Taxpayers overcharged millions in Sun Microsystems Deal

Changes Spurred Buying, Abuses
By Robert O'Harrow Jr. and Scott Higham
The Washington Post
Wednesday 23 May 2007

Taxpayers overcharged millions in Sun Deal, auditor says.

In February 2005, an auditor at the General Services Administration presented evidence to agency leaders that one of the government's top technology contractors was overcharging taxpayers.

GSA auditor James M. Corcoran reported that Sun Microsystems had billed the government millions more for computer software and technical support than it charged its commercial customers.

If true, the allegation was grounds to terminate the contract and launch a fraud investigation. Instead, senior GSA officials pressed last summer to renew the contract.

That decision meant the government's leading contracting agency would be able to continue collecting millions of dollars in what are called industrial funding fees from Sun under rules that permit the GSA to take a percentage of every sale made to the government. It also meant that taxpayers would pay millions more than necessary, according to congressional investigators.

"We thought of ourselves as being, not a part of the government, but as being a business, and we looked to profit on our customers," said GSA contracting officer Herman S. Caldwell Jr., who warned his superiors against renewing the Sun contract. "When a government buying office becomes a profit center, then bad things are likely to happen."

The circumstances surrounding the Sun contract are now being scrutinized by the GSA's inspector general, the Justice Department and members of Congress.

"Why did GSA agree to do business with Sun despite warnings of possible fraud?" Sen. Charles E. Grassley (R-Iowa), ranking minority member of the Senate Finance Committee, said in a statement to The Washington Post.

GSA officials declined to comment for this article. In testimony before Congress in March, GSA Administrator Lurita Alexis Doan said the agency made a good decision on behalf of taxpayers by renewing the contract. She also said a top aide had looked into the auditor's allegation and told her "nothing was there."

Sun also declined to comment. A GSA official told congressional investigators that a Sun vice president acknowledged past problems with pricing. The Sun official also said the company spent nearly $2 million to fix the problems and had submitted a plan to avoid a recurrence.

The Sun contract illustrates some unintended consequences of efforts a decade ago by Congress and the executive branch to streamline government buying at a time when reinventing government was the rage. The changes expanded the kinds of items that could be purchased through the GSA's buying programs and narrowed the government's ability to audit contracts and verify that federal agencies were getting the best possible prices.

The changes spurred a boom in buying. During the past decade, corporate sales to federal agencies through the GSA's flagship contracting program, known as the Multiple Award Schedules, rose from $5 billion to more than $35 billion. Interviews, audit reports and contracting documents show that agencies have used the GSA to avoid true competition and steer work to preferred companies, resulting in cases of waste, fraud and increased cost to taxpayers.

"This has been a scandal of great proportions," said David E. Cooper, until recently the director of acquisition and sourcing management at the Government Accountability Office, the investigative branch of Congress. "Our work and the work by the Defense Department inspector general and the GSA inspector general all show hundreds of millions, if not billions, that has been wasted."

Abuses have been well-documented.

In 2001, auditors found that GSA contracting officials failed in 10 of 11 price negotiations to secure the best deals for photocopiers largely because they "too readily accepted vendors' unsubstantiated or inaccurate information." Auditors put the cost to taxpayers at $195 million.

Last year, Oracle settled the largest fraud case involving the GSA schedule program, agreeing to pay the Justice Department a $98.5 million fine following allegations that a company it acquired had inflated prices for software it sold to the government.

The streamlining efforts have drawn contractors and government agencies into close relationships, often referred to as partnerships. Companies are no longer required to certify their prices on services as most favorable to the government even as the number of federal contracting officials watching the prices has not kept up with the growth in spending.

"It's kind of like going into a used-car dealership and being too trusting," said Angela B. Styles, a corporate lawyer who served as President Bush's chief contracting official from 2001 to 2003. "I don't think you really want a partnership with a used-car dealer because you're probably not going to get the best car at the lowest price."

Reinventing Government

Congress created the GSA's buying program in 1949 to make it easier for the burgeoning federal bureaucracy to buy furniture, office supplies and other products. The government sought to leverage its position as the world's leading buyer to get the lowest prices.

It permitted officials across the government to buy commonly used items and supplies, such as pencils and paper, directly from approved vendors, who were given open-ended contracts to supply products at pre-negotiated prices.

