United States District Court, S.D. New York
IN RE SAIC INC. DERIVATIVE LITIGATION
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For Monte Welch, Derivately on Behalf of SAIC, INC., Lead Plaintiff: Elizabeth Mary Gonsiorowski, LEAD ATTORNEY, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA; Brett D Stecker, Jeffrey J. Ciarlanto, PRO HAC VICE, Harwood Feffer LLP, New York, NY; Brian Philip Murray, Bridget Veronica Hamill, Murray Frank LLP, New York, NY; David M. Promisloff, Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Ex Kanos S Sams, II, PRO HAC VICE, Gregory Bradley Linkh, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA; Gregory Bradley Linkh, Glancy Binkow & Goldberg LLP (NYC2), New York, NY; James M. Ficaro, Robert Weiser, PRO HAC VICE, The Weiser Law Firm, P.C., Wayne, PA; Lionel Z. Glancy, Robert Vincent Prongay, PRO HAC VICE, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA.
For Edward Stellini, Derivatively on Behalf of Himself and All Others Similarly Situated, Lead Plaintiff: Elizabeth Mary Gonsiorowski, LEAD ATTORNEY, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA; Brett D Stecker, Jeffrey J. Ciarlanto, PRO HAC VICE, Harwood Feffer LLP, New York, NY; Brian Philip Murray, Bridget Veronica Hamill, Murray Frank LLP, New York, NY; David M. Promisloff, Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Ex Kanos S Sams, II, PRO HAC VICE, Gregory Bradley Linkh, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA; Gregory Bradley Linkh, Glancy Binkow & Goldberg LLP (NYC2), New York, NY; Robert Weiser, PRO HAC VICE, The Weiser Law Firm, P.C., Wayne, PA; Lionel Z. Glancy, Robert Vincent Prongay, PRO HAC VICE, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA.
For Stephen Robaczynski, Deritively on behalf of himself and all others similarly situated, Consolidated Plaintiff: Brian Philip Murray, Bridget Veronica Hamill, Murray Frank LLP, New York, NY; Gregory Bradley Linkh, Glancy Binkow & Goldberg LLP (NYC2), New York, NY.
For Louisiana Municipal Police Employee's Retirement System, Derivatively on behalf of itself, and all others similarly situated, Consolidated Plaintiff: Roy Laurence Jacobs, Roy Jacobs & Associates, New York, NY.
For Walter P. Havenstein, A. Thomas Young, France A. Cordova, Jere A. Drummond, Thomas F. Frist, John J. Hamre, Miriam E. John, Anita K. Jones, John P. Jumper, Harry M.J. Kraemer, Jr., Lawrence C. Nussdorf, Edward J. Sanderson, Jr., Louis A. Simpson, Defendants: Warren Neil Eggleston, LEAD ATTORNEY, Kirkland & Ellis LLP (Washington), Washington, DC; Beth Ann Williams, Kirkland & Ellis LLP (Washington), Washington, DC; Mark Robert Filip, PRO HAC VICE, Kirkland & Ellis LLP, Chicago, IL.
For Mark W. Sopp, Defendant: Eric Robert Delinsky, LEAD ATTORNEY, PRO HAC VICE, Zuckerman Spaeder LLP, Washington, DC.
For Kenneth C. Dahlberg, Defendant: Lloyd Winawer, LEAD ATTORNEY, Goodwin Procter, LLP(NYC), Menlo Park, CA.
For Gerard Denault, Defendant: Barry A. Bohrer, LEAD ATTORNEY, Eli Jacob Mark, Sidhardha Kamaraju, Schulte Roth & Zabel LLP (NY), New York, NY.
For Deborah H. Alderson, Defendant: Mark Henry Tuohey, III, LEAD ATTORNEY, PRO HAC VICE, Brown Rudnick LLP, Washington, DC; Lauren Elizabeth Curry, Brown Rudnick LLP, Washington, DC.
