A failure of communication (The Deal Magazine)
Public trust and private equity are at odds almost by definition. But when it comes to serving American citizens with hearing or speech disabilities, they're at loggerheads. Witness the schism between the Federal Communications Commission and the market leader in video relay service, or VRS.
VRS is the telecommunications relay service, or TRS, currently favored by Americans with hearing or speech disabilities. The Americans with Disabilities Act, as amended in 1990, guarantees all such citizens the right to communicate over the phone with others who can hear. All they have to do is register with a VRS provider to receive a 10-digit number to call from their videophones.
The law also dictates that qualified users of VRS, or any form of TRS, "pay rates no greater than the rates paid for functionally equivalent voice communications services." For this reason, the FCC established an Interstate TRS Fund in 1993 to collect a percentage of revenue from all interstate telecommunication companies. Monies from this fund have since been disbursed to TRS providers to compensate for what the Code of Federal Regulations calls "reasonable costs."
VRS improves on its TRS predecessor, the text-telephone machine, by exploiting broadband technology to stream real-time video. Here's how: A caller among the 400,000 to 500,000 U.S. citizens who primarily communicate in American Sign Language makes a videophone call to his 10-digit number. There the caller connects with a communications assistant, or CA, who's also conversant in sign language. The caller then gives the CA the outbound number of the destination party he wants to reach. The CA stays online and, after reaching the destination party by phone, on the line.
The CA's task thereafter is to interpret the caller's ASL via video and to voice it into the phone so the destination party hears what the calling party says. The objective is to make such conversations as fluid as possible.
Seldom has an endeavor so magnanimous evolved into an industry so contentious. Yet it doesn't take much to figure out why. VRS is a modern growth story capable of delivering enviable returns. It also boasts fat margins enhanced, historically, by slapdash oversight.
Then, too, the VRS market is dominated by a single company, Sorenson Communications Inc., whose overriding motivations are to increase profits and to entrench a near monopoly. These factors, taken by themselves, indicate a stasis that would take a face-off between the federal government and the free market to change. And that's before addressing the presence of private equity.
Privately held Sorenson is also a portfolio company of GTCR Golder Rauner LLC, whose returns from participating in telecommunications' VRS segment border on the preposterous. As peHUB put it in a blog posting in August 2009: "GTCR appears to be killing it on the firm's investment in Sorenson Communications. The investment was written up 13,691%." (GTCR did not respond to calls or e-mails regarding the return that peHUB attributes to Sorenson.)
Whatever the precise amount, there's no getting around the fact that it represents a public-to-private transference of wealth. As such, it underscores the basic incompatibility between public trust and private equity: The FCC is charged with protecting the integrity of the Interstate TRS Fund; Sorenson is charged with repatriating as much of that fund as it can to its financial sponsor.
Until this year, Sorenson had the upper hand in this surprisingly obscure public-private bout being played out in the VRS arena. As the FCC chief of the Disability Rights Office lamented in a memo to senior staff three years ago, "I hate to say it, but the whole TRS (VRS) compensation regime has become a classic fleecing of America." That may have changed on April 30, however, when the administrator of the Interstate TRS Fund recommended a 38% decrease in the per-minute compensation rate relevant to Sorenson's VRS business. The price of the company's bonds, which had been trading near par, fell within days to 50 cents on the dollar.
Salt Lake City-based Sorenson already ranked as the country's leading VRS provider, with about 80% of the market, when Chicago-based GTCR became its majority owner in November 2005. While terms of the transaction weren't disclosed, press accounts put the private equity firm's price of entry into VRS at $585 million. (GTCR did not respond to queries about this figure, either.) The price aside, the timing was clearly propitious. The Interstate TRS Fund set up to reimburse VRS clocked in at $61 million in 2002 when, according
to the FCC, "the service was first widely offered." In 2006, GTCR's first full year of ownership, the fund climbed to al-
most $400 million. The trajectory continued, with the fund pushing $900 million last year.
