in other government venues. He says he recently was "forced" to settle a case against the FCC at the Merit Systems Protection Board due to reasons that were unrelated to the merits of his claims. The OGC’s 2012 letter said three other government entities declined to pursue Scheiner’s allegations. Scheiner disputes related actions.

“Though I am not qualified to discuss whether the VRS rate was excessive, it certainly has every appearance of being so given Stanley Scheiner’s allegations,” emailed Craig Holman, a Public Citizen lobbyist. Holman said he was more troubled by the “apparent violation of law and protocol” in the OIG/FCC failure to pass the report along to the agency's chairman and Congress.

Andrew Schwartzman, Georgetown Law Institute for Public Representation senior counselor, who isn’t familiar with the particulars of Scheiner’s allegations, said: “Whistleblowers are frequently right, and they are often punished for doing the right thing. Unfortunately, as they get deeper and deeper into their mission, and as they face often unreasonable pressure to back off, they can sometimes begin to view ambiguous matters in a very black-and-white frame. This can make it very hard to figure out what really happened.”