Was Uncle Sam Bilked by IT Kickbacks?

The Justice Dept. has accused some of the tech industry's biggest companies of running secret rebate and commission schemes, and more charges are expected

With some big players already named in lawsuits alleging a widespread kickback scheme, the information technology industry will see further scrutiny as federal prosecutors pursue additional charges in coming weeks. Last week, the Justice Dept. filed civil charges against Hewlett-Packard (HPQ), Sun Microsystems (SUNW), Accenture (ACN), and Accenture subsidiary Proquire as part of a two-year investigation involving potentially billions of dollars in government procurement projects.

The Justice Dept. unsealed complaints Apr. 19 in U.S. District Court for the Eastern District of Arkansas in Little Rock, charging the four companies with fraud and conspiracy in their attempts to win lucrative government contracts. Prosecutors also made public six whistleblower lawsuits that had been filed under seal in September, 2004, by former Accenture employee Norman Rille and Neal Roberts, a onetime partner with Deloitte & Touche who has investigated alliances between technology vendors.

The lawsuits accuse at least a dozen technology vendors of operating rebate and commission programs, referral systems, and strategic alliances that they kept secret from the government agencies that bought their systems or followed their advice. The practice has been going on in some cases for a decade, the lawsuits claim. The Justice Dept. is seeking treble damages plus civil penalties.

Vigorous Defense Promised

Justice is expected to join more cases in the coming weeks, according to people familiar with the investigation. "I don't think you've seen the end of it," says Von Packard, a partner at Packard, Packard & Johnson in Los Altos, Calif., one of the firms representing the plaintiffs.

Accenture spokeswoman Roxanne Taylor says the company will vigorously defend itself. "We believe we have acted appropriately, and we'll fight the whole thing. We intend to defend our position, and expect to prevail," Taylor says.

Hewlett-Packard said in a statement that it did nothing wrong. "HP is proud to partner with the government and is confident its business practices are appropriate," HP spokeswoman Emma Wischhusen said in a written statement. "We plan to vigorously defend this action and look forward to demonstrating that HP has done nothing wrong."

Some Companies Dropped

The Justice Dept.'s involvement is significant. The original cases were filed under the False Claims Act, which allows individuals to bring suit on behalf of the U.S. in return for up to one-third of any damages recovered. Most cases proceed in civil court without the federal government's involvement. U.S. Attorneys often save their prosecutorial muscle for false-claims cases in which significant money is at stake or where evidence of wrongdoing is particularly strong. The U.S. joins only about 22% of false-claim cases but recovers about 98% of claims, according to Taxpayers Against Fraud, a watchdog group based in Washington.

According to court documents, the original six civil cases Rille and Roberts filed will proceed against Cisco Systems (CSCO), Electronic Data Systems (EDS), SAP (SAP), Oracle (ORCL), SeeBeyond Technology, and Dell (DELL). At least five other defendants remain cloaked under court seal, including one identified in court documents as a wholly owned subsidiary of IBM (IBM).

Boeing (BA), Raytheon (RTN), Microsoft (MSFT), SAIC (SAI), and Exostar were named in the original complaints, but the court, at the urging of prosecutors, dismissed them from the cases last week. On Apr. 24, plaintiffs asked the court to also dismiss CACI International (CAI), American Management Systems, and Lockheed Martin (LMT). The lawsuits themselves describe a network of relationships that reads like a Who's Who of the nation's biggest IT companies. Based on documents and information he received while a senior manager at Accenture, Rille claims in one of the original lawsuits, "all the major systems-integration consultants and technology vendors were and are engaged in the same kickback scheme and associated conspiracies."

'Influencer Fees' Outlined

Packard declined to comment on any particular case or corporation, but he described the alliances and reward system as a conflict of interest that ultimately costs taxpayers. "You are supposed to disclose and certify what conflicts of interest you have. The government is supposed to know who is paying their contractors and how they're being paid," Packard says.

In an example detailed in one government complaint, HP in November, 2002, launched PartnerONE, a program to boost sales and "triumph over competition" by paying "influencer fees," rebates, and other rewards to companies that steered federal business to HP. The computer maker's partners could profit, for example, by steering federal customers to buy HP hardware or reselling HP equipment to federal agencies as part of bigger systems-integration contracts.

Prosecutors claim that HP teamed up with Accenture, GTSI (GTSI), IBM, BearingPoint (BE), and other companies that were promised financial perks or commissions in return for persuading federal agencies to buy HP technology.

Fair Competition at Risk

Prosecutors say in one instance, Accenture billed HP on Aug. 27, 2003, for "influence and favorable treatment" that led the Defense Logistics Agency, part of the Defense Dept., to buy equipment from HP. The computer company paid Accenture nearly $788,000 in "influencer fees" between 2004 and 2005, the government alleges.

In another example, GTSI in 2005 asked HP to pay a fee in return for convincing the U.S. Army to choose HP hardware over that of Dell or Sun. Another scheme involved HP's New Business Opportunity program, which offered competitive pricing to partners that drummed up new business for HP. But prosecutors say those competitive prices weren't delivered to the end customer, in this case the federal government.

Because of the fees and commissions, "HP was awarded prime contracts with the U.S. government," prosecutors claim in their filing, leading the government to buy products and services it might not have bought if it had complete information. In the case of Accenture, the company's "focus on profits and alliance partner revenue, rather than the interest of their government clients, has destroyed their independence and eliminated fair competition," according to a government court filing.

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