VRS usage has grown commensurate with the fund that pays for it. The National Exchange Carrier Association Inc., which the FCC tapped to administer the Interstate TRS Fund from its inception, forecast 98.2 million VRS minutes for the current fund year. That's a 261% increase from when GTCR entered the business in 2005.
Yet it's not altogether clear how much of the growth is organic and how much is fraudulent. Indeed, based on actual and anecdotal evidence, illicit VRS activity is keeping the FCC's Office of Inspector General plenty busy. The biggest culprits are so-called run calls, which fill no purpose other than to generate billable minutes for FCC reimbursement.
As the OIG noted in its most recent report to Congress, some run calls were so blatantly fraudulent that "there was no communication at all because both principals to the call put up privacy screens (no communication is possible because of the very nature of video relay)." The report added that many such calls would "last for hours under these circumstances." Other examples cited by the FCC include: calls to lengthy podcasts that went uninterpreted; calls where the caller was put on interminable hold; and calls from one CA to another CA, who would then chat between themselves and chalk up VRS minutes for their employers.
In November 2009, on unsealing VRS-related indictments against 26 individuals and seven companies, the Department of Justice put the average rate of reimbursement for abuse of the program at $390 an hour. The DOJ's press release about the nine-state arrest sweep triggered by the indictments also observed that, in some instances, a VRS provider would split the take with those it induced to make run calls. One enterprising provider had even turned to outsourcing. Hence the DOJ's uncovering "hundreds of hours of billed calls that originate with Chinese IP addresses."
That Sorenson has never been accused of corporate-instigated fraud is laudable in light of its market dominance. But it has been a victim of what it calls interpreter fraud, wherein certain of its workers had friends not in need of assistance call in to tie up the VRS lines assigned to those workers. Sorenson unwittingly submitted minutes for these fraudulent calls to the FCC, receiving $2 million in unearned payments. But on uncovering the scheme, it both reimbursed the agency and fired its in-house con artists.
Despite Sorenson's record, the FCC has reason to believe VRS violations extend beyond the industry's mom-and-pop operations. Last month, for instance, it released a consent decree against the industry's second-largest player, Purple Communications Inc. The Rocklin, Calif.-based company, which traded on Nasdaq until November 2009, agreed to pay $22 million for overbilling and artificially inflating its TRS usage.
What made the decree noteworthy is that the investigation behind it didn't just limit itself to scams almost laughable in their clunkiness. Rather, it focused on domestic and international programs that, according to the FCC, were "designed to attract new customers or increase the number of VRS calls made by existing Purple customers (including marketing programs, third-party outreach, conference calls, surveys, contact with new customers, technical support, button programs, and customer confirmation calls)."
This focus has always been problematic for VRS providers in that it speaks to the possibility, from their perspective, of a wonderfully virtuous circle: More VRS marketing leads to more VRS minutes leads to more VRS money.
In contrast, for reasons many find self-evident, the FCC has tried to prohibit VRS providers from using their profits from the Interstate TRS Fund to stimulate false demand for more of their services. A series of rulings in 2005 even went so far as to deny, expressly, such activities as contacting VRS customers to urge them to make more calls and offering them financial incentives to increase their VRS usage. Moreover, in a release denouncing marketing activities in violation of the spirit, if not the letter, of the law, the FCC thought it necessary to explain why certain VRS rewards programs were wrong: "As a practical matter, [the FCC's Consumer & Governmental Affairs] Bureau said, the TRS provider is enticing the consumer to make TRS calls that will artificially raise costs to the Interstate TRS Fund, and the provider is doing so by in effect 'paying' the consumer to make more calls."
Such issues have never been fully resolved, despite perpetual efforts by the FCC to balance the needs of citizens with hearing or speech disabilities and the burden these needs impose on all users of interstate telephone services. (Telecom companies merely pass their VRS charges on to consumers.) For example, additional agency rulings in 2007 and 2008 sought to clarify impermissible lobbying efforts and customer data use. But these were challenged in federal appeals court. The challengers? Sorenson and the VRS provider that would later change its name to Purple.
