Bid rigging and kickbacks under the bridge

Dylan Murphy, an engineer at a municipal transit district, believed he should get rich with little or no personal risk. After some failed investments, he decided his future was in fraud. The kickback business was lucrative until the FBI caught up with him. Here's his story plus details of the post-trial recovery investigation.

This article is excerpted and adapted from the "Bribery and Corruption Casebook: The View from Under the Table," edited by Dr. Joseph T. Wells, CFE, CPA; and Laura Hymes, CFE, published by John Wiley & Sons Inc. ©2012 Used with permission. Some of the names in this case have been changed.

Dylan Murphy grew up in the countryside of Ireland. He came from a well-to-do family that owned several mines, but as a young man he aspired to immigrate to the U.S. and become a successful engineer. While in his senior year of boarding school he met Susan Ross, the daughter of a wealthy exporter who dealt with many of the mines in the area. After graduating, Dylan and Susan were soon married and decided to move to America to pursue their new life together and attend college.

Once the Murphys arrived in their new country, Dylan was accepted to the Rose Hulman Institute of Technology, where he would spend the next four years earning a Bachelor's Degree in Civil Engineering. Given that both Dylan and Susan came from families of means, neither one worked while Dylan was in school. In fact, the Murphys tended to come across as possessing a sense of entitlement when around others, which did not make them very many friends. By the time Dylan graduated, the Murphys had one daughter and another one on the way.

After Dylan graduated, the family moved to a small suburb of Denver, Colo., where he was offered an entry-level position as a resident engineer for the Regional Transportation District (RTD). Over the next 13 years, Murphy worked at RTD with very little upward mobility to show for it. Dylan thought he was an ambitious person, but he was unwilling to take the necessary steps to make himself more marketable. The Murphys' cultural upbringing contributed to their sense of entitlement, and they believed that they should obtain rewards with little or no personal risk.

To make up for his lack of career success, Dylan and his wife pursued different investment opportunities with the hope that they would be propelled into the social status they so desired. The first was opening an Irish pub in their suburban neighborhood; due to their lack of small-business experience, the pub failed in less than two years. The second was investing in rental property in a neighboring community. After a series of poor financial decisions, the rental property went into foreclosure, prompting the Murphys' need for more cash.

REGIONAL TRANSPORTATION DISTRICT

RTD, located in Denver, provides bus and light-rail public transportation to the 2.8 million residents living in the eight-county region that populates the metropolitan area. In 1969, the Colorado General Assembly organized the RTD by combining several bus and trolley services used in Denver and its neighboring communities to form one large public transportation system that would eventually provide service to 40 different municipalities in the area.

Throughout the 1970s, RTD experienced continued growth through a merger with Denver Metro Transit and an expansion of bus service with a series of sales tax increases voted by the public. After 15 years, RTD decided to revive and expand its light-rail train service. In 1994, RTD opened the first of three light-rail corridors, bringing rail transit back to the region.

Over the next eight years, RTD continued to expand and rehabilitate its light-rail train service to include the addition of two new corridors. In 2001, RTD broke ground with the Transportation Expansion Project (TREP), a multimodal construction venture combining light rail, highway, bike and pedestrian traffic. The TREP project was meant to alleviate the volume of traffic for one of the busiest interchanges in the U.S. As the latest installment of light-rail expansion, the Southeast Corridor would be RTD's crown jewel of the TREP project. It ended up being a success changing the way people commuted in the Metro Denver area, finishing under budget and almost two years ahead of schedule.

FBI INVESTIGATION

I was one of six auditors in RTD's internal audit department. Most of our work consisted of contract compliance and operational processes; very seldom did we encounter any significant fraud during the course of our audits. One November afternoon I received a phone call from my boss, Matt Wilhelm. Special agents from the FBI had contacted our general counsel to notify her that Dylan Murphy was under investigation and was soon to be indicted.

Additionally, our counsel was served with a subpoena requesting the release of contracts and project files that Murphy had been working on. Specifically, it included four major bridge rehabilitation projects and four small construction projects. All of them had been completed within the previous five years, with Murphy as the project manager on four of them. The FBI agents also instructed our counsel not to interview any employees or contractors while their investigation was ongoing.

