The Securities and Exchange Commission charged yesterday that a Florida computer equipment manufacturer deceived the Social Security Administration into signing a nearly $100 million contract to modernize its data system by passing off a competitor's equipment as its own and an empty box with nothing more than blinking lights as an electronic security device.
According to papers filed in U.S. District Court in Tampa, Paradyne Corp. of Largo used those and other gambits to defraud investors as well as the government, and delivered a system that was problem-plagued in its initial stages.
Paradyne released a statement last night saying that it "believes that it competed for and won the contract with the SSA fairly and in compliance with the terms of the SSA's request for proposals as amended and that its performance under the contract has generally been satisfactory to the SSA."
The contract in question was the largest ever for the Florida firm, a company that grew slowly during most of the 1970s but took off around 1979. That year, revenues grew by 60 percent to $41 million. In 1981, the year of the contract award, sales increased by 78.4 percent to $135 million. Paradyne has reported revenues of $21.2 million so far from the contract.
Documents filed in court yesterday portray the striving computer firm feverishly trying to put together a system to demonstrate to the Social Security Administration in its bid for the contract. Paradyne had represented in its bid that it had a fully developed, existing system and equipment, the complaint said. The SSA imposed that requirement to avoid costly delays in installation and maintenance, according to the SEC.
According to the government, as the date of the demonstration approached, Paradyne engineers took apart a cabinet containing a competitor's microprocessor/controller, removed the other firm's identifying labels from various parts and "relabelled these parts with Paradyne labels to make it appear that Paradyne had produced equipment . . . in case the SSA representatives at the demonstration looked inside the cabinet."
The Paradyne employes stuck the competitor's equipment in a newly built cabinet that "was represented to be a Paradyne P-8400 unit and was supposedly the heart of the Paradyne 8400 system demonstrated," the complaint alleged.
The SEC also charged that Paradyne management had two engineers build a "dummy" data encryptor that "was nothing more than an empty box with blinking lights."
Paradyne was the low bidder among several companies that successfully demonstrated equipment to the SSA.
After obtaining the contract, Paradyne spent considerable time and "significant" amounts of its own money to correct defects in the equipment it delivered, the SEC said. Those corrections yielded some improvements by November 1982, according the agency's complaint. Until then, the SSA system operated poorly and often did not work, resulting in penalties against the company. "To this day, many of the P-8400 systems, which have been installed in SSA field offices, do not work properly," the SEC said. A spokesman for the SSA said that, so far as he knows, the system is working well now.
According the the SEC, the company's stock soared from approximately $37 a share to approximately $48 a share in the 30 days after the SSA award was announced.
The SEC charged that, when Paradyne sold $54 million worth of additional stock after the contract award, the company misled investors by giving the impression "to the investing public and its shareholders that Paradyne legitimately and successfully competed for the SSA contract and can do so for such large contracts in the future."
The SEC said Paradyne has not cooperated with the investigation and that, so far, the investigation has not determined which individuals might be responsible for the conduct.
The charges were the result of an investigation involving the SEC's enforcement branch in Atlanta and the Atlanta office of the Inspector General of the Department of Health and Human Services, according to Barton Sacher. Sacher, who heads the SEC's enforcement and investigations branch in Atlanta, said the investigation was aided by Kenneth McAlhany, director of the Atlanta regional computer service center for HHS.