For SAIC, Inc., Nominal Party, Nominal Defendant: Andrew Santo Tulumello, Jason J Mendro, PRO HAC VICE, Kristopher Price Diulio, Gibson, Dunn & Crutcher, L.L.P., Washington, DC; Jason Robert Meltzer, Gibson, Dunn & Crutcher, LLP (DC), Washington, DC.
MEMORANDUM AND ORDER
J. PAUL OETKEN, United States District Judge.
In this shareholder derivative suit, Plaintiffs allege that a majority of the Board of Directors of SAIC, Inc. was on actual or constructive notice of significant wrongdoing in relation to the lucrative contract for a program called CityTime, but nonetheless consciously ignored or perpetuated that wrongdoing. Plaintiffs further allege various claims arising from SAIC's handling of the CityTime program. The defendants in this case have moved to dismiss on several distinct grounds. One such motion was filed by Nominal Defendant SAIC, which objects to Plaintiffs' efforts to bring suit on its behalf. Because Plaintiffs did not make a demand on SAIC's board of directors before filing suit, and have not alleged with sufficient particularity facts creating a reasonable doubt that a majority of the board is disinterested and independent, SAIC's motion to dismiss is granted and the complaint is dismissed.
This consolidated action includes four lawsuits relating to a program called CityTime, which SAIC developed for New York City (" the City" ). These shareholder derivative lawsuits were filed between
February and May of 2012. On May 15, 2012, Plaintiffs Welch and Stellini--current SAIC shareholders who have held stock in SAIC continuously since at least 2000--moved to consolidate these actions, appoint lead plaintiffs, and appoint lead counsel. On July 12, 2012, the Court ordered consolidation, appointed co-lead plaintiffs, and set a briefing schedule. Plaintiffs filed the operative Verified Consolidated Shareholder Derivative Complaint (" the Complaint" ) on September 10, 2012.
Nominal Defendant SAIC, a Delaware corporation headquartered in Virginia, provides defense, intelligence, homeland security, logistics, energy, environment, and health solutions and services to federal, state, and local government agencies, foreign governments, and customers in select commercial markets. In each of the last three fiscal years, SAIC generated over 90% of its total revenues from government contracts. Accordingly, SAIC has relied almost exclusively throughout the relevant period--and continues to rely heavily--on revenues generated from government contracts. All defendants were aware of this fact throughout the relevant period and consistently warned SAIC stockholders that SAIC's compliance with laws and regulations relating to the administration and performance of government contracts was (and is) critical to SAIC's business.
The following defendants have all served as directors of SAIC since the time indicated and on any noted committees during the relevant period: Young (July 1995); Córdova (February 2008) (Ethics Committee); Drummond (July 2003) (Ethics Committee); Frist (September 2009) (Audit Committee); Hamre (June 2005); John (June 2007); Jones (January 1998) (Ethics and Audit Committees); Jumper (June 2007) (Audit Committee); Kraemer (April 1997) (Audit Committee); Nussdorf (September 2010) (Audit Committee); Sanderson (October 2002); Simpson (July 2006 through April 2012). The Ethics and Audit Committees, among other entities organized by the Board, constituted a system of internal controls, practices, and procedures at SAIC.
Defendant Havenstein served as CEO of SAIC and as a director from September 2009 until his retirement took effect on March 1, 2012. Defendant Sopp has served as CFO and Executive Vice President of SAIC since November 2005. Defendant Kenneth Dahlberg served as CEO of the Company from November 2003 through September 2009, and as Chairman of the Board from July 2004 to June 2010. Defendant Denault served as the Vice President and Operations Manager of SAIC from October 22, 2002 until he was placed on administrative leave in December 2010; Denault's employment was terminated on May 25, 2011 and he was arrested on charges involving illegal kickbacks on May 27, 2011. Defendant Bell served as SAIC's Chief Systems Engineer during the relevant period; on June 14, 2011, Bell pleaded guilty in this District to multiple criminal charges arising from the CityTime billing scheme. Defendant Alderson served as SAIC's Group President from 2005 until 2011.
