This project manager for a public construction agency had earned its trust but had stolen its dollars – thousands of them. Learn how he did it and how the agency reformed. 

Everyone at the public construction agency knew project manager “Scott Johnson” was from the “old school.” Johnson, a seasoned, 10-year employee, was rough around the edges, a tough negotiator with contractors, terrible with paperwork, and not much for following procedures. But he got the job done. His multimillion-dollar capital construction projects were on time and within budget, or so it seemed.

Johnson, approaching 70 years of age, enjoyed the support of the agency’s management because he delivered for one of its largest and most prominent public clients. He thrived in the limelight and reveled in the power and prestige his position carried within the agency and, more importantly, with the client. New capital projects in the hundreds of millions of dollars were on the horizon and Johnson would be at the helm. However, his future dimmed when the agency’s Certified Fraud Examiner, “Dale,” received allegations from a confidential source that Johnson was steering work to favored subcontractors at two large capital projects under his direction.

Dale, who was the director of the agency’s internal investigations office, quietly began a review of contractor payment requisitions approved by Johnson to identify any anomalies. Dale proceeded quietly and cautiously because it would be risky to make public unsubstantiated allegations against one of the agency’s superstars until some concrete facts could be confirmed. Fortunately, Dale quickly identified a number of unusual payments to subcontractors working at the two projects. Payments to R&R Construction Inc. caught Dale’s attention and he conducted a background check.

A public database search identified Richard Clark as R&R’s president. Dale knew that the agency employed a Richard Clark whom Johnson personally hired as his project assistant. Was this simply a coincidence or indicative of a potential problem? Dale’s review of Clark’s personnel file disclosed that Clark was previously self-employed under “Richard Clark Contracting” but not R&R Construction. However, an emergency contact listing in the file identified his son also as Richard Clark with a business telephone number matching the number appearing on invoices from R&R found in the payment requisitions. At a minimum, it now appeared that the son of an agency employee might be doing business with the agency on a project his father supervised, and possibly, with Scott Johnson’s knowledge.

Additional information also surfaced that another subcontractor had performed exterior work on Johnson’s residence. Dale quickly confirmed this via an investigator’s drive-by of Johnson’s home and an interview with a second confidential source. After consulting with senior agency management, Dale reported these facts to state criminal investigators who, upon reviewing his findings, concluded that further review of Johnson’s and Clark’s activities was warranted. As per normal procedure, the state investigators contacted the local prosecutor’s office to receive some guidance, but the prosecutor unexpectedly requested that all further investigation cease until a joint meeting could be held to discuss the case.

At the meeting, the prosecutor informed Dale and the state investigators that his office already was investigating a kickback scheme involving Johnson and a design consultant working on a number of Johnson’s projects. The consultant now was cooperating in the covert investigation. The prosecutor requested that this information be kept confidential and promised to keep Dale and the state investigators updated on their progress. The CFE furnished his investigative file to the prosecutor’s office.

For the next two months, the prosecutor’s investigation progressed while Johnson and Clark continued to perpetrate their fraudulent schemes against their employer and its client. However, their brief reprieve suddenly ended early one morning when local and state law enforcement authorities executed search warrants simultaneously at Johnson’s and Clark’s residences. Dale and his investigative staff, who accompanied the two search warrant teams, immediately suspended Clark and Johnson from their employment, and retrieved their credentials and other official property, including Johnson’s assigned vehicle. Other internal investigative personnel simultaneously removed records and computers from Clark’s and Johnson’s offices and directed Johnson’s staff to go home until they could be debriefed at a later date. All confiscated records and computers were turned over to the prosecutor for examination.

The Design Consultant

The design consultant, who was now cooperating with the prosecutor, had worked on projects for the public agency for more than 25 years. His first project with Johnson involved a medium-sized renovation project that finished on time and within budget, much to the client’s delight.

During this project’s closeout phase, Johnson told the design consultant that he, Johnson, needed a vacation but was having difficulty making travel arrangements. The design consultant took Johnson’s bait and offered to have his secretary make the arrangements through his firm’s travel agent. The consultant placed the charges for the resulting airline tickets on his corporate credit card. He later approached Johnson for repayment of the charge to his corporate account. But to his surprise, Johnson refused to make repayment and demanded that additional tickets and other consideration be furnished for the consultant to ensure future work with the public agency.

Over the next two years, the design consultant, using his firm’s funds, furnished Johnson and others with airline tickets, traveler’s checks, use of credit cards, and various forms of entertainment totaling an approximate value of $24,000. Included was a holiday party for Johnson and approximately 20 invited guests at a cost of about $5,000. At that time, Johnson was providing both wholly false and inflated R&R invoices to the design consultant for payment directly to R&R by the consultant’s firm and also through the firm’s contract with the public agency. The consultant never reported Johnson’s illegal conduct to anyone at his firm or the public agency.

The design consultant’s partners became aware of the illicit activities in classic fashion – while he was on vacation. When he returned, the partners confronted him and told him to terminate his improper relationship with Johnson. But when he met with Johnson, Johnson again threatened that he would curtail the design firm’s future contract work with the public agency. The design consultant reported this to the partners who sought the advice of a forensic consulting firm. The forensic consultant quickly convinced the partners to report the matter to the local prosecutor who subsequently elicited the design consultant’s cooperation in a covert investigation into Johnson’s activities.

