SF key officials embroiled in byzantine legal case
San Francisco Chronicle
February 14, 2012
It’s not every day a sitting mayor is called to the witness stand.
But the case of a nearly decadelong legal battle between the city of San Francisco and two of its former technology vendors over allegations of a kickback scheme is anything but routine.
It has embroiled the highest levels of city officials, from Mayor Ed Lee to City Attorney Dennis Herrera to San Francisco Public Utilities Commission General Manager Ed Harrington, and spotlighted a contracting process under former Mayor Willie Brown‘s administration that a city official exploited for payouts.
The city maintains the case is about fighting corruption, while the companies argue they are the victims of an overzealous prosecution.
The aggressive pursuit of those believed to be involved, initially by Herrera and then-City Controller Harrington, has opened up the city to a lawsuit that could cost it more than $7 million and put it on the hook for years of legal bills. Even as the two technology vendors are wrangling with the city in court, the owner of another company involved in a kickback scam has slipped away after defaulting on $16 million in debts. That company, Government Computer Sales Inc., was hired to improve the city’s building permit tracking system but did no work in return for $500,000 in fees.
Fraud and kickbacks
Herrera, who had been city attorney for about a year after campaigning to root out public corruption, sued Government Computer Sales and the top technology officer at the Department of Building Inspection, Marcus Armstrong, in February 2003 for fraud and related counts for taking kickbacks to steer contracts to the company. Armstrong pleaded guilty to federal criminal charges for stealing $500,000 from taxpayers and was sentenced to 30 months in prison. The head of Government Computer Sales disappeared after transferring company funds to a Caribbean bank, according to court filings.
The city added Cobra Solutions and TeleCon, which operated as a joint venture, to its lawsuit in April 2003, alleging they had also participated in the scheme with Armstrong. The affiliated companies’ owners, James and Debra Brady, have countersued the city, contending their businesses were ruined by false allegations, and by being frozen out of bidding on city contracts.
According to their attorneys, Cobra made the payments to Monarch believing it was a legitimate subcontractor that Armstrong told them to use. Armstrong, in his role as a building inspection official, would then approve the work and indicate it had been completed, their attorney said.
In closing arguments at trial, attorneys for the city conceded that there was no evidence the Bradys intentionally defrauded the city, but the city asserted that the Bradys’ companies were still liable for fraud because they were either deliberately ignorant of, or recklessly disregarded, a scam being committed by one of their subcontractors.
“You can’t submit bills without verifying work was done,” said Ara Jabagchourian, an attorney for the city.
The city is suing Cobra for breach of contract and related counts for not verifying the work, failing to pay subcontractors, and refusing to submit to a city audit. Cobra and TeleCon countersued the city for breach of contract and civil rights violations, alleging the city illegally withheld payments that were due and froze the company out of city contracts. Officials say Cobra was removed as a city vendor because the company was losing money.
G. Whitney Leigh, the Bradys’ attorney, contends the city decided to “sue first, ask questions later.”
“They devastated these people. They ruined their lives,” Leigh said. “They knew within weeks Cobra wasn’t involved in any kickbacks. Now, based on the same evidence they had 10 years ago, they recognize what everyone knew all along: that this is an innocent company.”
The case began after city officials in the late 1990s set up a system to prequalify technology vendors to bid on city contracts to stop dozens of different departments from independently ordering computer products that sometimes weren’t compatible.
Cobra qualified for the program in 1998 and went on to become one of the city’s highest-ranked technology vendors, culminating in $16 million in contracts in 2002 working with the city’s Police Department, airport and building inspections department, according to court documents. Its owners were politically connected. Brown appointed James Brady to an advisory board on homelessness, and Lee testified that he played flag football with Brady.
Rejected three times
Government Computer Sales also sought to be approved as a preferred city vendor but was rejected three times for not meeting the requirements, including having a business presence in San Francisco, according to the 2008 deposition of Deborah Vincent-James, who was executive director of the Committee on Information Technology that qualified prospective vendors.
She described Government Computer Sales as “a fraudulent company from day one.”
Government Computer Sales was only allowed into the pre-qualification program after the company bypassed the committee and city attorney by going directly to then-Mayor Brown, Vincent-James testified at her sworn deposition. She has since died, but her deposition was read into the court record.
Vincent-James said Lee, then the city purchaser, told her to qualify Government Computer Sales as a contractor after Brown had directed Lee to do an alternate evaluation process.
“I just know that (Lee) told me that they were to be admitted,” Vincent-James said in her deposition. “It was about a two-minute conversation.”
The decision came after Government Computer Sales hired a former colleague of Brown’s in the Legislature, Terry Goggin, to intervene on their behalf, Vincent-James testified.
Brown, now a Chronicle columnist, said in an interview that he had no recollection of Government Computer Sales or meeting with Goggin on their behalf, but would not have directed staff to award a company vendor status.
“That would never be what I, or any other mayor, would do,” he said.
Lee, when asked in his deposition whether he had a role in approving Government Computer Sales as a vendor, replied: “I’m unclear about that. I can’t recall a lot of details about that.” He wasn’t asked about Government Computer Sales when he testified last week, and Jabagchourian called Vincent-James’ assertions “hogwash.”
At trial, an attorney for Cobra argued that city officials, embarrassed and eager to appear proactive, cracked down on his clients by freezing payments and denying new contracts even after Cobra executives had raised questions about Armstrong in 2000.
The city argued it was being prudent after attorneys for Cobra refused to allow the city to conduct an audit to determine what was going on. Cobra’s attorneys assert in court documents that the company cooperated with the FBI’s investigation of Armstrong after Herrera turned over his information to the U.S. attorney’s office, which found no criminal activity on their part or on the part of any other city official.
The Bradys are seeking more than $7 million in damages for the lost value of their companies and unpaid contracts. Depending on the verdict, the city could be responsible for millions more for Cobra’s legal fees. The city is already paying an outside firm to represent it after the state Supreme Court ruled Herrera’s entire office had to be removed from the case because his firm has once represented Cobra before he became city attorney.
Sending ‘a message’
The city is seeking damages ranging from $24,000 – Cobra’s cut of those fraudulent transactions – to $267,000 – the amount Armstrong falsely billed the city through a shell company he directed Cobra to use. The city is also seeking $1 in punitive damages to “send a message,” Jabagchourian said.
“At the end of the day, the city attorney probably was a little too aggressive,” Jabagchourian told the jury. “There’s fault going both ways, don’t get me wrong. But the city attorney and controller were looking to protect taxpayers’ money. That’s their job.”