MOORLACH UPDATE — Tata Litigation — September 17, 2013

The Board just concluded another weekly meeting. If you want a sampling of a topic that was covered in closed session, then the first article below, in the Voice of OC, provides it. At the March 19th Board meeting, we were given a choice of several firms from which to choose in order to pursue litigation against Tata Consultancy Services (see MOORLACH UPDATE — PTMS — February 12, 2013). I preferred a different firm than the one approved, which I selected based on their positive experience in a similar matter for a neighboring county. It gets a mention in this analysis of the County’s efforts to deal with this software code writer. This IT project started when I was still the Treasurer-Tax Collector. There was an incredible amount of preparatory work that was done, over a number of years, to lead up to the writing of the code, which was outsourced to a firm that just failed miserably. It is a major disappointment to see such a methodical and professional process for this critical project derailed in this manner.

The second piece, in the OC Register, mentions me as the former Board representative on the CalOptima Board.

County Lawsuit Claims Fraud by Computer Contractor

By NICK GERDA

In the latest development of a long line of controversial information technology cost overruns, Orange County supervisors are set Tuesday to discuss the county’s fraud lawsuit against contractor Tata Consultancy Services.

The federal lawsuit claims that the software vendor based in Mumbai, India, misled and defrauded the county into spending millions of tax dollars on property tax software that failed.

“The county has suffered millions of dollars of damages as a result of defendants’ wrongful conduct, and it will continue to suffer damages for the years it will take to a replacement for the failed project,” the county alleged in its April 30 lawsuit.

The county asserts that Tata, also known as TCS, engaged in “promissory fraud, intentional misrepresentation, fraudulent concealment, and negligent misrepresentation” as well as breach of contract.

According to court records, Tata has not filed a rebuttal, and its attorney didn’t return a message seeking comment.

Orange County government has a long history of cost overruns on such outsourced IT contracts, with allegations that vendors underbid contracts, then boost their price later through change orders.

Even after the Tata suit was filed, a majority of county supervisors awarded a $74-million IT contract to a firm at the center of a massive fraud case in New York City and a $132-million contract to a company that hiked its price by $11 million beyond the "final offer" it had previously promised to honor.

In Tata’s case, the firm and the county have been in mediation over the suit, which postpones the courtroom argument usually seen in lawsuits.

According to the county attorneys’ memo filed with the court in June, “The county contacted the defendants immediately upon filing the complaint, advised them of the filing of this action, and suggested that the parties consider mediating their dispute before proceeding with the litigation.”

As of mid-August, the two sides had agreed to “seek a confidential third party review” of the software as part of the mediation effort. That review was projected to take two months.

Attorneys for the county didn’t return calls seeking an update on the status of the case.

The suit claims that the problems started in 2007 when the county engaged Tata to develop software that could handle most of the county’s property tax responsibilities.

The software is critical for the county, which collects more than $4.5 billion per year in property taxes to help pay for schools and services provided by cities, the county and various special districts.

The program is supposed to calculate the property taxes for more than 1 million items of property, such as land, homes, boats and aircraft.

Until now, county officials have been relying on an aging mainframe computer system known as ATS, developed in the 1980s and 1990s. That system uses an obsolete programming language that, the county asserts, isn’t even supported by the company that has the rights to it.

To replace it, the county decided to split ATS’ functions into two systems, with the contract for the property tax system, known as PTMS, going to Tata in July 2008.

Tata was chosen based on what the county claims it later learned was “a series of false promises and intentional misrepresentations” by Tata.

The county alleges in its suit: "Defendants promised they had the capabilities to perform a project that was well beyond the capabilities of the personnel the defendants intended to provide for the project, and the defendants made promises to complete the project on a budget and according to a timeline with which they had no intention of complying."

Tata had promised that the software would be finished by July 2010 with a total county cost of just under $8 million, according to the suit.

The company also claimed it would assign 16 people to the project, including two property tax experts: Terri Sexton of California State University and Sam Birchfield of Ryan and Co., a tax services firm.

Instead, Tata sought and received millions of dollars in cost overruns and passed its deadlines twice before the county refused to grant any further money. The county alleges it has spent “millions of dollars” on county employee salaries and “hundreds of thousands of dollars” on other consultants because of Tata’s incompetence.

Among the issues, “only five of the sixteen promised personnel ever performed a role” for Tata in the project, the county claims.

As for the two experts, the county asserts that “TCS never had either of those experts play a meaningful role, if any role at all, on the PTMS project” despite numerous county requests to seek their expertise.

The county complained that Tata also assigned a project manager who “lacked the qualities needed to drive a complex project on schedule,” then replaced him with another project manager who was “incapable of managing a complex project like the PTMS project.”

According to the suit:

Yet TCS left him in his position for more than two years despite a host of problems with TCS’s performance. Only in June 2012, almost four years after starting work on the PTMS project, did TCS appoint a project manager, Manoj Singh, with the requisite experience and skills, but by that point it was too late to rescue the project.