The products were then put on GSA lists known as schedules. Contractors who deceive the government about their prices face civil and possible criminal penalties under the False Claims Act.

In the 1990s, lawmakers and contractors argued that the system was too cumbersome and the products and services too limited. Congress began streamlining and expanding the GSA's contracting programs. But the GSA's inspector general warned that the proposals would weaken oversight.

One proposal, to cut back on contract audits, "would strip the government of one of the most important tools" for detecting overpricing and "would hand contractors 'carte blanche' to violate contract terms," the inspector general wrote.

By 1997, a year after some of the changes went into effect under the Clinger-Cohen Act, the GSA had started to become one of the government's biggest brokers of sophisticated information technology and consulting services to federal agencies.

Over the next 10 years, information technology spending through the agency increased tenfold, to more than $17 billion. The number of GSA officials keeping watch over increasingly complex contracts remained relatively flat, however, and audits plummeted.

"One of the biggest problems is there are too few federal employees to administer this program," said D. Kent Goodger, a contracting official for 35 years who now teaches procurement classes for the federal government. "The contractors are able to take advantage of Uncle Sam and the American taxpayer."

The GSA benefited from the surge in business. In 1996, the agency began funding its operations by collecting a percentage of the sales it handled. These industrial funding fees - about $266 million last year - pay the agency's budget.

Contracting experts contend the fee structure creates a powerful disincentive for the agency to negotiate lower prices with vendors.

"You couldn't design a better system to make accountability impossible," said Daniel Guttman, a government contracting expert at Johns Hopkins University Center for the Study of American Government. "We simultaneously increased the incentive to get masses of contracts out the door and assured no one will look and see how the money is being spent."

Last fall, the GSA reorganized the buying program to improve financial controls and make federal purchasing easier. Rep. Thomas M. Davis III (R-Va.), who helped write the legislation, said the reorganization would allow the agency to operate more like a business.

Davis, the ranking minority member of the House Oversight and Government Reform Committee, said the reorganization "will transform federal purchasing by bringing GSA in line with the commercial market it must capture for its federal agency customers."

At an Impasse

When the issue with Sun Microsystems's prices first surfaced in an audit in 2004, it raised a dilemma for the GSA.

Sun was selling tens of millions of dollars a year in software and services to agencies across the government, and the GSA stood to lose millions in industrial funding fees. Details on the prices remain secret because they are considered to be proprietary information. But the audit findings - that Sun's commercial customers were getting discounts not provided to the government - could not be ignored by agency officials.

The GSA extended the existing contract and began extensive negotiations with Sun. But after more than a year of talks, Caldwell, the GSA contracting officer assigned to the deal, lost his patience. In February 2006, he wrote an e-mail warning a top GSA official that the contract was likely to be referred to the Justice Department for "civil fraud action."

A short time later, senior GSA officials removed Caldwell from the negotiations.

"The message that contracting management is sending to contracting officers is that if you play too rough with contractors, you will be given a bad report card and sent to a 'reform school,' " Caldwell said in a written complaint to a lawmaker.

In May 2006, Lurita Doan became the administrator of the GSA. Doan, the former owner of a technology company, came to the job pledging to work more closely with industry to make it easier to do business with the government.

"I am committing to you here today that we are going to fix these pesky issues," Doan told a group of GSA contractors days after taking office.

By Aug. 14, 2006, negotiations between the GSA and Sun were deadlocked, according to interviews, congressional testimony, correspondence and a staff memo by investigators for Rep. Henry A. Waxman (D-Calif.), now chairman of the House Oversight and Government Reform Committee.

Mike Butterfield, the new contracting officer, gave what is termed an "impasse briefing" to senior GSA officials, including James A. Williams, who oversees the schedule program.

Williams was given a fact sheet that estimated Sun had overcharged the government as much as $77 million over a six-year period, according to the Waxman memo.

The fact sheet said that accepting Sun's latest terms could result in the loss of another $14.4 million.

Grassley later wrote a letter to Williams questioning the GSA official about his involvement in the Sun contract and his attitude toward the deal: "At this point, you reportedly stated: 'This is a bad deal. . . . We should not go forward with this contract' or words to that effect."

On Sunday, Aug. 27, one of Williams's deputies forwarded an e-mail to Doan telling her that the contract was likely to be terminated. Doan replied three minutes later: "This is truly unfortunate" and said there would be "serious consequences" in lost business for her agency, according to the Waxman memo.