On both counts, the petitioners won. In its conclusion, the court found FCC restrictions on the lobbying of customers by VRS providers "arbitrary and capricious." What the agency failed to do, the court stated, was "provide any rationale for why lobbying expenses are the only use of TRS Fund revenues to be specifically prohibited." As for limitations on the use of customer data -- limitations meant to keep information about VRS provider-customer relationships from being mined for marketing campaigns -- the court took the FCC down the rabbit hole: "The prohibition on the use of customer data violates the First Amendment because it impairs commercial and political speech."
So it was that efforts by the FCC to ensure free speech for the speech-impaired came to be seen as violating free speech.
The losses in court, while significant, weren't nearly as debilitating to the FCC as a loss of its own devising: control over VRS compensation rates. The agency bungled this one from the get-go by basing those rates on projected costs and projected minutes of use. Only it allowed the VRS providers themselves to make the projections.
And, guess what? They overprojected. "Providers have an inherent incentive to submit higher, rather than lower, costs to ensure the compensation rate is as high as possible to cover their costs and presumably make a profit," the FCC acknowledged in a declaratory ruling released in November 2007. "We also recognize that, under the present cost recovery methodology, the resulting rates do not correlate precisely to any of the providers' actual costs."
Truer words were never spoken. Thomas Chandler, the chief of the FCC's Disability Rights Office who lamented the "fleecing of America" in a previously cited memo and who left the agency this year, estimated Sorenson alone was overcompensated by $80 million in 2006 and by $57 million in 2005. He also recognized that the conflict between the FCC and VRS providers was as intractable as it was untenable.
In an earlier memo that reappeared in "Deception and Distrust: The Federal Communications Commission Under Kevin J. Martin," a report released in December 2008 after a yearlong bipartisan investigation of the agency by a House of Representatives committee, Chandler got to the heart of the matter. "[VRS providers] want compensation from the Fund to cover all facets of running an independent, for profit business -- a business that has to keep growing and (in many cases) pay investors," he wrote. "We want to compensate only the costs of actually providing a specific service, mandated by statute, and circumscribed by the mandatory minimum standards." By then, however, the disability chief had concluded that "we are trying to do the impossible."
The FCC's limitations, whether self-imposed or court-imposed, may have emboldened Sorenson. "Deception and Distrust" even detailed attempts by the agency to verify the compensation claims of the VRS industry's biggest beneficiary. The FCC retained KPMG LLP for the task, but the auditor contends Sorenson not only denied access to its VRS staff but withheld unredacted financial statements for 2004, 2005 and 2006.
As a result, KPMG wound up writing a letter to the agency in April 2008 that it was "unable to complete our performance audit." The stonewalling, reportedly, was without consequences. As "Deception and Distrust" went on to note, "Nothing has been done to force Sorenson to open its books."
Sorenson, for its part, denies refusing KPMG access but admits to having worked hard on "hammering out" the limits and details of the investigation before letting the auditor into its headquarters. Yet it insists that's where the stonewalling ended. "We were all set for them to come out and do the on-site part of the audit," says Paul B. Kershisnik, Sorenson's chief marketing officer. "But they didn't show."
He also seems incredulous that the story would take root almost as deeply as an urban tale. "How can we as a company that's regulated by the FCC refuse to be audited by the FCC?" he asks.
An event much less ambiguous, which some believe reveals just as much arrogance, occurred in January when Sorenson issued $735 million of five-year notes. Of the proceeds, according to Debtwire, $178.9 million went to Sorenson's financial sponsor. Debtwire also quoted a source who said the most recent dividend brought to nearly $800 million the total amount that GTCR has taken out of the company. Sorenson declines to discuss its capital structure and dividend payments not only with The Deal magazine but, apparently, with the FCC. Thus, in a public document, the agency surmises, "Sorenson pays interest on the large amount of debt it has taken on -- more than $1 billion and perhaps as much as $1.5 billion."
As for the source of those figures, the FCC references not Sorenson but Debtwire. Then it retaliates like a regulator scorned: "Sorenson has not shown that its claimed costs, which include interest and dividend payments, are the result of sound business decisions."