Knowing my background as a Certified Fraud Examiner, my boss decided to bring me in. To protect the integrity of evidence and to establish a chain of custody, our legal department would be securing all engineering project files and procurement contracts related to the subpoena. After reading through the subpoena and grand jury indictment, I was able to determine that Murphy was being charged for receiving kickbacks from four different contractors on eight different RTD projects.

Once she reviewed the subpoena, RTD's senior counsel contacted the department heads in human resources, procurement and engineering and provided them with a list of documents that were to be pulled and sent to legal. These included Murphy's personnel files, procurement contracts for each of the projects and the project files from the engineering department.

After Murphy was arrested, he was placed on administrative leave. My boss and I removed all files from Murphy's desk and office and secured them in our office, which has restricted security access. Additionally, we removed his personal computer and storage devices and delivered them to our IT department to be cloned for data analysis.

I then began the daunting task of inventorying everything received by legal and all the files retrieved from Murphy's office. The documents that appeared to be relevant to the subpoenaed contracts were set aside for further review. Once this had been done, RTD made and certified copies; it subsequently released all original documents to the FBI.

Charges indicated that Murphy received kickbacks from the contractors through bribery and extortion. It was alleged that his crimes also extended to mail fraud and a conflict of interest violation of RTD's ethics policy. Furthermore, he was suspected of being involved in bid-rigging schemes with two of the contractors. In total, Dylan had been charged with 21 felonies.

Once I completed my review, I linked each of the eight projects to their applicable grand jury indictments. This practice allowed me to identify any unnamed conspirators and contractors in the indictment as well as any other possible RTD employees who could be involved. Armed with a better understanding of the FBI's case, I attended the trial along with Anna Chiles, a colleague from RTD's legal department, to learn more specific details about Murphy's crimes.

AN EYE-OPENING TRIAL

During the trial I learned that Murphy had conspired with three of the contractors in a bid-rigging scheme to inflate prices on the four small projects and inflate change order proposals on one of the four bridge rehabilitation contracts. The contractors would then pay the kickbacks from these prices to Murphy in cash. He was able to obtain cooperation primarily by withholding his approval for payment on work already done or threatening to discontinue a relationship between RTD and the contractor.

Additionally, the U.S. attorney demonstrated that Murphy had extracted bribes from one of the contractors by requiring that Murphy's wife's cleaning company be used as a subcontractor to provide cleaning services on three of the four bridge rehabilitation projects. Murphy's wife, Susan, had formed G&F Cleaning Service only weeks before Murphy made his initial demand from the contractor. Furthermore, G&F Cleaning Service had only one other client. Using his wife's company allowed Murphy to receive profit for personal gain while conducting official RTD business, which created a conflict of interest per RTD's code of ethics policy.

During the trial, Scott Drake, president of Athena Painting, testified that his company had been responsible for the rehabilitation of the central viaduct bridge during the expansion of RTD's southwest light-rail corridor. Drake said that Athena contracted with Andros Painting as a silent partner.

During the construction, Drake and his silent partner, George Rifkin, the president of Andros, were instructed on the scopes and amounts that should be included on change orders. Each of them had an inflated amount that Drake and Rifkin used to pay kickbacks to Murphy, totaling $45,000. Drake testified that at the conclusion of construction, Murphy refused to pay Athena's final contract bill of $115,000 without the guarantee of one last kickback of $15,000.

After Drake testified, the prosecution questioned his silent partner, Rifkin. He corroborated Drake's testimony about having to inflate prices on change orders to pay kickbacks to Murphy. Additionally, Rifkin swore that he formally served as the vice president of North-East Construction, a contractor on two of the small projects. The first was to repave a rapid transit station parking lot and the second was for repairs to a train platform.

