FSSA Office Building In Kokomo Owned By Bales Closed Due To Unsafe Conditions

Well, this makes for a fitting postscript to the acquittal of John Bales and his business partner, William Spencer, in a federal courtroom in South Bend. An inspector for the city of Kokomo ordered a building occupied by the Family & Social Services Administration closed indefinitely until its owner, John Bales' Venture Real Estate, addresses persistent water leaks that posed the risk of fire to damaged electrical wiring and falling ceiling tiles, raw sewage in the building's basement and falling bricks. FSSA employees who worked in the building experience respiratory problems and allergic reactions to mold. Other testing by inspectors found elevated levels of lead and carbon dioxide in the building. The Kokomo Perspective has the story:

State Paid Barnes & Thornburg $9.6 Million For Losing Case Against IBM

The state's lawsuit seeking hundreds of millions in damages against IBM for the failed welfare privatization implementation was a dubious lawsuit from day one. It was no secret that the Daniels administration had conspired with the law firm of Barnes & Thornburg , which represented ACS, to concoct a plan to privatize the state's welfare services and steer the bulk of that work to the law firm's client. It began with making sure that Daniels appointed a former ACS executive, Mitch Roob, to run the agency. Roob and another former executive of ACS, former Indianapolis Mayor Steve Goldsmith, immediately began pushing a model based on a privatization model being implemented by ACS in the state of Texas, one that would ultimately be chosen by the agency Roob ran. That model was known as "remote eligibility," one under which remote call centers would process all claims for welfare benefits over the Internet or over the phone rather than the traditional model of having case workers in county offices who met with those applying for benefits face-to-face. Word spread quickly among potential bidders that the bidding process was rigged in favor of the coalition of companies responding to the public bid, which was led by IBM but included ACS as the major subcontractor participant. In the end, all competitors dropped out of the bidding process, leaving the IBM-led coalition as the sole bidder for a more than $1 billion, 10-year contract, the largest in the state's history. The state inked a contract with the IBM-led team despite the fact that the model upon which it was based in Texas had been halted by that state's governor because problems with implementation were "so severe."

As Judge Dreyer's opinion denying all claims the state made against IBM found, the bulk of the services provided under the privatization contract were being performed by ACS, which was the source of most of the complaints against the system when its first rollout began. Instead of working with its prime contractor to work through the problems, ACS's lobbyist at Barnes & Thornburg, Joe Loftus, began meeting secretly with high levels of the Daniels administration behind IBM's back to undermine its control of the contract, including Gov. Mitch Daniels. Judge Dreyer noted one e-mail exchange that Loftus had with Roob where he complained that IBM "just didn't get it" in reference to frequent lectures he received from them reminding him that IBM was the lead contractor and the principal point of contract for all communications under the conract. Even ACS officials who testified at the trial conceded that Loftus' communications behind IBM's back constituted a breach of their contract, and the state was breaching its contract with IBM by engaging in the direct communications with ACS. These communications created "distrust" among the contract partners according to Judge Dreyer's opinion. "Certainly the State showed that IBM did not perform well in some respects, especially when trying to get subcontractor ACS Human Services ("ACS") to answer phones notwithstanding evidence of ACS lobbying against IBM in violation of its own subcontract." But Dreyer found plenty of evidence offered during the long trial where the state and IBM traded claims against one another where the state had given favorable reviews of IBM's work. One scoring of the company's performance prepared by FSSA's Zach Main gave the company 9 out of a possible 10 points. What the evidence showed was that IBM was being scapegoated as public pressure mounted to drop the privatization move, particularly from state lawmakers.

The state had the option of terminating its contract with IBM for convenience, but it chose instead to terminate the contract for cause and put ACS in charge of a new hybrid approach to delivering services, and to file a lawsuit against IBM seeking more than $150 million in damages, and IBM, in turn, filed a countersuit against the company seeking more than $100 million in damages. What stunned legal observers was a decision by Gov. Mitch Daniels personally to hire the law firm of Barnes & Thornburg to represent the state's interests over the objections of Attorney General Greg Zoeller given that it had been knee deep in representing ACS from day one. The engagement agreement entered into with the law firm contained pages of disclosures concerning the law firm's potential conflicts. Some legal observers questioned whether the conflicts of interest raised in the engagement letter were even waivable under the rules of professional conduct. A key deputy chief of staff in the governor's office, Betsy Burdick, worked with her brother at the law firm, Brian Burdick, to ink the deal. Although Burdick signed the agreement, he's a bond lawyer and not a litigator or an expert in contract law. According to the Star's Mary Beth Schneider, the state has paid the law firm a staggering $9.6 million to represent the state's interests in the lawsuit. If the Attorney General's office had been allowed to handle the lawsuit, existing state employees would have been utilized at no additional expense to the state. Instead, the very law firm which played an instrumental role in the privatization fiasco was allowed to profiteer from its own handiwork. Judge Dreyer ruled against all of the state's claims against IBM, and he ordered the state to pay IBM more than $52 million. Remarkably, one of the key attorneys handling the lawsuit against IBM for the firm, Peter Rusthoven, had the audacity to accuse Judge Dreyer of writing an opinion that contained "unnecessary political commentary that is neither accurate nor relevant." I think what he meant to say was that he used words that hit too close to home. He said the state will appeal Judge Dreyer's ruling, and the firm will charge the state at least another $250,000 for its services.

