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April 25, 2007

Kickback scandal to hit IT industry

Posted by David Hunter at 10:50 AM ET.

When the first reports surfaced last week that a number of big name IT companies (including Microsoft) had participated in widespread kickbacks on US government contracts, it wasn’t clear to me exactly how Microsoft was allegedly involved. Today, the details are a little clearer in Lorraine Woellert’s report at Business Week. First the big picture:

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.

There are more details in the article, but the problem is with the payment of referral fees which aren’t uncommon or illegal in many business situations, but have to be disclosed on government contracts. The way the fees were so visibly institutionalized at these companies indicates to me at least that they didn’t understand what trouble they were getting themselves into with the government. Where’s a lawyer when you need one?

As for Microsoft:

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), Lockheed Martin (LMT), Oracle (ORCL), American Management Systems, CACI International (CAI), 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. 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.”

So Microsoft isn’t on the hook right now, but they and a number of other big names still seem to have a significant risk. I wonder if it will rate a footnote in tomorrow’s quarterly report?



Filed under Accenture, Cisco, Coopetition, Dell, General Business, Governmental Relations, HP, IBM, Legal, Microsoft, Oracle, SAP, Sun

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