In each instance Murphy instructed Rifkin on the amounts he should bid and how much would be paid as a kickback. RTD grossly overpaid for these projects, allowing Murphy and North-East Construction to pocket $25,000 in kickbacks. To avoid unwanted suspicion, Murphy conspired with Rifkin on the other two small projects to hire a subcontractor, Campbell Construction, to place inflated bids. Both projects involved subsequent drainage repairs needed for the viaduct bridge that had been rehabilitated by Athena Painting and Andros Painting. Testimony indicated that Rifkin received a 10 percent cut of the contracts awarded to Campbell Construction, and an additional $10,000 in cash went to Murphy.

Alec Berg, former president of Salcer Construction, was the final co-conspirator to testify at the trial. Berg said that he had worked as the manager for three separate contracts related to RTD's TREP. Each contract was for the rehabilitation of a light rail bridge. Two of the bridges (Madison Street and Water Street) were part of the southeast corridor, and the third (Center Street) was part of the northwest corridor.

When Salcer Construction was awarded the three contracts, Murphy approached Berg and demanded that he hire his wife's cleaning company to clean construction site trailers. Berg initially rejected him, but Murphy implied that he would make things hard for Berg during the course of the contracts and possible future business if he didn't do as told.

Berg went on to testify that Dylan had mailed all G&F invoices to him throughout the project, and he had never actually corresponded with Susan. Invoices presented at trial illustrated that Salcer Construction had paid $80,000 for cleaning service over an 18-month period. Based on market rates and the nature of work required to be performed, it was estimated that $80,000 was twice what an outside cleaning service actually would charge.

Berg also said that he was instructed to power wash the Madison Street and Water Street Bridges rather than sandblast them as required in the contract's scope of services. In turn, Murphy was to receive kickbacks for the difference in cost between sandblasting and power washing, which was estimated to be $30,000 each. It was also revealed that during the course of these bridge rehabilitations, Murphy had Berg pull one of his employees off the project during working hours to go to Murphy's personal residence and perform emergency flood damage repair and repaint his porch.

After little deliberation, the jury convicted Dylan Murphy on all counts of conspiracy, bribery, extortion, mail fraud and making false statements. Months later he was sentenced to eight years in prison and ordered to pay RTD $88,000 in restitution. Susan was convicted of making false statements and was sentenced to one year in prison.

POST-TRIAL RECOVERY

Once a verdict had been rendered against Murphy, members of the internal audit and legal departments formed a joint task force led by Anna Chiles and me. The goal was to evaluate testimony and evidence presented at trial as well as RTD documentation to determine how and why Murphy was able to commit a fraud against RTD and to see if there were any losses we could identify and recover. Findings from our internal investigation would be used to seek further restitution as well as a recommendation for management to improve RTD's internal controls.

During our review, the task force established that RTD had weak and inefficient internal controls in both our procurement and engineering departments, which allowed for Murphy to get away with his schemes. We were able to determine that the chain of custody for dealing with bid submissions was inadequate and had little or no documentation. Particularly, some procurement files had missing or incomplete information pertinent to their contracts. We also concluded that Murphy's supervisor hadn't properly overseen him, which allowed Murphy to abuse his authority when dealing with the contractors.

Lastly, our review indicated that personnel in both the procurement and engineering departments lacked the latest training for dealing with construction projects, as suggested by industry guidelines.

The task force presented management with our recommendations, which included: 

• Evaluating and improving the procurement policies and procedures, especially for bid submissions and the chain of custody for bids. 
• Reconciling procurement policies and procedures manual to the engineering policies and procedures manual to ensure all parties are in compliance with industry standards. 
• Establishing a debarment policy, which would allow RTD to "bar" contractors from bidding on RTD projects if they have any criminal convictions or civil judgments against them involving fraudulent acts. 
• Implementing a watch list to preclude irresponsible companies. 
• Providing the latest training for contract administrators. 
• Instituting a fraud hotline for employees, contractors or customers to provide tips for suspicious and fraudulent activities. 

We also recommended that RTD file a crime claim with our insurance company, Pacific Mountain, to determine if we were owed additional restitution and to ask if it had tips to prevent and investigate fraudulent activities in the future. Once Pacific Mountain received the claim, our insurance agent hired Washington Tax Group (WTG), a forensic accounting firm, to investigate on behalf of Pacific Mountain.

