Computer Vendor at Center of Massive Fraud Scandal

Orange County supervisors are set Tuesday to award a large-scale computer contract to a company at the center of one of the largest municipal contract fraud cases in U.S. history.

In a deal with federal prosecutors last spring, Virginia-based SAIC paid $500 million to authorities and admitted that it defrauded New York City on a computer contract that exploded in cost from $73 million to nearly $700 million.

The U.S. attorney for Manhattan described the scheme, which allegedly involved tens of millions of dollars in kickbacks at taxpayer expense, as “one of the largest and most brazen frauds ever committed against the city of New York,” according to The New York Times.

High-level SAIC managers ignored multiple warnings of the fraud, the company has admitted, enabling what U.S. Attorney Preet Bharara called “a fraudsters’ field day that lasted seven years.”

The scandal prompted SAIC, which primarily does work for the federal government, to announce it would be pulling back significantly from state and local government work.

“When you venture out of your own lane, there is some uncertainty, a lack of knowledge, and maybe you’re not completely aware of the issues at hand,” the company’s chief operating officer, Stu Shea, told a newspaper. “We’ll be much more conservative in looking at state and local. It’s a hard business that has no money, and we don’t do it well. So why would we do more?”

The firm is now set to receive a $74-million contract to run Orange County’s data center and other computer services for the next five years.

Supervisor John Moorlach said he was comfortable moving forward with the contract, attributing the New York fraud to two “bad apples” among SAIC’s 40,000 employees.

“What I was told was that they recognized that there was a failure on the part of two employees and that they settled with the city of New York with a rather substantial settlement,” said Moorlach.

However, the company itself admits that higher-level managers had received warnings about the fraud, including a whistle-blower complaint, yet failed to investigate.

“Some managers supervising [Program Manager Gerard] Denault and the project disregarded warning signs of possible corruption,” SAIC acknowledged as part of its agreement with prosecutors. “As a result, SAIC failed to take actions that might have detected, disrupted or curtailed the charged conspiracies, allowing the city to be victimized repeatedly and systematically for more than seven years.”

Asked about the apparent failure of SAIC’s higher-level management, Moorlach said the company did its best overall after learning of the problems.

“Every large organization is going to have this kind of activity. It’s just part of doing business,” said Moorlach. “And so you have to look at the overall picture. You have to look at the response to the matter. And I think SAIC did their best to emphasize a good customer service perspective once it was detected and correct it.”

Supervisor Todd Spitzer declined to comment, and supervisors Pat Bates, Shawn Nelson and Janet Nguyen didn’t return phone calls.

There are questions about how forthcoming the company originally was about the New York criminal case while bidding for services in Orange County.

SAIC’s “best and final offer” submission to Orange County on March 19, 2012, came more than a week after the fraud settlement, but apparently didn’t disclose the massive payout.

The company then sent a follow-up letter three days later to reveal the settlement, saying that while not required, the firm “feels it ethically appropriate to voluntarily disclose.”

SAIC didn’t return messages seeking comment.

The New York scandal centered around the massive CityTime project, which sought to overhaul the city’s payroll system.

SAIC took control of the effort in 2001, and within a few years, two of its top project managers were using a sole-source subcontractor, Technodyne, “as a vehicle for the payment of tens of millions of dollars” in kickbacks to themselves and others, according to the company’s admission.

By 2005, SAIC had started receiving internal warnings about the kickbacks.

“A whistleblower within SAIC filed an anonymous ethics complaint with the company alleging that Technodyne was receiving preferential treatment on the CityTime project, and that the only explanation for the conduct was that Denault had to be receiving kickbacks from Technodyne,” the company acknowledged.

But “SAIC failed to properly investigate the complaint and did not notify the city that a complaint had been made,” it acknowledged.

Then in 2006, SAIC persuaded New York to agree to transfer responsibility for cost overruns from the company to the city, paving the way for a massive increase in the contract.

“Following the execution of Amendment 6, which was being negotiated at the time the ethics complaint was made, SAIC, under the direction of Denault, staffed the Project with hundreds of consultants hired by Technodyne, and the cost of the Project expanded dramatically, from approximately $115 million in 2005 to approximately $620 million in 2011,” the company admitted.

The move helped enable SAIC to turn a net loss on the project into an estimated $60 million in profit, according to the company.

Higher-level management essentially ignored several warnings of the fraud, SAIC acknowledged.

“In those instances in which SAIC employees on the project expressed concerns to Denault's supervisors about the possibility that he had a corrupt relationship with Technodyne, those managers reacted with inappropriate skepticism, shifted the burden to the employees to prove their assertions, and failed to pass on the concerns to the proper company personnel for investigation,” according to the company.

In the wake of its $500-million payout, SAIC said it fired the managers who oversaw Denault and “voluntarily implemented measures designed to strengthen its compliance systems and enhance its culture of ethics and compliance.”

The company also agreed to reforms such as an independent monitor and whistle-blower protections.

Additionally, the case helped prompt the New York City Council to require a cost-benefit analysis before certain types of outsourcing.

Nick Berardino, general manager of the Orange County Employees Association, called on supervisors Monday to hold off on Tuesday’s vote until District Attorney Tony Rackauckas conducts a “thorough review” of the New York case.

Rackauckas' office should “publicly report back to the board its findings prior to the board encumbering that amount of taxpayer money,” Berardino said. “It’s the only prudent thing to do.”

The county might lay off as many as 40 of its information technology employees as part of the contract, Berardino has said. County management said it would try to find the workers jobs at SAIC.

The data center contract, along with an upcoming vote on a phone and data network agreement, will be among the most expensive service contracts the county has ever awarded and has drawn intense industry interest.

Much of that interest has come in the form of campaign contributions. Since 2009, supervisors have received at least $23,000 from the top bidders, according to campaign finance records.

You can reach Nick Gerda at, and follow him on Twitter: @nicholasgerda.

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