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City's Construction Giants Face Criminal Probe for Billing Fraud

Monday, July 30, 2012

Just a few stories remain at the Deutsche Bank building in lower Manhattan. (Stephen Nessen/WNYC)

Months after one of the city’s biggest construction giants agreed to pay nearly $60 million for inflating costs on public works projects, WNYC has learned that the criminal probe into billing fraud has expanded to other major contractors.

Bovis Lend Lease, which avoided indictment in the 2007 Deutsche Bank fire that killed two firefighters, agreed in April to pay $56 million in penalties and restitution for overbilling.

Now, WNYC has confirmed federal prosecutors are looking into the billing practices of Turner, Plaza, Skanska and Tishman construction companies. The construction contracts under scrutiny run into the billions of dollars.  

The firms are linked to major public projects like the Croton Filtration Plant, the extension of the 7th Avenue Subway and the World Trade Center.

In April, Janice Fedarcyk, the head of the FBI’s New York office, zeroed in on the impact of Bovis's fraudulent inflation of public construction costs.

"The over billing fraud affected city, state and federal public building projects,” she said. “If you are a New York City resident, Bovis indirectly swindled you on three different levels. For 10 years the pattern of fraudulent over billing was a standard practice, business as usual.”

At the heart of the probe is what prosecutors say is an industry-wide practice known as "8 and 2" in which construction companies fraudulently bill clients for hours not worked by labor foremen.

Bovis would add two hours of overtime pay on top of regular hours for as many as 60 foremen and falsely listed unworked hours as worked, prosecutors said.

The standard contract states that the union foremen get $34.24 an hour with no guaranteed overtime.

Federal prosecutors say the union foreman were not charged and did not break the law because they played no role in Bovis’s fraudulent billing.   

(A few stories remained at the Deutsche Bank building in lower Manhattan in 2010. Stephen Nessen/WNYC)

At the Bovis announcement in April, Loretta Lynch, U.S. Attorney for the Eastern District of New York, had a warning for the city's construction industry.

"The message should be clear to all who are engaged in similar contract billing fraud: You are in our sights,” she said. “And the defense that ‘everyone does it’ will not be a shield against law enforcement."

In a statement to WNYC, Tishman’s corporate parent, AECOM, confirmed that in December 2011 it was served with a grand jury subpoena in the billing investigation. The company said that it was cooperating with prosecutors.  

A spokesman for Turner would say only that the company "could neither confirm nor deny" it was under investigation. Skanska and Plaza declined to comment.

Brian Aryai, a 13-year veteran of the Treasury Department, was a former senior vice president at Bovis. He is the whistle blower credited by prosecutors with tipping them off to the 8-and-2 billing scheme that set off the probe.

Aryai, who could collect a substantial reward under the federal False Claims Act, said that what Bovis admitted to is a common industry practice.

"I think within the industry there was such rampant corruption that the people who were entrusted with being in positions of accountability and power overlooked very visible symptoms of the issues that have been uncovered," Aryai said in an interview with WNYC.

One of the former Bovis employees who pled guilty is James Abadie, a leading contractor trade group and former chairman  of the powerful Contractor Association of Greater New York.

Abadie  is awaiting sentencing and faces 20 years in jail. His guilty plea has sent off shock waves in construction circles, because he was so well regarded across the industry, according to Louis Coletti, president of the Building Trades Employers Association.  

Coletti said Abadie’s fall and the wider probe has the industry “reeling.”

He says the across-the-board nature of the continuing probe is a challenge for builders at a time when contractors are dealing with thin profit margins.

(Photo: Croton Filtration Plant in Van Cortland Park in the Bronx. The $3.5 billion dollar project is being built by Skanska. Bob Hennelly/WNYC)

Coletti defended the industry's "8 and 2" practice as a cost of doing business. He says the money paid to the foremen was to assure jobs got done on time.

"This was not a question of over billing. There is some question about procedures and compliance issues," Coletti said.

Prosecutors say what matters is how contractors represent these costs to their customers in their bills.

Coletti predicted the fallout from the focus on billing practices would force the industry to be more transparent in how it does business.

He conceded the industry has had a tough time shaking its image of being plagued by 'no show jobs' linked to organized crime. He says, in reality, those days are the stuff of TV and the movies.

