MANHATTAN (CN) - Science Applications International Corp., the lead contractor for New York City's automated payroll system, will pay $500 million in restitution and penalties for "the single largest fraud ever perpetrated on the city of New York," the U.S. attorney said.
U.S. Attorney Preet Bharara said Wednesday that SAIC defrauded the city into "significantly overpaying for the CityTime information technology project."
The city will get more than $370 million in restitution and another $96 million in penalties; another $34 million will go to the Department of Justice.
"I can now report that, while the criminal case against eight individuals is still pending, we have now made good on our pledge to make the city whole," Bharara said in prepared remarks about his deferred prosecution agreement with SAIC.
CityTime was an information technology project designed to modernize New York City's timekeeping and payroll systems and prevent payroll waste, fraud and abuse. By 2011, the cost of the project had ballooned from $63 million to more than $700 million.
The program manager of CityTime and seven other people were accused of bilking the city of millions of dollars by hiring so-called "consultants" from whom they received kickbacks.
SAIC hired a "single source" subcontractor, Technodyne LLC, in 2003 to provide staffing for the project. According to charges filed by federal prosecutors, program manager Gerard Denault and other SAIC employees received millions of dollars in kickbacks from Technodyne for steering business to the company. SAIC had paid Technodyne nearly $325 million by 2011, according to an SAIC statement.
Technodyne's two owners fled to India as the scandal unfolded.
In 2010, the U.S. Attorney's Office began investigating SAIC's failure to monitor CityTime and prevent fraud.
In the deferred prosecution agreement, "SAIC has agreed to pay more than $500 million in restitution and penalties, and to forgive more than $40 million in payments that the city would otherwise owe to SAIC arising out of the CityTime project," Bharara said in his prepared remarks.
"This resolution is, as far as our office is aware, the largest by dollar amount arising out of any state or local government contract fraud in history. It is also a resolution that ensures, as promised, that every penny of fraud will be returned to the city."
SAIC agreed to pay $500,392,977 to the government and to forgive $40 million in invoices for work on the CityTime project.
SAIC said it would cooperate with authorities in the pending criminal case and adopt internal reforms against fraud.
SAIC also agreed to be subject to an independent monitor for the next 3 years.
The government will dismiss criminal charges against SAIC after 3 years if the company complies with all of the terms.
In the statement of responsibility filed with the Southern District, SAIC admitted that its "managerial failures" and its failure to investigate an ethics complaint in 2005 enabled its employees to defraud the city.
"SAIC accepts responsibility for the illegal conduct alleged against Denault and admitted by [Chief Systems Engineer Carl] Bell during the course of the CityTime project," according to the statement. "The company acknowledges that the conduct and managerial failures described herein contributed to the ability of Denault and Bell to commit their alleged crimes against the city, and that the city was defrauded by SAIC as a result."
SAIC admitted it failed to oversee Denault and other employees, to monitor their activities and control the costs of the project. And the company ignored an anonymous 2005 ethics complaint that alleged that Denault was taking kickbacks from Technodyne, and did not notify the city that the complaint had been made, according to the statement.
"SAIC's failures resulted, in part, from an overemphasis on the financial and operational success of the CityTime project by those assigned to manage the project, at the expense of the company's own ethics, human resources and procurement policies," SAIC said. "In order to assure the success of the project, some managers supervising Denault and the project disregarded warning signs of possible corruption, and tolerated Denault's improper handling and supervision of the CityTime contract and SAIC's New York office. As a result, SAIC failed to take actions that might have detected, disrupted or curtailed the charged conspiracies, allowing the city to be victimized repeatedly and systematically for more than seven years."
SAIC fired the managers who directly supervised Denault and the project, and agreed to revise its policies and procedures.
"In short, the investigation revealed that SAIC managers responsible for CityTime placed profit ahead of principle, time and again," 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. And that is why, by the close of business tomorrow, SAIC will make a total forfeiture payment of more than a half billion dollars - which includes a restitution amount of at least $370 million and a penalty of $130 million. Almost all of it will go to the City of New York.
"Half a billion dollars is a staggering sum, but it is a sum commensurate with the staggering scale of the crimes and misconduct we uncovered, and it is an amount that makes the city whole.
"It represents essentially all of the money overpaid by the city to SAIC plus a penalty; it leaves the city with a functional web-based timekeeping system; and it enables the city to achieve this outstanding result at a time of real need for the city, without having to incur further expense or delay in litigating this matter with SAIC or others involved in the fraud."
By signing the deferred prosecution agreement, SAIC, one of the nation's largest defense contractors, with 41,000 employees, managed to avoid losing billions of dollars in current and future government contracts.
According to the U.S. attorney, SAIC generates 93 percent of its business from government contracts.
Federal prosecutors also seized $52 million in assets from eight criminal defendants involved in the CityTime fraud. If the government wins the cases against them, the total recovery could approach $600 million, Bharara said.