Department of Law
120 Broadway
New York, NY 10271
Department of Law
The State Capitol
Albany, NY 12224

For More Information:
212-416-8060 For Immediate Release
June 28, 2002

State Attorney General Eliot Spitzer today announced the results of a joint investigation between the Office of the Attorney General and the Special Commissioner for Investigation for the New York City School District into the sale of copiers and duplicators to the New York City Board of Education.

The investigation revealed a decade-long conspiracy between two of the New York metropolitan area's largest copier and duplicator retailers to supply customers in violation of the Donnelly Act, New York's antitrust law. The investigation also led to the indictment of a salesperson for bribery and bid-rigging in connection with the sale of copiers and duplicators to New York City schools.

Yesterday, in New York Supreme Court, Joseph Weiss – the Chief Executive Officer of Candle Business Systems, Inc. of Bohemia, New York – pled guilty before the Honorable Justice John Cataldo to violating the Donnelly Act, a class E felony. In his plea, Weiss admitted to entering into a customer allocation agreement with Atlantic Business Products, Inc., another substantial copier dealer. Weiss's sentencing is scheduled for October 30.

In addition to Weiss's plea to criminal Donnelly Act violations, Candle entered into a consent decree to resolve a civil complaint filed by Spitzer, and to pay $400,000 in penalties and costs. The consent decree bars Candle from entering into similar illegal agreements in the future, and places restrictions on its sales to the Board of Education.

The joint investigation, upon which these civil and criminal cases were based, also disclosed that Candle had previously entered into an illegal customer allocation agreement with another significant office equipment dealer, Copyworld of America, Inc. It further revealed that salespersons from Candle and other copier dealers had engaged in extensive improper conduct in their sales to the Board of Education, including the submission of fictitious bids and charging schools far in excess of Board of Education contract prices.

Spitzer further announced a five-count indictment of Candle salesperson Abraham Thomas a/k/a Thomas Abraham on felony charges, based on Thomas's bribery of school officials and submission of false bids in violation of the Donnelly Act.

"Competition is the life blood of our economy," AG Spitzer said. "When businesses agree not to compete against each other, prices go up and consumers lose. We are committed to pursuing those who engage in such illegal conduct."

"Every available dollar needs to be earmarked for the City's schoolchildren," said Rose Gill Hearn, Commissioner of the New York City Department of Investigation. "This case puts would-be corrupt vendors on notice that we will not let them line their pockets with money that belongs in the classroom."

During the investigation, the Attorney General's office uncovered numerous problems with the system by which the BOE and other local governmental agencies purchase office equipment. As a result, the Attorney General has issued recommendations for reforming those procedures, which are set forth in an attachment to this release.

Among the reforms urged by Spitzer are centralized purchasing, more intensive training of purchasing staff, and school-based budgeting.

This case is being handled by Assistant Attorneys General Lesley Brovner of the Criminal Prosecutions Bureau and David Weinstein of the Antitrust Bureau, and Special Counsel Vicki Multer Diamond and Deputy Chief Investigator Tom Comiskey of the Office of the Special Commissioner for Investigation.

REPORT AND RECOMMENDATIONS FOR IMPROVING PROCUREMENT BY THE NYC BOARD OF EDUCATION AND OTHER LOCAL GOVERNMENT PURCHASERS OF COPIERS AND DUPLICATORS

For the past year the Attorney General's Office and the Special Commissioner of Investigation for the New York City School District ("The Special Commissioner") have been conducting a joint investigation into anti-competitive conduct in the sale of copiers and duplicators in the New York metropolitan area. That investigation was initiated as a result of misconduct by an employee of Copyworld of America, once the BOE's primary supplier of copiers and duplicators, and now owned by Candle Business Systems, Inc. ("Candle").

The investigation led to the felony plea of Candle President Joseph Weiss, the indictment of former Copyworld -- and now Candle -- salesperson Abraham Thomas, and the filing of a civil suit against Candle. It also revealed a number of systemic shortcomings in the procurement of office equipment and other goods by the BOE and other local government purchasers. The purpose of this Report is to describe these problems, and to suggest some steps that may reduce incentives for corrupt conduct, and thereby save school funds for educational needs. Although the report focuses specifically on copiers and duplicators – the subject matter of the joint investigation – its suggestions may be applicable to a wide variety of other procurement.

