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.

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.

Supreme Court Rules Gov. Daniels Is Immune From Being Deposed In IBM Case

The Indiana Supreme Court wasted no time after hearing oral arguments this morning in reversing an order granted by Marion Co. Superior Court David Dreyer in the case involving the cancellation of IBM's billion-dollar contract with the state's Family & Social Services Administration to privatize welfare services requiring Gov. Mitch Daniels to be deposed. Late this afternoon, the Supreme Court issued a brief order reversing Judge Dreyer, holding that the immunity from civil arrest authorized to certain state officials under I.C. 34-29-2-1 extends to depositions in cases like this one even where the evidence shows the governor was intimately involved with the decisions related to IBM's contract. A later opinion will follow in due course explaining the Court's decision to reverse Judge Dreyer the order reads.

The month of February will be a month of big political decisions for the state's Supreme Court. The court will hear a dispute among Indiana lawmakers over whether the Indiana House of Representatives can impose fines for members' unexcused absences and deduct the fines from their pay. It will also be deciding whether Marion Co. Circuit Court Judge Louis Rosenberg erred in reversing a unanimous decision of the state's Recount Commission that Charlie White was eligible to hold the office of secretary of state. The Supreme Court will get to decide whether White's Democratic opponent, Vop Osili, will become secretary of state or a person appointed by Gov. Daniels. White forfeited the office by law after a Hamilton Co. jury found him guilty of six felony counts earlier this month. It's highly unusual for the state's Supreme Court to have so many highly-charged political decisions on its plate in such a short period of time. It will provide an unprecedented opportunity for Chief Justice Randall Shepard to leave a lasting mark in shaping Indiana law on these critical political issues.

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 Supreme Court Accepts Direct Interlocutory Appeal Of Trial Court Order Compelling Gov. Daniels To Be Deposed In IBM Lawsuit

The Indiana Supreme Court wasted no time in agreeing to hear an emergency, direct appeal of a Marion Superior Court judge's order allowing IBM to depose Gov. Mitch Daniels in its heated litigation with the state's Family & Social Services Administration over the cancellation of its contract to privatize the state's welfare services. An expedited briefing schedule will require the state to file its brief within ten days, followed by a reply brief from IBM within ten days and the state's reply brief to IBM's brief within four days thereafter. According to the Order authored by Chief Justice Randall Shepard and signed by three of the four  other justices, a separate order will schedule the date for an oral argument in the case.

Interestingly, the Attorney General's office and Secretary of State Charlie White's attorney are not requesting an expedited, direct appeal to the Supreme Court of Marion County Circuit Court Judge Louis Rosenberg's final order overturning a unanimous decision in White's favor and ordering White removed from office and Vop Osili, the winner of just 38% of the 2010 general election vote installed to that constitutional office. Rosenberg's order removing a sitting statewide constitutional officer in this fashion is unprecedented in Indiana history and would seem to be the type of decision requiring an emergency, direct appeal to the state's high court more than hearing an interlocutory order requiring the governor to be deposed in a civil lawsuit. Rosenberg stayed his order while the case is appealed.

As a consequence of no request being filed by the Attorney General or White's attorney for an emergency direct appeal, White will face trial at the end of this month on seven felony charges based on what I believe is an erroneous assumption by the special prosecutor that White was illegally registered to vote when he ran for secretary of state. It could take months for the decision to work its way through the appellate process. Decades-old Supreme Court precedent is on White's side in the case, and his prospects in his criminal case would no doubt benefit from a favorable ruling from the state's high court if it rules in his favor. By not seeking a direct appeal, White's attorneys have guaranteed that he will face trial on multiple criminal charges without the issue of his legitimacy to hold the office being cleared up. If found guilty of any of the felony counts, White will be forced to resign from office. The appeal of election contest will then become meaningless to White. It is absolutely astonishing that his attorneys have foregone that valuable right of direct appeal. The Supreme Court justices must be scratching their heads wondering what White's attorneys are thinking.

UPDATE: Attorneys for the Democratic Party, who had assumed White and the Attorney General's office would file a motion with the Supreme Court to transfer for direct appeal, on their own initiative filed a motion last Friday I'm told to appeal the case directly to the Supreme Court. Charlie White's attorney, David Brooks, did not join in that motion; however, the Attorney General yesterday separately filed a motion concurring with the Democratic Party's motion to transfer the case to the Supreme Court.