All named defendants are referred to collectively as " Defendants." Defendants who served as directors of SAIC at any point during the relevant period are referred to as " Directors." The Board of
Directors at the time this suit was initiated is referred to as " the Board." By reason of their positions as officers, directors, managers, and/or fiduciaries of SAIC, and because of their ability to control SAIC's business and corporate affairs, all defendants other than SAIC owed SAIC and its shareholders certain fiduciary obligations.
The allegations in this case arise from misconduct in connection with SAIC's billing on a contract with the City to develop and implement CityTime: an automated time, attendance, and workforce management system for certain City agencies. In 2001, the City's contract with SAIC was budgeted to cost the City a total of $63 million. By April 2010, however, the City had paid SAIC more than $600 million. In 2006, mid-way through the CityTime project, the City and SAIC entered into a contract that, among other things, had the effect of transferring the risk of future cost overruns and any expansion of the CityTime project from SAIC to the City. CityTime was intended to serve as a model and prototype that SAIC could then market to other municipalities. At several points during the relevant period, SAIC publicly touted CityTime as an example of its high-quality work.
From 2003 through 2010, Denault served as SAIC's Program Manager on CityTime and Bell was responsible for developing software for CityTime. During that period, there existed an elaborate scheme organized by Denault, Bell, and other non-SAIC co-conspirators to defraud the City in connection with CityTime through material misrepresentations to the City, omissions of material fact in communications with the City, the payment of millions of dollars in kickbacks to participants in the scheme (including Denault and Bell), and the laundering of ill-gotten proceeds through shell companies and bank accounts. In addition to Bell and Denault, co-conspirators in this scheme included City employees and employees of certain subcontractors and sub-subcontractors.
On December 15, 2010, the United States Attorney for the Southern District of New York (" U.S. Attorney" ) filed a criminal complaint against four consultants to the City's Office of Payroll Administration in connection with CityTime. On February 10, 2011, the U.S. Attorney issued a press release announcing that it was unsealing a superseding indictment that added Denault, among others, as a defendant. In that same press release, the U.S. Attorney also announced that Bell had pleaded guilty to multiple charges arising from the CityTime scheme. Denault and Bell were charged with defrauding both the City and SAIC. U.S. Attorney Preet Bharara stated that " since the first announcement of arrests and seizures, we have developed evidence that the corruption on the CityTime project was epic in duration, magnitude and scope." In June 2011, The New York Times and The Wall Street Journal quoted Bharara as saying that most of the money paid for CityTime had been tainted by the fraud that permeated the deal.
On March 14, 2012, SAIC announced that it had entered into a deferred prosecution agreement (" DPA" ) with the U.S. Attorney in relation to the CityTime project. In the DPA, SAIC admitted " that it, through the conduct of certain managerial employees and others, defrauded the City into significantly overpaying for CityTime." SAIC also agreed to disgorge the profits of the offense, totaling $500,392,977 for restitution and a penalty, and to undertake certain corporate reforms to reduce the likelihood of such fraud in the future.
As part of the DPA, SAIC issued a statement of responsibility (" SOR" ). In the SOR, SAIC stated that " [i]n 2005, a whistleblower within SAIC had filed an anonymous ethics complaint" regarding the scheme, that " SAIC failed to properly investigate the complaint and did not notify the City that a complaint had been made," and that " the complaint also was not brought to the attention of SAIC's Board of Directors." SAIC " accept[ed] responsibility for the illegal conduct alleged against Denault and admitted by Bell during the course of the CityTime project," " acknowledge[ed] that the conduct and managerial failures described herein contributed to the ability of Denault and Bell to commit the alleged crimes against the City," and admitted that " the City was defrauded by SAIC as a result." The SOR contained other admissions by SAIC of failures at the level of staff and management.