The Present System

The State of New York, through its Office of General Services, issues periodic Invitations for Bids for copier and duplicator contracts. These offerings specify terms of sale, and those copier companies that meet those terms, and submit a sufficiently low price per machine, are included on the state contract. State agencies, as well as local governments and certain non-profit agencies, may purchase copiers and duplicators under the terms and rates set forth in the government contract.

The BOE is a substantial buyer of copiers and duplicators. While the BOE is eligible to buy under the state contact, it also enters into its own contracts with copier and duplicator manufacturers, which similarly allow it to use its substantial, systemwide purchasing power to obtain lower prices than could be negotiated by individual schools. Nonetheless, the BOE also allows schools to make "off-contract" purchases. Under BOE rules, schools buying equipment not under BOE contract, and costing over $250, must obtain three independent bids before the purchase is made. Many other local governments in New York State have similar requirements.

The evidence reviewed in the course of the joint investigation indicates that the "three bid" requirement is often evaded. The evidence showed that staff members in some schools would reach agreement with a single seller, who was then asked to provide the school with false bids from "competitors," in order to create a paper record of compliance with the BOE's requirements. There are several factors which encourage this practice. First, the purchasing employees – and the schools themselves – have had little incentive to save money. Their priority is frequently to avoid burdensome administrative tasks, rather than to obtain the best value for the school. Moreover, they often lack the time, training and information necessary to make the most economical purchase. Many employees making purchasing decisions, for example, seem to lack up-to-date information on contract pricing.

Second, in some instances, obtaining alternative bids is simply impossible. For example, Copyworld was at times the exclusive dealer for certain manufacturers in some New York City boroughs, and thus competitive bids for the same product were unavailable. Schools nonetheless had to obtain multiple bids, and acclimated themselves in the process to obtaining false bids from the seller.

Finally, unscrupulous salespersons often seek to persuade schools that an off-contract transaction is advantageous, since they can obtain higher commissions for such sales than they can under the BOE contract. Most often, this is accomplished by offering to lease, rather than sell, a copier or duplicator. We have found many instances in which schools entered into leases that required exorbitant payments, and resulted in significant overcharges over BOE contract rates for purchases, even when a reasonable interest rate is factored into the cost.

This is not the first time the Attorney General and Special Commissioner have found that problems with the BOE's "three bid" requirement. In December 2001, a similar joint investigation resulted in criminal charges against eleven custodians for accepting bribes and false bids in a scheme arising out of the same bidding structure. Ten of those individuals have since pled guilty to charges arising out of the investigation, and a criminal case is pending against the remaining defendant.

It seems apparent, from these cases, that requiring multiple bids often fails to constrain pricing, absent other measures which restrict the improper practices described above. It is simply too easy for salespersons and BOE employees wishing to avoid this procedure to provide a sufficient paper trail, and enter into a transaction without any competitive constraint. Further, those charged with oversight and auditing have, in some cases, failed to identify fictitious bids, even when a seller submits bids from the same fictitious "competitors" on multiple occasions.

The Attorney General and Special Commissioner understand that the BOE has taken, or is considering, steps to remedy these problems. To assist in this process, our suggestions for reform, formulated on the basis of the joint investigation, are set forth below.

Proposals for Change

Under the present system, salespersons can augment their profits by making off-contract sales, purchasers have limited incentive to cut costs, and procedures intended to insure competitive bidding are consistently and easily evaded. There are a number of different avenues through which the BOE can rationalize this process, including:

Centralize Purchasing - While there are some instances in which schools should have autonomy in purchasing decisions, there is little reason to allow such independence in buying common administrative items such as copying machines. That is particularly true where individual schools have no incentive to save money. Eliminating off-contract purchases would remove the problems described above, and would likely allow the BOE to negotiate a more advantageous contract. We understand the BOE has issued a Request for Proposal aimed at implementing a more centralized approach. Further, an August 2001 memorandum by BOE Chief Financial Officer Beverly Donohue set forth a number of procurement reforms, including a directive that goods and services only be purchased from contract vendors. We applaud and encourage these initiatives.