An FCC spokeswoman calls it a coincidence that, three months after GTCR received its most recent payday from Sorenson, the agency went public with VRS rate changes recommended by Interstate TRS Fund administrator NECA. The recommendations, based on analyses of historical costs, had the relevant rate for Sorenson falling from the $6.24 per minute it had been receiving since 2007 to $3.89 per minute starting July 1. The news did more than collapse the price of Sorenson bonds. It also stirred talk of bankruptcy by no less than Michael D. Maddix, Sorenson's director of government and regulatory affairs.
Two months later, when the FCC raised the compensation rate relevant to Sorenson to $5.07 per minute, the company appeared more mollified than satisfied. Although the revised rate came within 20% of what it had been receiving, Sorenson complained in a statement of "having to make certain operational changes and cost reductions."
And, true to its word, it cut 5% of its workforce. The company also moved that the FCC reinstitute the former rate. Then, with that motion denied in July, it petitioned federal appeals court, again, in September.
This time, though, the FCC isn't waiting for the court's decision. In June, it put out a Notice of Inquiry, the purpose of which is to "take a fresh look at the Commission's video relay service (VRS) rules so that we can ensure that this vital program is effective, efficient, and sustainable in the future."
The NOI was also refreshingly frank about FCC intentions to make the VRS program "less susceptible to the waste, fraud, and abuse that plague the current program." So, over the course of a year, the NOI committed the FCC to considering "fundamental changes to the delivery of VRS, including questions on the structure of the VRS market."
Sorenson CMO Kershisnik insists his company not only welcomes the NOI but will work closely with the FCC throughout the inquiry. Yet he's also aware of its leading, potentially, to "a dramatic departure" from VRS as he, Sorenson and GTCR know it.
But don't expect any such departure to generate a lot of sympathy, especially for private equity. As a longtime observer of the GTCR team that has made millions from working the public trust says, "Those guys have been playing with house money so long there's no way they're going to be hurt." What does hurt, however, is the house is us.
Public trust and private equity are at odds almost by definition. But when it comes to serving American citizens with hearing or speech disabilities, they're at loggerheads. Witness the schism between the Federal Communications Commission and the market leader in video relay service, or VRS.
VRS is the telecommunications relay service, or TRS, currently favored by Americans with hearing or speech disabilities. The Americans with Disabilities Act, as amended in 1990, guarantees all such citizens the right to communicate over the phone with others who can hear. All they have to do is register with a VRS provider to receive a 10-digit number to call from their videophones.
The law also dictates that qualified users of VRS, or any form of TRS, "pay rates no greater than the rates paid for functionally equivalent voice communications services." For this reason, the FCC established an Interstate TRS Fund in 1993 to collect a percentage of revenue from all interstate telecommunication companies. Monies from this fund have since been disbursed to TRS providers to compensate for what the Code of Federal Regulations calls "reasonable costs."
VRS improves on its TRS predecessor, the text-telephone machine, by exploiting broadband technology to stream real-time video. Here's how: A caller among the 400,000 to 500,000 U.S. citizens who primarily communicate in American Sign Language makes a videophone call to his 10-digit number. There the caller connects with a communications assistant, or CA, who's also conversant in sign language. The caller then gives the CA the outbound number of the destination party he wants to reach. The CA stays online and, after reaching the destination party by phone, on the line.
The CA's task thereafter is to interpret the caller's ASL via video and to voice it into the phone so the destination party hears what the calling party says. The objective is to make such conversations as fluid as possible.
Seldom has an endeavor so magnanimous evolved into an industry so contentious. Yet it doesn't take much to figure out why. VRS is a modern growth story capable of delivering enviable returns. It also boasts fat margins enhanced, historically, by slapdash oversight.
Then, too, the VRS market is dominated by a single company, Sorenson Communications Inc., whose overriding motivations are to increase profits and to entrench a near monopoly. These factors, taken by themselves, indicate a stasis that would take a face-off between the federal government and the free market to change. And that's before addressing the presence of private equity.