See the motion filed by the Attorney General's office here. A press release issued by the AG's office today reads:

The Indiana Attorney General's Office has asked the Indiana Supreme Court to directly hear the state Recount Commission's appeal regarding a statewide candidate's ballot eligibility, due to the importance of the case.

The Marion County Circuit Court on December 22 had reversed the Recount Commission's ruling on a Secretary of State candidate's 2010 ballot eligibility, but stayed that ruling pending appeal by the commission and other litigants. The Attorney General's Office, which represents the Recount Commission, filed a motion Monday seeking transfer directly to the Indiana Supreme Court, the state's highest court.

"It is in the public's interest that this lingering question of whether a statewide candidate was eligible for the ballot be decided with certainty and finality. In this rare circumstance, my office has asked the Indiana Supreme Court to take this case directly. In our role defending the legal authority of state administrative boards, we will vigorously contend the Recount Commission's unanimous decision was correct and ought not to have been reversed," Indiana Attorney General Greg Zoeller said.

The commission made a unanimous finding concerning candidate Charlie White's eligibility for the 2010 ballot as a candidate for Secretary of State, but the trial court reversed that decision, prompting the appeal. In the ongoing litigation, the Attorney General's Office represents the Indiana Recount Commission only and does not represent candidate White. The commission's verified motion to transfer jurisdiction of appeal before consideration by the Indiana Court of Appeals was filed Monday in the Indiana Supreme Court, and an appeal brief will be filed at a later date. The Supreme Court has not yet decided whether to take the case.

UPDATED ANALYSIS: As you all know, Gov. Mitch Daniels has repeatedly called on Charlie White to resign. Daniels does this knowing he has committed worse in the way of vote fraud than White. Daniels is registered to vote at the Governor's residence on North Meridian Street where he does not live; however, the Indiana Constitution requires the governor to live within Marion County. Although Daniels formerly lived in Marion County, shortly after he became governor he built a multi-million dollar home in a gated Carmel community where he now resides. Indiana State Police transport Daniels to and from his Carmel residence on a daily basis. When Republicans tried to disqualify Evan Bayh from running for governor because he had not resided in Indiana for the 5-year residency requirement imposed by the constitution, Democrats launched an attack against then-Gov. Robert Orr. Although Orr resided at the governor's residence, he registered to vote at his permanent home in Evansville. Democrats charged that Orr had committed vote fraud by casting votes from his Evansville home. Daniels is doing the opposite, claiming to reside at the governor's residence when he in fact resides in Carmel outside Marion County. Those of you who have studied Daniels have figured out that he often bends the rules to suit his own ends. He has the luxury of doing that because the news media eats out of his hand, ignoring his transgressions, unlike White, who they beat over the head for every slip-up no matter how minor.

Daniels is banking on White being found guilty on at least one of the seven felony charges the special prosecutor has brought against him. Daniels wants White tossed from office in a fashion that allows him to appoint one of his cronies as White's successor. As far as Daniels is concerned, he would just as soon not see the election contest case decided until after White's criminal trial later this month. Given the way the AG's office dragged its feet on filing its motion for direct appeal (only after the Democrats filed their own motion) and the fact that White's attorney, David Brooks, a close ally of Daniels who didn't even file a motion to transfer White's appeal directly to the Supreme Court on an emergency, expedited basis, it's quite obvious the establishment is putting their own interests ahead of White's constitutional right to hold the office to which he was legitimately elected.

In the Evan Bayh case, it was Chief Justice Randall Shepard, a Republican appointed by Gov. Orr, who swung the vote of the Court in deciding in favor of Bayh's residency to run for governor in a direct appeal heard on an expedited basis. Shepard would have to move the court to turn the Bayh decision on its head to find in favor of the Democratic Party and overrule the unanimous decision of the Recount Commission in White's favor. It is very likely the Supreme Court will overturn Marion Co. Circuit Court Judge Louis Rosenberg's questionable ruling in which he re-weighed the evidence heard by the Recount Commission and substituted it with his own judgment. If that decision comes after a criminal court found White guilty of no more than one of the criminal charges leveled against him, it would ensure that Daniels' handpicked crony and not White would get to finish out the term. That's the end game for Daniels. It should be plain for all to see. Charlie White was long ago dumped in the garbage can by Daniels and the political establishment.

