the schools were in terrible disrepair and a lot of the money was being used on âenvelopeâ workâroof and exterior repairs to maintain the integrity of the shell of the building. New York City had a long and sordid history of construction corruption and bid rigging, so the New York state legislature had created a new position of inspector general to put an end to inflated costs and waste.
Peter was a recent law grad who was interested in doing a very different kind of public interest law. Making sure that construction auctions and contract change-orders are on the up-and-up is not as glamorous as taking on a death penalty case or making a Supreme Court oral argument, but Peter was trying to make sure that thousands of schoolchildren had a decent place to go to school. He and his staff were literally risking their lives. Organized crime is not happy when someone comes in and rocks their boat. Once Peter was on the scene, nothing was business as usual.
Peter called me because he had discovered a specific type of fraud that had been taking place in some of his construction auctions. He called it the âmagic numberâ scam.
During the summer of 1992, Elias Meris, the principal owner of the Meris Construction Corporation, was under investigation by the Internal Revenue Service. Meris agreed, in exchange for IRS leniency, to wear a wire and provide information on a bid-rigging scam involving School Construction Authority employees and other contractors. Working undercover for prosecutors, Meris taped conversations with senior project officer John Dransfield and a contract specialist named Mark Parker.
The contract specialist is the person who publicly opens the sealed bids of contractors one at a time at a procurement auction and reads out loud the price that a contractor has bid.
In the âmagic numberâ scam, the bribing bidder would submit a sealed bid with the absolute lowest price at which it would be willing to do the project. At the public bid openings, Parker would save the dishonest contractorâs bid for last and, knowing the current low bid, he would read aloud a false bid just below this price, so that the briber would win but would be paid just slightly less than the bidder who honestly should have won. Then Dransfield would use Wite-Out to doctor the briberâs bidâwriting in the amount that Parker had read out loud. (If the lowest real bid turned out to be below the lowest amount at which the dishonest bidder wanted the job, the contract specialist wouldnât use the Wite-Out and would just read the dishonest bidderâs written bid.) This âmagic numberâ scam allowed dishonest bidders to win the contract whenever they were willing to do the job for less than the lowest true bid, but they would be paid the highest possible price.
Popeâs investigation eventually implicated in the scam eleven individuals within seven contracting firms. Next time youâre considering renovating your New York pied-Ã -terre, you might want to avoid Christ Gatzonis Electrical Contractor Inc., GTS Contracting Corp., Batex Contracting Corp., American Construction Management Corp., Wolff & Munier Inc., Simins Falotico Group, and CZK Construction Corp. These seven firms used the âmagic numberâ scam to win at least fifty-three construction auctions with winning bids totaling over twenty-three million dollars.
Pope found these bad guys, but he called me to see if statistical analysis could point the finger toward other examples of âmagic numberâ fraud. Together with auction guru Peter Cramton and a talented young graduate student named Alan Ingraham, we ran regressions to see if particular contract specialists were cheating.
This is really looking for needles in a haystack. It is doubtful that a specialist would rig all of his auctions. The key for us was to look for auctions where the difference between the lowest and second-lowest bid was unusually small.
Peter was a recent law grad who was interested in doing a very different kind of public interest law. Making sure that construction auctions and contract change-orders are on the up-and-up is not as glamorous as taking on a death penalty case or making a Supreme Court oral argument, but Peter was trying to make sure that thousands of schoolchildren had a decent place to go to school. He and his staff were literally risking their lives. Organized crime is not happy when someone comes in and rocks their boat. Once Peter was on the scene, nothing was business as usual.
Peter called me because he had discovered a specific type of fraud that had been taking place in some of his construction auctions. He called it the âmagic numberâ scam.
During the summer of 1992, Elias Meris, the principal owner of the Meris Construction Corporation, was under investigation by the Internal Revenue Service. Meris agreed, in exchange for IRS leniency, to wear a wire and provide information on a bid-rigging scam involving School Construction Authority employees and other contractors. Working undercover for prosecutors, Meris taped conversations with senior project officer John Dransfield and a contract specialist named Mark Parker.
The contract specialist is the person who publicly opens the sealed bids of contractors one at a time at a procurement auction and reads out loud the price that a contractor has bid.
In the âmagic numberâ scam, the bribing bidder would submit a sealed bid with the absolute lowest price at which it would be willing to do the project. At the public bid openings, Parker would save the dishonest contractorâs bid for last and, knowing the current low bid, he would read aloud a false bid just below this price, so that the briber would win but would be paid just slightly less than the bidder who honestly should have won. Then Dransfield would use Wite-Out to doctor the briberâs bidâwriting in the amount that Parker had read out loud. (If the lowest real bid turned out to be below the lowest amount at which the dishonest bidder wanted the job, the contract specialist wouldnât use the Wite-Out and would just read the dishonest bidderâs written bid.) This âmagic numberâ scam allowed dishonest bidders to win the contract whenever they were willing to do the job for less than the lowest true bid, but they would be paid the highest possible price.
Popeâs investigation eventually implicated in the scam eleven individuals within seven contracting firms. Next time youâre considering renovating your New York pied-Ã -terre, you might want to avoid Christ Gatzonis Electrical Contractor Inc., GTS Contracting Corp., Batex Contracting Corp., American Construction Management Corp., Wolff & Munier Inc., Simins Falotico Group, and CZK Construction Corp. These seven firms used the âmagic numberâ scam to win at least fifty-three construction auctions with winning bids totaling over twenty-three million dollars.
Pope found these bad guys, but he called me to see if statistical analysis could point the finger toward other examples of âmagic numberâ fraud. Together with auction guru Peter Cramton and a talented young graduate student named Alan Ingraham, we ran regressions to see if particular contract specialists were cheating.
This is really looking for needles in a haystack. It is doubtful that a specialist would rig all of his auctions. The key for us was to look for auctions where the difference between the lowest and second-lowest bid was unusually small.
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