Three sentenced for $100 million fraud in botched automated payroll project in New York City

timeclockThe conviction of three consultants charged in a $100 million fraudulent scheme involving a project to modernize the payroll system in New York City offers yet another lesson of the perils of contracting out.

On Monday, the three defendants each received sentences of 20 years in prison for their role in implementing the automated payroll system known as CityTime, whose cost mushroomed from an initial budget of $63 million to more than $700 million over more than 10 years.

“It’s a classic tale of greed and corruption,” U.S. District Judge George Daniels said. “It’s the largest city corruption scandal in decades. It is unparalleled in its amounts.”

The corrupt contractors lined their pockets with millions of dollars as they accepted kickbacks, funneled huge sums into shell companies, deposited stolen money into overseas accounts, inflated bills and maintained a bloated payroll with excessively paid and even fired employees.

The defendants include Gerald Denault, 52, who was the project manager of the prime contractor, Science Applications International Corp. SAIC is a Fortune 500 company that generates more than 90 percent of its business through government contracts. Under an agreement with the federal prosecutor in 2012, SAIC paid the city $466 million for the CityTime fraud.

Also sentenced were Mark Mazer, 50, a former consultant of the city’s Office of Payroll Administration, and his uncle, Dmitry Aronshtein, 53, who worked for a subcontractor.

The CityTime scandal was a major embarrassment to former Mayor Michael R. Bloomberg, who promised to bring a business ethos and the latest technological know-how to New York City.

During his 12 years in office, the portion of the city’s budget devoted to contracting increased by about a third to more than $10 billion.

From the start, CityTime encountered opposition from unionized workers, who, concerned about privacy, objected to the new payroll system’s use of hand scanners for clocking in.

Daily News reporter Juan Gonzalez broke open the scandal with a series of articles about CityTime that included revelations about cost overruns and excessive payments to computer consultants who earned as much as $400,000 a year, easily four times the pay of city information technology workers.

The municipal union District Council 37 ran a series of white papers that called attention to wasteful spending on contracting out, including the CityTime debacle and another project to upgrade the city’s emergency communications system. The original cost of the 911 upgrade overseen by Hewlett Packard was $380 million, and it skyrocketed to $666 million by 2011.

“Politicians have given out contracts like candy,” said Lillian Roberts, executive director of District Council 37, which represents tens of thousands of municipal employees in New York City. More than a year ago, Bloomberg and former New York City Comptroller John C. Liu agreed to assign the CityTime work to computer workers represented by DC 37.

Roberts said the CityTime scheme—perhaps the greatest municipal theft in the city’s history– pointed to the need for greater oversight of contracting out, which she blamed for vast waste of tax dollars, the loss of civil service jobs and the siphoning off of funds for social services. Recently, the new comptroller, Scott Stringer, announced steps to monitor contracting out more closely.

Kickbacks and Money Laundering

Between 2003 and 2010, the city paid SAIC more than $628 million. SAIC used over $464 million of those funds to pay a subcontractor, Technodyne to hire IT personnel.

The principals of Technodyne LLC, Reddy and Padma Allen, who face charges of wire fraud and money laundering, fled to India, according to the United States Attorney’s Office of the Southern District of New York. Denault, the former CityTime project manager, was charged with receiving $5 million in kickbacks from Technodyne and its principals.

Denault received a $5 kickback from Reddy Allen and Padma Allen for every hour Technodyne billed the city for labor, according to the prosecutor.

Mazer received kickbacks by channeling $65 million to a subcontractor controlled by Aronshtein and $23 million to another subcontractor controlled by Victor Natanzon, who earlier pled guilty along with four other defendants.

On the day of the sentencing, Manhattan U.S. Attorney Preet Bharara said in a statement, “These defendants are being justly punished—through lengthy sentences and forfeiture of over $40 million in cash and property—for orchestrating one of the largest and most brazen frauds ever committed against the city. This Office’s CityTime prosecutions have held accountable culpable individuals, as well as SAIC, the contractor at the center of the scheme, and through penalties and restitution of over $55 million, has made the City economically whole.”

An Invitation to Waste and Corruption

After sentencing the defendants and sending them away to prison, Judge Daniels criticized the procurement process in New York City.

“The city’s contracting process has created an atmosphere that lacks adequate and effective oversight,” he said. “It is an invitation for not just waste, but corruption and fraud.”

Last year, on his weekly radio program, Bloomberg remarkably said the city in a sense is “lucky” that the fraud happened.

“The whole system cost us something like only $100 million, and it should have been many times that,” he said, as quoted by gothamist.com. “We were lucky because of the fraud… In the end it turned out that because of the recovery that we save a lot of money. And it certainly works.”

Gregory N. Heires is senior associate editor at Public Employee Press, the official publication of District Council 37, which represents 120,000 municipal workers and 50,000 retirees in New York City.  He blogs at The New Crossroads.

Read other Talking Union posts by Gregory Heires.

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