Wireless Licensees Dispute Auction Process

Two unlikely wireless license winners - retired mail carrier Vincent D. McBride and emergency room physician Scott Reiter - want their money back.

Two unlikely wireless license winners — retired mail carrier Vincent D. McBride and emergency room physician Scott Reiter — want their money back. They both won spectrum in the federal governments auction that ended in January, but havent yet received their licenses and might not ever get them.

Theyve begun to scrutinize the auction process and they dont like what theyre finding. One policy, which hands over interest earned on deposits to a private investment company, particularly irks them.

"I got involved because I thought it was an opportunity for small businesses," Reiter said. "But the more I look at this, the dirtier it looks."

Prior to an auction for the precious airwaves, bidders are required to submit 5 percent of the amount they think they might spend in the auction to the Federal Communications Commission. That money earns interest until the auction closes. Under a part of the Telecommunications Act of 1996, that interest goes to the Telecommunications Development Fund, a private investment company that makes little of its affairs public.

TDF has received $30 million in interest since it was created in 1996, and has invested in several small businesses, including Invertix, Kobalt Interactive, Synovial and Wisor Telecom. It doles out $375,000 to $1 million per initial investment.

According to the law, TDF must submit an annual audit to the FCC and the secretary of the U.S. Department of the Treasury, which must in turn share a report with Congress and the president. But because TDF is a private company, its not obligated to share financial information with the public.

McBride and Reiter think the secrecy stinks: Because people like them supply the money that funds TDF, they argue that the companys records should be available to the public.

The fund was created because prior to the Telecommunications Act of 1996, the FCC could not legally allow auction down payments to earn interest. The lawmakers who built the TDF into the legislation saw the possibility of earning interest on the billions of dollars held by the FCC, and wanted to create a vehicle for funneling that money to small businesses. Creating a private company was apparently the only way to put the interest to use.

"What carried the day with them was how to create vehicles that support economics that are private-sector-focused," said Khalil Munir, a former staffer to Rep. Edolphus Towns, D-N.Y., who created the TDF segment of the Telecommunications Act of 1996.

Ironically, however, some of the license winners — the very people whose money funds TDF — arent always able to secure investments from the company.

Mia Lovink won three licenses in the original auction in 1996. When she was looking for funding after the close of the auction, she submitted to TDF her business plan for building wireless networks with her licenses and was rejected. TDF told her it was looking for cutting-edge technologies, not just companies that aimed to build networks. Lovink sold her licenses at a significant loss two years after the auction.

These independent bidders entered the auctions for the chance to run their own companies because the FCC set aside certain parts of the airwaves specifically to encourage small businesses to enter the telecommunications industry.

McBride, Reiter and other license winners are also angry that so much time has passed since the auction and they havent yet been awarded their licenses or gotten a refund. After the close of the auction, license winners are required to give 20 percent of the price they bid on licenses to the FCC, with the remainder due when the licenses are awarded. McBride has submitted $300,000, and Reiter has submitted $200,000.

But license winners learned three weeks ago that they may not get the licenses they won during the auction because some of them bid on spectrum originally won by NextWave Telecom in a 1996 auction. NextWave recently prevailed in a court battle that allows it to keep those licenses, even though the FCC reauctioned the spectrum to new owners.

Most bidders knew that if NextWave were to win in court, they wouldnt receive licenses. In that case, the FCC promised to return their down payments, without interest. However, its not clear yet whether the FCC will appeal the decision or a settlement can be reached.

But some small bidders, such as McBride and Reiter, have been left in the dark about the status of the licenses. Theyre angry because their money is tied up with the FCC and they arent able to earn interest on it.

"I figured thered be an appropriate time period between when I won the licenses and when theyd be granted. I didnt realize itd drag out like this," Reiter said.

Last week, McBride sent a letter to the FCC, demanding the return of his deposit. "As qualified very small businesses, time to market is critical to our business success, and we can no longer afford the expense of having such a large percentage of our working capital sitting dormant, without earning interest," the letter reads.

The FCC hasnt released any public responses to the NextWave ruling. FCC Chairman Michael K. Powell has called the situation a mess, adding that the agency is considering its options.