U.S. joins fraud suit against major investor


The Justice Department said yesterday that it planned to pursue civil fraud claims against famed money manager Mario J. Gabelli, contending that he orchestrated a scheme to deceive the Federal Communications Commission in its auctions of wireless spectrum licenses several years ago.

The government is seeking to take over a civil lawsuit filed by a lawyer involved in the auction process in 2001 that accused Gabelli of creating a series of sham companies that bid for FCC licenses at a discount under a program that favored minorities and small businesses.

Most of these Gabelli-backed companies were fronted by individuals who were friends and associates of the fund manager and who had virtually no experience in telecommunications. Most never began companies to sell cell phone or other communication-related services to customers, according to the 2001 lawsuit.

Instead, the companies resold the licenses at a substantial profit, with Gabelli pocketing much of the gains, according to the lawsuit.

One of the nation's most successful and high-profile fund managers who controls a number of companies worth an estimated $28 billion, Gabelli is often featured on investor panels and quoted in the financial media.

For years, Gabelli has played down the significance of the lawsuit, calling it a "form of legal extortion" in a statement last fall.

He suggested contingency-fee lawyers seeking their own payday from him initiated the suit. He also said the suit lacked merit because the Justice Department had initially chosen not to join it.

That may no longer be the case. The judge overseeing the suit did not immediately rule on the government's motion. A trial is scheduled to begin June 1, but it could be delayed.

A call to Gabelli's office was not returned. A call to the assistant U.S. attorney in the case also was not returned.

The fact the government wants to join the suit was seen as a major victory for the plaintiff's side. "This is excellent news," said John Phillips, a lawyer representing the plaintiff in the case. "It's good to have the government totally acknowledging the validity of the claim and joining us in it."

A lawyer for Gabelli questioned the timing of the government's move. "I think the government conduct in this matter has been outrageous," said Lanny A. Breuer, a former White House lawyer in the Clinton administration who also represents the Gabelli-backed bidders.

"For years, we asked the government to play a constructive role in this case, and on the eve of trial to come in and try to join the case while they denied us most of the documents we were entitled to - and are essential to this defense - is very, very troubling."

This is not the only lawsuit facing Gabelli, who made his name by being a vocal champion of shareholder rights. Some of the biggest shareholders in a Gabelli-controlled private holding company have sued him for paying himself too well - his publicly disclosed income for 2004 was $55 million - and for preventing them from selling their shares.

The fraud suit against Gabelli dates to the mid-1990s, when the FCC, noting the rabid demand from communications companies, realized it had been giving away a prized asset for years: radio spectrum. So it decided to auction off slices of radio spectrum for cell phone service.

Recognizing that large telecommunications companies could spend billions of dollars - which they did - to win spectrum in the auctions, the government set aside some of that spectrum for small- and minority-owned companies that would be sold at a steep discount.

In the days and even, in some cases, hours before the series of auctions occurred between 1995 and 2000, several bidding corporations were founded by individuals with close ties to Gabelli and were financed by a private investment firm he owns, according to the lawsuit.

Most of these individuals lacked any experience in the telecommunications industry. One of the companies was headed by Trent Tucker, a former New York Knicks basketball player who later claimed in testimony that he believed he was a passive investor in the scheme.

Another company was owned by Thomas Wilson, a dentist in Bronxville, N.Y., and the father-in-law of Gabelli's daughter. Other companies were owned by an aerobics instructor and a couple that owned a media buying and advertising agency, according to the lawsuit.

Bidding for spectrum through these companies, Gabelli and his partners qualified for $90 million in federal discounts as well as $70 million in favorable financing on federal loans, the lawsuit stated. After being awarded the licenses, several were quickly sold to others at a profit of $206 million, the lawsuit alleges.

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