For the life of me, I do not understand why a criminal investigation has not been launched by the FBI and the U.S. Attorney's office. This has got to be one of the most corrupt deals in the history of Indiana state government. Hundreds of millions of federal tax dollars were being misspent simply so big campaign contributors of Gov. Mitch Daniels could make a lot of money with no concern at all to the services being provided using those tax dollars. One of the administration's biggest critics in the state legislature is a Republican lawmaker, State Sen. Vaneeta Becker (R-Evansville). “The whole thing could have been avoided if the state from the beginning had just provided new computers and additional training to caseworkers,” she told the Star's Mary Beth Schneider. “A lot of this could have been avoided and a lot of costs.” Gov. Daniels, for his part, was totally unapologetic about the outcome and says he expects the decision will be overturned on appeal. Even if the state loses on appeal, he told Schneider that the more than $52 million the state will be required to pay IBM was irrelevant because they "are so tiny compared to the savings we’re achieving.” The state has spent more than a half billion dollars to date on the privatization effort. What do you expect from a guy who told Congress when he was OMB Director that the Iraq war would only cost taxpayers $50 billion? Oh, and did I mention that Gov. Daniels put a former paid consultant for ACS, Mike Gargano, in charge of FSSA after Roob's successor, Anne Murphy, left the agency after a short stint running the agency? Her sole task was to get rid of IBM after Roob stepped down to become head of the Indiana Economic Development Corporation. Murphy's short tenure simply provided cover for the conspiring parties. When that task was completed, she moved on and Gargano stepped in so ACS and Loftus would have a person under their thumb in charge of the agency.

Judge Dreyer's Decision Vindicates Carl Moldthan

Carl Moldthan started out as a big fan of Gov. Mitch Daniels who gladly accepted his invitation to join his administration in helping remake the Family & Social Services Administration. After less than a year on the job, Moldthan left the agency disillusioned and disheartened by Mitch Roob's single-minded mission of getting rid of the county welfare case workers and replacing them with remote call centers run by Roob's former employer, ACS. Carl passed away a little more than a year ago after suffering a serious stroke, but I couldn't help but think about him as I read through the decision Judge David Dreyer handed down today awarding IBM $52 million in a drawn out lawsuit during which the state and its former contractor traded multi-million dollar claims against one another after Daniels fired IBM when the state's privatization plan didn't go as planned. The Indiana Law Blog has uploaded a copy of his 73-page opinion here.

Moldthan visited all of the state's county welfare offices and learned first-hand what problems ailed the system. He found that dated computers and obsolete computer systems made it impossible for case workers to do their jobs efficiently. Add to that the low pay of workers and poor communications with mid-level managers and decision-makers in Indianapolis, Moldthan found a broken system. Moldthan pleaded the case for an alternative solution to privatization recommended by the consulting firm hired by Roob, but Roob and others rebuffed him. As Moldthan explained to me his disgust and disappointment at the chosen outcome:

The best example I can think of is a person who is brought into the Governors office and told by him that he wants you to operate the State Garage. You look at him and because it is such a challenge, you accept. The Governor hands you a pair of pliers and a regular screw driver and says, “Here you go, here’s your tools.”

You immediately take a deep breathe and accept the seemingly unbelievable task and proceed to try and do the job. After 5 years the Governor says, “Well, he’s tried his best to do the job but I’m going to hire a consultant to see if we cannot privatize it to do better.” The consultants report comes back and says that even though you have tried to do a good job, all of the screws are messed up and all the bolts are rounded off. Their advice, privatize!

Now anyone who would read this would say that this scenario isn’t fair. The person in charge wasn’t given the proper tools, the proper money the proper support so how could they succeed? The answer is they couldn’t. If this sounds vaguely familiar to what has happened at FSSA, it is.

Reading Judge Dreyer's opinion, it is unmistakable that he understood and took to heart the exact sentiment Moldthan summarized.

The largely undisputed evidence shows that the Governor, the Family and Social Services Administration ("FSSA") and various State of Indiana ("State") officials set out to fix Indiana's poorly-performing welfare system by inserting an untested theoretical experiment, and substitute personal caseworkers with computers and phone calls ("remote eligibility"). This is now admitted to be an error, and there is nothing in this case, or the Court's power, that can be done to correct it, or remedy the lost taxpayer money or personal suffering of needy Hoosiers. All that can be done in this case is to take the first step at setting the final numbers among so many millions already spent.

This case is about nothing but the intent of the parties, performance of the parties, and whether there was a "material breach" of the contract as a whole. Breach of public trust is not included here, consideration of private greed is not included here, nor is any measure of public injury. It is just about the money between the parties, much of which is already spent by the State.  

The good faith of the parties cannot reasonably be questioned, especially the hard-working employees of the State and IBM. But the competence of the parties in this project is sometimes open to question.  