The Schemes

R&R Construction

Project assistant Richard Clark controlled R&R that was the mechanism through which Clark and Johnson funneled in excess of $500,000 for their personal benefit. Clark’s son, Richard “Rick” Clark, functioned as R&R’s foreman and directly supervised R&R’s general construction activities at various projects supervised by both his father and Johnson. The scheme involved the submission of both inflated and wholly fraudulent R&R invoices to the agency through the design consultant’s firm and two construction consulting firms.

In one scheme, Johnson directed the design consultant to use R&R as a general contractor to perform miscellaneous structural probing work in conjunction with the design consultant’s testing sub-consultant. Excess payments to R&R were facilitated by inflating the reimbursable expenses component of the design consultant’s consulting contract with the public agency. To make invoices supporting R&R’s work appear legitimate, Clark and Johnson approved and signed them with few exceptions. The agency reimbursed approximately $168,000 after the design consultant submitted invoices for sub-contract work purportedly performed by R&R. In addition, Johnson separately provided the design consultant with wholly false R&R invoices, totaling approximately $107,000, to be paid directly to R&R by the design consultant’s firm.

Johnson also structured payments to R&R through the contracts of construction consultants hired by the agency to oversee Johnson’s larger projects. Through this method, payments to R&R on one project were more than $320,000. The investigation found that although R&R actually performed miscellaneous work on these project sites, the invoices submitted by R&R to the construction consultants were inflated primarily by reporting non-existent manpower. Johnson or Clark pre-approved most invoices, again making them seem legitimate. But, rather than using “Rick” Clark’s name, a fictitious name was placed on invoices and other documents submitted by R&R to the construction consultants for forwarding to the agency for payment.

In instances when project records showed that R&R obtained its work through a competitive procurement process, the investigation found that Johnson had a less than arm’s length relationship with the other competing firms, strongly suggesting the bidding results were contrived.

Johnson and Clark used this same scheme on another project in which a construction consultant paid more than $380,000 to R&R from inflated invoices approved by Johnson and Clark. Johnson bypassed the construction consultant’s field office by submitting the invoices directly to the construction consultant’s accounting office, bypassing the construction consultant’s field office. When investigators later asked a manager for the construction consultant why Johnson was allowed to process the invoices in this “special” fashion, the manager explained that Johnson showed a good deal of interest in R&R and because it was a small firm, Johnson apparently wanted to ensure they were paid on a timely basis. The manager said he processed the invoices without question because they bore both Johnson’s and Clark’s signed approval. He acknowledged that no other invoices on the project were handled in this manner.

Inflation of Consulting Fees

Johnson also manipulated the fee proposals submitted by the design consultant for a large construction project to create a pool of funds he later could convert into payments to himself and Clark. During the fee negotiation process, Johnson directed the design consultant to increase his proposed design fee and reimbursable expenses by more than $690,000. For a subsequent contract amendment, Johnson again directed the design consultant to increase his proposed design fee and reimbursable expenses by more than $700,000. Due to the complexity and magnitude of this project, these inflated amounts did not draw the attention of the agency’s contract administrators. The investigation found evidence strongly suggesting that Johnson was in the process of manipulating the design consultant’s fees at another new project at the time his schemes unraveled.

The Results

One week after the search warrant at his home, and facing the weight of the evidence against him, Johnson entered into a plea agreement with the local prosecutor admitting to stealing in excess of $500,000 from the public agency and its client. Johnson pleaded guilty to grand larceny and was sentenced to three to nine years’ imprisonment. Johnson was 69 years old at the time of his plea. Also, Johnson’s employment with the public agency was terminated.

Two months later, Richard Clark entered into a plea agreement admitting to stealing in excess of $500,000 in conjunction with Johnson. Clark pleaded guilty to grand larceny and was sentenced to two to six years’ imprisonment. Clark agreed to make restitution in the amount of $200,000 to the public agency and its client. In addition, Clark’s company, R&R Construction, similarly pleaded guilty to grand larceny and received a conditional discharge.

The conditional discharge, a standard penalty in the criminal prosecution of corporations, essentially required the firm to be a “good corporate citizen” for the next three years or face further sanctions.

The design consultant was not charged but did resign his partnership interest in the design consulting firm. The firm’s remaining partners, who had no knowledge of the illicit activities, signed an integrity agreement with the public agency as a condition of continuing its existing contract work and obtaining new work with the agency. The firm agreed, among other things, to the retention of an Independent private-sector inspector general (IPSIG) responsible for implementing and monitoring a new system of internal controls and a comprehensive corporate ethics program, and reporting its findings periodically to the agency through Dale, the CFE. The firm also agreed to pay the agency $50,000 to offset the agency’s cost of conducting its internal investigation. In addition, the firm reduced its fees by almost $400,000 through a contract amendment to offset the increases directed by Johnson. Furthermore, approximately $160,000 was returned to the agency and its client by the construction consultants for payments made to R&R for purported work not sufficiently supported by the construction consultant’s own internal project records.

Lessons Learned

The agency had never experienced anything like this before. The entity, which had prided itself on quality construction and employee integrity for more than 50 years, was shaken at all levels. It had missed and ignored obvious red flags. The attitude, “it could never happen here” was gone forever and a new era of internal accountability began. Management acted swiftly and decisively. They retained a forensic consultant to review all internal controls, particularly those susceptible to fraudulent activity in the construction arena. The agency provided Dale and his staff with additional resources and greatly increased their responsibilities. Management was now better prepared to deal with any future Scott Johnson or Richard Clark and realized that because of the agency’s business environment of public construction, “it” could happen again. But the next time, management would be ready.

Edward T. Dominelli, CFE, MPA, is director of internal affairs for the Dormitory Authority – State of New York.