Justice Dept. Seeks Right to Sue Gabelli on Spectrum Auctions

Potentially reopening a chapter from the earlier days of the wireless telecommunications boom, the U.S. Justice Department said it intends to pursue a civil fraud case against Wall Street money manager Mario Gabelli.

The DoJ is seeking permission to directly sue Gabelli, who runs Gamco Investors, claiming he was at the center of a complex scheme to defraud the U.S. government by manipulating the auctions held for valuable radio spectrums to be used for wireless communications.

Taking Over

The request to have the Justice Department take over what has to date been a privately brought and slow-moving case must be ruled upon by a U.S. District Court judge. Both sides in the case will file briefs over the next month, with a hearing on the request likely in the spring. A trial has been scheduled for June, but many observers believe that will be pushed back given the new developments.

The case began in 2001, when Gabelli and some of the companies he has invested in were accused in the suit of tampering with Federal Communications Commission (FCC) auctions of wireless spectrums.

The allegations were that Gabelli bankrolled companies that could benefit from FCC set-asides during the auction process. Many of those companies were headed by Gabelli associates — one was owned by an in-law relative of Gabelli who was also a Bronxville dentist, the suit alleges. With the special qualifications in place, those firms purchased spectrums for discounts worth at least US$90 million along with access to low-cost financing.

Many of those that won spectrum licenses never entered the wireless calling business in any significant way, the suit charges, but instead held the licenses for a short time and then re-sold them at a premium.

The move comes at a key time, since the FCC plans to hold another round of auctions this summer, this time selling off broadband spectrum. The FCC has vowed to put stricter controls in place this time around, carefully vetting all of the potential bidders before the auction begins.

Allegations Denied

Lynch Interactive, a company funded by Gabelli, had a hand in 12 of the auctions conducted by the FCC starting as long ago as 1996, when the Telecom Act of 1996 paved the way for additional de-regulation and competition in the industry and helped give rise to standalone wireless companies.

Lynch has said that its only role in the auctions was as a consultant, providing bidding help and administrative services to companies that wanted to take part in the auction but lacked experience in dealing with the complicated process.

Gabelli, meanwhile, has said the suit lacks merit and suggested that it was started by attorneys who saw an opportunity to make money.

The money manager has gained a high profile on Wall Street since forming his own firm in 1977. His firm is known for adhering to the value investing philosophy, one that has helped his funds perform well in many market and economic conditions.

News of the Justice Department action hit the stock of Gabelli’s main company, Gamco, on Wednesday, but the shares recovered quickly. By mid-afternoon Thursday, the stock was trading higher by nearly 4 percent at $41.68.

Gamco issued a statement noting that neither it nor its direct subsidiaries were impacted by the action. “These developments have no affect on our business operations or our focus on earning a return for our clients,” said President and COO Doug Jamieson.

Spectrum of Spectrums

The FCC spectrum auctions have been a sore spot for regulators and the industry alike for some time, with much of the spectrum that was auctioned later being sold off at a fraction of the cost when the telecom industry fell on hard times in the late 1990s.

On June 29, the FCC plans to auction an estimated $15 billion worth of “advanced wireless service” spectrum. It has begun to enroll potential bidders and again plans to offer set-asides.

Interest in those new spectrums will be heavy once again because of the growing importance of high-end wireless services to the financial health of telecommunications companies, telecom analyst Jeff Kagan told the E-Commerce Times.

The FCC, meanwhile, applauded the decision by Justice to seek status in the case, noting that by doing so, it increased chances that the government would be compensated for its losses through a successful verdict.

Leave a Comment

Please sign in to post or reply to a comment. New users create a free account.

E-Commerce Times Channels