Program receives funding under the USF, marks recent expansion after Bush era Hurricane Katrina giveaway

The U.S. Department of Justice (DOJ) announced late last week that it was cracking down on Associated Telecommunications Management Services LLC (ATMS) -- a small rural cellular service provider in the East.  ATMS and its various subsidiaries -- such as True Wireless LLC and Angles Communications LLC -- received contracts under the "Lifeline" federal program, which looked to provide cellular and landline telephone service to low-income Americans.
I. "Lifeline" -- a Quasi-Voluntary, Government-Managed Phone Voucher Program
Lifeline, like many efforts today associated with the Obama administration, began under U.S. President Ronald Reagan (R).  Much as President Reagan's EMTALA (a subclause of COBRA), socialized the American healthcare system by forcing hospitals to treat Americans with no payment (and forcing taxpayers to pick up the difference), Lifeline looked to make sure poor Americans didn't go without phone service.
The bill that hatched Lifeline was a bipartisan effort proposed by Sen. Robert William "Bob" Packwood (R, Oreg.) and Rep. John David Dingell, Jr. (D-Mich.).  President Reagan swiftly threw his weight behind the effort.  

Telephone Lines
The Reagan administration and its allies in Congress, pressured telecoms into backing a private fee to pay for land line vouchers for the poor. [Image Source: Listener Communications UK]

The New York Times wrote in 1983, "[The law reflects] a growing recognition that the price of telephone service could become a 1984 campaign issue."
The pending law was never passed.  But the bill -- and pressure from President Reagan -- did convince telecoms to bow to the federal whims, creating a new line item "phone stamp" fee on customers phone bills.  This fee was collected by the U.S. Federal Communications Commission under the ambiguous power granted it under The Communications Act of 1934 [PDF] (47 U.S.C. § 151).
This was not the first fee of this kind; a similar fee on long-distance calls had already subsidized local calling.   But the Lifeline program was the first time the federal government had forced telecoms to redistribute income from their customers to the FCC, in order to fund poverty-assistance programs.
The next major shift would come in 1996 with The Telecommunications Act of 1996.  Under that bill -- signed into law by President Bill Clinton (D) -- the FCC and private sector's voluntary poverty assistance program was made mandatory regulation.  The Universal Services Fund (USF) fund was born.  

Universal Services Fund
Under the Universal Services Fund, signed into law by President Clinton, participation in the voucher program was no longer mandatory, although telecoms could still pass off the cost of the program to consumers. [Image Source: A Capitol Blog]

The USF was initially tasked with extending landlines to poor, rural underserved parts of America, and providing internet access at libraries and other public service efforts.  Thus America's mildly socialist poverty assistance program morphed from voluntary socialism to mandatory socialism.
II. Lifeline? Isn't that the "Obamaphone"?
The USF program was executed via a service called "Lifeline", which was initially a wired service, but eventually expanded to offer vouchers for both wired and wireless customers.  Since its inception, Lifeline has been pushed slowly to repurpose itself towards cellular service.
In a 2004 Congressional hearing, Rep. James Warren "Jim" DeMint (R-S. Car.) complained that the USF money would be better spent on building cell phone towers and spending on cellular vouchers, rather than land lines:

We missed the estimate of wireless users so bad it's unbelievable now that we've got more cell phone numbers than we've got hardwired numbers.  I'm worried that the whole concept of Universal Service Fund is basically subsidizing or based on an old technology.

TracFone Wireless, Inc. -- a subsidiary of Mexico's América Móvil SAB de CV (AMX) -- was the recipient of USF funds from FCC  funds under President George Walker Bush (R).  The Bush administration pushed for funds to be award to TracFone and other firms who offered low-cost cellular services with no credit checks and no monthly bills.
Under President George W. Bush, Hurrican Katrina victims got free phones with 300 minutes, courtesy of their fellow taxpayers. [Image Source: TracFone Wireless]

The first major phone giveaway occurred under President Bush. The FCC in 2005 handed out thousands of free TracFones and other budget cell phones (Bushphones?) with 300 free cellular minutes on them.  The phones were distributed to impoverished victims of Hurrican Katrina in the stricken Gulf Coast region.

TracFone described the program in a press release, writing:

The applicant must have lived in an area affected by Hurricane Katrina, as determined by FEMA, and have been approved by FEMA to receive emergency housing assistance. Applicant must provide TracFone with a copy of the FEMA grant letter advising them they are eligible to receive support, present a copy of a Federal or state-issued I.D. and must answer eligibility questions in writing.

The program was popular and in 2009 under new President Barack Obama (D), the free phone giveaway to the poor and the voucher-backed free phone service was expanded.  For that reason, while President Obama's program was nearly identical to past programs, it began to draw much more attention.
Between 2008 and 2011 costs soared, tripling.  By 2011, the USF was drawing down a subsidy of $2.2B USD from the U.S. federal government.  Thus in 2012, President Obama's rivals were quick to lambaste the program as "Obamaphones", pointing to growing claims of corruption.  One point not fully explored -- while not necessarily good nor bad -- was that some of these costs came from President Obama seeking to repurpose the USF to fund broadband internet vouchers and rural rollout (in other words, not all of these rising costs were coming from the traditional Lifeline services, alone).

