HRDC Seeks Pai Recusal on Securus and ICS as Company's Deal Encounters More Headwinds

The Human Rights Defense Center asked FCC Chairman Ajit Pai to recuse himself from all decisions on Securus Technologies and the inmate calling service industry. Pai has an apparent and actual conflict of interest because of past representation of Securus and because he "never stopped representing" the company's interests via favorable rulings, said an HRDC filing posted Thursday in docket 17-126. Meanwhile, former state and federal commissioners said alleged misrepresentation of state approval status in FCC review of a proposed Securus sale to Platinum Equity could be problematic for Securus.

HRDC sees a "clear conflict of interest" in Senate confirmation of Pai to a new FCC term because he was outside counsel for Securus at Jenner & Block 2011-12 before becoming a commissioner in May 2012. While at Jenner & Block, Pai did "a limited amount of work for a few clients," including Securus, according to his statement in the record of his Nov. 30, 2011, Senate Commerce Committee nomination hearing cited by HRDC.

A Pai spokeswoman directed us to Section 2635.502 of executive branch ethical standards "that an employee recuse from party-specific matters if someone for whom they were employed during the last year is a party or represents a party.” She noted Pai’s Securus work was five-plus years ago. The section notes a “party-specific matter is a proceeding or other matter affecting the legal rights” of individual entities, “such as a merger transaction or enforcement proceeding,” not a general rulemaking. All of Pai's work since becoming a commissioner was cleared through the agency's ethics office, the spokeswoman said. Communications Daily Thursday requested related documents under the Freedom of Information Act.

Pai's clearance is "immaterial" because "it seems like he's never stopped representing Securus," said HRDC Executive Director Paul Wright, saying he learned Aug. 4 of Pai's Securus representation: "This would have been a red flag for us."

While at the FCC, Pai "has vigorously and consistently taken actions to undercut all federal regulation of the ICS industry," said HRDC, citing dissents from orders to constrain ICS prices and other actions. "Perhaps the most significant action taken by Mr. Pai to benefit Securus and the ICS industry" was a Jan. 31 FCC letter, eight days into his chairmanship, telling the U.S. Court of Appeals for the D.C. Circuit the commission wouldn't defend intrastate rate caps, the group said (see 1701310061). The court then threw out the caps (see 1706130047). "Lack of federal regulation guarantees the company’s ability to continue to generate obscene profits at the expense of prisoners and their family members," said HRDC, which asked Pai to disclose any financial interests in Securus or the ICS industry. Pai's Senate disclosure for his current nomination listed no such interests.

Pai or his law firm may have done “a trivial amount” of business for Securus, CEO Richard Smith said. Jenner & Block didn't comment.

Candor's Importance

The FCC doesn’t take lightly truthfulness of parties that come before the agency, said former state and federal telecom regulators. The Wright Petitioners allege Securus misled the commission on state approvals and other matters in its planned sale to Platinum.

“Candor of the applicant is important,” said attorney Rachelle Chong, a former commissioner of the FCC and the California PUC. “Misrepresentation of state approval status is a big ‘no-no’ for candor purposes.” Former CPUC Commissioner Catherine Sandoval said the FCC “has always taken a dim review of misrepresentation,” and it was a “material representation” for Securus to say it had all necessary state OKs when two were outstanding. Former Colorado PUC Chairman Raymond Gifford said: “More than anything, you want to avoid being disingenuous or shifty to any regulator, particularly the FCC.”

Securus is likely coming up against a typically protracted regulatory process, said Moody's analyst Neil Mack. It appears Securus is trying to speed things up because Platinum Equity is paying "ticking fees" to lenders as a result of the deal not closing by the projected date, Mack said. The fees are causing some financial pain, but so far it's "totally manageable," not likely to threaten the transaction, and Securus has the financial wherewithal to pay fees through August or longer, he said.

Smith said Securus will soon clear up all confusion on the state approvals in an ex-parte filing to be released by Friday that summarizes a Wednesday meeting with FCC staff.