The short ill-fated life of this super-sized contract will remain an enigma. Overall, the Court finds, as a matter of fact, that the State failed to meet its burden to show that International Business Machines Corporation ("IBM") committed a material breach of the contract. Certainly the State showed that IBM did not perform well in some respects, especially when trying to get subcontractor ACS Human Services ("ACS") to answer phones notwithstanding evidence of ACS lobbying against IBM in violation of its own subcontract. But the record is too laden with too much evidence of political factors, the overwhelming difficulty of attempting such a project, and the State's own inconsistent performance to not allow a conclusion that unsatisfactory results were not caused as much by the State as IBM. Considering the contract as a whole, IBM's performance does not show breach going to the heart of the contract, and the State did not prove otherwise.

I have always steadfastly maintained that it was never the intention of the Daniels administration to put IBM in charge of this major undertaking. I've contended that IBM's role was that merely as a placeholder to provide cover to Mitch Roob from criticism that he was steering the state's largest contract in Indiana history to his former employer. Judge Dreyer fully grasped this fact. In his opinion, he traces back the origins of the "remote eligibility" model for delivering welfare services by a private contractor to Roob and his former colleague at ACS, former Indianapolis Mayor Stephen Goldsmith. The model was based on one previously undertaken by Texas, which just happened to be an ACS project that also ran into serious problems with implementation. Dreyer observed that the problems with the Texas rollout were "so severe" that the project rollout was stopped even before Indiana signed the IBM contract. The documents Dreyer references in his opinion tying Roob and Goldsmith to the decision undercuts the administration's claim that Roob had not participated in the selection process that ultimately chose the IBM-led proposal that provided most of the work under the contract to ACS as the lead subcontractor. "The largest portion of the work among the Coalition members, and the largest portion of the compensation, went to ACS, which employed the personnel assisting in the processing of eligibility applications (many ofwhom were former State employees)," Dreyer wrote. Dreyer noted that all of the competing bidders had dropped out of the procurement process before it had concluded, leaving the IBM-led coalition alone as the single bidder for the state's largest contract.

Underscoring my view, Judge Dreyer noted evidence in the record that ACS's lobbyist, Joe Loftus, was lobbying state officials behind IBM's back to have it assume control of the contract and to oust IBM despite ample evidence that many problems with the implementation involved tasks performed by ACS. He cited testimony that Loftus "used his political contacts with the administration to help his clients, ACS and Arbor, with respect to Modernization" and "Anne Murphy relied on Joe Loftus as a source of information in her dealings with IBM." Judge Dreyer found that ACS was interfering with IBM's contract "by directly lobbying the Governor, and the State was unable or unwilling to redirect the revenue necessary to adequately fund Modernization with IBM." Judge Dreyer found that Loftus' lobbying actions were creating distrust among the contract partners. He cited an e-mail exchange Loftus had with Roob in which he said, "I expect to get a lecture today from IBM reminding me that they are the Prime." Loftus added, "They just don't get it." Dreyer found that Loftus' communication behind IBM's back "presumably violated its contract with IBM and the state was in violation of the terms of the MSA, which provided that IBM was the sole point of contact with regard to contractual matters." Loftus' communications included conversations directly with Gov. Daniels and one of his top staffers, Betsy Burdick, who is the sister of Brian Burdick, the Barnes & Thornburg attorney who signed the contract on behalf of the firm to represent the state in its lawsuit against IBM despite its obvious conflict of interests. Loftus' actions were that of a snake in the grass, completely stabbing IBM in the back to win the contract for his client. Dreyer noted that ACS officials testified that Loftus' communications behind IBM's back "were contractually prohibited." As Dreyer put it, "The Court is unable to find that IBM breached the contract by failing to adequately manage ACS at the same time ACS and the State were talking behind IBM's back.

In the end, the State cooked its case against IBM by the multiple favorable reviews members of the Daniels administration gave on various occasions both internally and publicly regarding IBM's performance on the contract cited in Judge Dreyer's opinion. Perhaps the administration officials were just blowing smoke to cover up the botched privatization effort, but it all came back to bite the state hard in the butt. Judge Dreyer figured out that IBM was sacrificed for window dressing purposes because of all the flack the state was getting over the privatization effort, particularly increased pressure from state lawmakers. Nonetheless, the conflicted attorneys at Barnes & Thornburg were shameless in their criticism of Judge Dreyer's opinion. "We believe the court's view that IBM's concededly bad performance did not materially breach the contract is wrong, and cannot be squared with the overwhelming evidence of poor performance," Peter Rusthoven said in a statement to the media. Rusthoven also said the ruling contained "regrettable, unnecessary political commentary that is neither accurate nor relevant." It's absolutely incredible that the law firm has been permitted to profit to the tunes of millions of dollars result of a problem largely of its own making. Gov. Daniels is promising to appeal the decision, which will allow the law firm to profit even more from their wrongdoing

