ORLANDO WEEKLY MICA'S MILLIONS -- Unearned Millions From 1980s Federal Cellular Telephone Lottery Speculation Helped Propel John Mica Into Congress

ORLANDO WEEKLY MICA'S MILLIONS -- Unearned Millions From 1980s Federal Cellular Telephone Lottery Speculation Helped Propel John Mica Into Congress


John Mica: "I consider myself a pioneer in the cellular business, having helped to build two successful systems"

ORLANDO WEEKLY
11/12/1998

News

Mica’s millions




By Edward Ericson Jr.

John Mica is sitting pretty.

Re-elected last week as Florida’s 8th District congressman, Mica had campaign money to burn, no opposition from the Democrats and rides into a fourth term with a reputation -- carefully cultivated -- as a tough-talking political reformer.

He’s a crowd-pleaser on crime, steering federal money toward Central Florida as a "High Intensity Drug Trafficking Area" and voting to try 13-year-olds as adults. And as the first and only representative of a heavily Republican district drawn in 1991, Mica has taken off the gloves to fight powerful interests such as ... average federal workers, with dramatic hearings on what he regards as wasteful labor-union activities performed on government time.

Mica also has been fiercely partisan in his attacks on President Clinton, co-sponsoring an early impeachment resolution and calling the president "the little bugger" from the floor of the House.

A member of the House Government Reform and Oversight Committee, Mica attacked the White House over an obscure miniscandal involving Indian tribes in Wisconsin. One tribe reportedly used its casino-generated money to block a nearby tribe’s efforts to open a competing gambling hall. The Interior Department officials who blocked the new casino were accused of taking their marching orders from the White House, which received big campaign contributions from the wealthy tribe. Then the bureaucrats quit their government posts to take lucrative lobbying contracts with the tribe. Mica was incensed.

"Under the Ethics in Government Act, what was done by [those bureaucrats] is prohibited except for one loophole," Mica fumed during a hearing on the matter last year. "Do you think that that’s right for folks to step right out of government and then into a position of conflict?"

Mica came to Congress on a platform built on such stands, equating his financial security with political independence. "I’ve made a lot of money and I don’t need the salary," he said.

Proud of his status as a self-made entrepreneur, Mica would like to privatize as many services as possible, including public education. He would convert foreign aid into aid for U.S. businesses for "export assistance." Last year he put your money where his mouth is by voting for taxpayer-subsidized loans to nations that import U.S. weapons -- but only after taking $14,200 from political-action committees associated with those weapons merchants, according to the Center for Responsive Politics.

But while championing welfare for Grumman and Lockheed Martin, Mica’s tightwad side rules his philosophy regarding government aid to poor people.

In a 1994 survey on welfare, Mica chose all the most restrictive options regarding welfare reform, endorsing mandatory work and a requirement that teen moms must live with a parent. Then he added: "Six-month maximum on welfare."

Mica even endured a moment of infamy in the spring of 1996 when he likened welfare recipients to reptiles. "Do not feed the alligators," he said. "We post these warnings because unnatural feeding and artificial care create dependency."

The metaphor was denounced by many Democrats and caused even some Republicans to wince.

Yet few could know that at least $2 million of Mica’s own wealth had come from a government giveaway of a public resource. And nobody at the time noted the irony of Mica’s dependence on that taxpayer-sapping bonanza -- which one federal official likened to "one of the biggest welfare programs in the United States."

The giveaway

The man who said those words was former Federal Communications Commission chairman Mark S. Fowler, who was in charge of the giveaway. The date was March 30, 1985. Fowler was addressing a Senate subcommittee on communications, trying to get Congress to help him turn off the spigot of public money.

It was a frustrating time for Fowler; nothing was done, and the result was a five-year opportunity for a few thousand sharpies in and out of government. Fowler’s welfare program was John Mica’s ticket to easy millions.

It was called the cellular telephone service lottery.

