This is Part 2 of 2 of a mini-series on the epic fraud committed right under the noses of the public and the City of New York. Read Part 1 here.
UPDATE (July 17, 2014):
On July 15, 2014, Svetlana Mazer, Mark Mazer’s wife, was convicted for obstruction of justice. The court sentenced Svetlana Mazer to three years of probation and ordered her to complete 200 hours of community service.
Larisa Medzon, mother to Svetlana, was convicted for structuring transactions to evade reporting. Medzon was sentenced to six months of home confinement, three years of probation, and ordered to complete 200 hours of community service.
Anna Makovetskaya, Mark Mazer’s distant cousin, was convicted for conspiracy to defraud the United States. Makovetskaya was sentenced to three years of probation and ordered to complete 200 hours of community service.
UPDATE (April 29, 2014):
On April 28, 2014 Mark Mazer, Gerard Denault, and Dimitry Aronshtein were each sentenced to 20 years in prison and ordered to forfeit $40 million in cash and property.
Co-conspirators, Svetlana Mazer, Mark Mazer’s wife; her mother Larisa Medzon; and Anna Makovetskaya, Mark Mazer’s distant cousin, all pleaded guilty on June 19, 2013 and their adjournment for sentencing is slated for June 24, 2014.
Carl Bell reportedly co-operated with investigators and pleaded guilty on June 14, 2011. His sentencing records are sealed.
Victor Natanzon also reportedly co-operated with investigators and pleaded guilty on February 8, 2011. No sentencing information is currently available.
Scott Berger, co-conspirator and defendant in the case, died of an apparent heart attack on December 19, 2010.
As discussed in Part 1, this $700 million scandal could not have been possible if it were not for a few key players and their ability to influence, authorize, and conceal illegal activities. Once these individuals laid the groundwork to defraud the City they began recruiting others to aid in the scheme.
According to court documents, around 2003, Gerard Denault (SAIC’s Program Manager on the CityTime project) and Carl Bell (SAIC's Chief Systems Engineer in New York City) recommended that SAIC (the lead project developer on the CityTime project) hire TechnoDyne LLC, wholly owned by Reddy and Padma Allen (CEO and CFO respectively) as a subcontractor to assist in the CityTime project. In turn, the Allens agreed to pay Denault and Bell each $5 for every hour worked by a CityTime consultant hired by or through TechnoDyne, and thus these kickbacks created an incentive for the perpetrators to increase the project labor as much as possible.
Perhaps as a method to create another layer of concealment, around 2005, Mark Mazer (a third party consultant and subject matter expert on the CityTime Project) and Denault, among others, caused the Allens and TechnoDyne to hire D.A. Solutions, Inc. as a sub-subcontractor on the CityTime project. The owner of D.A. Solutions was Dimitry Aronshtein, Mark Mazer’s uncle. This familial relationship was apparently not disclosed to project officials.
The following year, Mazer and Denault, among others, caused the Allens and TechnoDyne to hire yet another sub-subcontractor, Prime View, Inc., whose owner was Victor Natanzon. Both of these sub-subcontractors agreed to pay kickbacks to Mazer. Initially, Natanzon agreed to pay Mazer 80 percent of Prime View’s profits on CityTime. Perhaps not satisfied with this deal, over time, Mazer demanded an even larger share of the profits.
With these two sub-subcontractors in place and with illegal proceeds flowing into Mazer's and the Allen's pockets, prosecutors allege that Mazer and the Allens agreed to pay Denault an additional $2 for every hour billed by D.A. Solutions and Prime View.
Around 2005 and 2006, Mazer and Denault, among others, used their influence to recommend an amendment to SAIC’s CityTime contract, in which the City agreed to change the agreement from a “fixed price” contract, which SAIC would bear “the responsibility of absorbing cost overruns,” to a “fixed price level of effort” contract, “so that the City, and not SAIC, would largely become responsible for future cost overruns.”
According to court documents, after the contract amendment, the co-conspirators allegedly upped the ante and significantly increased the staffing on the project. In 2005, less than 150 consultants worked on the project. In 2007, the number of consultants increased to more than 300; most of them hired by TechnoDyne. This hiring spree occurred in spite of an internal memo by Denault that indicated that the program "was staffed adequately to meet both current and projected contract needs.”
Based on interviews with former employees, investigators claim that the scheme also extended to fraudulent time sheets and ghost employees. In one interview, a former employee claims to have witnessed time sheets, which were submitted to the City for billing, that were fraudulently completed for work conducted, when in fact the consultant in question was on vacation or had been already terminated. The same former employee alleged that when he/she was notified of his/her termination, Aronshtein, owner of D.A. Solutions forced the employee to sign two weeks' of new time sheets in order to receive severance pay. Investigators believe these blank time sheets with the employee's signature would subsequently be completed and submitted, following the employees' termination, for work that had not actually occurred. Mazer and a colleague, Scott Berger, purportedly acted as supervisors and knowingly approved these fraudulent time sheets.
