CityTime Payroll Scandal a Cautionary Tale

Closing the city's $600 million dollar budget gap was not without tough trade offs. A thousand workers will lose their jobs, and to save $6 million dollars, the city will end its commitment to thousands of kids who had been promised college scholarships for keeping a B average. The shortfall that prompted the hard choices is roughly the same amount federal prosecutors say was involved in a massive case of contract fraud that has come to be shorthanded as CityTime. It's a cautionary tale of what can happen when the city drops the ball on oversight for just one of its 47,000 private contracts.

Preet Baharara, the U.S. Attorney for the Southern District of New York, did not sugarcoat his description of the CityTime scandal when describing it earlier this month to reporters.

"The crimes alleged in today's superseding indictment are truly jaw dropping," said Baharara. "They reveal one of the most elaborate and massive schemes to defraud the city ever charged." The city's Department of Investigation, led by Rose Gill Hearn, initiated the case and brought it to Baharara's office on the sprawling case.

The irony here is rich. "The massive scheme" started as an outsourced city contract to design a payroll system that would precisely track the hours worked by city employees. After a couple of false starts with other vendors, defense contractor Scientific Applications International Corporation was awarded the job in a no-bid contract by the Giuliani Administration.

Under Mayor Bloomberg, the contract ballooned from $63 million where it had started out in the Giuliani years , to more than $700 million. Federal prosecutors now say at least $600 million of that was "tainted." At every level, federal prosecutors allege grafters had honeycombed CityTime in to a paragon of corruption.

"Between 2003 and 2010, the CityTime payroll project served as a vehicle for an unprecedented fraud, which appears to have metastasized over time," said Baharara.

The prime contractor was the defense contractor Scientific Applications International Corporation. The city's contract database notes SAIC has been the subject of "multiple investigations by the Department of Defense, the U.S. Department of Justice, NASA and the General Services Administration." Citing the criminal probe, SAIC had no comment for this story.

Back in 2005, prosecutors say SAIC got a whistleblower tip about company employee Gerald Denault, SAIC's CityTime manager, saying Denault was deliberately slowing down the project and raised the possibility he was taking kickbacks from subcontractors. Prosecutors say SAIC took a look for five months but found no evidence of wrongdoing.

Meanwhile, Denault continued on an upward corporate trajectory.

"Gerald Denault allegedly used his authority at SAIC to cause consultants to be hired at inflated rates, to artificially delay the implementation of the project, and to approve work orders for staffing increases that were not necessary," said Baharara.

Official oversight for this project rested with a three-person panel including Mayor Bloomberg's Budget Director Mark Page, a representative for than Comptroller Bill Thompson, and Joel Bondy, who led the Office of Payroll Administration up until he was fired after the first indictments came down last year. Despite this oversight, Attorney Baharara says the private contractors and consultants were able to manipulate the terms of their contracts and inflate the costs eleven times its original estimate. Bondy and Page declined to comment for this story.

"Because of their efforts, the contract went from a fixed-price contract to a fixed-price level of effort contract. What that meant is that from then on, it would be the city - not SAIC - that would become largely responsible for future cost overruns. What followed as described in the indictment was a dramatic acceleration in costs with the city on the hook for all of it," explained Baharara.

What prosecutors have yet to publicly discuss is the role played by former city officials from both the Giuliani and Bloomberg administrations that acted as lobbyists on behalf of SAIC and subcontractors such as New Jersey-based Technodyne.

This month Technodyne, and its husband-and-wife ownership team of Padma and Reedy Allen, were indicted for their role in the conspiracy that netted Technodyne $450 million dollars of city funds via SAIC. Prosecutors contend it was 80 percent of Technodyne's business.

The city's lobbying database shows a small army of former prominent city officials who did work for SAIC and Technodyne. Defense contractor SAIC has retained former City Comptroller Liz Holtzman, Peter Powers, who served as Mayor Giuliani's top deputy Mayor for operations, and Seth Kaye, who worked in both the Giuliani and Bloomberg administrations. Technodyne's lobbyists include former Bloomberg Department of Information Technology and Telecommunications Commissioner Gino Menchini and Agostino Cangemi, who also held key posts in both administrations.

National Strategies, the lobbying firm that employs Menchini and Cangemi, says the firm had no role in CityTime and discontinued working "on general business procurement" for Technodyne as soon as the criminal allegations surfaced. (Another Technodyne lobbyist of record, Sal Salamone, was director of the Mayor’s Office of Computer Planning and has worked for SAIC.)  

Watchdog group Common Cause Executive Director Susan Lerner says as the city increasingly turns to outside contractors, these contractors turn to former city employees as lobbyists to influence the contracts.

"Simultaneous with that shift, you get a massive explosion in lobbyists because now you are not just lobbying on behalf of a company that does or doesn't want certain regulation," she says. "Now you're lobbying on behalf of a company that is looking at a job which could be $400 million dollars worth of city money."

In December of last year, federal prosecutors and the DOI alleged initially that another nest of fraudsters had exploited CityTime, walking away with more than $80 million dollars. They charged that "subject matter expert" Mark Mazer, who was supposed to be monitoring the contract work on CityTime, had actually used his position to orchestrate an international kickback scheme.

At the time, Mayor Bloomberg tasked Deputy Mayor for Operations Stephen Goldsmith with evaluating the city's largest information technology contracts. Goldsmith conceded that the city had erred in sub-contracting even the quality assurance oversight of CityTime out to multiple layers of contractors. He vowed to have city employees play a more active role in monitoring contracts and conceded the migration of city officials into the world of contracting could be problematic.

"If a revolving door means you have city employees on the contractor side at higher salaries, I think there is some evidence of that and we are concerned about it," he told WNYC.

Meanwhile, Technodyne founders Reedy and Padma Allen have yet to be taken into custody. They are facing multiple counts of bribery and corruption on their 450 million share of the CityTime money. But finding them will be a challenge. City lobbying records list one of Technodyne's addresses as 576 Valley Road, a UPS mailbox in Wayne, New Jersey.

"They rented one of my big postal boxes, says Mr. Choi who owns the Wayne UPS Store. "I have not seen them for awhile but they are paid up through July." Prosecutors claim the Allens are now in India.

City Comptroller John Liu announced today that he is freezing $42 million of money left to be paid to SAIC pending the outcome of the federal investigation. And Liu joined the Financial Information Services Agency board of directors in approving a plan to transition management of payroll system away from outside contractors to city workers.

“This transition is possible because of the significant progress achieved due to the new paradigm we established in September forcing the project on the right track at no further expense to taxpayers to build the system," Liu said in a statement. "As we move forward, it is my hope that the city will be able to recoup every dollar stolen from taxpayers, and that the administration will continue to cut down on the use of outside consultants.”