On announced occasions, beginning in 1984, in a windowless room on the eighth floor of the FCC building, three big air-blown tanks full of pingpong balls were activated as groups of 30 to 50 anxious players looked on. Like Meyer Lansky or a Wisconsin tribe, the federal government was in the gambling business. But players of FCC Cellular Bingo, unlike the naive pigeons of Vegas, placed their bets for free or nearly free. And payoffs ranged from a few million dollars to hundreds of millions.

The prize was the right to use the radio spectrum between 800MHz and 920MHz, the frequencies cellular telephones use to communicate with each other and with wire lines. Conservative estimates at the time put the assets’ combined value at $20 billion.

The giveaway was supposed to spur competition. AT&T, whose Bell Labs had developed crucial cellular-switching technology two decades earlier, had just been dismantled by the largest antitrust action the U.S. government had ever undertaken. Regulators didn’t want a huge company to dominate the new service. Comparative hearings -- in which FCC bureaucrats weighed the merits of corporate proposals to provide service -- already had delayed widespread cellular service by 10 years. A call for proposals brought an avalanche of 5,000 -- a possible 20-year backlog -- in just a few days. "This was an inefficient system, and it delayed the delivery of new services to the public," remembers David Aylward, formerly an assistant to then-Colorado Sen. Tim Wirth, who chaired the Senate subcommittee on communications.

By law the FCC could not sell public assets. A lottery was deemed the only fair thing.

To spur competition, the FCC divided the country into 734 regions, the largest 306 being outrageously valuable, city-based "Metropolitan Service Areas" (MSAs) and the remaining 428 deemed "Rural Service Areas" (RSAs), which ranged in value from perhaps $1 million to tens of millions of dollars. Each area or city would get two cellular providers: the local phone company and a newcomer. To discourage speculators, the FCC demanded 500-page applications packed with engineering reports. Applicants also had to submit a letter of credit attesting they had the million dollars it would take to build the system within five years.

But specialized "application mills" popped up immediately to do the paperwork for just a few thousand dollars. They knew that the right to use the radio spectrum, if won in the lottery, could be sold quickly to a big company like Southwestern Bell or Western Wireless that would build the actual towers and staff the billing and marketing departments. A lottery application, once created, could be duplicated for as many gamblers as would pay, making application services a profitable business in itself. Commercials appeared on the Financial News Network, urging folks to "roll the dice." Regulators were appalled. The FCC, Federal Trade Commission and the Securities and Exchange Commission stepped in to collar the mountebanks. Journalists reported the scandal; editorialists clucked tongues.

As the greed frenzy began, Mica was an administrative assistant to Florida Sen. Paula Hawkins, who sat on the key Senate communications subcommittee. Also working for Hawkins was John Dudinsky; following Hawkins’ defeat in 1986, the two men would find themselves in business together as lobbyists.

More important, Mica and Dudinsky also formed a partnership as MD Cellular. It was MD Cellular that -- two years after Mica left Hawkins’ employ -- would put Mica himself into the communications business.

A driven man

John Mica would be a millionaire today even without his cellular profits. But the millions he made in the lottery appear to have been his best return on investment. Mica takes pride in his attention to such things.

Mica has been a dedicated public servant, a stalwart for conservative causes, a tireless go-getter and a careful cultivator of his own financial garden for more than 30 years of public life.

"He is extremely energetic," says brother Dan, a former Democratic congressman who now heads the National Association of Credit Unions. "He eats breakfast early, works to 8 or 9 p.m., then he’ll go out to get a refrigerator or stove to install in the house, and do the installation before bed."

John Mica also is a deliberative and sharp thinker, his mind toned early by the high-school debating society. "For many, many years he held the record for the most points ever accumulated," says his brother, a fellow debating team member.

As a student at the University of Florida, John Mica raised the money to rebuild his fraternity house and even sketched the design for it himself, his brother says. He worked as a necktie salesman and dishwasher, and networked Republican circles as his brother moved in Democratic ones, although little separated them politically.

