The former head of DNS regulator ICANN has been named as co-CEO of a company that launched a controversial attempt to purchase the .org internet registry earlier this year. The news has again raised concerns over the revolving doors between regulators and those who need regulation.
In the past week, the website of Ethos Capital, the private equity firm that offered $1.13bn to take control of the popular .org registry, was updated to list ex-ICANN CEO Fadi Chehade as its joint head.
The change is significant because it was Chehade’s involvement in the attempted .org purchase that first alerted internet users that the deal deserved closer scrutiny.
The sale was ultimately vetoed several months later by ICANN, but only after the Attorney General of California got involved and sent a last-minute letter to LA-based ICANN telling it not to approve the deal in part due to the “lack of transparency” on Ethos Capital.
Part of that lack of transparency was who would actually own the .org registry after the sale: behind Ethos was a complex structure of no less than four shell companies that were all registered on the same day in Delaware with the prefix “Purpose Domains.” Ethos Capital refused to divulge who all the directors of those companies actually were despite repeat requests, including from ICANN, which had the power to refuse the sale.
Chehade’s close link to the proposed sale was only noticed because he had registered Ethos Capital’s .org domain name, EthosCapital.org, under his own name on May 7, 2019. The company Ethos Capital LLC was registered in Delaware one week later, on May 14, 2019.
All in the timing
That date is significant because May 13, 2019, the day before Ethos Capital was established, was the deadline for ICANN staff to publish a report on the controversial lifting of price caps on .org domains.
For the previous 20 years, the price of .org domains had been strictly limited by ICANN to a specific annual percentage increase. However, under reforms Chehade made as CEO of ICANN, prior to his departure in 2016, registries were allowed to request the caps be removed altogether when their current contract expired.
The company that runs .org, the Internet-Society-owned Public Internet Registry (PIR), had made that request for its contract expiring June 30, 2019, sparking a furious backlash from the internet community. ICANN public comment periods typically attract between five and 50 comments but when it came to the lifting of price caps on .org domains, there were over 3,200 responses of which more than 98 per cent were opposed to the idea.
That staff report of the comment period, due on May 13, was supposed to be an objective review of what the internet community has said; the internet community meanwhile, has long complained that ICANN’s staff frequently skew such reports to fit with a predetermined outcome.
The .org price cap issue was no exception, and despite overwhelming opposition, the staff report gave equal weight to the few comments in favor of the change as to the thousands opposed to it. It was clear that ICANN’s staff would recommend their board approve lifting the .org price caps: a decision that was potentially worth hundreds of millions of dollars over the course of the new ten-year contract.
There are just over 10 million .org domains, and the registry is one of the oldest and most stable in the market. In 2019, PIR reported [PDF] a 78.2 per cent renewal rate, meaning that the vast majority of existing domain holders automatically renewed their names for another year (you can register domains for multiple years but roughly 70 per cent of people renew a domain every year). To put it into hard numbers, there were 6.9 million .org renewals in 2019.
License to print money
That extraordinary loyalty rate, believed to be the highest in the domain industry, is what makes .org so valuable. Many organizations have built their websites and online reputation on .org domains for a decade or more, and domain names are incredibly cheap (roughly $10 a year) when compared to the enormous costs associated with moving to a different online home.
That makes the .org registry home to over eight million domain registrants who would likely pay many multiples of the current annual cost to keep their name. Even if PIR doubled its price from $10 to $20, the renewal rate would be unlikely to fall very much, resulting in an additional $69m in revenue, or thereabouts, just for that one year. In short, the .org registry without price caps was a money-printing machine.
Chehade was clearly following the issue closely, and the day after the staff report deadline, Ethos Capital – the private equity outfit that would a few months later approach the owner of the .org registry, the Internet Society – was registered in Delaware.
What makes this timeline all the more peculiar is that it isn’t clear that the staff report was actually published on Monday, May 13, 2019. Due to the volume of comments, ICANN’s staff asked for, and were granted, an extension. And so the final report that those outside the domain industry saw for the first time was published [PDF] three weeks later on June 3, 2019.
