• Solomon and Huering engaged in a conspiracy to set prices for items sold to Intelenet and IU/IHETS.
• Solomon and Huering both profited from the sale of computer equipment to Intelenet and IU/IHETS in that Huering paid Solomon a bribe for his actions in support of the sale to Huering.
• Solomon took steps to create a need for the computer equipment.
• Solomon and Huering agreed and conspired to deceive the true vendor of the equipment as well as the purchasing agents for Intelenet and IU/IHETS.

During calendar year 2002, there were four purchase requests to buy equipment from Huering Consulting. Two were for equipment purchased with IHETS funds, and two were for equipment purchased with Intelenet funds. King noted that at the time, IHETS owned the customer premise equipment (CPE)—basically routers at the network member sites—and Intelenet owned the equipment at the core of the network.

Solomon's responsibility in part was to help identify the network equipment needs as part of the design of the overall network. In consultation with other network engineers and with Intelenet he would specifically recommend what to purchase and when.

In at least one instance, it appears Solomon may have “lost” a network card to create an artificial need. However, in all cases of the equipment purchased, it has been in use in the network or part of required back-up resources from the time of purchase until the U.S. Attorney demanded we remove the items from the network. On December 17, we physically presented the equipment to investigators. 

The fraud appears to be that Solomon would suggest equipment needs for the network and then turn around and tell Huering where to find it and offer it for sale to either Intelenet or IU/IHETS. This activity was a significant breach of ethics, and then when the sales were consummated and money exchanged, they became illegal transactions. This occurred for four purchase orders (two through IU purchasing and two through Intelenet purchasing) for a total of nine pieces of equipment. There were two additional proposals from Heuring located by investigators in Solomon's desk: one, which was voided, for $191,400 (dated 1/29/03) and a second for $235,000 (dated 2/5/03). However, there is no record of either proposal/quote being submitted into the IHETS purchase process as a formal request for purchase.

Issues of oversight

King reported that there are two basic issues raised in the criminal complaint regarding oversight. The first reflects confusion about the purchasing processes at IHETS. The processes are depicted as one-dimensional and easily manipulated. In fact, the processes have always included multiple checks and the expectation that bids would be taken on purchases. IU has a clear-cut process, and there is no reason to assume that there were not multiple bidders on the purchase as that is the normal process. IU purchasing would only consider a vendor as a sole source provider if there is strong documentation presented. King reviewed a flowchart illustrating the purchasing process.

King noted that most purchases went through SBC because Intelenet had a standard contract with SBC that typically provided best prices for new equipment. Heuring purchases were a minority.

In the case of the purchases through Intelenet purchasing, IHETS sent Intelenet information relating to multiple vendors for some purchases, but it was always their right and responsibility to decide whether to bid or not based on Intelenet purchasing guidelines and available bidders. When we received the appropriate indication to complete the purchase, we did so at their direction. King stated that the implication in the criminal complaint that Intelenet did not have adequate involvement in the process is untrue. 

The indication in the criminal complaint that Intelenet was unable to fully account for materials purchased by Intelenet for use by IHETS is due either to the fact that they have not finished the full review of Intelenet records and/or to the fact that their records are inadequate. The investigators have just now begun reviewing the IHETS records required in the search warrant and subpoena. 

The complaint alleges other transactions that cannot be accounted for. King stated that he believes as the investigation continues and as the records come together, these transactions will be reconciled.

The second issue comes from an e-mail from Solomon to Huering dated December 5, 2000, which is quoted at length in the criminal complaint. King noted that it alleges that state auditors have reviewed aspects of the state network operation, and that is untrue. Solomon alleges people will be going to jail and that he had archived email that would be detrimental to individuals, shredded documents (at random at times), and was concerned about being fired. 

King reported that in 2000 IHETS staff were concerned about on-going network operating funds, as we had not yet reached a point of positive cash flow. IHETS negotiated an agreement through IU to carry approximately $4.8 million dollars in operating shortfall until the end of the fiscal year. At that time Intelenet would need to find additional resources to cover the short fall. Kramer added that Intelenet was responsible for marketing the network and we were responsible for meeting that demand. 