Shortly after graduation, John Mica landed a job as executive director of the Palm Beach and Orange County Government Charter Study Commissions, and sold the idea of charter government to the citizens of West Palm Beach. He then turned his charter knowledge into a minor franchise, selling his expertise to Pasco and Manatee counties as well.

In 1975 Mica hooked up with Orlando architect Robert Koch and formed MK Development, which 10 years later would build Koch’s office building and a small strip-mall on Temple Trail, eventually earning Mica more than $50,000 a year in rent payments.

Beginning with his election to the Florida House of Representatives from Orlando’s District 17 in 1976, Mica’s personal finances improved yearly. In 1977, he and developer Loren H. Roby borrowed about $110,000 to invest in two oceanfront lots on New Smyrna Beach. After the pair built condos on the site, both were on their way to financial security; by June 1980, Mica pegged his net worth at $302,550.

When Hawkins was elected to the U.S. Senate during the Reagan landslide of 1980, Mica followed her to Washington. After she lost her bid for re-election in 1986 to Bob Graham, Mica joined his friend Dudinsky as a lobbyist, working for such clients as American Specialty Chemical, Coopers & Lybrand and 3M Corporation. Mica built his five-bedroom, four-bath home on Via Tuscany in Winter Park just a few months after leaving Hawkins’ employ. The house is now assessed at $350,000.

Money was always important to John Mica, brother Dan says, and he was ambivalent at best about the value of public service in amassing suitable wealth. "For a while he questioned why I spent so many years in public service," says Dan, who served a decade each as a congressional staffer and as a congressman from Palm Beach County. "He said I might do better financially for my family."

Dan says he was surprised in 1991 when John announced he was running for the newly created House seat, until he said he had made his fortune and worried no longer about paying the mortgage. "John wanted to make sure he could be assured for his family," Dan says.

Mica lent himself $100,000 to run against Democrat Daniel Webster. Mica positioned himself as a reformer, and depicted Webster as a tool of trial lawyers and labor unions; Webster called Mica "the epitome of the professional politician." Webster did not make an issue of the cell-phone lottery, from which Mica divulged at least a million-dollar profit in financial disclosures filed four months before the election.

Mica won with 53 percent of the vote and went on to distinguish himself as a bold entrepreneur, a self-made millionaire who created jobs and opportunity. It was this image Mica put forth when first queried about his cellular deals.

"I consider myself a pioneer in the cellular business, having helped to build two successful systems from the ground up, now all part of a national system we take for granted," Mica replied early this year in a letter after Orlando Weekly began inquiring about his finances.

Yet a closer look reveals not a "pioneer" but a man whose luck made him rich with no work required.

‘Little appointee’

Mica refuses to say exactly how much he invested or earned in cellular, although the financial disclosure forms he filed as a congressman indicate a gross profit of at least $2 million. Because those forms list only income ranges, and because two of the three companies that eventually bought Mica’s phone interests refused to divulge the prices they paid, it’s impossible to be more precise.

But precision has not been a hallmark of Mica’s cellular business. In interviews and letters over many months, he gives varied and confusing explanations of his role, at first depicting himself as a wheeler-dealer and, more recently, as a "little appointee." From interviews and available public records, it appears the latter role is most accurate.

In fact, so informal was MD Cellular -- Mica’s first phone venture with Dudinsky and Carl Medei of Maitland -- that as far as the state of Florida is concerned, it was not even a legal business entity, having failed to register as required with the state.

The oversight was understandable. MD was less a business than a betting pool, Mica’s claims to the contrary.

"We were lucky. We were lucky. We were lucky," says Medei. "The FCC does a drawing, and if they pick you, you get money. And if they don’t, you lose."

Medei remembers little else about MD Cellular. He can’t say when it was begun -- "All that’s so long ago, I don’t think I even have the paperwork anymore" -- or what work Mica did on its behalf. He would not divulge the amount of his own investment or profit, although he says his was much smaller than that of his partners.

Mica says his duties as "managing general partner" included setting up the partnership, providing facilities and expensing the partnership. But he also says that another company, Genesis Management, did all the actual work.

