Investigative report misfeasance by officials of Scottsdale Unified School District No. 48

              Investigative Report:
Misfeasance by Officials of
Scottsdale Unified School
District No. 48
October
1998
Douglas R. Norton
Auditor General
Investigative Report:
Misfeasance by Officials of
Scottsdale Unified School
District No. 48
October
1998
Table of Contents
Summary 1
Finding I:
District Officials Breached Their Fiduciary
Duty 2
Finding II:
Employees Improperly Received Economic
Benefits 8
Finding III:
District Administrator Misused District
Resources 9
Conclusion 10
1
Summary
n June 1997, the Office of the Attorney General requested that the
Office of the Auditor General investigate certain allegations of
financial improprieties on the part of administrators and employees of
Scottsdale Unified School District No. 48. As a result of that request,
and in conjunction with the Attorney General’s Office, we conducted an
investigation of those allegations and submitted the following findings to
the Attorney General. The Attorney General has taken corrective legal
action against the District. See the Conclusion on page 10.
Our investigation revealed that from July 1994 through June 1998,
certain administrators and employees practiced misfeasance; that is, they
violated the laws and regulations associated with lawful District
activities. Furthermore, they breached their fiduciary duty to use public
money prudently. In addition, certain administrators personally profited
from their official business dealings and misused District resources.
Accordingly, officials may have violated Arizona Revised Statutes,
school district procurement rules, and District policies. Principally:
§ Certain District administrators and employees were responsible for
violating and circumventing procurement rules affecting projects
totaling $11,725,425.
§ Certain District administrators and employees accepted favors from
vendors. Examples of these favors include deep-sea fishing in San
Diego, vendor discounts on personal services, and various sporting
event tickets.
§ A District administrator misused District equipment for the benefit
of his and his spouse’s personal businesses.
These financial improprieties occurred primarily because District top
management established a business climate that encouraged a disregard
for responsibilities associated with administering public monies.
District administrators and employees often acted autonomously without
consideration for the community they served. For instance, the
Governing Board was not apprised of projects on a timely basis and was
presented with limited information. Employees were reportedly
instructed to include less than adequate detail concerning procurement
items in agendas provided to the Board members. In addition, many
local vendors were prohibited from participating in full and open
competition for District projects because procurement rules were not
enforced. These vendors complained to District employees but the
complaints went unheeded.
I
Investigation Highlights:
Projects totaling
$11,725,425 were
awarded in violation
of procurement rules
District employees
received discounts
and other favors
from certain vendors
A District administrator
and his spouse
personally benefited
by misusing
District equipment
2
Finding I
District Officials
Breached Their Fiduciary Duty
As public officials, all District employees have a responsibility to
safeguard and manage District assets for and on behalf of the
community and the schools. Further, they must protect and use
public monies according to state law. However, certain employees
repeatedly acted with misfeasance. They breached their fiduciary
duty, were not responsive to their obligation for the prudent use of
public money, and were not held accountable for their imprudence.
Some employees also had improper close relationships with vendors.
Finally, an attitude that promoted circumventing procurement rules
and limiting fair competition among qualified vendors was so
pervasive that it led to a complete breakdown of credible business
practices.
School district procurement rules, applicable Arizona Revised
Statutes, and the Uniform System of Financial Records exist to help
ensure that districts receive the best possible value for the public
money they spend by prohibiting the restraint of free trade and the
unreasonable reduction of competition among vendors. However,
during the period July 1994 through June 1998, administrators and
employees in the Superintendent’s Office, Building Services
Department, and Purchasing Department failed to abide by those
rules and statutes. Consequently, school district business was often
directed toward favored vendors without the benefit of full and open
competition. Therefore, the District may have paid more than the fair
market value for certain projects. In addition, many critical
procurement records were not available for review.
During our investigation, we noted the following procurement
violations for projects totaling $11,725,425.
