County’s Lawsuit Alleges Fraud by Software Contractor

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In the latest development surrounding a long line of  cost overruns on information technology contracts, Orange County supervisors are set Tuesday to discuss the county’s fraud lawsuit against contractor Tata Consultancy Services.

The federal lawsuit claims that the software vendor based in Mumbai, India, misled and defrauded the county into spending millions of public dollars on property tax software that failed.

“The county has suffered millions of dollars of damages as a result of defendants’ wrongful conduct, and it will continue to suffer damages for the years it will take to a replacement for the failed project,” the county alleged in its April 30 lawsuit.

The county asserts that Tata, also known as TCS, engaged in “promissory fraud, intentional misrepresentation, fraudulent concealment, and negligent misrepresentation” as well as breach of contract.

According to court records, Tata has not filed a rebuttal, and its attorney didn’t return a message seeking comment.

Orange County government has a long history of cost overruns on such outsourced IT contracts, with allegations that vendors underbid contracts, then boost their price later through change orders.

Even after the Tata suit was filed, a majority of county supervisors awarded a $74-million IT contract to a firm at the center of a massive fraud case in New York City and a $132-million contract to a company that hiked its price by $11 million beyond the “final offer” it had previously promised to honor.

In Tata’s case, the firm and the county have been in mediation over the suit, which postpones the courtroom argument usually seen in lawsuits.

According to the county attorneys’ memo filed with the court in June, “The county contacted the defendants immediately upon filing the complaint, advised them of the filing of this action, and suggested that the parties consider mediating their dispute before proceeding with the litigation.”

As of mid-August, the two sides had agreed to “seek a confidential third party review” of the software as part of the mediation effort. That review was projected to take two months.

Attorneys for the county didn’t return calls seeking an update on the status of the case.

The suit claims that the problems started in 2007 when the county engaged Tata to develop software that could handle most of the county’s property tax responsibilities.

The software is critical for the county, which collects more than $4.5 billion per year in property taxes to help pay for schools and services provided by cities, the county and various special districts.

The program is supposed to calculate the property taxes for more than 1 million items of property, such as land, homes, boats and aircraft.

Until now, county officials have been relying on an aging mainframe computer system known as ATS, developed in the 1980s and 1990s. That system uses an obsolete programming language that, the county asserts, isn’t even supported by the company that has the rights to it.

To replace it, the county decided to split ATS’ functions into two systems, with the contract for the property tax system, known as PTMS, going to Tata in July 2008.

Tata was chosen based on what the county claims it later learned was “a series of false promises and intentional misrepresentations” by Tata.

The county alleges in its suit: “Defendants promised they had the capabilities to perform a project that was well beyond the capabilities of the personnel the defendants intended to provide for the project, and the defendants made promises to complete the project on a budget and according to a timeline with which they had no intention of complying.”

Tata had promised that the software would be finished by July 2010 with a total county cost of just under $8 million, according to the suit.

The company also claimed it would assign 16 people to the project, including two property tax experts: Terri Sexton of California State University and Sam Birchfield of Ryan and Co., a tax services firm.

Instead, Tata sought and received millions of dollars in cost overruns and passed its deadlines twice before the county refused to grant any further money. The county alleges it has spent “millions of dollars” on county employee salaries and “hundreds of thousands of dollars” on other consultants because of Tata’s incompetence.

Among the issues, “only five of the sixteen promised personnel ever performed a role” for Tata in the project, the county claims.

As for the two experts, the county asserts that “TCS never had either of those experts play a meaningful role, if any role at all, on the PTMS project” despite numerous county requests to seek their expertise.

The county complained that Tata also assigned a project manager who “lacked the qualities needed to drive a complex project on schedule,” then replaced him with another project manager who was “incapable of managing a complex project like the PTMS project.”

According to the suit:

Yet TCS left him in his position for more than two years despite a host of problems with TCS’s performance. Only in June 2012, almost four years after starting work on the PTMS project, did TCS appoint a project manager, Manoj Singh, with the requisite experience and skills, but by that point it was too late to rescue the project.

Notably, TCS had promised at the outset, in its 2007 RFP response, that Mr. Singh would be assigned to the PTMS project, but the County is informed and believes, and upon that basis alleges, that Mr. Singh played no role in the PTMS project until 2011 and did not work on-site on the PTMS project until 2012.

Additionally, Tata “significantly understaffed” the project, according to the county.

“A number of project tasks required a specifically skilled and dedicated person, such as a database administrator and system tester. Instead, TCS often tasked one employee with two full-time jobs, leading to poor or slow performance of both roles,” the county wrote.

Because of Tata’s misrepresentations, the suit claims, the county had to devote several of its staff members “for years” to working with Tata “to address the issues plaguing the software project.”

Tata ultimately missed several deadlines for delivering the project, with the county agreeing to give the firm an extra 18 months and $3.9 million to finish the software.

Then in 2011, the firm ran out the county’s patience when is asked for another $5.8 million and another 18 months to finish the program, according to the suit.

Tata “promised to complete the PTMS project in three years and for under $8 million” yet “was now asking the county to accept a project that would take six years at a total cost of more than $16 million,” the suit alleges.

Facing a “poorly designed” product that would take “years of work” to finish, the county allowed Tata’s contract to expire in January, according to the lawsuit.

The software had errors that “created significant security risks that could have threatened the confidentiality and accuracy of the information for hundreds of thousands of taxpayers,” the county claims.

The county then filed suit in April, alleging:

TCS intentionally misrepresented the capabilities and expertise it intended to provide to the county to complete the PTMS Project while simultaneously ‘underbidding’ the cost and time required to complete the PTMS Project.

TCS’s goal, at all times, was to induce the county to select TCS over the other bidders for the PTMS project, to enter into a contract with TCS, and, subsequently, to increase the time and money TCS would receive to complete the PTMS project.

The county is being represented by Assistant County Counsel Jeff Richard and outside attorney Todd Theodora.

Theodora himself has been at the center of controversy surrounding potentially illegal votes by Janet Nguyen in her capacity as a board member at the county’s CalOptima health care plan.

In one of the CalOptima votes, Nguyen approved a $200,000 increase to Theodora’s contract days after receiving the maximum allowed $1,800 contributions from Theodora and his wife, Voice of OC reported last month.

The state’s Levine Act generally prohibits officials who are appointed to outside agencies from participating in the approval of contracts at that agency with their campaign contributors. The prohibition doesn’t apply to their directly elected positions.

Back in March, county supervisors hired Theodora for the Tata suit on a 4-1 vote, with Supervisor John Moorlach dissenting.

Tata is being represented by William Escobar of the New York-based firm Kelley Drye & Warren.

Judge Josephine Tucker is presiding over the case, No. 8:13-cv-00683-JST-JC.

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

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