Limit Purchasing Authority to Trained Employees - In many of the schools whose practices were reviewed by the investigation, purchasing decisions were made by a wide variety of employees, some of whom were unfamiliar with the BOE rules or contract, or uninterested in trying to secure genuine savings for the school system. Employees that have purchasing authority must be adequately trained and provided with current information on the existence of the BOE contracts, the importance of purchasing under them, and the prices which are available under those contracts.


Provide Schools with Incentives to Save Money - During the period reviewed by the investigation, budgeting was accomplished at the district level, and individual schools gained little by saving money by cutting purchasing costs. To the extent that schools retain the authority to procure goods or services, they should be given some budgetary incentive to limit costs. We understand that the BOE is in the process of adopting school-based budgeting, and we encourage its implementation.


Implement System of E-Procurement - At present, all purchases made by individual schools are documented on paper. The prevalence of paper records makes oversight difficult, and eases evasion of BOE contract procedures. We understand that the BOE has been considering a system of e-procurement, which would allow purchases to be made on-line. Such a system would, among other advantages, allow employees to gain immediate access to contract price information. We urge its implementation.


Scrutinize Leases - As noted above, most of the transactions which resulted in substantial overcharges were leases, which are not subject to the State or BOE contract. Auditors and district officials should scrutinize these transactions with particular care, to determine whether there was good reason to lease rather than purchase a machine, and to prohibit leasing where it results in higher costs without corresponding advantage to the school.


Take Greater Advantage of State Contracts - Like other local government entities, the BOE is entitled to purchase copiers and duplicators under New York State contracts. These contracts may provide schools with low cost alternatives to those machines available under the BOE contracts. Yet many schools seem to be unaware of this purchasing option. More information should be disseminated to schools on the existence of these contracts.


More Effective Use of Sanctions and Monitoring - We found several instances in which principals complained about overcharges to the Board of Education Legal Department, but the allegations were never referred to the Board's Enforcement Department. The BOE should monitor such complaints carefully, and use the effective sanctions mechanisms at its disposal to discipline those sellers that are not abiding by the BOE contract. Further, a system of computerized record keeping for purchases would quickly reveal certain bids as fraudulent. In the joint investigation, for example, bids were consistently submitted in the name of companies that did no business in New York, and which never won a contract. The fraudulent nature of such bids would become apparent if auditors could easily access systemwide bidding records for individual sellers.

We commend the BOE on the steps it has been taking to remedy these problems, and urge it to implement those measures listed above as warranted to insure that purchasing is carried out in a rational and cost-effective manner.

Other Local Government Agencies

The investigation by the Office of the Attorney General focused primarily on sales to the New York City Board of Education, and did not extensively review purchases or leases of copiers and duplicators by other local governmental entities. Nonetheless, anecdotal evidence indicates that there are many agencies eligible to purchase under the state contract which are not taking advantage of the low prices available to them. As in the case of the BOE, we have found instances in which such agencies enter into leases which are not cost effective, in comparison to the low purchase prices provided for under the state contract.

We urge local governments and non-profit corporations to determine their eligibility to purchase under these contracts, to inform their employees of their existence, and to thoroughly investigate the advantages of purchasing thereunder. In addition, they should carefully consider whether leasing arrangements -- which are not covered by the state contract -- are cost effective in light of the available state purchasing options.

Those wishing to be kept apprized of available state contracts should contact the following:
For Copiers:

Linda Holcomb, Purchasing Officer 1
New York State Office of General Services
Procurement Services Group
38th Floor, Corning Tower
Albany, NY 12242
Telephone: (518) 474-7902
For all others:

Customer Services
New York State Office of General Services
Procurement Services Group
37th Floor, Corning Tower
Albany, NY 12242
Telephone: (518) 474-6717