Washington, DC, July 12, 2024— The Armstrong Group of Companies agreed to pay $6.5 million to settle allegations the companies submitted false claims to the Federal Communications Commission (FCC)’s Universal Service Fund (USF) High Cost Program. The case was brought by a whistleblower client of Phillips & Cohen LLP under the False Claims Act.
Purpose of the FCC’s High Cost Program
The purpose of the FCC’s High Cost Program is to provide federal funding to expand connectivity infrastructure to ensure that residents living in rural or underserved areas have access to modern communications networks capable of providing voice and broadband service at rates that are reasonably comparable to the rates in urban areas. The USF is administered by the Universal Service Administrative Company (USAC) as an agent of the FCC under the FCC’s direction.
Allegations Against Armstrong Group
Telecommunications carriers, designated by state regulatory commissions or the FCC as “eligible telecommunications carriers” or ETC, may recover a cost subsidy from the Universal Service Fund based on financial and operational data certified by the ETC as accurate. The Armstrong Group, headquartered in Butler, PA, has diverse business interests including commercial real estate; electronics manufacturing; heating, cooling, plumbing services; food production; and telecommunications. Armstrong has operated affiliated rural telephone service providers in Clinton, PA, Hamlin, WV, Rising Sun, MD, Harrisville, WV, and Addison, NY that participate in the High Cost Program.
The complaint, originally filed by Phillips & Cohen in 2017, alleges that, since at least 2008, Armstrong Telephone knowingly submitted fraudulent cost reports, grossly inflating its reported costs and expenses by misallocating costs to Armstrong Telephone that were incurred in support of non-regulated activities conducted by affiliated entities. The misallocated costs included upwards of 80% of executive compensation that was incurred in non-telecom work and should have been allocated to other non-subsidized Armstrong subsidiaries.
Impact of Misreported Costs
Reporting inflated costs attributable to the telecoms generally results in federal subsidies higher than those to which the company is entitled, a violation of FCC regulations on cost reporting and cost allocation. In one example, beginning in 2012, Armstrong is alleged to have misallocated at least $180,000 per year in company airplane costs to Armstrong Telephone. Armstrong Telephone received tens of millions of dollars in federal subsidies under the FCC’s High Cost Program.
Whistleblower’s Role and Legal Proceedings
“The purpose of the FCC’s High Cost Program is to expand modern communications to ensure that residents living in rural or underserved areas have access to services at rates that are comparable to the rates in urban areas. Accurate reporting of costs by rural telephone carriers is essential to ensure proper allocation of federal subsidy dollars. We applaud our client for coming forward to report his concerns to the Department of Justice and the Federal Communications Commission,” said Colette Matzzie, a whistleblower attorney and partner at Phillips & Cohen LLP.
“I have never witnessed such greed, arrogance, and mindlessness in my entire career and felt the need to come forward to address what I saw was a blatant misuse of the federal subsidy program by Armstrong’s decisions to improperly allocate costs to pad their profits with government dollars,” said James Ranko, the whistleblower and former employee of Armstrong Telephone from 2008 to 2016, serving as Controller from 2008 to 2014 and Director of Regulatory Compliance from 2014 to 2016. Ranko and others had suggested developing a cost allocation manual to ensure Armstrong Telephone’s cost allocations complied with FCC regulations. The complaint alleges that this idea was rejected by Armstrong executives.
The False Claims Act and Whistleblower Rewards
The False Claims Act empowers whistleblowers to file qui tam lawsuits to sue entities that are defrauding the government. The law requires that the cases be filed under seal. The government then investigates the allegations and decides whether to join the case before it is made public. Whistleblower rewards under the False Claims Act range from 15% to 25% of any recovery resulting from allegations in which the government intervenes.
The whistleblower and his attorneys appreciate the work performed by the government in investigating the qui tam complaint and specifically thanked US Attorney Eric Olshan and Assistant US Attorney Paul Skiritch of the Western District of Pennsylvania; Senior Trial Counsel Benjamin Wei, Fraud Section, Civil Division, Department of Justice; and FCC Attorney and Investigator Elliott Lowenstein and FCC General Attorney Peter Feinberg for their commitment to bringing this case to a successful resolution. Andrew Stone of the Stone Law Firm in Pittsburgh, PA joined Phillips & Cohen as co-counsel in this case.
The whistleblower complaint.