On the flip side, there have also been allegations that lobbying from TracFone/América Móvil was a key cause of the Obama administration expanding funding for the program; TracFone President Frederick "F.J." Pollak was a "major Obama donor", according to The Huffington Post.

The Washington Free Beacon elaborates on this, writing:

One of the major providers of the free cell phones—3.8 million subscribers as of late 2011—is Miami-based TracFone Wireless, a company whose president and CEO, Frederick “F.J.” Pollak, has donated at least $156,500 to Democratic candidates and committees this cycle, including at least $50,000 to the Obama campaign.
Pollak’s wife, Abigail, is a campaign bundler for Obama who has raised more than $632,000 for the president this cycle, and more than $1.5 million since 2007. She has personally contributed more than $200,000 to Democratic candidates and committees since 2008.

Despite various criticisms the Obama administration has tried to stand behind its USF voucher program.  At the same time it has looked to crack down on small contractors that have been filing fraudulent claims, inflating program costs.
(The Wire offers an excellent summary of the evolution of the phone vouchers program from President Reagan to President Obama.)
That's how we arrive at the current controversy.
III. Obamaphone Fraud
The DOJ worked in cooperation with the U.S. Internal Revenue Service (IRS) and U.S. Federal Bureau of Investigation (FBI) to investigate claims that a handful of businesses were taking money from the USF for selling budget phones and services to the poor.  The key to the scam was that the firms repsponsible would request funds from the government for providing products or services at one rate, then turn around and charge impoverished customers a higher amount, pocketing the difference.
The federal agencies allege that between September 2009 and March 2011 three key culprits affiliated with ATMS conspired to defraud taxpayers, gaining roughly $32M USD in the process.  The suspects reportedly were quite brazen in their ill-gotten gains purchasing yachts, mansions, and exotic sports cars with the Obamaphone money.
Regardless of your feelings on the government paying for peoples' phones and phone service, clearly this is an even more blatant fleecing of the taxpayer for private profit.
Meet the accused criminals...
Thomas E. Biddix -- Age: 44 -- Location: Melbourne, Fla.
Mr. Biddix was "Chairman" of ATMS and allegedly the ringleader of the scheme.

Thomas Biddix
[Image Source: Facebook]

[Image Source: Florida Today]

Kevin Brian Cox -- Age: 38 -- Location: Arlington, Tenn.
Created numerous subsidiaries such as Go True Wireless and Angles Communications LLC, which submitted more fraudulent documents, sharing cash with Mr. Biddix.

(No pictures available)

Leonard I. Solt -- Age: 49 -- Location: Land O’Lakes, Fla.
Created other subsidiaries and performed collection duties for Biddix.

Leonard I. Solt

The men involved are charged with fifteen counts of wire fraud (18 U.S.C. § 1343) and an additional count of conspiracy to commit wired fraud (18 U.S.C. § 1349).  Under those provisions the suspects may face virtually a life sense (20 years per wire fraud count) in prison and fines of $15M USD, plus be entitled to forfeit what they gained from the fraud scheme.  
In most such cases, when the suspect is found guilty of multiple duplicate counts, these duplicate charges are merged/consolidated during sentencing, so you're probably looking at something more in the realm of 20-30 years in prison.  Given the suspects' age, that's still a pretty stiff penalty.
The DOJ in a press release says it has issued warrants to seize the suspects’ property while the court battle plays out:

The court also authorized a seizure warrant seeking the defendants’ ill-gotten gains, including the contents of multiple bank accounts, a yacht and several luxury automobiles.

The Tampa Bay Tribune covers these seizures, which affected the pawn shop business Mr. Biddix also operated.  It writes:

The government wants $32.4 million back, along with alleged spoils that include an orange Lamborghini, a red-bronze Chevrolet Corvette, a black Cadillac Escalade, a Chevrolet Suburban limo, a black Mercedes Benz S63 and a blue Audi R8.

Employees of a pawn shop operated by Biddix saw vehicles hauled away on flatbed trucks Thursday as federal agents descended on the Melbourne business, Outdoor Gun & Pawn.

It should be interesting how the public reacts to this crackdown on Lifeline fraud.  One thing's for sure -- whether you love Lifelines/"Obamaphones" or view them as despicable socialist wealth redistribution, they're unlikely to go away.  After all, both parties appear to support the program on some level, given its potential to win votes.  
Both will likely look to capitalize on perceived weaknesses in the scope and implementation of the other’s plan, but at the end of the day there will likely still be free phones on the menu.

Sources: DOJ [press release], The Wire, The Tampa Bay Tribune

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