State Ordered To Pay IBM $52 Million For Botched Welfare Privatization Deal

The state's Family & Social Services Administration attempted to scapegoat IBM for the failed privatization of the agency's welfare services, which was primarily carried out as a way of steering hundreds of millions of dollars to ACS, the former employer of the agency's then-Secretary Mitch Roob. When it became apparent the effort had caused harm rather than the promised benefits from the initiative, the state sought to blame the lead contractor IBM while retaining the services of ACS despite ample evidence that ACS had not performed its job well either. The Daniels administration then hired the law firm employed by ACS to win the contract in the first place, Barnes & Thornburg, to represent it in a breach of contract suit against IBM seeking more than $100 million in damages despite the law firm's conflict of interest. IBM fought back with its own countersuit. Today, Marion Co. Superior Court Judge David Dreyer ruled in favor of IBM on some of its claims against the state, and he ruled against the state of Indiana on all of its claims against IBM. Judge Dreyer's latest order requires the state to pay IBM $12 million for computer equipment the company purchased but the state retained for ACS's use on its continued contract with the state. Judge Dreyer had previously ruled that the state had to pay IBM $40 million to cover fees it paid to its subcontractors, bringing its total judgment to $52 million. Dreyer admonished both parties in his ruling.  "Neither party deserves to win this case," Dreyer wrote in a 65-page ruling. "This story represents a 'perfect storm' of misguided government policy and overzealous corporate ambition," the Star reported on his ruling. "Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers." The ruling still left IBM without many of the damages it had sought from the state over the state's termination of its contract.

UPDATE: Gov. Mitch Daniels remains unapologetic about the badly-botched privatization deal. The Fort Wayne Journal-Gazette's Niki Kelly says the state will seek and expects a reversal of Judge Dreyer's decision:

“Here’s what matters: Indiana, which eight years ago had the nation’s worst welfare system, now has its most timely, most accurate, most cost effective and fraud free system ever. That was always the goal, and changing vendors was essential to achieving it. We’ll seek and expect a reversal, and either way, it’s all been well worth it to solve the problem we set out to fix.”

IBM Lawsuit Closing Arguments

The six-week trial in the battling lawsuits between the state's Family and Social Services Administration and IBM over the failed welfare privatization initiative is coming to a close. There's been very little reporting of the trial to date, which will be decided by Marion Superior Court Judge David Dreyer. Media interest in the story waned after Gov. Mitch Daniels avoided having to testify at the trial after the Supreme Court ruled that he was immune from doing so under state law. The Fort Wayne Journal-Gazette's Niki Kelly offers some interesting comments made by opposing lawyers during closing arguments. Barnes & Thornburg's John Maley argued for the state:

“Were there breaches? Scores and scores and scores,” said John Maley, the state’s primary lawyer. “Needy Hoosiers were not being well served.”

Maley said IBM clearly did not meet its contractual obligations to Indiana and the state suffered substantial damages by having to create a new hybrid system.

“It’s time for IBM to finally be held accountable,” Maley said . . .

He said the company could have invested more in the project by hiring more workers to improve the metrics, but IBM executives were focused on profit.

“Shareholders trump a million needy Hoosiers,” Maley said.

If needy Hoosiers being well served was the motive, there would not have been a privatization initiative. See my bombshell report on Carl Moldthan's inside account of the welfare privatization debacle. It was all about Mitch Roob, FSSA's former secretary, steering hundreds of millions of dollars to his former employer, ACS. That Barnes & Thornburg was even permitted to represent the state's interests in this lawsuit is nothing short of an outrage. The law firm has long represented ACS and has very close ties to Roob and others who have worked for the firm, including the current FSSA secretary, Michael Gargano. IBM was merely a place holder to provide cover for the primary purpose behind the contract. Not surprisingly, ACS' financial role with FSSA grew substantially after IBM was dumped.

Kelley has an interesting e-mail exchange between Roob's replacement, Anne Murphy, and the agency's spokesman, Marcus Barlow, in explaining IBM's theory of the case.

Steve McCormick, attorney for IBM, argued further that the state intentionally looked for a way to terminate the contract to get out of paying additional dollars to convert the contract to a new hybrid system.

“This is not about IBM’s performance,” he said. “This is all about saving the state from having to pay.” 

“This was a wrenching, difficult transition,” he said. “Everybody understood there were going to be problems.”

He noted that the tenor of the state’s relationship with IBM changed in January 2009 when Anne Murphy took over as secretary of the Indiana Family and Social Services Administration. Within days, she fired off an email asking whether IBM might be in default.

McCormick also said a three-month corrective action plan was just a sham – a ruse to fire IBM when it was up in October 2009.

As proof, he showed an email between Murphy and then-department spokesman Marcus Barlow from the summer of 2009 where Murphy wanted Barlow to say negative things about IBM to the media. He warned it would be the first time to do so and said, “we just need to survive until October. Then we’re going to drop bombs ala Hiroshima and Nagasaki.”

McCormick said of the 22 corrective-action-plan items, all were improved except the four controlled by subcontractor ACS, whose liaison was working in Murphy’s executive office. He reiterated several witness statements that suggested ACS was purposely not trying to improve so IBM would get fired.

The state retained ACS in the hybrid system.

“They engineered that to happen and then come in here to use the failure of the (corrective action plan) against us,” he said. “They terminated this contract because of their budget problems.”

Marcus Barlow is a friend. I'll have to check to see if he comments on the nuclear option e-mail on his Facebook page today.

Judge Dismisses 17 of State's Claims Against IBM

It's easy to forget a trial over the legal dispute between the state's Family and Social Services Administration over the canceled welfare privatization contract IBM has been going on for the past month because there has been very little coverage to date. The Star does have a brief story today mentioning that Judge David Dreyer has signed an order dismissing 17 of the state's claims against IBM following the conclusion of the state's case.

"Specifically, the state has introduced no credible evidence that IBM knowingly or intentionally made any false statements to the state or any other governmental entity," according to Dreyer's order.