Smith questioned motives of the Wright Petitioners, saying delaying the transaction drives up Securus’ costs and could ultimately drive up ICS rates. "Why would someone appear to hijack a process for an ultimate result that I think hurts a lot of parties? I don't understand." Platinum Equity likely will invest hundreds of millions of dollars in the company, which will drive ICS rates down and produce more services, he said. Securus does great work for all stakeholders, he said: “Our record speaks for itself.” He said the Wright Petitioners are misusing the process by filing new allegations daily.

The petitioners aren't raising new allegations; they're responding to new information Securus and Platinum Equity gave the FCC, said Wright Petitioners' attorney Lee Petro. "There remains a very real question whether the applications, as amended and restated numerous times, should be re-released for a new public comment period." Abry Partners when seeking to buy Securus "promised to invest millions and lower ICS rates in 2013, and all we have seen is intrastate rates go up," replied Petro. "There is no guarantee that Platinum Equity would do anything different.”

FCC delay approving the deal suggests regulators have concerns, Petro said. "Any final decision ... must address both the substantive issues ... and the new misrepresentation and lack of candor concerns arising from the efforts of Securus and Platinum Equity to bull-rush the applications through.” The Wright Petitioners and others said Securus rebranded prohibited per-call connection charges and flat-rate fees as “first minute” rates, continued charging unjust prices (see 1706190023) and committed privacy violations with its location-based service products -- allegations Securus disputed. Criminal defense attorney Michael Hamden said that “Securus has a documented history of questionable practices flouting FCC orders to maximize profit by shamelessly exploiting their customers and the public."

Securus "has made it difficult for the FCC because they have a track record of playing fast and loose with the FCC’s rules," said Cheryl Leanza, United Church of Christ policy adviser. "The worst thing you can do to the FCC is lie to them."

Alleged Misrepresentation

What Securus said about state status was “factually wrong,” as several filings show the company knew it didn't have California or Alaska approval, said Sandoval, a Santa Clara University contracts law professor who was CPUC commissioner 2011 to 2016. The FCC may want to investigate if the incorrect statement was intentional, and it could lead to fines, she said. Possible misrepresentation “becomes a real problem if the applications [present] real competition policy concerns," said Gifford, now a Wilkinson Barker attorney who was Colorado PUC chairman 1999 to 2003. "If not, then the solution is to mea culpa and hope it doesn’t end up putting you in the penalty box for long.”

The FCC and CPUC each focuses on its own merger review standard, said Chong, FCC commissioner 1994-97, and CPUC commissioner 2006-09. The FCC “only lightly monitors the state commission approvals but that in no way drives the FCC's processing schedule,” she said. The CPUC “doesn't care if it's the last state commission to approve a deal. Sometimes it gives it more leverage to ensure there are public benefits to a merger.” Regulator sensitivity to business concerns and deal deadlines depends on commissioners’ business backgrounds, Chong said. “Some will try and accommodate them; others won't care much.”

Securus created its own problem, Sandoval said. Decades-old statute requires CPUC approval to transfer the Securus state license, and setting the closing date at Aug. 1 was an “unrealistically short period of time” for getting all regulatory OKs required by state laws, she said. The CPUC tends not to be sympathetic to an applicant that creates its own “time box” and rushes state review, and "running to the FCC" won't help to secure state OKs, she said. The applicants could modify their contract to avoid any contractual fines for not closing on time, the contracts law professor said.

CPUC members may vote Aug. 24, and the Regulatory Commission of Alaska may decide by Dec. 11. Closing in California without CPUC approval could mean $50,000 in fines per violation daily or nullification of Securus' state license, Sandoval said. Closing the deal early everywhere but California and Alaska -- and notifying those state commissions -- might not violate rules, Sandoval said. Mack said it wouldn't be logical for Securus to try to close the deal before getting regulatory approvals from all states where the company operates.

An RCA spokeswoman said she wasn’t aware of any communications between Alaska and the FCC about the Securus acquisition. The CPUC didn’t comment and the FCC didn't comment on the deal.