Plaintiffs allege that " Defendants were undeniably aware of numerous 'red flags' concerning the massive overbilling for the CityTime project for years." The Complaint alleges, among other things, that a series of news articles concerning CityTime supports the conclusion that the Directors were aware of misconduct throughout the relevant period:
o On March 2, 2008, CityLimits published an article entitled " A Show of Hands: City Workers Resist Tracking." The article noted that CityTime was far over budget and that SAIC had previously experienced " high-profile problems over the years," gesturing to a number of scandals in the 1990s and early 2000s.
o On April 12, 2008, The Daily News published an article entitled " Big Brother System for Keeping Eye on City Workers at $410 Million and Rising," which questioned cost overruns on the CityTime project and noted that New York State Senator Joseph Addabbo, Jr. planned to hold a hearing in May 2008 concerning CityTime's skyrocketing costs.
o On May 18, 2008, CityLimit published an article entitled " Time-Out Proposed for CityTime System," highlighting numerous criticisms of CityTime's cost, duration, and efficacy at a May 8, 2008 City Council hearing. The article also noted that Senator Addabbo had called for the CityTime project to be halted in light of its " undetermined duration and inflated cost," and that he had stated " there's enough evidence or inefficiency or questionable facts to justify further investigation" of CityTime.
o On December 3, 2009, The Daily News published an article entitled " High-Tech Computerized Payroll System for City Employees Costs Taxpayers Big," criticizing cost overruns, noting high salaries paid to consultants, and pointing out that Mayor Michael Bloomberg's administration had amended the CityTime contract's limits " every six months."
o On March 29, 2010, Risk Factor published an article entitled " Can You Top This? $68 Million New York City Project is Now $722 Million and Counting." The article stated that " if anyone knows of an IT project over $50 million that has exceeded its budget by more than 10 times and still hasn't been canceled, let me know. I can't find any in my archives." The article described and criticized cost overruns, noted that the contract had been amended eight times since its original signing, referenced criticism of the project by
Mayor Bloomberg, and reported that City Comptroller John Liu had announced in February that his office would audit the CityTime contract.
Plaintiffs also rely upon certain articles published after the U.S. Attorney first announced CityTime-related indictments on December 15, 2010:
o On December 19, 2010, The Daily News published an article entitled " As Scandal Erupts and Arrests Are Made, Warning Signs for CityTime Fraud Were There All Along," opining that The Daily News had " first raised questions about CityTime in April 2008, when it was a $410 million project."
o On December 30, 2010, after the U.S. Attorney first announced CityTime-related indictments, Lost in the Ozone published an article discussing statements by Senator Addabbo, who reflected back on the 2008 hearing concerning cost overruns and noted that he had worried at the time that the City was " throwing good money at a bad program."
o On April 21, 2012, The Washington Post published an article entitled " How Could SAIC Miss This?" That article, published after SAIC had entered into the DPA, argued that " [w]hat is fascinating about the CityTime debacle is how many times SAIC was warned about irregularities and potential fraud without ever doing anything about it . . . there were plenty of warning signs for anyone with even a passing familiarity with the government contracting business, which includes almost everyone at SAIC."
At a hearing held in May 2008, Addabbo--then-Chairman of the Civil Service and Labor Committee of the New York City Council--called for a moratorium on CityTime expenditures pending an investigation into cost overruns, the program's duration, and its efficacy. At a second hearing, held on December 18, 2009, Chairperson Letitia James of the Committee on Contracts criticized CityTime's spiraling costs. In support of her concerns, James cited critical coverage in The Daily News and an e-mail from an anonymous individual, who claimed to have been paid $120,000 for work on CityTime over an eight-month period even though he or she " probably did real work for approximately two weeks."
CityTime was not the first SAIC project to encounter cost overruns. Plaintiffs allege that Defendants " were likewise on notice of numerous other 'red flags' concerning the Company's overbilling practices and other misconduct in the administration and performance of government contracts." The Project on Government Oversight's Federal Contractor Misconduct Database identifies thirteen " instances of misconduct," at least two of which involved claims for overbilling on government contracts brought pursuant to the False Claims Act (" FCA" ). These incidents of misconduct non-exhaustively include the following:
o In 1995, SAIC was charged with defrauding the government over its efforts to design a flat panel screen for fighter jets; this claim was settled, ...