And the $90,000 fee he reported in 1991 as the start of his cellular income?

That was an accountant’s creation, for tax purposes, Mica says. In fact, Mica now says MD was not a partnership at all. "Similar to thousands of other investor applicants, we retained a packager to prepare legal, engineering and financial applications to file with the FCC," Mica wrote in another letter. "Rather than form a formal partnership or corporation, as investors we signed Service Contract Agreements (forms used by nearly all cellular packagers) provided by Genesis, the Virginia-based cellular packager."

Chance encounters

Genesis Management founder Wladimir Naleszkiewicz was a Polish émigré who taught economics at Notre Dame before stints with the FCC and the White House office of telecommunications policy under presidents Ford and Carter. He had spent the early 1980s trying to assemble financing for a visionary direct satellite broadcasting system -- much like the one Bill Gates is invested in today. But Genesis, founded in 1986, was a much more modest enterprise, filling out complex FCC forms and grouping investors for the cellular lotteries in a subtle -- and sometimes blatant -- attempt to beat the system. The goal was to enter the lottery process under as many names as possible.

FCC rules and federal law forbade the submission of duplicate applications, threatening a $10,000 fine and up to five years in prison for anyone caught doing so. But the FCC didn’t enforce the rule. And Naleszkiewicz was the engineer for several lottery syndicators, according to Mica, cranking out engineering specs for all comers. That gave packagers like Naleszkiewicz tremendous power, controlling which small investors were grouped with others and in some cases directing the whole profitable enterprise.

Some application mills would sign up anyone with a pulse, charge them next to nothing to enter, but require that if the applicant won, he or she would hire the packager -- at high cost, with perhaps a bit of equity -- as a consultant to set up the system. The other tactic was to charge unsophisticated investors high fees based on inflated claims about the chances of winning and the value of the asset to be won.

By mid-1986 FCC Chairman Fowler threatened to report "charlatan-type applications" to the Justice Department. But in the end the market ruled, and the speculators won. "We have seen that too many applicants have too little intention of actually providing telecommunications services and merely apply in order to sell out later to the highest bidder," Fowler complained in a speech to telecom industry officials. "Try as we might, we have no way to distinguish between authentic service providers and these racehorse Charlies."

Enter John Mica.

"We had done some research on packagers," says Mica. "Wladimir had the best reputation."

As the first of five RSA lotteries closed, Mica saw that instead of the expected thousands of applicants, only 800 to 1,200 people applied for each license. This created favorable odds for any savvy investor who could enter all of the remaining 340 drawings. Even if the number of applicants doubled -- which it nearly did -- the odds of winning still were better than seven to one.

By mid-1988, Mica had entered several hundred lotteries. By 1990 he had won three times.

MD Cellular was part of two groups that won RSAs. Those service areas were based in Front Royal, Va.; Aberdeen, S.D.; and Monroe, La.

Within weeks the partnership sold the Virginia RSA, which covered a six-county territory 100 miles from the Washington beltway -- prime territory -- to Southwestern Bell. "I didn’t want to sell Virginia," Mica says. "If we’d gotten stock for this, we’d be so rich I wouldn’t even be here. I’d be out on my yacht somewhere."

Mica did get some stock in the next RSA sold, a seven-county area in the northeast corner of Louisiana.

The partnership to which MD Cellular belonged was in turn controlled by a larger partnership, Tri-Coastal Cellular; in 1991 Tri-Coastal’s 18 partners formed a shell corporation, Monroe Cellular, to operate a cellular-phone company there. "We built the system in Louisiana," says Jim Arch of Maitland, one of the partners.

By "built," Arch doesn’t mean he actually flew down there with a tool belt around his waist and worked the cranes that erected the towers. He hired the people who hired the people who did that. Or rather, like Mica, he invested with people who hired people who hired people who did the work. But Mica’s role was such that, today, he can’t even remember the name of the company, or its owner, that the partnership hired.