Notably, TCS had promised at the outset, in its 2007 RFP response, that Mr. Singh would be assigned to the PTMS project, but the County is informed and believes, and upon that basis alleges, that Mr. Singh played no role in the PTMS project until 2011 and did not work on-site on the PTMS project until 2012.

Additionally, Tata “significantly understaffed” the project, according to the county.

“A number of project tasks required a specifically skilled and dedicated person, such as a database administrator and system tester. Instead, TCS often tasked one employee with two full-time jobs, leading to poor or slow performance of both roles,” the county wrote.

Because of Tata’s misrepresentations, the suit claims, the county had to devote several of its staff members “for years” to working with Tata “to address the issues plaguing the software project.”

Tata ultimately missed several deadlines for delivering the project, with the county agreeing to give the firm an extra 18 months and $3.9 million to finish the software.

Then in 2011, the firm ran out the county’s patience when is asked for another $5.8 million and another 18 months to finish the program, according to the suit.

Tata “promised to complete the PTMS project in three years and for under $8 million” yet “was now asking the county to accept a project that would take six years at a total cost of more than $16 million,” the suit alleges.

Facing a “poorly designed” product that would take “years of work” to finish, the county allowed Tata’s contract to expire in January, according to the lawsuit.

The software had errors that “created significant security risks that could have threatened the confidentiality and accuracy of the information for hundreds of thousands of taxpayers,” the county claims.

The county then filed suit in April, alleging:

TCS intentionally misrepresented the capabilities and expertise it intended to provide to the county to complete the PTMS Project while simultaneously ‘underbidding’ the cost and time required to complete the PTMS Project.

TCS’s goal, at all times, was to induce the county to select TCS over the other bidders for the PTMS project, to enter into a contract with TCS, and, subsequently, to increase the time and money TCS would receive to complete the PTMS project.

The county is being represented by Assistant County Counsel Jeff Richard and outside attorney Todd Theodora.

Theodora himself has been at the center of controversy surrounding potentially illegal votes by Janet Nguyen in her capacity as a board member at the county’s CalOptima health care plan.

In one of the CalOptima votes, Nguyen approved a $200,000 increase to Theodora’s contract days after receiving the maximum allowed $1,800 contributions from Theodora and his wife, Voice of OC reported last month.

The state’s Levine Act generally prohibits officials who are appointed to outside agencies from participating in the approval of contracts at that agency with their campaign contributors. The prohibition doesn’t apply to their directly elected positions.

Back in March, county supervisors hired Theodora for the Tata suit on a 4-1 vote, with Supervisor John Moorlach dissenting.

Tata is being represented by William Escobar of the New York-based firm Kelley Drye & Warren.

Judge Josephine Tucker is presiding over the case, No. 8:13-cv-00683-JST-JC.

You can reach Nick Gerda at ngerda, and follow him on Twitter: @nicholasgerda.

Could Nguyen’s CalOptima votes be conflicts?

Some believe they violate state law aimed at preventing trade of influence for donations.

By MIKE REICHER and TONY SAAVEDRA

It was a cozy affair – a gathering of high-powered Orange County hospital leaders paying tribute to county Supervisor Janet Nguyen.

About 15 executives huddled with Nguyen on Feb. 28, 2012, in the Lemon Heights home of Dan Brothman, CEO of Western Medical Center Santa Ana and senior vice president of operations for Integrated Healthcare Holdings Inc. They noshed on meatballs in Brothman’s family room and inked $5,000 worth of checks for Nguyen’s summer re-election.

Brothman would later describe the fundraiser as a “meet and greet” with Nguyen.

Two days later, Nguyen voted as a trustee for Orange County’s health network for the poor – Cal-Optima – to pay $750,000 to IHHI-owned hospitals to settle a lawsuit over unpaid bills. A unanimous vote March 1, 2012, by five members of CalOptima’s board of directors was held in closed session and has still not been disclosed by CalOptima.

The 2009 breach-of-contract lawsuit by IHHI alleged CalOptima failed to pay Integrated Healthcare hospitals for $2 million worth of services to Medi-Cal patients covered by CalOptima. Court records show it is one of a number of similar suits filed by hospitals against the agency.

The Orange County Register confirmed the vote and the settlement through court documents and interviews with officials involved in the case.

State law prohibits officers with special agencies, such as CalOptima, from voting on certain items benefiting donors who have contributed within 12 months before or three months after the vote. Integrated Healthcare donated $1,000 in July 2011 and another $250 in February 2012, about three weeks before the vote, to Nguyen.

The IHHI settlement vote is one of at least four concerning CalOptima that Nguyen made, and which benefited donors to her campaign.

A federal-state task force looking for corruption in Orange County has been asking questions about the IHHI settlement vote, according to three public officials who were interviewed by FBI agents or district attorney investigators.

The state Fair Political Practices Commission has also disclosed publicly that it is investigating CalOptima board members and four members of the Orange County Board of Supervisors.

What’s still not clear is whether any of Nguyen’s votes violated any law. One expert on the Levine Act, the state law that applies to special agencies, said the law is so narrowly drawn that what may appear to be blatant conflicts of interest can be legal.

Regardless, Nguyen said she was not aware of a potential conflict.

