Tech Firm to Pay New York City Nearly $500M over Payroll Scandal

A technology giant and federal contractor in charge of the city's scandal-plagued CityTime payroll project agreed to pay more than $500 million in restitution and penalties to avoid prosecution.
by | March 15, 2012
 

A technology giant and federal contractor in charge of the city's scandal-plagued CityTime payroll project agreed Wednesday to pay more than $500 million in restitution and penalties to avoid prosecution.

The agreement, which prosecutors said they believed was the largest of its kind ever made, recoups for the city the bulk of the $652 million it spent on a project that began as a $63 million attempt to automate employee timekeeping but ballooned tenfold into what authorities say was an epic fraud involving kickbacks, systemic overbilling and an international money laundering conspiracy.

"The investigation revealed that SAIC managers responsible for CityTime placed profit ahead of principle, time and time again," Manhattan U.S. Attorney Preet Bharara said. "That is why we insisted that the company pay from its own pocket every penny of the massive fraud perpetrated against the city."

In the deal, entered by an SAIC Inc. attorney before a federal judge in Manhattan, the multibillion-dollar contractor acknowledged it had failed to properly investigate a 2005 whistleblower complaint and had employed managers who disregarded employee concerns and missed or ignored warning signs.

"Some SAIC managers failed to perceive or ignored significant and pervasive irregularities," the company said in court papers. "SAIC's failures resulted, in part, from an overemphasis on the financial and operational success of the project."

The project's senior manager, Gerard Denault, has pleaded not guilty to criminal charges. SAIC said that Denault's managers had missed or ignored his creation of an atmosphere of fear in the office that discouraged subordinates from coming forward.

When some employees went to Denault's supervisors with concerns, they "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," the company said.

The $500 million payment — restitution to the city of $370 million and a penalty of $130 million — is more than twice the amount that SAIC anticipated in a filing in December. Then, the San Diego-based company made a $232 million provision to cover possible losses associated with the case.

The city stands to receive $466 million of the settlement money, and the company is forgiving another $40 million the city had owed. Authorities have moved to take control of more than $52 million in assets of those charged in the case. Prosecutors have said that "virtually the entirety" of the money spent by the city on the project "was tainted, directly or indirectly, by fraud."

The company, which is facing a shareholder lawsuit over the case, continues to receive contracts worth hundreds of millions of dollars from the federal government. It has undergone a shake-up in recent months, with the CEO announcing his retirement in October, several weeks before the company fired three senior managers and hired a law firm to review its ethics and practices. A new CEO and chief operating officer have been named.

Under the agreement with federal prosecutors, the technology company, which took in $2.81 billion in the third quarter of last year, will implement an ethics program and hire an independent monitor.

SAIC attorney Douglas Lobel declined to comment after Wednesday's court hearing. A company spokeswoman didn't return messages seeking comment.

Of the 11 people charged in the case, two have pleaded guilty, and a third has died. Two others believed to have fled the country have not formally declared their guilt or innocence, and the remaining six have pleaded not guilty. A message left for Denault's lawyer wasn't immediately returned.

Mayor Michael Bloomberg, asked on Wednesday whether failings of city oversight may have led to the fraud, said the city was examining its practices and seeking to improve them.

"We take it very seriously," he said. "We look back and see how it was perpetrated. Should we have known? Could we have known? We keep strengthening all of our surveillance."

The city is implementing a number of changes to its contracting to increase oversight and reduce the size of contracts. After the CityTime investigation, one of Bloomberg's appointees, the head of the city office that was in charge of the project, was suspended without pay and resigned. He had previously worked for the company in charge of quality assurance on the project, a firm that employed contractors who have been charged in the case.

Bloomberg said the settlement represented a victory for the city and noted that the CityTime project had ultimately provided the city with working timekeeping technology.

Later Wednesday, the City Council passed legislation that will require the mayor's administration to report cost overruns to the council. Bloomberg is expected to sign it.

Copyright 2012 The Associated Press.

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