Steven Pearlstein
Steven Pearlstein
Columnist

Steven Pearlstein: How could SAIC miss this?

Last week in these pages, The Post ran a profile of John Jumper, the straight arrow former Air Force general who was brought in as chief executive of local contracting giant SAIC in the wake of an embarrassing overbilling scandal involving bribery, kickbacks, foreign shell corporations and a safe deposit box stuffed with $850,000 in cash.

A year ago company officials were publicly denying that there were any problems at all with its contract to build a new timecard system for New York City, which by then was so late and so over budget that “CityTime” had become a frequent target for the New York tabloids and political embarrassment for Mayor Michael Bloomberg.

Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.

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SAIC over the years
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SAIC over the years

It was just last June that SAIC executives and directors first informed shareholders that there might be a little $2.5 million overbilling problem with the contract and that federal prosecutors had brought criminal charges against six employees of an SAIC subcontractor. Shareholders had to read deep into Note 9 of that quarterly report to learn that there might be “a reasonable possibility of additional exposure to loss that is not currently estimable” that “could have a material adverse impact” on the company’s finances.

It was just six months ago that SAIC got around to firing the three executives who were supposed to oversee the New York operations and letting shareholders know that the board of directors had formed a special committee and hired a couple of law firms to get to the bottom of things.

And it was a month ago that SAIC, acknowledging its responsibility in failing to detect a bribery and kickback conspiracy going on right under its corporate nose, agreed to repay the city $500 million of the $635 million it had received for the completed CityTime system. The settlement will allow SAIC to avoid criminal prosecution and the almost certain debarment from government contracting work that would follow.

Now with the appointment of a new chief executive, SAIC wants to assure everyone that the problems have been fixed and that the company has regained its “entrepreneurial spirit” and returned to its “core values.”

Imagine that: In less than a year, SAIC has gone from having no problem at all with its CityTime contract, to having its entire business put in legal jeopardy, to putting everything right and putting it all behind them. The speed of these corporate cultural transformations is truly remarkable.

This familiar narrative, of course, comes straight out of the Official Corporate Scandal Handbook that they must pass out to all executives when they are first ushered into the C-suite. Ignore. Deny. Obfuscate. Fire a few bad apples. Hire expensive outside counsel. And in a final flurry, acknowledge that mistakes were made but assure that it’s all behind us. The only thing left is for SAIC to quietly settle the inevitable shareholder class-action lawsuit to guarantee that the full story of who knew what and when will never see the light of day.

What is fascinating about the CityTime debacle is how many times SAIC was warned about irregularities and potential fraud without ever doing anything about it.

There was the February 2003 letter from Richard Valcich, director of New York’s Office of Payroll Administration, complaining that SAIC was constantly rewriting plans, requirements and schedules without consulting the city, demonstrating a certain lack of conformity with acceptable industry practices. One tell-tale sign: Hardware purchases had been marked up 400 percent.

Then there was the 2005 letter from an anonymous whistleblower alleging that a subcontractor was receiving such preferential treatment, including a large no-bid contract that violated company policy, that the only explanation was that SAIC project manager Gerard Denault was receiving kickbacks. Higher-ups failed to investigate, failed to notify the customer and failed to inform the board of directors.

A few years later came another flurry of complaints from SAIC employees who ignored Denault’s threats and went to his superiors to raise their concerns about irregularities with the CityTime contract. Their pleas were met with skepticism and they were told no further action would be taken unless they could deliver some proof of wrongdoing.

What is it about the corporate mentality that, when presented with repeated complaints from line workers that something is not right, the first instinct is invariably to treat them like disgruntled employees who don’t see the full picture and are focused on minutiae rather than getting the job done and making a profit?

How many Enrons have to go out of business, how many billion-dollar settlements with the Justice Department do there have to be, before corporate managers and executives finally learn to treat whistleblowers with the respect they deserve?

In the CityTime case, it took the power of the government subpoena and threat of prosecution to finally crack what turned out to be an elaborate kickback conspiracy. The key players were: Mark Mazer, a consultant hired by the city to help manage the contract; from SAIC, Denault, the project director, and Carl Bell, the chief engineer; and Reddy and Padma Allen, owners of TechnoDyne, a small subcontracting firm in Teaneck, N.J.

According to the Justice Department, the conspirators were able to overcharge the city by hiring consultants that were not needed, inflating their hours and their hourly rates. Then dummy corporations and bank accounts were set up here and in India to launder the inflated payments and recycle the kickbacks to the conspirators.

Even without uncovering the details of the kickback scheme, however, there were plenty of warning signs for anyone with even a passing familiarity with the government contracting business, which includes almost everyone at SAIC.

Mazer and Denault were widely known to be longtime friends and associates who had most recently worked for the same consulting firm — not exactly the sort of relationship you want between a government contract officer and the lead contractor.

Shortly after SAIC took over the contract, the two arranged for it to be changed from a “fixed-price” contract that was losing money to a “fixed-price level of effort” contract that allowed the project’s ever-escalating costs to be passed on to the city — an odd concession from the city, which got nothing in return.

Most significantly, the vast majority of the work on the CityTime project was done not by SAIC employees but by employees and consultants at TechnoDyne under a no-bid, single-source subcontract that violated SAIC’s procedures, doubled the number of people working on the project and generated billing rates that ran as high as $160 an hour.

The $450 million it received from SAIC between 2003 and 2010 constituted almost all of TechnoDyne’s revenue, with a significant portion of that sub-subcontracted to firms with little or no other revenue.

In a “statement of responsibility” explaining its see-no-evil attitude, SAIC said its “failures resulted, in part, from an overemphasis on the financial and operational success of the CityTime project.” Ah! So that’s it.

Although the Allens, Reddy and Padma, are facing criminal prosecution stemming from the CityTime work, the TechnoDyne Web site still boasts SAIC as one of its satisfied clients. Among the company’s other accolades: the 2010 Entrepreneur of the Year award for New Jersey from the accounting firm of Ernst & Young. Way to go, audit team!

What I’d still love to know is the name of that original whistleblower who figured out early about Denault and his kickback scheme. Neither the company nor the prosecutors would tell me the name of the employee, or even whether he or she is still working at the company. There will be a second column, and a dinner on me at Komi, whenever this hero is ready to tell his or her story.

Who knows, maybe Gen. Jumper will join us?

 
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