Eventually New Jersey-based Centennial Cellular came calling, and in 1994 they paid $11.5 million for the property, according to Centennial Comptroller Tom Bucks. Mica’s share of that sale would have been $862,500; he took half of that in Centennial stock, which he eventually sold.

The final RSA -- comprising five counties in South Dakota -- was sold in 1995, also for an undisclosed sum, to Western Wireless. Mica reported a gain of between $100,000 and $1 million on that sale, but has said that his 12 percent stake in the Aberdeen property was his least profitable.

Mica entered the 1990s more than $1 million ahead in the cellular game. Real losses were almost unthinkable. Instead, the risks were associated with business partners shuffled into the deck by Genesis Management.

The riskiest would prove to be the packager himself, Wlad Naleszkiewicz.

In January 1989, Naleszkiewicz told 40 clients he had submitted to the FCC their cellular lottery application fees -- $200 each for 1,438 applications -- but he didn’t. "The last ones, he never filed," says Arch. "He put the applications in the garbage."

Naleszkiewicz pled guilty in federal court to two counts of mail fraud in connection with this failing. He told the court he kept the $287,600 to save himself embarrassment and "avoid financial difficulties." He and his wife, Nancy, were fined double damages, and Wladimir faced 10 years in prison, though he served just four months’ home detention. Genesis’ was the first and only criminal indictment to arise from cellular licensing application fraud.

Genesis filed for bankruptcy protection under Chapter 11 in August 1993, claiming assets of $5,088 and liabilities of $1.4 million. Wladimir Naleszkiewicz died in February 1996. His wife could not be reached for comment.

Mica rests much of his credibility as a true cellular player -- and not a passive speculator -- on his choice of Genesis. "The firm had a reputation as the best engineering and packaging company for cellular applications," he wrote. "We researched the firm and found that all of the critical engineering studies required by the FCC for previously awarded MSA Cellular licenses and prepared by Genesis were approved."

But Genesis did not exist until 1986, well after the MSA process had gotten under way. And what was Naleszkiewicz doing immediately before then? He was vice president and director of economics for American National -- an application mill the FTC had shut down for fraud in 1985.

Mica says he knew nothing about that.

Tallying the costs

Today Mica is out of the phone business.

He’s coy about his income from the deals, noting that he put money into the systems he owned for years before deriving any profit. He says the cost of applications was high as well. "Application fees and packaging fees for engineering and legal work were costly," he wrote. "As I recall, just the FCC application for each block exceeded $80,000, not including packager fees for legal, engineering and financial application work."

But what did it really cost to get into the sweepstakes?

According to FCC records, the early lotteries were free. Later a $200 per application fee was instituted. Syndicators like Naleszkiewicz charged between $3 and $5,000 per application, depending on the worth of the properties being raffled off and what kind of deals they made with clients.

Mica’s real costs may never be known. But the aftermath of the Genesis fraud provides a glimpse at the figures.

In a letter dated May 15, 1997, Mica wrote to James Hanson, chairman of the House Committee on Standards of Official Conduct, regarding a payment Mica left off his 1996 financial disclosure statement. "In 1996 I received $7,502.23 as a court-ordered restitution (Naleszkiewicz Order of Restitution) from a case in which I and other investors were defrauded," Mica wrote. "Staff of the committee advised that this need not be considered ... for reporting purposes."

The restitution was for double the amount Naleszkiewicz collected from each applicant. That puts Mica’s cost for that final lottery, in which 83 RSAs were raffled, at $3,751.12. Multiplied by four application blocks, that represents an initial investment of less than $15,000 to make his first cellular million (or two).

Such speculation annoys John Mica, who doesn’t like to talk about his money.

Although he once pegged his net worth at $6 million and equated his financial independence with political independence, Mica is reticent about the details. "Someone might read that [I’m rich] and try to push down my door," he says.

So don’t ask him what he’s worth now. He’ll say only that it’s less than a few years ago. And don’t ask him to say just how much he invested, and earned, in the cellular-phone business.

He says he just doesn’t know.