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.

 

Daniels Dodges IBM Lawsuit Depo For Now

Marion Co. Superior Judge David Dreyer has ruled for now that IBM's attorneys cannot depose Gov. Mitch Daniels in its contentious lawsuit with the Family & Social Services Administration arising out of the cancellation of the company's welfare privatization agreement with FSSA. Gov. Daniels' Chief of Staff, Earle Goode, isn't as lucky. Judge Dreyer will allow IBM attorneys to depose him. The ruling suggested Dreyer could change his decision on a Daniels' deposition at a later time. "Dreyer wrote that forcing the governor to give a deposition would be 'at least premature, until such evidence is forthcoming and sufficient,'" the Star reports.

A decision on the timing of the trial for the lawsuit could have implications for Daniels' anticipated presidential campaign in 2012. The trial date has been pushed back from this October to Feb. 6, 2012, just as the presidential primary season is heating up. The failed privatization effort has cost taxpayers nearly a half billion dollars to date according to some estimates. The state is suing IBM to recover $437 million from the company, while IBM has countersued the state for $100 million it claims it is owed. The failed privatization bid is clearly the greatest embarrassment during Daniels' two terms as Indiana governor. Evidence that comes to light during the trial could cloud his message as a cost-cutting, efficient government manager. E-mails obtained from the state during discovery has already depicted Daniels as an active participant in the botched privatization effort undertaken by his former FSSA Secretary, Mitch Roob, who wanted to steer business to his former employer, ACS, which partnered with IBM on the deal. Daniels had told taxpayers the deal promised savings of up to $500 million, while this blog exclusively reported an insider's first-hand account that Roob knew the deal would not produce any savings to the 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.

Don't Be Fooled By Goldsmith's Views On Privatization

Star State House reporter Mary Beth Schneider expressed her shock on a Twitter post this afternoon concerning former Indianapolis Mayor Steve Goldsmith's "conversion" on privatization. "Former Indy Mayor Goldsmith, now dep mayor of NYC, said it's time to get rid of costly private contracts and have city workers do more. WOW," she wrote.  "Goldsmith was Mr. Privatization in Indy, so pretty bizarre to see this conversion." Presumably, Schneider's comments were made in regards to Goldsmith's recent announcement the City of New York would bring back some IT work inside that it had outsourced to private contractors. As Crain's New York reported:

The Bloomberg administration, in something of an about-face, will reduce spending on outside contractors and reassign some work to city employees.


Deputy Mayor Stephen Goldsmith announced Thursday—first in a Daily News op-ed and later in a press briefing—that a “project management office” would be expanded to oversee outsourced information technology projects. The city office will essentially replace a larger, more expensive layer of supervision that private contractors had been providing.

“I think the eventual savings will be in the hundreds of millions of dollars,” Mr. Goldsmith told reporters at City Hall. No formal estimate of the savings has been calculated, but “there are some folks we're paying contractors' [higher] rates to that we could easily get done on our side.”

In many cases, a city employee qualified to oversee a complex, technical project does not exist and will have to be hired. The administration also plans to train city workers to work on the kinds of projects that in recent years have been outsourced. The training will not be outsourced, according to Jason Post, a spokesman for Mayor Michael Bloomberg.

The deputy mayor, who joined the administration for the mayor's third term, said the change promises not just to save money but to reduce fraud. “Whenever you have a vendor, you have to have a high-quality city employee supervising the vendor,” Mr. Goldsmith said. “This level has caused us not only to pay more, but has caused us to lose too much control.”

The key to this change of heart at least on Goldsmith's part lies in reducing fraud, as well as costs. Last year, city subcontractors on a project known as CityTime to automate payroll and timekeeping for city employees were accused of stealing at least $80 million from the city. "What began as a $68 million effort will end up costing more than $700 million," Crain's reported. But even as Goldsmith was making this announcement, his boss was on the radio defending the city's practice of outsourcing much of the city's services. As the New York Daily News reported:

Perhaps Mayor Bloomberg didn't get the memo. Literally.


On his Friday radio show, he was asked about a new shift in city policy that had been in the newspaper for two days running - and didn't seem to know it had happened.

It's a shift on something that had been a sore point for Bloomberg's critics - outside contractors paid six-figure salaries for tech projects that blow deadlines and budgets, like the scandal-ridden CityTime system.

