How business was done

Mayor Lee testifies in corruption lawsuit that could cost the city $10 million

Mayor Ed Lee (with attorney Joe Cotchett) heads for the courtroom to testify in the case.

A complicated civil lawsuit alleging corruption and fraud and involving several prominent current and former city officials — including Mayor Ed Lee, who took the witness stand to discuss actions he took as city purchaser a decade ago — could end up costing city taxpayers as much as $10 million.

City and County of San Francisco vs. Cobra Solutions and Telecon was being deliberated by jurors in Superior Court at press time. It centers on a fraud and kickback scheme engineered by convicted felon Marcus Armstrong, a former Department of Building Inspection information technology manager who bilked the city out of at least $482,000 between 1999 and 2001 (see "Dirty Business," 2/8/11). His scheme was exposed by an FBI investigation following a whistleblower's complaints in September 2001 that sub-contractors were not being paid.

The City Attorney's Office accused Cobra Solutions of participating in Armstrong's fraud, but Cobra's owners denied being part of the scheme and they say their business was wrongfully damaged when their contracts were frozen by city officials.

Armstrong created two phony companies, Monarch Enterprises and Mindstorm Technologies, and ordered master contractor Cobra Solutions to use the phony sub-contractor companies to provide technology services to the city's Computer Store (a list of approved contractors) under an agreement awarded to Cobra by the Committee on Information Technology (COIT). It also partnered with another company alleged by the city to be fraudulent, Government Computer Sales, Inc. (GCSI), whose principals fled and whose whereabouts are unknown.

Cobra Solutions founder and president James Brady had raised questions about Armstrong as early as 2000, questions that triggered an unfruitful investigation by the city. Brady maintained in court testimony that Cobra, unaware of Armstrong's fraud, relied on him to sign off on work services that Armstrong's phony companies were supposed to have supplied to the city.

The Computer Store was set up by then-Purchaser Ed Lee under the administration of then-Mayor Willie Brown to centralize technology procurement across departments. Now-Mayor Lee was deposed in the case and called to the witness stand on Feb. 6, where he said he awarded Cobra Solutions the highest-rated ranking among several vendors being evaluated by COIT for master contract award status. Each of the other city evaluators, including Deputy Controller Monique Zmuda, also ranked Cobra the top service provider.

According to Armstrong's guilty plea agreement, GCSI partnered with Armstrong to defraud the City out of $240,000. Deborah Vincent James — then-director of COIT and now deceased — testified in a pre-trial deposition that GCSI was "fraudulent," that city staffers recommended against certifying the company, and that it was only awarded master contract status because of its political ties to Brown, who directed Lee to overrule the staff recommendation. In his deposition, Lee claimed he could not remember GCSI.

Vincent-James and former Purchasing Directory Judith Blackwell forwarded whistleblower complaints about GCSI to the City Attorney's Office in early 2001, but neither that office nor the Controller's Office acted on the complaints until GCSI had gone bankrupt and GCSI's owners, two foreign nationals, had disappeared.

Of note, Lee was not questioned about his and Brown's involvement in awarding GCSI its master contract status in 1998. Time restrictions placed on attorneys by Judge James McBride limited the scope of witness examinations, so the most politically explosive charges went largely unexplored in court.