"There is a certain excitement to thinking that kind of activity goes on on a regular basis. It’s like the Sopranos TV show. It was a very popular show. I don't know if we are over going to overcome that kind of perception, unless we begin to do very publicly the kind of things I am talking about with you now," Coletti said, referencing the industry’s efforts improve transparency. 

Ronald Goldstock, former director of the New York State Organized Crime Task Force – which investigated the infiltration of the construction trades by the Mafia – says law enforcement has been successful in rolling back the mob's dominance in construction. But he says the organized crime legacy still makes the industry vulnerable to corruption like the "8 and 2" billing arrangement.

"Over time customs and practices are set up within the industry. They do become internalized. People don't think about them as being corrupt necessarily,” he said. “Over time it is an accommodation between both sides, and no one really knows which it is anymore.”

As federal prosecutors pursue white-collar cases in the construction industry, one challenge they may encounter is that the bigger the construction firm, the more limited their enforcement options may be.  

This was the case with Bovis. US Attorney Loretta Lynch struck a deferred prosecution deal with the Australian-based multinational building firm. She cited concerns that criminally prosecuting Bovis would do more harm than good for the city because Bovis was so central to so many ongoing projects.

This is not the first time Bovis avoided criminal prosecution because of its size and dominance in the city’s construction industry.  

In 2008, Bovis benefited from similar forbearance by Manhattan District Attorney Robert Morgenthau for the firm's role in the Deutsche Bank Building fire.  

Two firefighters were killed, and the DA’s investigation determined that Bovis was partially responsible as the prime contractor. In that case Bovis was granted a non-prosecution agreement.

It paid the families of the firefighters $16 million and agreed to reform its management of subcontractors.

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Comments [7]

Wilson Velez Coll from Puerto Rico USA

coming soon....notice from Puerto Rico.

Dec. 08 2012 02:07 PM
Jimmy from Florida

This happens more often than one might think. In fact. over-billing is a multi-billion dollar problem in this country. However, those who use contractors don't have to fall victim for this as there is now a service, http://www.transparentbusiness.com/, that allows real time tracking of all contractors.

Sep. 20 2012 04:28 PM
Hennelly

There is no discussion in this story about the details surrounding the Croton filtration project so I don't no where correspondent SP3 is coming from. There is no attempt in this story to link cost over runs with the ongoing criminal probe surrounding billing.
I did spend time up at Croton and one worker on the site opined that the $3.5 billion price tag might end up being closer to $7 billion.
How it went from $900 million to the current estimate is a multi-faceted question that I am investigating. Nothing ever happens for one reason.
But there has been a lot of international scholarship on the issue of chronic public works cost over runs that offers some insight. Often politicians and contractors are fools for each other, over selling to the public what they can do and for how much. (See "Big Dig.")
On Croton there was a very interesting November 2008 Independent Budget Office review of the increasing costs at the Croton Filtration plant. IBO noted "the general construction contract for the plant" IBO reports "had only two bidders, which may have contributed to higher costs." IBO goes on to recount how the "lowest bidder on that contract withdrew and the city awarded the contract to the second bidder at $200 million dollars higher than the lowest bidder."

Aug. 01 2012 10:36 AM
SP3

The Croton project is a fixed price job that was awarded to the low bidder. Monthly billings are done based on construction progress, not time and material. Henneley is clearly just another tabloid writer who cares little for facts.

Aug. 01 2012 06:19 AM
WSQ Neighbor

Would someone please look into the rehabilitation of Washington Square Park? Why is it taking six years to complete this small project?

Aug. 01 2012 05:36 AM
Norton from Nutley, NJ

First "too big too fail"; now "too big to not do business with"?!?!?

What kind of country do we live in where we let the corrupt stay in business? These kinds of practices just encourage it even further.

Time to fire all the people doing "oversight" and find some honest contractors; I'm sure there are plenty out there.

In addition they need to prosecute the people involved; let's start with the CEOs and work our way down...

Jul. 30 2012 11:50 AM
bernie from bklyn

is there any oversight on the Gowanus Expressway construction project? this is one of the most offensive examples of these construction companies rubbing it in the noses of the taxpayers in this city. it's so obvious that they are doing an unbelievable job of stretching this project on ad infinitum and no one says peep about it. these people have jobs for LIFE at the expense of the taxpayer and residents in brooklyn. shameful.

Jul. 30 2012 09:19 AM

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