Fraud at Obamaphone, Inc.

by Jillian Kay Melchior
A provider of government-subsidized cell phones cuts plenty of corners in its applications.

Street-level vendors for TerraCom, Inc., a provider of government-subsidized phone service, were trained to forge signatures and falsify data, a former employee has told National Review Online and the Scripps National Investigative Team.

The federal government’s $2.189 billion Lifeline program, which is supposed to provide subsidized phone service to the poor, has become notorious for fraud and abuse. Earlier this year, the Federal Communications Commission reported the results of an audit of the top five Lifeline providers: It found 41 percent of beneficiaries — approximately 6 million subscribers — hadn’t proven their eligibility.

A new report from Scripps National Investigative Team, which airs on September 15 and 16, reveals more troubling details about potentially fraudulent applications from Lifeline provider TerraCom, which made $52.3 million off the program last year, up from $32.6 million in 2011.

“It raises a lot of questions about where the information comes from,” says Jim Osman, Scripps TV’s national investigative correspondent. “Did the company get reimbursed for those applications?”

Reginald Strode began working on commission for TerraCom in the late spring of this year, earning $3 for each Lifeline phone he distributed. Strode, a three-time felon, says he was not required to pass a background check before he began work handing out subsidized mobile phones.

“Part of the problem is that we were taught go, go, go, go, go, as many clients — like 25 to 45 people a day,” Strode tells National Review Online. “You gotta get that money. . . . Basically, we were rushing through the process. That’s another reason I believe we were never taught to have the client fill out that information.”

Strode says managers instructed him to sign Lifeline applications himself, rather than allow the prospective subscribers to sign.

Furthermore, Strode says, “there was one box that said, under penalty of perjury, that [applicants must] declare that all the information was correct. . . . I was the one clicking all the information. The client was not. And we were not even reading off the information to the client at all. We were just clicking and going.”

Strode says he asked questions to determine eligibility and then submitted the application online for approval. If an application for a subsidized phone was not approved using the personal information the prospective subscriber had provided, he says, “there was a way that [TerraCom managers] taught us to go around it, which was go pick a random address off a website . . . just to push it through.”

Strode provided National Review Online with a video he had recorded of a Lifeline employee training other workers to find an address at random to use for problematic applications. Addresses on Lifeline applications must be residential, but in the video, the trainer notes that for one applicant, “the address that he used was a business address, so I went and found an address on this site. . . . Hope he gets a phone.”

Phone companies make about $9.25 per month for each customer they enroll in the Lifeline program. On June 25, the FCC’s Enforcement Bureau issued an advisory reminding Lifeline providers “that they are liable for any conduct by their agents, contractors, or representatives (acting within the scope of their employment) that violates the FCC’s Lifeline rules.”

Strode says he has since quit TerraCom, and he’s taking college classes to become a pastor or social worker. But he says the company never fully paid him the commission he earned. A current Lifeline user himself, Strode says some users really do need help paying for a phone.

But he says he also noticed that “there were many people who already had cell phones, like their own personal cell phones, but that didn’t matter. It was [our job] to get the phones out.”

Strode’s story may help explain why, when Scripps National Investigative Team obtained TerraCom Lifeline applications and interviewed 51 people listed on them in person, all but one said their signatures were forged. Most of the people had never heard of TerraCom. Some had owned Lifeline phones from other vendors, but others said they had never applied for a subsidized cell phone.

The Scripps National Investigative Team also discovered that several Lifeline phones were registered under addresses of vacant homes in Indiana. Six TerraCom applications were under the names of men in a Milwaukee homeless shelter, who also claim their applications were forged.

But earlier this summer, TerraCom’s chief operating officer, Dale Schmick, told Indiana officials that TerraCom followed a verification protocol to ensure that phones were not approved for applications that listed addresses of abandoned buildings or homeless shelters. (According to the Lifeline rules, applicants who live in homeless shelters must fill out a worksheet verifying that they are economically separate from any other residents there.)

This is not the first time TerraCom has come under scrutiny for its practices. Earlier this year, the Scripps Investigative Team discovered that confidential data regarding more than 170,000 TerraCom Lifeline subscribers was put online, including Social Security numbers and financial information.

In April, Indiana’s Utility Regulatory Commission launched an investigation about how TerraCom “has been able to accomplish such rapid growth in the State of Indiana and whether the practices involved are compliant with the Commission’s Order and goal of minimizing waste, fraud, and abuse.”

Oklahoma and Texas are also making inquiries about the company. In February, TerraCom and its affiliate, YourTel, agreed to pay a settlement of more than $1 million after an FCC investigation found some of the company’s customers had received more than one phone, which is against the Lifeline program rules.

In July, TerraCom said they had laid off 700 people in 21 states, their “entire sales staff.” But National Review Online spoke with a salesman this week who claimed he was still working at TerraCom, and had been there for more than a year. Strode says many of the commissioned TerraCom employees he had worked with went to SafeLink and other Lifeline vendors after being laid off.

TerraCom is not the biggest Lifeline provider by a long stretch, but anecdotes, audits, and reports continue to reveal widespread fraud and abuse throughout the program. And Lifeline’s costs have increased by 166 percent in the past five years.

What began as a program for the poor has quickly devolved into corporate welfare, but like many federal initiatives, this deeply flawed program is almost impossible to shut down. A simple start would be to bar repeat abusers like TerraCom.

— Jillian Kay Melchior is a Thomas L. Rhodes Fellow for the Franklin Center for Government and Public Integrity.