SAIC to Pay $500 Million to Settle New York CityTime Fraud

Science Applications International Corp., the contractor hired to overhaul payroll systems for New York City agencies, agreed to pay $500.4 million under a deferred-prosecution agreement to resolve claims that it conspired to defraud the city.

SAIC admitted it failed to investigate claims that a manager of the CityTime payroll project directed staffing tasks to a single subcontractor, Technodyne LLC, in exchange for kickbacks, according to documents unsealed today by federal prosecutors. The McLean, Virginia-based company also failed to notify the city of the claims, according to the agreement.

“The people of New York City have half a billion reasons to celebrate,” Manhattan U.S. Attorney Preet Bharara said at a press conference today, calling the scheme the “single largest fraud ever perpetrated on the city.”

The $500 million, which the company must pay to the U.S. Attorney’s office “within one business day,” represents the “largest by dollar amount arising out of any state or government contract fraud in history,” Bharara said. It ensures the city will be reimbursed for all the money it overpaid, plus a penalty, he said.

The city was billed about $690 million for SAIC to create a now-operational Web-based, time-keeping payroll management system, according to Marc LaVorgna, a spokesman for Mayor Michael Bloomberg. City officials intend to use the windfall to help close a $3 billion deficit in a $72 billion budget projected for 2014, Bloomberg said.

‘Face Justice’

“The lesson we take away from this is, if you attempt to defraud the public you will be caught, you will regret it and you will face justice,” Bloomberg said. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Payments to Technodyne ballooned to $325 million from $17 million, even as the contract was amended to transfer cost overruns to the city, according to a statement of responsibility submitted by SAIC. The scheme was a “fraudsters’ field day that lasted more than seven years,” Bharara said.

“Those responsible for directly managing the project failed to enforce the company’s procurement policies in ways that allowed the irregular Technodyne relationship to continue,” according to the company’s statement of responsibility.

Manager Arrested

The project manager, Gerard Denault, was arrested in May and charged with fraud and conspiracy. His case is pending. Bharara wouldn’t comment on whether the company’s other government contracts were under investigation. Prosecutors have charged 11 defendants plus Technodyne. One died, two pleaded guilty, and eight cases are pending, Bharara said.

SAIC agreed to the filing of one count of conspiracy to commit wire fraud and agreed to disgorge proceeds of the offense, including $370.4 million in restitution to the city and a $130 million penalty, according to a Justice Department letter describing the settlement. An independent monitor will be appointed to ensure compliance with the accord and with procurement policies.

If SAIC pays the money and cooperates with federal investigators, the U.S. will seek to have the charges dropped after three years, according to the agreement.

The company provides scientific, engineering, systems integration and technical services to governments, including U.S. intelligence and defense agencies, and the Department of Homeland Security, according to its website.

Billings Forgiven

The agreement calls for the company to forgive $40 million more in invoiced billings to the city, Bharara said. The U.S. attorney said his office has liens on $52 million more in illegal gains of individual defendants. A total of $466 million will be remitted to the city by the Justice Department, according to prosecutors.

Depending on the resolution of frozen assets, the project will have cost the city $134 million to $186 million of the $692 million billed, LaVorgna said in an e-mail.

U.S. District Judge George Daniels approved the agreement today, according to Bharara’s office.

“We welcome this settlement as an important step in our efforts to move forward as a better, stronger company,” SAIC Chief Executive Officer John Jumper said in a statement today. “We have implemented strong improvements to our compliance program and have new leadership in place. Our financial position is solid.”

SAIC rose 7 cents to $12.82 at 2:56 p.m. in New York Stock Exchange composite trading. The shares climbed 3.7 percent this year before today.

The case is U.S. v. Science Applications International Corp. (SAI), 11-cr-00121, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net; Henry Goldman in New York at hgoldman@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tannenbaum at mtannen@bloomberg.net

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