Before the trial got underway last month, Judge Dreyer made key rulings that substantially affected the parties' potential liability if either lost the case. On one summary judgment motion in favor of IBM, Judge Dreyer ruled the company is entitled to up to $40 million in subcontractor assignment fees provided under the contract if it prevails in its claims against the state. Under Dreyer's earlier ruling, IBM both parties could be liable to the other in excess of $100 million if it prevails at the conclusion of the trial.

Judge Makes Key Rulings In Indiana's Lawsuit Against IBM

The Indiana Lawyer is reporting that Judge David Dreyer has made some key rulings in the costly litigation between IBM and the state of Indiana over the cancellation of the contract FSSA entered into with IBM for the privatization of the agency's welfare services. On one summary judgment motion in favor of IBM, Judge Dreyer ruled the company is entitled to up to $40 million in subcontractor assignment fees provided under the contract if it prevails in its claims against the state.

Judge Dreyer ruled against IBM's motion for summary judgment for $43 million in deferred fees it claims it is entitled to receive as a result of the termination, as well as $9.3 million in equipment the state retained that IBM says it purchased. In another favorable ruling for the state, Judge Dreyer denied the company's motion for summary judgment on its claim that its poor performance should be excused because of an economic downturn and flooding that occurred after the contract was signed.

The Indiana Lawyer observes that the state of Indiana could still recover up to $125 million in damages on its remaining claims against IBM if it prevails in the litigation. If IBM prevails, however, the state could owe IBM $100 million per a termination clause in the contract.

Judge Dreyer granted a motion by IBM's attorneys to depose Gov. Mitch Daniels as part of ongoing discovery in the case. The Indiana Supreme Court has granted transfer to hear the appeal directly. Oral argument on the appeal is scheduled for February 13.

Indiana Lawmakers Inadvertently Repealed Family & Social Services Administration

I'm not sure how a mistake of this magnitude could occur, but it did. After the legislature concluded its work this year and Governor Mitch Daniels put his signature on all the new laws, Senate staffers discovered the state's largest agency, the Family & Social Services Administration, had been repealed. Gov. Daniels has corrected the mistake by signing a new executive order reviving the agency while the fingerpointing between lawmakers over who is to blame for the error begins. It's among several major mistakes made during the rush to conclude this year's legislative business this year. The Fort Wayne Journal-Gazette's Niki Kelly has the story:

Gov. Mitch Daniels signed an executive order late Thursday to maintain Indiana’s human services structure after realizing lawmakers accidentally eliminated the state’s largest agency in a bill that went into effect this month.

“It apparently was repealed as of June 30 in a drafting error,” said Jane Jankowski, spokesman for the governor . . .

Though possibly the most extreme example, it’s not the first time this year that legislation from the 2011 session was found to be flawed.

“We have had some clerical errors that seem to be more than I can recall in the past,” conceded House Speaker Brian Bosma, R-Indianapolis.

For example, a bill establishing wage rates for public construction projects accidentally deleted the minimum threshold for a six-month period, which could cost taxpayers more on small projects.

Numerous major education initiatives had errors that had to be fixed in the budget bill before lawmakers left town.

Federal judges have issued injunctions against both an abortion and immigration bill, while a voucher bill also faces a constitutional challenge.

And a new law giving felons a chance to seal their records likely needs to be tweaked to make it more consistent . . .

Bosma said the five-week House Democrat walkout is partly to blame, creating a compressed time period at the end of session to get things done.

“We lost five weeks, and those were workhorse weeks where we pore over legislation. There was a crunch at the end, so there is little doubt that had an impact.”

Rep. Win Moses, D-Fort Wayne, said it’s easy to blame Democrats but said Republicans were simply pushing too much too fast.

He said in the last month, lawmakers still had Fridays and weekends off that could have been used to catch up if leadership felt the General Assembly was behind.

Moses also said no one can blame Legislative Services, because each caucus has staff attorneys and lawmakers who carry the bills, both of whom are responsible for reading legislation to make sure it’s correct.

“These are entirely Republican flubs,” he said. “They just didn’t do a thorough enough job. They were in charge.”

LA Times' Look At The Corrupt FSSA Privatization Deal Indiana Media Refused To Do

Taking a look at today's LA Times article discussing Gov. Mitch Daniels administration's failed FSSA privatization deal, it's no small wonder he decided against running for president. Reporters from the newspaper came to Indianapolis to investigate the deal while Daniels was still being encouraged to jump into the 2012 GOP presidential race. Reporters Tom Hamburger and Melanie Mason spent several days in Indianapolis in May digging for information on the deal in the days leading up to Daniels' surprise announcement that he would not run due to family considerations. The two reporters met with me for several hours back in May to ask questions and discuss my reporting on the subject (even though there's no attribution in their story). They were surprised the botched privatization deal hadn't received more coverage by the Indiana media, particularly given the ties of key players in the deal to ACS, the big benefactor of the deal. I thought the story would be dropped after Daniels decided not to run, but the material they uncovered was just too good to pass up.

Here's some of what the reporters had to say on those corrupt ties that seemed to drive the deal from the beginning:

Though the $1.37-billion project proved disastrous for many of the state's poor, elderly and disabled, it was a financial bonanza for a handful of firms with ties to Daniels and his political allies, which landed state contracts worth millions . . .