In an email response to the Register’s questions on the IHHI vote, Nguyen said the meeting agenda listed the plaintiff as “WMC-Santa Ana,” not its parent company, Integrated Healthcare.

“Legal counsel never brought the affiliation between WMC-SA and IHHI to the attention of my staff or myself, so again, we had no reason to believe there was a possible conflict,” Nguyen wrote.

The Register found three additional instances in which Nguyen, who is now running for state senate, has voted to benefit her donors:

In June 2011, Costa Mesa attorney Todd Theodora and his wife donated $3,600 to Nguyen’s campaign. In the weeks before and after the donations, Nguyen voted twice with the CalOptima board to give a total of $300,000 in legal work to Theodora. The actions were taken in closed session, with the CalOptima board hiring Theodora to do confidential personnel investigations.

In November 2011, Dr. Viet Van Dang donated $500 to Nguyen’s campaign. Nguyen voted in May 2012 – as part of the Board of Supervisors – to appoint Van Dang to the CalOptima board of directors.

Also in 2011, charity worker Ellen Ahn made donations totaling $600 to Nguyen. In May 2012 Nguyen and the rest of the supervisors voted to appoint Ahn to the CalOptima board of directors.

INCREASE IN FUNDRAISING

Nguyen’s time on the Cal Optima board has been helpful to her campaign war chest.

She was appointed to the CalOptima board by county supervisors on Jan. 25, 2011. She took her seat in March 2011, when Supervisor John ‍Moorlach‍’‍s appointment expired.

The board has 10 members, all appointed by the Board of Supervisors, representing doctors, hospitals, other providers and consumers. Nguyen is the only elected official who sits on the board.

In the two years before she was seated on CalOptima’s board, Nguyen raised $10,500 from the medical industry, or about 5 percent of her total campaign fundraising, according to a Register analysis of campaign disclosure forms. During the next two years, she raised about $93,000 from medical interests, some 20 percent of her war chest.

Under Nguyen’s influence, hospitals now have a permanent seat on the board. The supervisors voted 3-2 on Dec. 6, 2011, to change the CalOptima board makeup so hospitals always have at least one seat.

But Nguyen said neither she nor the rest of the CalOptima board is giving hospitals special treatment.

“They’re getting whatever anybody else is getting,” she said.

AN EFFORT TO CURB CONFLICTS

The state Legislature passed the Levine Act in 1982, in an effort to keep public officials who are appointed to special agencies from trading their influence for campaign contributions. The law prohibits officials with conflicts from voting to approve a “license, permit or other entitlement for use.” Violations of the Levine Act are punishable by a $5,000 fine and can be prosecuted as misdemeanors by the district attorney’s office.

In Nguyen’s case, the law applies only to her service on CalOptima, not to elected boards such as the Board of Supervisors.

San Francisco attorney Jim Sutton, an expert in campaign law, said litigation settlements, like the IHHI case, may fall outside the definition.

“I don’t think that’s the type of contract the law was intended to cover,” Sutton said, adding “I wouldn’t be surprised if the (Fair Political Practices Commission) gives a broader interpretation.”

Sutton also said the law does not apply to contributions by employees of a vendor, unless they represent the company before the board. That would exclude workers for Western Medical Center Santa Ana or other IHHI-owned hospitals who donated to Nguyen.

Whether or not they meet the test of the law, the IHHI settlement and the Theodora contracts were the type of votes the Levine Act was intended to stop, the law’s author, former Assemblyman Mel Levine, told the Register last week.

“This is clearly inconsistent with the intent of the law,” Levine said. “The wording technically may not have been broad enough to cover it, but it clearly was the intent to cover every beneficial action.”

California Common Cause said Nguyen’s votes to appoint donors – even if legal – run afoul of the public trust.

“It is something generally frowned upon by voters and good-government groups,” said Phillip Ung, spokesman for California Common Cause. “We urge elected officials to be mindful of the negative appearance these types of appointments give off to voters, and how these appointments breed mistrust and suspicion about giving special access to donors.”

Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California, echoed Ung.

“It’s the type of thing that makes people who can’t make large contributions cynical about politics,” Schnur said.

But Nguyen expressed annoyance at questions about ethical concerns.

“Now I have to pray every time I cast a vote?” she asked.

In January, the county grand jury issued a report, recommending, among other things, that the CalOptima board of directors include two members of the Board of Supervisors.

“This would minimize potential conflict of interest or reduce any opportunity for CalOptima to be used for political gain or to advance personal agendas,” the grand jury wrote.

The county responded that the recommendation “needs further analysis.”

CONTACT THE WRITER: Tsaavedra and mreicher

FIVE-YEAR LOOK BACKS

September 19

2003

Dennis Foley of the OC Register announced the news that the tax bills were coming in “County mails out property-tax bills.” September is usually the month when the Treasurer-Tax Collector mails out secured (real) property tax bills. Here was some of the info provided:

Taxpayers have time to pay. The regular installment deadlines are Dec. 10 and April 10.

Taxes to be collected this year total $3.1 billion, compared with $2.9 billion last year, Treasurer-Tax Collector John Moorlach said.

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