Privately held Sorenson is also a portfolio company of GTCR Golder Rauner LLC, whose returns from participating in telecommunications' VRS segment border on the preposterous. As peHUB put it in a blog posting in August 2009: "GTCR appears to be killing it on the firm's investment in Sorenson Communications. The investment was written up 13,691%." (GTCR did not respond to calls or e-mails regarding the return that peHUB attributes to Sorenson.)
Whatever the precise amount, there's no getting around the fact that it represents a public-to-private transference of wealth. As such, it underscores the basic incompatibility between public trust and private equity: The FCC is charged with protecting the integrity of the Interstate TRS Fund; Sorenson is charged with repatriating as much of that fund as it can to its financial sponsor.
Until this year, Sorenson had the upper hand in this surprisingly obscure public-private bout being played out in the VRS arena. As the FCC chief of the Disability Rights Office lamented in a memo to senior staff three years ago, "I hate to say it, but the whole TRS (VRS) compensation regime has become a classic fleecing of America." That may have changed on April 30, however, when the administrator of the Interstate TRS Fund recommended a 38% decrease in the per-minute compensation rate relevant to Sorenson's VRS business. The price of the company's bonds, which had been trading near par, fell within days to 50 cents on the dollar.
Salt Lake City-based Sorenson already ranked as the country's leading VRS provider, with about 80% of the market, when Chicago-based GTCR became its majority owner in November 2005. While terms of the transaction weren't disclosed, press accounts put the private equity firm's price of entry into VRS at $585 million. (GTCR did not respond to queries about this figure, either.) The price aside, the timing was clearly propitious. The Interstate TRS Fund set up to reimburse VRS clocked in at $61 million in 2002 when, according
to the FCC, "the service was first widely offered." In 2006, GTCR's first full year of ownership, the fund climbed to al-
most $400 million. The trajectory continued, with the fund pushing $900 million last year.
VRS usage has grown commensurate with the fund that pays for it. The National Exchange Carrier Association Inc., which the FCC tapped to administer the Interstate TRS Fund from its inception, forecast 98.2 million VRS minutes for the current fund year. That's a 261% increase from when GTCR entered the business in 2005.
Yet it's not altogether clear how much of the growth is organic and how much is fraudulent. Indeed, based on actual and anecdotal evidence, illicit VRS activity is keeping the FCC's Office of Inspector General plenty busy. The biggest culprits are so-called run calls, which fill no purpose other than to generate billable minutes for FCC reimbursement.
As the OIG noted in its most recent report to Congress, some run calls were so blatantly fraudulent that "there was no communication at all because both principals to the call put up privacy screens (no communication is possible because of the very nature of video relay)." The report added that many such calls would "last for hours under these circumstances." Other examples cited by the FCC include: calls to lengthy podcasts that went uninterpreted; calls where the caller was put on interminable hold; and calls from one CA to another CA, who would then chat between themselves and chalk up VRS minutes for their employers.
In November 2009, on unsealing VRS-related indictments against 26 individuals and seven companies, the Department of Justice put the average rate of reimbursement for abuse of the program at $390 an hour. The DOJ's press release about the nine-state arrest sweep triggered by the indictments also observed that, in some instances, a VRS provider would split the take with those it induced to make run calls. One enterprising provider had even turned to outsourcing. Hence the DOJ's uncovering "hundreds of hours of billed calls that originate with Chinese IP addresses."
That Sorenson has never been accused of corporate-instigated fraud is laudable in light of its market dominance. But it has been a victim of what it calls interpreter fraud, wherein certain of its workers had friends not in need of assistance call in to tie up the VRS lines assigned to those workers. Sorenson unwittingly submitted minutes for these fraudulent calls to the FCC, receiving $2 million in unearned payments. But on uncovering the scheme, it both reimbursed the agency and fired its in-house con artists.