§ Specifications for a competitive sealed proposal were restrictive
to benefit a certain vendor
§ Purchases were improperly classified as “sole source”
§ Contracts were illegally extended
§ Critical procurement records were missing
§ Contracts were approved without obtaining the required sealed
proposals or price quotations
§ Unauthorized individuals entered into contracts and allowed
contract increases
Over $11 million of District
purchases were improperly
awarded
District administrators
caused or condoned repeated
procurement violations
3
Exhibit 1
Summary of Procurement Violations
July 1994 through June 1998
Source: Records of Scottsdale Unified School District, vendor confirmations, and investigation reports.
Further, during the investigation process numerous items were
requested for review, including certain personnel files, project bid
files, payment records, Governing Board minutes, and internal
investigation reports. The then-acting Superintendent refused to
provide certain records to this Office in clear opposition to state
statutes that authorize such access to the Auditor General.
Consequently, our investigation was delayed for approximately three
months until a court process ultimately provided our lawful access.
District officials’ failure to properly abide by school district
procurement rules was a breach of their fiduciary duty, a restraint of
free trade, and inadequate managerial oversight. More importantly, it
created a climate conducive to the improper use of public money.
A few examples of the improper conduct we found follow.
6,494,580
1,821,004
1,516,994
355,812
1,537,035
Restrictive proposal specifications
Improper "sole source" classification
Illegal contract extensions
Missing procurement records
Improper contracts
The Auditor General was
refused access to certain
records
4
Restrictive Proposal Specifications
In October 1993, the District purported to follow competitive sealed
proposal procedures to purchase instructional technology services.
However, the District’s specifications in the request for proposals
(RFP) were so restrictive that only one vendor submitted a proposal.
In fact, an employee of this vendor helped prepare the specifications
for the District and was later hired by the District. That vendor was
awarded the contract and, as a result, was paid nearly $6.5 million
from July 1994 through June 1998. Some of the details relating to
this particular RFP follow.
§ There was inadequate time to respond to the 37-page RFP. The
invitation for proposals was publicized only 7 days prior to the
proposal-opening deadline instead of the lawfully required 14-day
minimum.
§ Some proposal specifications were taken directly from the
winning vendor’s literature. According to a competing vendor, a
District employee refused to allow any specification substitutes
and stated that all vendors had to provide what was specified in
the RFP.
§ Finally, the following statements recorded in a District e-mail
message from the Director of Information Services to the Director
of Building Services indicate that the contract may have been
improperly steered to a certain vendor. The Information Services
Director’s e-mail message was his reaction to the RFP four days
after the Building Services Director submitted it to the Purchasing
Department and eight days prior to the issuance of the RFP.
§ “The RFP seems terribly restrictive. It’s as if you know exactly what
you want and you’ve developed a generic description for that system
but it still is obviously based on one system that we know about and
they don’t.”
§ “The continual mention of the UNIX-based operating system is
mentioned so many times that again as a vendor I have to sit there
and say why? Certainly this can be done with some other operating
system.”
§ “Now I know that that is precisely what you’ve done and I just hope
that nobody raises a fuss about that.”
Although his e-mail message was dated several days before the
RFP was issued, the Director of Information Services identified
the winning vendor by name.
§ “Once [the named vendor] wins the RFP I assume that we will sit
down with them and redesign the system to fit exactly what we (not
they) want to do.”
The winning vendor of a $6.5
million proposal employed an
individual who assisted the
District in compiling the
specifications for the proposal
An administrator’s e-mail
message detailed the purposeful
selection of a favored vendor
5
In accordance with their usual procedures, Purchasing Department
employees contacted the non-responding vendors to determine why
they did not submit a proposal. The vendors stated that the RFP was
too specific to one vendor, the specifications were very limiting, and
there was not enough time to respond. Despite the warning of
possible impropriety implicit in these comments, the District did not
pursue the matter or reissue the proposal.
Improper “Sole Source” Classification
In February 1997, based on improper information from the Office of
the former Superintendent, the Governing Board approved a $1.4
million purchase of educational software without going through the
competitive procurement process. In fact, the software was
purchased directly from a Minnesota company that had previously
employed the former Superintendent.