Prosecutors allege that conspirators withdrew cash through ATM transactions at multiple banks for amounts under the threshold for which a currency transaction report needs to be completed, avoiding possible anti-money laundering detection; transferred their illegal proceeds to foreign banks in India and Latvia; and deposited kickbacks to shell companies formed by the perpetrators and their family. Prosecutors accused Mazer's wife and his mother of forming some of these shell companies that received kickbacks to add layers of complexity to the fraud and to further conceal Mark Mazer's involvement.
In total, between 2003 and 2010, TechnoDyne allegedly received at least $450 million in connection with the CityTime project. Sub-subcontractors, D.A. Solutions and Prime View reportedly received $55 million between 2005 and 2010 and $20 million between 2006 and 2010 respectively. Prosecutors stated, "virtually the entirety of the well over $600 million that the City paid to SAIC on the CityTime Project was tainted, directly or indirectly, by fraud."
Denault is reported to have received $9 million in kickbacks and Bell $5 million. Dimitry Aronshtein of D.A. Solutions and Victor Natanzon of Prime View allegedly paid Mark Mazer $25 million in kickbacks.
So how was this fraud allowed to continue for nearly seven years, even when the original budget for the project ballooned to an absurd number? Perhaps performing some very basic due diligence and exercising tighter internal controls may have uncovered the scheme sooner.
According to court documents, D.A. Solution's revenue from the CityTime Project represented almost 100 percent of the company's income and Prime View's portion totaled 75 percent, after they were hired and up until the scheme unraveled.
News outlets reported that in 1994, Mark Mazer was investigated by the FBI while working at City’s Administration of Children’s Services division after millions of dollars went missing in the division he supervised. The media claimed that foster-care checks were being issued without proper supporting documents and approximately $2 million went missing. Mazer was never charged; however, he was barred from the room that wrote the checks and his salary was lowered from $43,925 to $34,537.
In 1995 and 1996, allegations against Mazer were made for sexual harassment. The victims eventually received payment from the City. Mazer was again under investigation when two city laptops were stolen in 1998, though he was not charged. The media also reported that he was arrested on petty larceny charges in 1999, though the case is sealed.
SAIC, a Fortune 500 company and a major government contractor, receives billions of dollars in revenue from its contracts, so how did they allow TechnoDyne to be hired as their major subcontractor for this project? Court documents show that upon Denault's recommendation and denial of any conflict of interest, TechnoDyne did not have to undergo any competitive bidding process to win the contract and was retained as a "sole source" contractor.
In one damning piece of evidence, according to court documents, in 2005 SAIC received a whistle blower complaint alleging that subcontractor TechnoDyne was receiving an inordinate amount of work from SAIC on the CityTime project and claimed contract mismanagement and allegations of Denault receiving kickbacks. Despite SAIC's internal investigation, TechnoDyne continued to reap a large amount of the work, about 74 percent of the overall total paid to SAIC for the CityTime project, compared to 14 percent to all the other subcontractors and vendors combined.
City officials are also partly responsible for ignoring the warning signs According to published media, during Bill Thompson's tenure in office as city comptroller from 2002 to 2009, he failed to audit the CityTime program despite the program's growing costs. Instead, on seven ocassions he authorized amendments to the program's contract allowing the program to use more and more of the taxpayers' money.
In July 2008, the OPA internally audited the program and discovered several instances where consultants had been collecting paychecks weeks after they had been terminated, costing taxpayers $145,000. According to news articles, Thompson's office was aware of the OPA audit and had been requested to investigate further. However, no further action was taken until 2010, when Thompson was succeeded as city comptroller by John Liu. As discussed in Part 1 of this series, the subsequent audit found that the program was mismanaged.
Reddy and Padma Allen
Eventually, the scheme was discovered in June of 2010, when a former consultant on the CityTime project came forward and informed the City's Department of Investigation that the consultant was being paid by D.A. Solutions rather than SAIC and TechnoDyne. DOI then learned that D.A. Solutions did not have contractual rights to receive payment for the CityTime project, which led to several interviews with other former consultants and eventually revealed the fraudulent time sheet scheme.
On November 22, 2013, Mazer, Denault, and Aronshtein were convicted for their involvment in the fraud, as have all of the defendants that have been charged in the CityTime scandal. The Allens have fled to their native India, where, with the $39 million it is believed that they embezzled, will be quite comfortable as fugitives. News articles report that at their sentencing in March 2014, both Mazer and Denault will face life in prison.
Although SAIC paid back $500 million this was a huge embarrassment for the City and officials. A project meant to create efficiency and prevent waste and fraud turned into a decade long debacle resulting in one of the largest fraud cases in New York history. One can only hope that the City has learned from its mistakes and will conduct its own due diligence to prevent future recurrences.
To learn about MSA Investigations' fraud investigation, monitorship, and due diligence capabilities, contact us today.
Photo Credits: NY Daily News