NEC Unit Admits It Defrauded Schools
By MATT RICHTEL and GARY RIVLIN

SAN FRANCISCO, May 27 - Criminal investigations into corruption and waste in the E-Rate program, a federal plan to bring Internet access to poor schools and libraries, yielded their biggest legal settlement to date on Thursday. NEC Business Network Solutions, a subsidiary of NEC, the computer giant, agreed to plead guilty to two federal felony counts, one for wire fraud and one for antitrust violation, and to pay $20.7 million in fines and restitution.

The settlement, announced in federal court in San Francisco, comes amid increasing scrutiny of the multibillion-dollar E-Rate program. Congressional hearings on the program may be held as early as next month, according to Congressional staff members. Lawyers involved in the case said there were likely to be additional, and even larger, settlements with other technology vendors.

"This is just one piece of a nationwide scheme that is all coming to light," said Eric R. Havian, a lawyer who is representing the San Francisco Unified School District, which tipped federal prosecutors to the fraud. "There are many school districts that were victimized."

Gerald P. Kenney, general counsel of NEC America, said in a statement: "We made mistakes with E-Rate. We've acknowledged and accepted responsibility for those mistakes, cooperated fully with the government and taken action to ensure that these problems can't happen again."

Established with great fanfare in 1996, the E-Rate program added a tax to telephone bills, with the proceeds to be distributed mostly to poor and rural schools. The program has been used by school districts to pay for network infrastructure, like routers and switches to direct Internet traffic, computer servers to manage the system and cables to connect them.

The program gave schools the ability to seek competitive bids from vendors. But there is mounting evidence that some companies hired to provide equipment and services persuaded schools to forgo competitive bids, inflated their prices or defrauded administrators of the E-Rate program when presenting the final cost for services.

"Schools are being promised million-dollar systems when a system costing $10,000 would make more sense," said John Dunbar of the Center for Public Integrity, a public policy research group in Washington. "That's one of the flaws of the system. If the schools had vested interest in making sure that the money was being spent wisely, then it wouldn't be so easy to defraud the program."