The procurement rules allow school districts to purchase a required
item without obtaining price quotations or going through the
competitive sealed proposal process if the district can document that
there is only one source for the item. However, this particular
educational software could have been purchased in Arizona from at
least one other vendor. Furthermore, District employees did not
compare this software to other brands that perform a similar
education function to determine which brand would offer the best
possible value to the District.
Illegal Contract Extensions
In December 1990, the District entered into a five-year contract with
an energy management contractor and paid that contractor $7,678,103
over the contract term. In 1996, based on the recommendation of the
Business Services Department Assistant Superintendent, the
Governing Board unlawfully renewed that contract beyond the five-year
limit established by state statute. In 1997, the Board again
renewed the contract without following the procurement process.
The Board granted these renewals despite the lack of sealed proposals
or a determination that the District was receiving the best possible
value. This contractor was paid an additional $1,537,035 under these
illegal contract extensions.
The former Superintendent
engineered the payment of
$1.4 million to a former
employer
The District spent $1.5
million on illegal contract
extensions
6
Missing Procurement Records
Employees in the Purchasing and Building Services Departments
could not locate or did not retain significant documents supporting
several sealed proposals. In particular, an October 1993 RFP for
high-performance air conditioners was missing all vendor proposal
submittals, as well as recap sheets detailing their responses.
Consequently, it was impossible to determine the propriety of the
$1,065,773 paid to the winning vendor. Additionally, District
employees failed to request contract approval from the Governing
Board until January 1995. By then, over $400,000 had been paid to
the vendor.
Improper Contracts
Building Services Department employees steered District projects to
favored vendors by circumventing procurement requirements.
Although many projects were completed before Purchasing
Department employees became aware of the evasion, they made little
or no effort to stop the circumvention. Below are some examples of
employees’ failure to abide by procurement laws designed to ensure
free trade and competition among vendors.
§ A security vendor was allowed to increase prices on a fixed price
contract and was paid nearly $100,000 for services not included in
the contract. The contract stated that all prices were to remain
unchanged and the contract was not to be transferred, conveyed,
or sublet. However, not only was the security vendor allowed to
subcontract with another vendor, but the District also paid an
extra 20 percent to the security vendor for the subcontracting.
§ Although lacking the authority to do so, a Building Services
Department Manager entered into a contract with a glass repair
vendor and allowed a carpet vendor to perform work on a project
outside the scope of the contract. The employee did not solicit the
required price quotes or inform the Purchasing Department that
sealed proposals were necessary. Consequently, these favored
vendors were paid more than $110,000 without a proper contract
and without the District ensuring that it received the best possible
value.
§ A construction vendor who sponsored part of a San Diego fishing
excursion attended by District officials was overpaid $9,000.
This overpayment went undetected by the District for two years,
until uncovered by the Auditor General’s Office.
Procurement records for a
$1 million purchase were
missing
A favored security vendor
was paid $100,000 more than
the contract allowed
7
§ Building Services Department employees split construction
projects into phases thereby circumventing the procurement rule
requiring price quotes from at least three vendors. By allowing
this evasion to proceed, Purchasing Department employees also
failed to ensure compliance with procurement rules. As a result,
the District may have paid more than market value when it
avoided the competitive process and paid over $129,000 to
favored construction vendors. Using a similar scheme, the
Building Services Director told contractors not to expect action on
change orders over $10,000, indicating that he could avoid
Governing Board approval only if the change order was for less
than $10,000.
8
Finding II
Employees Improperly Received
Economic Benefits
A public official is in a fiduciary position to do business on behalf of
the citizens. That business should be conducted at “arm’s length,” in
an open, above-board manner. For public officials to profit
personally from their official business dealings violates the public
trust and jeopardizes the integrity of the District as a whole.
District officials profited personally from their relationships with
certain favored District vendors. District policies prohibit any
employee from accepting or receiving gifts, gratuities, or anything of
value from anyone doing, or desiring to do, business with the District.