Critics say that in Indiana, the privatization process barreled forward with little public input and was marred by the appearance of conflicts of interest. Despite the massive nature of the changes he was proposing, Daniels insisted he did not need legislative approval. And the only public hearing occurred after he announced he would proceed with the project.

Key players involved in the process had ties to Affiliated Computer Services, the company that benefited the most from the deal. Mitch Roob — a Daniels appointee who ran the state's Family and Social Services Administration when it awarded the contract — was a former ACS vice president. As the state began the project, Roob occasionally sought advice from former Indianapolis Mayor Stephen Goldsmith, a political ally of Daniels and fellow privatization advocate who also had been an ACS vice president . . .

In a brief interview, Daniels called "completely bogus" the suggestion that his administration was too close to companies that won lucrative contracts.

"There is no evidence of that," he said. "Our approach was either firms perform well — or we will get rid of them and try someone else."

Yet it took two years before the governor acknowledged that replacing caseworkers with centralized call centers "just didn't work." In October 2009, Daniels canceled a 10-year contract with an IBM-led consortium of companies that included ACS among its subcontractors. IBM and Indiana are now engaged in dueling lawsuits scheduled to go to trial next February.

After IBM was fired, ACS — which was blamed by welfare advocates for many of the problems — was given a new eight-year contract worth $638 million to continue its work, according to state records.

All told, three politically connected firms gained from the welfare privatization effort in Indiana: ACS; the Lucas Group, a Boston-based firm that wrote the specifications for the contract; and Barnes & Thornburg, the Indianapolis law firm that lobbies for ACS and is representing the state in its suit against IBM.

ACS — via several political action committees — donated nearly $50,000 to Daniels' gubernatorial campaigns and his state leadership PAC between 2003 and 2010. Barnes & Thornburg gave Daniels almost $120,000 between 2004 and 2010.

Daniels began pursuing the idea of privatizing Indiana's welfare eligibility system soon after his 2005 inauguration. The idea was taken up enthusiastically by Roob, whom Daniels had brought over from ACS, and who repeatedly described the failings of Indiana's social services agency, which serves more than 1 million needy residents . . .

Even before Daniels signed off on the privatization effort, the little-known Lucas Group started reaping benefits. Its role was not publicized at the time, but the consulting firm had a nearly $4-million contract — signed by Roob — to write the specifications by which the bidding companies would take over the system.

Like ACS, the Lucas Group had ties to former mayor Goldsmith: He served for a time as a senior consultant for the firm, which is run by a longtime associate. Goldsmith, now a deputy mayor in New York, said in an interview that he had nothing to do with the state's awarding of contracts to the Lucas Group or ACS . . .

During Indiana's deliberations, ACS was under fire from federal regulators examining backdating of stock options, as well as from officials in several states who complained of delays, technical problems and, in one case, manipulation of data to justify bonus payments.

Ken Ericson, a spokesman for ACS, said the company remained in good standing with its government clients, continuing to provide services in all 50 states.

Despite its troubles around the country, ACS — as a subcontractor to IBM — ended up with the biggest piece of the contract in Indiana. The company hired 1,500 former state workers, built the system's call center and provided the staff that did the initial processing of welfare applications. It was also poised to make a minimum of $596 million in fixed fees, according to documents obtained by the Tribune Washington Bureau/Los Angeles Times.

Roob, whose agency solicited bids for the project, did not return calls for comment. But aides to Daniels said the former Family and Social Services Administration secretary played no role in the selection process.

They noted that the winning consortium, then led by IBM, ended up being the only bidder for the deal after another group led by Accenture dropped out in May 2006. An interagency review committee studied the proposal by the IBM-led consortium and recommended that the governor move forward with the project.

"No one ever said, 'We want to make sure ACS is part of this,'" said Earl Goode, Daniels' chief of staff, who chaired the review committee. "It was looking at the best solution and what's best for the taxpayers of Indiana."

In late November 2006, Daniels announced he had accepted the review committee's recommendation. A week later, the state held the only public hearing on the proposal. He signed the deal with IBM a month later, declaring the move would save taxpayers $1 billion . . .

IBM said the problems were due to an unexpected surge in applications.

"Our contention has always been there weren't enough caseworkers," said IBM spokesman Clint Roswell.

The state said the issue was IBM's oversight of ACS.

"The state is now managing them and they're doing fine," said Peter Rusthoven, one of the lawyers representing the state in its suit against IBM.

When the state decided to sue, the Daniels administration opted to hire Rusthoven's firm — Barnes & Thornburg, which also represents ACS — to handle the case, rather than rely on the state attorney general. One of the Barnes & Thornburg partners listed on the $5.25-million contract is Brian Burdick, the brother of Daniels' deputy chief of staff.

Mark Massa, who was Daniels' general counsel at the time, said hiring outside counsel was necessary because of the complexity of the case.

"I just wanted to hire the best litigators I could find," Massa said. "The decision was solely mine and I didn't take political considerations into account." . . . 