Did the former CEO of ICANN use his many connections with staff, many of whom he had hired and promoted, to get an early copy of the staff report? And is that why when Ethos Capital was named as the company trying to buy the .org registry there was no mention of Chehade’s close connection?
Despite the evidence and repeat requests, Ethos Capital refused to acknowledge Chehade’s involvement, even when he was spotted at the PIR offices, shortly after the deal was announced, with Ethos Capital CEO Erik Brooks, a former business partner, to discuss the acquisition.
Oh, that Chehade?
Eventually, Ethos Capital admitted its relationship with Chehade several months later in January in response to very specific questions posed by ICANN about the deal. On page 25 of a 27-page response [PDF] from Ethos, it answered a request that it name “former directors, officers or employees of ICANN that are or have been involved in, have advised on or otherwise have an interest in the transaction.”
And it named Nora Abusitta-Ouri, Chehade’s former personal assistant who had worked with him at previous companies; Allen Grogan, whom Chehade had hired to be ICANN’s head of compliance, and Fadi Chehade himself. They were “acting as advisors to Ethos Capital,” the company insisted, and provided no more details. Grogan, incidentally, is now listed as an Ethos Capital “executive partner” on its website.
It’s possible that Chehade’s connections with the CEOs of PIR, Jon Nevett, and the Internet Society, Andrew Sullivan, that made the dot-org takeover even remotely possible. It was always going to be a hard sell – as was made clear from the response when the deal, which had been green-lit in secret and in record time by the Internet Society and PIR boards, was announced.
When the Internet Society revealed that it was not only selling .org to a private equity firm but would also change PIR’s status from a non-profit organization to a for-profit one as part of the deal, the internet community and .org registrants were stunned. And then outraged.
Chehade had had plenty of time to work out the details and he knew the key person, PIR CEO Jonathon Nevett, extremely well. Nevett was co-founder of registry operator Donuts and had been a persistent presence in the domain name industry for years, many of them when Chehade was head of the industry’s regulator. The connection continued after Chehade left ICANN.
When Nevett sold Donuts in 2018 to Abry Partners, it was in a deal that was brokered by… Fadi Chehade and Erik Brooks. Within a few months, Nevett became CEO of PIR. And his position at Donuts was taken by another long-term Chehade business associate Akram Atallah, who had taken over as interim CEO of ICANN after Chehade left.
Contractual terms
As for the also-new CEO of the Internet Society, Andrew Sullivan, he had previously worked at Afilias, which runs the technical back-end of .org for the Internet Society’s PIR, and was the person responsible more than any other of helping the Internet Society win the contract to run .org 20 years previously. More than 80 per cent of the Internet Society’s annual revenue comes from the sale of .org domains.
Chehade was the connection between all these men who pushed through a proposal that the internet community, .org registrants, the internet society chapters, not to mention a former CEO and the former chair of ICANN, and US senators all condemned in the strongest terms.
Eventually it took the Attorney General of California, and an explicit threat to audit the notoriously secretive non-profit organization based in Los Angeles, to push ICANN off the .org sell-off and refuse it.
As for why Chehade persisted in only being an advisor to Ethos Capital when he almost certainly helped establish the company, filled it with his old staff, and was the point person for the entire deal, the answer to that may be in responses to questions put to the Internet Society and PIR about when they were first approached about a possible sale of .org.
“The Internet Society was first approached by Ethos Capital in September,” the organization told us in an official statement in response to our questions about interactions and timing of the deal. When PIR was asked the same question, its CEO Jon Nevett answered that he had no knowledge of any planned sale to Ethos Capital when he took over the CEO job in December 2018, or when his organization decided to formally ask for pricing caps to be lifted.
But of course, Ethos Capital only formally existed in May 2019. And Fadi Chehade was not a representative of Ethos Capital, merely an advisor, until last week when he suddenly became co-CEO. As to conversations Chehade may have had with his former staff to smooth the path of the billion-dollar sale, ICANN continues to refuse to supply records of staff or board communications, citing confidentiality.
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