Donald Sanger, a senior associate for WTG and the lead investigator for our case, requested documentation to review most of the same information the FBI agents had requested. Sanger also identified a list of current and former employees he wanted to interview.

They included current employees who had worked with Murphy on the eight contracts. Jim Nagy and Erica McDonald were procurement contract administrators who were assigned to Murphy's contracts; Nagy was contract administrator for one of the four large projects, and McDonald was the contract administrator for two of the four small ones. Anthony Fatica, who had since retired from RTD, administered the remaining five contracts. Murphy's immediate supervisor, Henry Atkins, and Todd Sinclair, the vice president of engineering, were also interviewed.

Sanger and his associates conducted their investigation in similar fashion as the FBI and RTD's task force, by going through all related personnel records, project files and procurement contracts. After reviewing the trial transcripts and evidence, Sanger and his team conducted employee interviews while Anna and I observed. All the interviewees gave descriptions of their job duties as well as the procedures that are in place for working on construction projects.

Furthermore, the employees were questioned about any involvement they had with the eight projects that Murphy had worked on. When his investigation was complete, Sanger presented Pacific Mountain and our general counsel with his findings report. WTG quantified the total loss incurred by RTD at about $200,000, calculated on four key variables: 

1. Kickbacks Murphy received from inflated bids. 
2. Funds from change orders and other kickbacks that Murphy collected. 
3. Payments to G&F Cleaning. 
4. Repairs to Murphy's home. 

WTG's report also included a series of recommendations to improve RTD's internal controls, some of which coincided with what my task force had suggested. One was to terminate Murphy's supervisor, Henry Atkins. He had been a well-respected bridge engineer with RTD for 25 years, but records from each of the projects indicated that he had blatantly disregarded the proper performance of his duties in reviewing and overseeing Murphy's work. This same sentiment came across when we interviewed Atkins. After the report was reviewed and accepted, Pacific Mountain issued a claims check of $200,000 to reimburse RTD for its incurred losses, and RTD terminated Atkins.

LESSONS LEARNED

Our findings indicated that it's essential for any business to have strong internal controls. While RTD did have some controls in place to ensure that contracts were properly executed, a lack of training and employee supervision allowed for these controls to be ignored and manipulated. When construction projects are an important part of your business, it's essential to ensure that your policies and procedures are continually updated to meet industry standards and guidelines. It's also essential to ensure that the proper chain of custody is in place to protect the integrity of the project. Businesses need to make sure that the roles of their employees are clearly defined to certify a proper segregation of duties.

It's also important to have controls in place, such as watch lists and debarment policies. Having these allows management to know when it's dealing with potentially untrustworthy contractors or clients.

Perhaps the most important lesson to be learned is to make sure a business has both an ethics and a fraud policy to protect the company and the employees. No fraud policy should exist without a fraud hotline and whistleblower protection.

RECOMMENDATIONS TO PREVENT FUTURE OCCURRENCES

After concluding this investigation, I found that it's essential to have solid controls in place to prevent and detect fraud, waste and abuse. Any entity should have at a minimum an ethics and/or fraud policy as well as a hotline that will give individuals the opportunity to comfortably report suspicious activities. Additionally, policies and procedures should be clearly defined throughout an entity.

Management should periodically perform background investigations on those who have been placed in positions of trust. It would also be beneficial to enforce a vacation policy and rotate employees who work repeatedly with the same vendors or contractors. An entity should also offer continuous training and education to keep employees sharp and aware of any new standards and guidelines.

Entities should also perform employee background checks on vendors and contractors. It's important to know with whom you're dealing when you're contracting or partnering with firms on long-term projects. An entity that implements a debarment policy will be able to set guidelines and standards for ethically and legally conducting business. Any entity contracting work should include a watch list as part of its bid process to exclude contractors that might have been sanctioned or participated in any illegal or unethical activities.

Edward J. Gaio, CFE, is a criminal justice and finance graduate of Kent State University with 10 years of experience in auditing and compliance review. Gaio has experience working with corporations and public agencies and has participated in the recovery of more than $2 million in misappropriated assets. He's a staff auditor with Greater Cleveland Regional Transit Authority.

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