The LA Times reporters missed one big item: the hiring of Mike Gargano as FSSA's new secretary to oversee ACS. Gargano is a former consultant for ACS who is married to Ann Lathrop, another former member of the Goldsmith administration who worked as an executive at ACS, alongside Goldsmith, Roob and Skip Stitt. The reporters had access to documents prepared by former FSSA employee Carl Moldthan, now deceased, who warned Daniels and legislative leaders the privatization of the FSSA services was misguided and being done for all of the wrong reasons. Moldthan's critique included an admission by Roob that the privatization would not save taxpayers one dime despite Daniels' public claim that it would save $500 million over ten years.

 

U.S. Attorney Announces Arrest Of FSSA Workers In "Large-Scale Theft"

Just two day after announcing he would not be seeking the Republican presidential nomination, the Daniels' administration has been rocked by an announcement today by U.S. Attorney Joe Hogsett of employees of his embattled Family & Social Services Administration being indicted on charges of a "large-scale theft." Hogsett has scheduled a press conference at 1:30 p.m. to announce the charges. Gov. Mitch Daniels is telling State House reporters his administration uncovered the wrongdoing and "turned over the miscreants" to federal authorities for prosecution. More to come.

UPDATE: From WRTV:

Three former employees of the Indiana Family and Social Services Administration face federal theft charges, accused of stealing nearly $200,000 from federal programs administered by the agency.


U.S. Attorney Joe Hogsett said Tuesday that the workers -- Robert Edwards, Timberly Snyder and Adina Lopez -- were involved in "large-scale theft."

The indictment alleges that Edwards, Snyder and Lopez created dozens of EBT cards, taking a total of $191,103.89 from food stamp funds and money used to provide temporary assistance for needy families, among other funding programs.

The thefts occurred from December 2008 through April 2010, Hogsett said.

Authorities said Edwards, Snyder and Lopez generated fraudulent benefit cards in the names of more than 100 people, 6News' Jack Rinehart reported

The cards were used to get money from ATMs and were used to buy various items, authorities said, and some of the cards were sold to third parties.

The thefts were discovered by state officials, but the investigation was turned over to federal authorities because the case involved federal funds.

"Anyone who steals from Hoosier taxpayers will be held strictly accountable by this office. This is particularly so when it is theft by public employees, people who have violated our trust," Hogsett said.

Edwards, Snyder and Lopez each face a maximum of 10 years in prison and up to $250,000 fine.

This is "large-scale theft?" What about the nearly half billion dollars wasted to put money in the pockets of private contractors in a failed effort to privatize the state's welfare delivery system? I guess "large-scale theft" is in the eyes of the beholder. Wake us up, Joe, when your office decides to tackle real public corruption in this state.

E-Mails Showed Daniels Worried That Union Was Flooding Call Center With Calls To Sabotage Privatization Effort

IBM is engaged in contentious litigation with the state's Family & Social Services Administration over the decision made by the Daniels' administration to terminate the company's continued role in the privatization of Indiana's welfare services. Lawyers for IBM want to depose Gov. Mitch Daniels and his chief of staff, who they contend were key players in the decision-making process. Attorneys for the state contend state law exempts high-ranking officials, including the governor, from having to testify or otherwise directly participating in litigation involving state agencies. Surprisingly, discovery has shown more than 900 e-mails sent or received by Daniels related to the ongoing privatization effort. To emphasize the governor's close participation in the project, IBM lawyers cited one e-mail in which Daniels suggested a high volume of calls to the troubled call center may have been the work of a state employees union that opposed the privatization effort. Shortly after becoming governor, Daniels signed an executive order that ended the state's collective bargaining agreement with AFSCME that had been entered into by executive order by his Democratic predecessors. The union opposed the privatization move. The AP reports:

Gov. Mitch Daniels had such a keen interest in the state's $1.37 billion contract with IBM Corp. to automate welfare intake in Indiana that he asked an aide if an unexpectedly high number of telephone calls to a call center was a ploy by a state employees union, an IBM attorney said Monday.

IBM wants to depose Daniels soon because it's concerned he will announce he's running for president and would be too busy on the campaign trail to give a deposition, said IBM attorney Steven McCormick, who also wants to depose Daniels' chief of staff.


Daniels has said he won't decide on a White House run until after the General Assembly adjourns later this month . . .

The oral arguments lasting more than two hours revealed the level of Daniels' involvement in one of the biggest outsourcing contracts in state history. McCormick displayed on the IBM attorney's table four thick binders containing what he said were 930 email messages to and from Daniels that the state has surrendered so far.


"They're here to illustrate the cradle to grave, preconception to afterlife" level of Daniels involvement in the deal, McCormick said.

Daniels received detailed reports on the number of calls welfare clients made to a call center created with IBM technology, and after one report showed an unusually large number of calls, he asked an aide if it was a union ploy, McCormick said. McCormick didn't identify the union, but a state employees union, the American Federation of State, County and Municipal Employees, vociferously opposed the outsourcing deal.

Another e-mail message instructed recipients "the governor was to be familiarized with all aspects of modernization," McCormick said, using the term the state used for the IBM project.

"The governor was not only the chief decider, he was the chief cook, he was the chief bottle washer," McCormick said.

"He made the key decisions all the way," McCormick said. "We're concerned that any delay will be met with, 'Well, now it's too late.'"

The story lays out the legal argument one of the state's attorneys, Peter Rusthoven of Barnes & Thornburg, makes to shield the governor from being deposed.