Williams and Doan later told lawmakers that they discussed the fact that Sun could sell its products to the government through another, smaller federal buying program run by the National Aeronautics and Space Administration. NASA would then collect the fees, rather than the GSA.

Two days later, Doan told the inspector general, whose auditors had turned up the evidence of pricing problems, that it was essential for the GSA to sign the contract with Sun, according to Waxman's memo. Butterfield, the contracting officer, continued to balk.

On Aug. 31, Williams had a conversation with Butterfield about the contract, expressing an apparent shift from his view two weeks earlier. Butterfield later told congressional investigators that Williams said: "Lurita wants this contract awarded. I want it awarded."

In an interview with The Post, Williams said he did not recall saying "I want it awarded." He said he urged contracting officials to continue negotiating for the best deal for taxpayers after Sun expressed a willingness to provide concessions. Williams said he had no role in the final decision.

At the time of their conversation, Williams asked Butterfield if he wanted to continue working on the contract. Butterfield declined, he later told congressional investigators. Hours later, a new contracting officer, Shana Budd, was assigned to replace Butterfield.

On Sept. 5, Doan met with senior officials from the GSA's inspector general's office, who told her that Sun was "using defective and inaccurate information to cheat the government out of millions of dollars," Grassley recounted in his letter.

"I'm Dumbfounded

As it negotiated with the GSA, Sun hired the Washington Management Group, a consulting firm that employs former senior GSA officials, the Waxman memo said. The firm operates the Coalition for Government Procurement, an association of GSA contractors that includes Sun.

E-mails show that Doan communicated with Larry Allen, a vice president of the coalition and a WMG executive, during the negotiations.

"I understand that new life has been breathed into the Sun situation," Allen wrote in a Sept. 7 e-mail to Doan. "Thanks for any help you provided."

Minutes later, Doan responded: "Thank you for alerting me. I feel confident that with Jim Williams' involvement, an agreement will be reached to everyone's satisfaction."

The following day, Budd, the new contracting officer, signed off on the Sun contract.

Budd later received a $1,400 cash bonus "for stepping in to negotiate a highly sensitive and political contract with a strategically important vendor after impasse occurred," according to the Waxman memo.

Grassley and Waxman later criticized Budd for her role.

"She allegedly agreed to terms that could cost the government tens of millions in lost savings over the next three years," Grassley wrote in one of his letters to GSA.

Budd defended herself, saying she made the decision without any pressure from GSA leaders, in an e-mail released at a March 28 hearing by Waxman's committee. It was read by Rep. Davis. "I'm astonished! I'm dumbfounded! This is destroying my well deserved good name and reputation," Budd wrote. "I know beyond a shadow of a doubt that every action I took was in the best interest of the Government and the American taxpayer - of which I am one!"

In a report prepared by the Republican staff of the House Oversight and Government Reform Committee, investigators questioned Waxman's findings and defended Doan and the Sun contract. "There is no evidence the Administrator acted improperly with respect to the Sun Microsystems contract," the report said, adding that "many of the issues" had been resolved before Budd took over the contract.

Doan testified before Waxman's committee that she played no role in the Sun negotiations or in the assignment of contracting officers. She said Williams, her aide, spoke of the fraud allegations "in what seemed to me a, sort of, lackadaisical manner" and told her "nothing was there."

Doan also told Grassley, "I have never met nor had any discussions with Sun Microsystems managers" and that she "had no knowledge of the negotiations or the basis for decisions made regarding this contract."

Waxman responded that Doan's statements "appear to be misleading" based on the committee's review of the e-mails of her multiple contacts with Larry Allen.

Allen told The Post that he approached Doan in his capacity as vice president of his trade group, not as an executive of the consulting firm. He said the trade group normally does not get involved individual contacts, but it did so in this case because he thought Sun was being treated unfairly.

Doan told Waxman she believed she did the right thing.

"What I was interested in is making sure that we were getting the very best value for the American taxpayer," she testified.

On April 12, the U.S. attorney in the Eastern District of Arkansas filed suit against Sun, alleging that the company violated the False Claims Act when it "made false statements to the government about its commercial sales practices and the discounts it offers to its commercial customers."

In a statement, the company declined to comment. "The pending court case is the appropriate forum to address these issues," it said.
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Researcher Alice Crites contributed to this report.