Despite Sorenson's record, the FCC has reason to believe VRS violations extend beyond the industry's mom-and-pop operations. Last month, for instance, it released a consent decree against the industry's second-largest player, Purple Communications Inc. The Rocklin, Calif.-based company, which traded on Nasdaq until November 2009, agreed to pay $22 million for overbilling and artificially inflating its TRS usage.
What made the decree noteworthy is that the investigation behind it didn't just limit itself to scams almost laughable in their clunkiness. Rather, it focused on domestic and international programs that, according to the FCC, were "designed to attract new customers or increase the number of VRS calls made by existing Purple customers (including marketing programs, third-party outreach, conference calls, surveys, contact with new customers, technical support, button programs, and customer confirmation calls)."
This focus has always been problematic for VRS providers in that it speaks to the possibility, from their perspective, of a wonderfully virtuous circle: More VRS marketing leads to more VRS minutes leads to more VRS money.
In contrast, for reasons many find self-evident, the FCC has tried to prohibit VRS providers from using their profits from the Interstate TRS Fund to stimulate false demand for more of their services. A series of rulings in 2005 even went so far as to deny, expressly, such activities as contacting VRS customers to urge them to make more calls and offering them financial incentives to increase their VRS usage. Moreover, in a release denouncing marketing activities in violation of the spirit, if not the letter, of the law, the FCC thought it necessary to explain why certain VRS rewards programs were wrong: "As a practical matter, [the FCC's Consumer & Governmental Affairs] Bureau said, the TRS provider is enticing the consumer to make TRS calls that will artificially raise costs to the Interstate TRS Fund, and the provider is doing so by in effect 'paying' the consumer to make more calls."
Such issues have never been fully resolved, despite perpetual efforts by the FCC to balance the needs of citizens with hearing or speech disabilities and the burden these needs impose on all users of interstate telephone services. (Telecom companies merely pass their VRS charges on to consumers.) For example, additional agency rulings in 2007 and 2008 sought to clarify impermissible lobbying efforts and customer data use. But these were challenged in federal appeals court. The challengers? Sorenson and the VRS provider that would later change its name to Purple.
On both counts, the petitioners won. In its conclusion, the court found FCC restrictions on the lobbying of customers by VRS providers "arbitrary and capricious." What the agency failed to do, the court stated, was "provide any rationale for why lobbying expenses are the only use of TRS Fund revenues to be specifically prohibited." As for limitations on the use of customer data -- limitations meant to keep information about VRS provider-customer relationships from being mined for marketing campaigns -- the court took the FCC down the rabbit hole: "The prohibition on the use of customer data violates the First Amendment because it impairs commercial and political speech."
So it was that efforts by the FCC to ensure free speech for the speech-impaired came to be seen as violating free speech.
The losses in court, while significant, weren't nearly as debilitating to the FCC as a loss of its own devising: control over VRS compensation rates. The agency bungled this one from the get-go by basing those rates on projected costs and projected minutes of use. Only it allowed the VRS providers themselves to make the projections.
And, guess what? They overprojected. "Providers have an inherent incentive to submit higher, rather than lower, costs to ensure the compensation rate is as high as possible to cover their costs and presumably make a profit," the FCC acknowledged in a declaratory ruling released in November 2007. "We also recognize that, under the present cost recovery methodology, the resulting rates do not correlate precisely to any of the providers' actual costs."
Truer words were never spoken. Thomas Chandler, the chief of the FCC's Disability Rights Office who lamented the "fleecing of America" in a previously cited memo and who left the agency this year, estimated Sorenson alone was overcompensated by $80 million in 2006 and by $57 million in 2005. He also recognized that the conflict between the FCC and VRS providers was as intractable as it was untenable.
In an earlier memo that reappeared in "Deception and Distrust: The Federal Communications Commission Under Kevin J. Martin," a report released in December 2008 after a yearlong bipartisan investigation of the agency by a House of Representatives committee, Chandler got to the heart of the matter. "[VRS providers] want compensation from the Fund to cover all facets of running an independent, for profit business -- a business that has to keep growing and (in many cases) pay investors," he wrote. "We want to compensate only the costs of actually providing a specific service, mandated by statute, and circumscribed by the mandatory minimum standards." By then, however, the disability chief had concluded that "we are trying to do the impossible."