However, Peter Rusthoven, an attorney for the state, said a state law exempts certain high-level state officials including the governor, from court subpoenas and that other current and former state officials who are expected to testify will provide the same information Daniels and chief of staff Earl Goode were privy to . . .

Rusthoven said the level of Daniels' interest in the project did not trump a state law dating to the 1900s that protects the governor and certain other state officials from answering subpoenas. Rusthoven said it protects them from depositions as well, so well that there has never been an exception.


"It's never happened. The governor has never been called to testify," Rusthoven said.

IBM set out to depose Daniels on his knowledge of the deal before it had deposed anyone else in the case, Rusthoven said.

"There's been no attempt to get it by less intrusive means," Rusthoven said.

The state's ongoing litigation with IBM is a lose-lose proposition for Daniels. Critics questioned the deal from the beginning, even from within Daniels' own administration as I laid out in great detail Carl Moldthan's efforts to get Daniels to reconsider the ill-fated plan. Because the state retained the services of ACS after firing IBM, it raises the specter that IBM was nothing more than a placeholder for the Daniels administration to put ACS in charge of the deal. Daniels' former FSSA Secretary, Mitch Roob, who spearheaded the privatization effort is a former ACS executive. Critics believe it was Roob's intention all along to privatize in order to create a business opportunity for his former employer. Critics have also questioned the use of Barnes & Thornburg to represent the state's interests in the litigation. The firm has long represented ACS in its state and local lobbying efforts in Indiana. Indeed, the engagement letter with the firm acknowledged the firm's potential conflict of interest as ACS' attorney as well.

Daniels Administration's Attorneys Lose Fight To Exclude Thousands Of Documents From Discovery In Lawsuit Over Failed FSSA Privatization

I can't say that I'm surprised attorneys at Barnes & Thornburg, who are representing FSSA in a lawsuit with IBM over the failed welfare privatization effort despite their obvious conflict of interest in doing so, tried to exclude more than 11,000 documents from discovery under a claim of privilege. Fortunately, Judge David Dreyer wasn't impressed with the claim of privilege after personally reviewing the documents himself. With dollar signs no doubt flashing in his eyes (the state is paying him $475 an hour), Barnes & Thornburg's Peter Rusthoven says the state may appeal Dreyer's ruling. The Star's Carrie Ritchie explains:

A Marion Superior Court judge has ordered Indiana to turn over thousands of documents to help sort out two lawsuits over the state’s cancellation of a welfare modernization contract with IBM.


In an order entered this afternoon, Judge David Dreyer said documents the state claimed were privileged are not and should be turned over to IBM for review. They will not be released publicly.

Attorneys for the state are considering an appeal, which would temporarily stop the suits from moving forward, and will notify the court of their decision within 10 days, said Peter Rusthoven, who’s representing the state.

The documents include state employees’ e-mails, including some belonging to Gov. Mitch Daniels.

Daniels cancelled the 10-year, $1.37 billion contract in 2009 after only three years because of complaints about the automated system.

The state sued IBM in May to take back the $437 million it paid the company.

The most interesting aspect of Ritchie's story is the mention that some of the documents include e-mails authored by Gov. Daniels, who IBM is trying to depose in the matter. Under normal circumstances, it wouldn't be appropriate to insist the governor himself be questioned about an agency contractual dispute due to executive privilege, but a governor typically doesn't get directly involved involved in such matters; rather, he uses intermediaries to carry out his wishes to the extent he risks any involvement to keep his own hands clean. It is remarkable that the governor appears to have taken a more direct role in this matter.

IBM countersued, saying the state still owes the company about $100 million.


Dreyer, who reviewed more than 11,000 pages of documents privately before ruling, said in the order that he excluded “a relatively small number of individual e-mails or pages that are extraneous, personal or obviously unrelated communications.”

He also noted that he tried to be considerate of state employees’ privacy, and that he afforded the governor’s e-mails “particular scrutiny and due regard.”

Attorneys for IBM had criticized the state for trying to shield the documents.

“The state has delayed production of these documents since last fall and we hope we will now receive them promptly,” IBM spokesman Clint Roswell said today.

IBM also is trying to get a deposition from Daniels, and the state has requested a protective order to prevent the company from doing so.

The most outrageous aspect of this litigation is the fact that Barnes & Thornburg is being allowed to represent the state's interests. As I've previously pointed out, the firm has long represented ACS, the company that partnered with IBM on the welfare privatization agreement. ACS got to continue its role after the state opted to dump IBM. That ACS's services were retained was even more troubling because the company formerly employed former FSSA Secretary Mitch Roob, who initiated the privatization effort after leaving the company to work for Daniels. After Roob departed, the agency named another ACS consultant, Michael Gargano, as the agency's chief of staff and then later as the agency's Secretary. Gargano's wife, Ann Lathrop, also formerly worked at ACS with Roob. The agreement the state entered into with Barnes & Thornburg to handle the representation acknowledged the existence of the conflict of interest, but Daniels nonetheless insisted on using the firm. A top deputy in Daniels' office, Betsy Burdick, is the brother of the Barnes & Thornburg partner who signed the agreement with the state, Brian Burdick. It's notable that Burdick is a bond lawyer and not a litigator.