SEC broke law with Apple equipment purchase

May 27, 2011

The SEC violated procurement law in 2008 when, without proper testing, it spent about $1 million buying computer equipment from Apple that “immediately failed” to work as intended, the agency’s inspector general said in a report released this week.

The agency violated federal regulations by awarding the contract without competitive bidding and by telling Apple its budget for one of the orders, the report said.

Apple used that information to tailor its offer precisely to the budgeted amount, the report said. But Apple left out “essential equipment that the SEC was subsequently forced to purchase” at additional cost, the report said.

Among other violations, the SEC bought the equipment before the written justification for the contract had been approved, the report said.

“We agree with the report’s recommendations and are taking steps to improve our policies and controls over purchases of information technology solutions,” SEC spokesman John Nester said.

Apple spokeswoman Kristin Huguet declined to comment.

The report, dated Dec. 14, was released in response to a Freedom of Information Act request by Reuters.

The release of the report comes as congressional Republicans have been accusing the SEC of mismanaging several issues, including the agency’s failure to stop Bernard Madoff’s Ponzi scheme, its handling of an alleged fraud involving R. Allen Stanford and SEC employees’ viewing of pornography on the job.

The inspector general gave the agency’s critics fresh ammunition this week in a separate report, which said that the SEC leased office space it did not need and could not afford, leaving it in a $94 million dispute with a private landlord.

The criticism has left the SEC on the defensive as it argues that it needs more funding to meet its expanded regulatory duties and upgrade inadequate information technology.

The Apple deal was meant to save the agency money and solve some of its information technology problems, the report said.

The SEC, which still relied on tape reels to store and back up data, was experiencing problems and looking for a more reliable system.

In January 2008, an Apple salesman made a pitch for equipment sold by Apple and manufactured by Cloverleaf Communications.

Instead of doing its own engineering analysis, the SEC relied primarily on the pitch by the Apple salesman, the report said.

“I think they bit it hook, line and sinker,” an SEC employee, whose name was redacted from the report, told the investigation.

The agency passed up a chance to try the equipment free, despite the fact that Cloverleaf “was virtually unknown and untested,” the report said.

The agency justified its use of a no-bid contract by saying Apple was the only vendor that could supply the Cloverleaf equipment, but it did not establish that Cloverleaf was the only product that would fit the bill, the report said.

About five months after a batch of equipment was purchased but before it had even been removed from its crates, an SEC information technology specialist did a “theoretical” analysis and concluded that it would not do the job, the report said.

Weeks of testing led to a similar conclusion.

The SEC told Apple that its Office of Information Technology had budgeted $200,000 for the project, and that is the price Apple quoted.

“The normal discounted price was to be 240k, but he only had 200k. So we backed into his budget based on much larger order,” according to an email cited in the report. The SEC blocked out the identity of the author.

After making an initial $200,000 purchase, the SEC placed an additional $773,000 order, the report said.

Cloverleaf is now owned by Dot Hill Systems, which responded to an interview request by saying that it aquired Cloverleaf after the SEC purchase.

Asked if any SEC employees were disciplined over the matter, the SEC's Nester said “appropriate action was taken.”

The SEC solved its data-storage problem with a different product, the agency spokesman said.

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