The FCC's limitations, whether self-imposed or court-imposed, may have emboldened Sorenson. "Deception and Distrust" even detailed attempts by the agency to verify the compensation claims of the VRS industry's biggest beneficiary. The FCC retained KPMG LLP for the task, but the auditor contends Sorenson not only denied access to its VRS staff but withheld unredacted financial statements for 2004, 2005 and 2006.
As a result, KPMG wound up writing a letter to the agency in April 2008 that it was "unable to complete our performance audit." The stonewalling, reportedly, was without consequences. As "Deception and Distrust" went on to note, "Nothing has been done to force Sorenson to open its books."
Sorenson, for its part, denies refusing KPMG access but admits to having worked hard on "hammering out" the limits and details of the investigation before letting the auditor into its headquarters. Yet it insists that's where the stonewalling ended. "We were all set for them to come out and do the on-site part of the audit," says Paul B. Kershisnik, Sorenson's chief marketing officer. "But they didn't show."
He also seems incredulous that the story would take root almost as deeply as an urban tale. "How can we as a company that's regulated by the FCC refuse to be audited by the FCC?" he asks.
An event much less ambiguous, which some believe reveals just as much arrogance, occurred in January when Sorenson issued $735 million of five-year notes. Of the proceeds, according to Debtwire, $178.9 million went to Sorenson's financial sponsor. Debtwire also quoted a source who said the most recent dividend brought to nearly $800 million the total amount that GTCR has taken out of the company. Sorenson declines to discuss its capital structure and dividend payments not only with The Deal magazine but, apparently, with the FCC. Thus, in a public document, the agency surmises, "Sorenson pays interest on the large amount of debt it has taken on -- more than $1 billion and perhaps as much as $1.5 billion."
As for the source of those figures, the FCC references not Sorenson but Debtwire. Then it retaliates like a regulator scorned: "Sorenson has not shown that its claimed costs, which include interest and dividend payments, are the result of sound business decisions."
An FCC spokeswoman calls it a coincidence that, three months after GTCR received its most recent payday from Sorenson, the agency went public with VRS rate changes recommended by Interstate TRS Fund administrator NECA. The recommendations, based on analyses of historical costs, had the relevant rate for Sorenson falling from the $6.24 per minute it had been receiving since 2007 to $3.89 per minute starting July 1. The news did more than collapse the price of Sorenson bonds. It also stirred talk of bankruptcy by no less than Michael D. Maddix, Sorenson's director of government and regulatory affairs.
Two months later, when the FCC raised the compensation rate relevant to Sorenson to $5.07 per minute, the company appeared more mollified than satisfied. Although the revised rate came within 20% of what it had been receiving, Sorenson complained in a statement of "having to make certain operational changes and cost reductions."
And, true to its word, it cut 5% of its workforce. The company also moved that the FCC reinstitute the former rate. Then, with that motion denied in July, it petitioned federal appeals court, again, in September.
This time, though, the FCC isn't waiting for the court's decision. In June, it put out a Notice of Inquiry, the purpose of which is to "take a fresh look at the Commission's video relay service (VRS) rules so that we can ensure that this vital program is effective, efficient, and sustainable in the future."
The NOI was also refreshingly frank about FCC intentions to make the VRS program "less susceptible to the waste, fraud, and abuse that plague the current program." So, over the course of a year, the NOI committed the FCC to considering "fundamental changes to the delivery of VRS, including questions on the structure of the VRS market."
Sorenson CMO Kershisnik insists his company not only welcomes the NOI but will work closely with the FCC throughout the inquiry. Yet he's also aware of its leading, potentially, to "a dramatic departure" from VRS as he, Sorenson and GTCR know it.
But don't expect any such departure to generate a lot of sympathy, especially for private equity. As a longtime observer of the GTCR team that has made millions from working the public trust says, "Those guys have been playing with house money so long there's no way they're going to be hurt." What does hurt, however, is the house is us.