Federal prosecutors in New York City arrested the owner of Connect2 Internet Networks Inc., a Staten Island Internet services provider, and several company employees December 18 on federal criminal charges of fraud and obstruction of justice in connection with a scheme designed to defraud the E-rate program.

Prosecutors said the company targeted schools that were eligible to receive 90 percent discounts and then advised them that they would be able to qualify for the program without having to pay their portion of the cost. The case marks the first time that fraud accusations have led to the filing of formal criminal charges in the E-rate program.

A criminal complaint that was unsealed in the U.S. District Court in Manhattan charged that the defendants, including owner John Angelides, misrepresented to the government that the schools were paying their share. The complaint alleged that the company charged the schools nothing for the products and services they purchased, and then assured the schools, sometimes in writing, that they would never have to pay for the goods and services. The company then charged the E-rate program inflated costs for eligible services.

The complaint also said that defendants created phony invoices, "dummy" checks and other fake documents to make it appear as if the schools were paying a portion of their costs. Further, the complaint said that as government investigators began to uncover the scheme, company officials tampered with witnesses and concealed incriminating evidence.

In one example, captured by investigators in a recorded conversation, Angelides urged two administrators of the Islamic Elementary School in South Ozone Park, NY., to lie to investigators and say that the school had agreed to pay its part of the costs, even though Angelides had promised school officials in writing that they would not have to pay anything. Angelides, according to the complaint, also allegedly suggested that the school's administrators say that the school was now financially unable to pay its share because of the September 11, 2001, terrorist attacks. He suggested that the school could "use 9/11 as a wedge," asserting that investigators would 'understand because" the school was "Islamic." Angelides continued to assure school officials that they would not have to pay, according to the complaint.

The U.S. Attorney said that if convicted, Angelides could face a maximum penalty of 60 years in prison and a fine of $2 million or twice the gross gain or gross loss from the offenses. Company employees could face penalties ranging from 30 to 15 years in prison. The Federal Bureau of Investigation assisted in the investigation of the case.

According to the SLD's public records, Connect2 received $9,072,854.60 in discount payments in the program's first three years. For the 2001 funding year, it was approved for $490,089 worth of commitments on more than $25 million in funding requests. Only $17, 039.20 of that amount has actually been disbursed. For the 2002 funding year, close to $30 million worth of funding requests were pending.

The SLD's public records indicate that 203 different billed entities, including the New York City Board of Education, had requested funding for Connect2 since the start of the program. The list of the schools, and the status of their requests, can be reviewed by clicking here .