The mayor has long defended his administration's contracting policies, even though municipal unions and Controller John Liu say city workers could do the job for less.

So it was news last week when one of Bloomberg's deputy mayors, Stephen Goldsmith, agreed with critics and said New York will save tens of millions of dollars by bringing the work in-house.

On the radio, WOR-AM host John Gambling tossed Bloomberg a softball about it. But instead of explaining the new company line on insourcing, the mayor defended outsourcing.

"People say, 'Oh, you're spending too much money on outsiders.' If you didn't do that one contract outside, you'd have to have those people permanently on your staff," the mayor said.

"The consultants, they say, 'Oh, they charge a lot more.' Well, because that's the business," he continued. "They don't work all the time, so they have to get paid more. And sometimes they have expertise you don't have in-house."

If the Bloomberg administration has a new message on contracts, why did Bloomberg himself go off-message?

You would be mistaken, however, to think Goldsmith is turning away from privatization, even if his boss hasn't. He's now working on a new public-private partnership for which city service? You knew it. Parking meters. Here's what the Daily News is reporting on that front:

Now, Mayor Bloomberg is eying a "public-private" partnership for parking meters.


On Monday, the city's Economic Development Corp. got 12 from financial firms seeking to advise Bloomberg on the best way of "unlocking value in existing assets to save money and improve service delivery," says mayoral spokesman Jason Post.

High on the list of such assets are parking meters, along with city-owned garages.

The mayor and his aides say they have no intention of doing what Chicago did a few years ago - getting a big upfront payment to plug an immediate deficit by giving away city parking revenues for 75 years.

City Hall is already using more meters, higher rates and bigger fines to squeeze record payments from motorists.

The Daily News story notes the controversy that has plagued past privatization efforts pertaining to New York's parking meter assets. Back in the 1980s during the administration of Ed Koch, several city officials were caught up in a bribery scandal involving the awarding of a contract with a private company to provide hand-held computers for parking enforcement officers. "By the time the Parking Violations Bureau scandal was over, Stanley Friedman, Koch's close ally and head of the Bronx Democratic Party, was in jail, along with his sidekick, Bronx Borough President Stanley Simon, and a handful of others," the Daily News noted. "Queens Borough President Donald Manes committed suicide before he could be indicted, and their chief prosecutor, Rudy Giuliani, became a hero." Koch's successor, David Dinkins, similarly had a scandal involving parking meters. His administration was forced to cancel a contract it had entered into with Lockheed after an investigation revealed the company had colluded with other bidders and a city hall staffer had solicited a job during the bidding process. The Daily News doesn't fail to pick up on Goldsmith's ties to ACS, which was recently awarded the 50-year parking meter lease deal with the City of Indianapolis.

Deputy Mayor Stephen Goldsmith became a Republican Party star for privatizing government services when he was mayor of Indianapolis.


From 2001 to 2005, Goldsmith was senior vice president of Dallas-based Affiliated Computer Services Inc. Last year, his old firm landed a 50-year contract from Indianapolis to manage all parking meters for that city.

Under the contract, Affiliated even gets the money from tickets written by Indianapolis police. The contract barely passed the Indianapolis City Council by a 15-14 vote.

Given New York's checkered history with parking meters, we need to watch this process very carefully.

At least someone in the media in New York is keeping an eye on Goldsmith and his ties to ACS. The Indianapolis news media turned a blind eye to the ties a whole cast of key players in Indianapolis' parking meter deal had to ACS. Goldsmith, a former ACS executive, has admitted he has advised Ballard on a regular basis in an unpaid role since Ballard became mayor in 2008. Although he has represented interests lobbying the city for business as well, he never registered as a lobbyist. His former deputy mayor, Joe Loftus, is engaged to lobby the City of Indianapolis on behalf of ACS. One of the attorneys Loftus supervises at Barnes & Thornburg is City-County Council President Ryan Vaughn, who twisted arms of his fellow councilors to ram the 50-year deal through the council despite his obvious conflict of interest. Mayor Ballard's Deputy Mayor for economic development, Michael Huber, formerly worked for Skipp Stitt, another ACS executive who worked in Goldsmith's administration, prior to his work for Ballard. Of course they all insist their ties to ACS had nothing to do with the awarding of the lucrative 50-year lease to the company.

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.