King reminded the group that the IHETS consortium is much broader than just the operations of the ITN.  The handout shows IHETS role with the Indiana Partnership for Statewide Education, ICN, Learning Module Development Grant Program, IHETS Interactive, and SUVON. It also shows the relationship with the ITN steering committee and the Intelenet Commission.

[Enlarge photo] [Printable format pdf]



The criminal complaint indicates there were rumors about Solomon and Heuring's relationship at IHETS. When Huering was low bidder on an equipment purchase, an IHETS engineer thought he remembered Solomon talking about a friend in Evansville named Mike, and wondered out loud to Kevin Siminski if there was a connection. Siminski took this information to Ed Tully, and was told that from then on we would no longer recommend Heuring as a vendor. IU and Intelenet have the responsibility to ask vendors for bids; we simply offer suggestions. If Huering on his own connected with IU and/or Intelenet and came in low bidder, we would do as the purchasing process indicated.  

King added that he spoke with a criminal lawyer earlier in the week who indicated that this was a fairly sophisticated fraud. 

Recommendations

King stated that at this point, we need to do whatever is necessary to regain the public trust that has been lost during this process and recommended that bringing in outside reviewers is the best first step to that end. This would involve acquiring legal counsel and the services of an outside forensic auditor to make sure there are no other problems. It was noted that the audit might also identify any purchasing processes that should be reviewed or changed, and legal counsel would help, as the investigation proceeds, to preserve the rights of the organization and ensure that our responses are appropriate. 

The group discussed how best to select the outside legal counsel and auditor and how the board should be involved in the process. The consensus was that the selection of counsel is a Board responsibility and that the chairs of the board and management committee should work with King to identify potential candidates for final selection by the board. 

The group recommended that the services of the forensic auditor should be to review previous purchases to see if there were other fraudulent activities and then, based on their review of the purchasing processes and management structure, make any appropriate recommendations to ensure that this doesn't happen again.  King noted other questions might include: how many years should be involved in the audit, and the breadth of the investigation (review ITN only or all of IHETS?).

Jischke expressed concern about the bifurcated purchasing process. Fisher responded by reviewing the purchasing process for Intelenet, tracking, tagging, and inventory control. 

Following discussion:

1. Jischke moved to identify legal counsel to assist the organization during the criminal investigation and offer whatever representation is needed, with Benjamin and Kramer instructed to bring the names of potential counsel candidates to the Board for final approval. 
   
2. Secondly, IHETS should employ a forensic auditor to review records of past purchases, to look at current purchasing processes, and to comment on the adequacy of the current management structures. The auditor should report to the Board, with all reports presented to the full Board for review and appropriate action. 
   
3. Lamkin seconded the motion and it was unanimously approved.

King noted that a related issue is how to fund the new counsel and audit. On December 9 the Intelenet Commission voted to reduce circuit prices as of January 1, 2005, for all ITN connections to $900/month for the primary T1 with pricing for additional circuits remaining the same. IHETS funds reallocated from the reduction in satellite channels were used to offset the cost of ITN connections for all of higher education for the last five years. IHETS spends about $1.1M/yr to help offset all member T1 connections. So IHETS members only pay $600/mo already. Out of the $1.1M IHETS uses every year to offset member fees to Intelenet, IHETS can capture about $150,000 in savings over the next six months from this reduction in circuit fee. Legal fees are estimated at $25,000, and the audit could range from $100,000 to $300,000.

The consensus of the group was that it is the management committee's responsibility to work with staff in identifying funding for legal counsel and a forensic audit.

Legislation

King noted that House Bill 1137 and Senate Bill 184, introduced yesterday, could have a significant impact on IHETS. They call for the creation of a state Department of Information Technology but may impact IHETS' ability to provide its statutory services. King asked that Board members pass on to IHETS staff any issues or concerns with this legislation that they might hear. Benjamin asked that any new developments with the legislation be communicated with the group.

With no further business to discuss, the meeting adjourned at 5:15 p.m.