Notwithstanding District policies, we noted the following instances of
District employees receiving gifts.
§ The Director of Building Services, and his spouse, received a total
discount of at least $2,708 on the installation of, and monitoring
services for, their personal security systems. A District security
vendor did the work and provided the discount.
§ The Assistant Superintendent of Business Services, Director of
Building Services, and a former Superintendent accepted a San
Diego fishing trip sponsored in part by a District construction
vendor.
§ Various employees have accepted offers of tickets from existing
and potential District vendors for Phoenix Open golf and box
seats for Phoenix Suns basketball.
§ Numerous meals were provided to District officials and staff as
they met with existing and potential vendors.
Many vendors frequently offered District employees out-of-state
trips, golf outings, tickets for various sporting events, and meals. In
fact, at least one employee attended an out-of-state entertainment
event with the vendor. By accepting these gifts, District employees
presented at least the appearance of impropriety.
Administrators responsible for
the management of District
purchases received personal
benefits from District vendors
9
Finding III
District Administrator Misused
District Resources
Employees in the Building Services Department are responsible for the
construction and maintenance of all District facilities. Accordingly,
some employees were issued specially purchased personal computers to
take home so they could remotely control the District’s energy
management system. However, in addition to the District’s software, the
personal computer issued to the Director of Building Services (Director)
improperly contained software programs and numerous client files from
his spouse’s tax and accounting business.
District employees also use other computers for network applications
such as e-mail and word processing; however, the other computer issued
to the Director contained not only the District software, but also many
personal documents, including corporate records of an electrical business
he and his spouse owned. This indicates that the computer improperly
held data used for the Director’s private corporation.
On April 4, 1997, the day the Director was placed on administrative
leave, he deleted personal and possibly District documents from the
computer in his office. He also called his spouse, who then reformatted
the hard drive on the District’s personal computer purchased for its
energy management system. As a result, not all information on these
computers could be retrieved; however, an examination of both hard
drives revealed the following items improperly stored on the computers:
§ Private business software that was installed by the Director’s spouse
§ At least 62 separate account files that were clients of the Director’s
spouse
§ Financial records of 2 local businesses that were clients of the
Director’s spouse
§ Business reports from 1987–1994 for the Director’s private
corporation
§ Other personal documents
The Building Services Department Regulation and Procedure Manual,
issued March 1995, states that “absolutely no District-owned equipment,
tools or materials are to be used on or off District property for personal
reasons.” This manual was prepared with the Director’s supervision and
guidance.
An administrator misused District
computers to benefit his and his
spouse’s private businesses
10
Conclusion
The Scottsdale Unified School District No. 48, as a government entity, is
responsible to Arizona citizens for the prudent use of public money.
Arizona taxpayers in general and District students, parents, teachers, and
taxpayers in particular were denied the benefits of full and open
competition and may have paid more than market value for certain
projects for the following reasons.
§ District administrators fostered a climate of disregard for the proper
use of public monies.
§ District administrators and employees ignored or circumvented
required school district procurement rules.
§ District administrators and employees accepted favors from
preferred vendors.
In addition, a District administrator misappropriated District resources to
his own use and that of his spouse.
On October 6, 1998, the Attorney General’s Office filed a 25-count civil
complaint in Maricopa County Superior Court against the Scottsdale
Unified School District. This complaint alleges conspiracies in restraint
of trade and violations of Arizona procurement laws for District projects
totaling $11,725,425. In addition, the District is charged with tampering
with public records, and unlawfully withholding and failing to maintain
official records.
Within the complaint, the Attorney General’s Office seeks damages as
follows:
§ Civil penalties of $150,000 for each of the six antitrust violations.
§ Penalties in the amount of the entire dollar value of each contract,
plus 20 percent, totaling $14,070,510.
Further, the Court was requested to issue a ten-year injunction
restraining the District from:
§ Engaging in unlawful procurement conduct and conspiracies in
restraint of trade.
§ Failing to maintain, refusing to produce, or tampering with
documents.