Impacts of a Fraud Investigation:Lessons Learned

Michèle G. GoetzAssociate Executive DirectorSponsored Research Services

SDSU Research Foundation

• 501(c)3 auxiliary organization to San Diego State University• SDSU is the largest of the 24 campuses in the California State

University system • Main campus in San Diego• Satellite campus in Imperial Valley – approximately 100 miles east• 1,044 proposals submitted FY 11• 799 awards valued at $145 million• $135.2 million in expenditures

Lesson #1: Bad Things Happen in Multiples!

2000 – 2002: NSF OIG system-wide audit of CSU cost-sharing documentation practices

2001 – 2004: NSF OIG audit of faculty compensation practices at SDSU Research Foundation

Booz-Allen desk audit (NSF) 2007 – 2009

2008 – 2012: Multi-agency Fraud Investigation led by NSF

Background

SDSU Research Foundation administered, through a satellite campus of SDSU, three separate sub awards received from a California school district for teacher training in mathematics and science in grades K-12 in the Imperial Valley.

Source of funding for the sub awards came from:• National Science Foundation grant awarded to school district• US Department of Education grant awarded to school district

All three sub awards were signed by the Superintendent of the school district, after being approved by the school district board

National Science Foundation Funding

• Five year project designed to implement standards based instruction in all content areas

• SDSURF was contracted to provide stipend payments to local teachers for their participation in professional development institutes

• A separate sub award was issued to SDSURF to document impact of the project on student performance

US Department of Education Funding

• Collaborative partnership intended to address teacher leadership development and included a research design guided by researchers from branch campus

• SDSURF was contracted to provide stipend payments to teachers for their participation in professional development institutes

• In 2007-2008 funds were added to pay the Superintendent of the school district

Initial Indication of Problems

•July 2007 - NSF grant was issued a second no-cost extension by school district. (prime on NSF award ) Additional funds added to pay Research Associate•October 2007 – Elementary school district questioned why we were still billing since the fund had ended and the P.I. at school district had retired•When questioned, SDSU P.I. thought all funds had been transferred to SDSURF •SDSURF notified P.I. to stop work and provided documentation of extension to school district•Prime institution did not return phone calls after initial conversation•February 2008 – Phone call from NSF OIG requesting information on payments to P.I. on prime through our institution•Found that P.I. from prime was being paid as Research Associate on subaward

Lesson #2“Empower your staff to trust their instincts!”

First comment from administrative staff when asked about payments to Dr. M:

“I never trusted that guy. I always thought he was kind of slimy.”

Second comment:

“I thought it was weird that he was the point of contact at the prime and also being paid off the subagreement but the school board approved it so I didn’t question it.”

Investigation Process

• Feb 2008 – Request for information from NSF OIG regarding payments to Dr. M

• April 2008, federal investigators interviewed SDSU faculty members, dean, admin staff and Foundation staff

• Only minimal information provided by NSF on nature of the investigation

• Unclear who were the potential targets of the investigation besides the initial request for payments to Dr. M

• Confidentiality stressed as part of the process

Lesson #3“Cooperating with the federal investigation is just

the beginning of your institution’s responsibilities.”

Initial Institutional Actions

• Determined up front that we would cooperate fully with investigation

• Requested NSF OIG send request for documents in writing• Requested to sit in on interviews by investigators of foundation

staff• Conducted follow up interviews with dean and faculty who had

been interviewed independently• Compiled task force of university and foundation management to

conduct internal review independent of federal investigation• Identified a single point of contact for federal investigators

Lesson #4“Hiring of relatives is seldom a good idea –

especially if not disclosed.”

Key Players

• Dr. M - Superintendent of a local elementary school district, P.I. on NSF and DED grant.• Dr. L - Faculty member who served as P.I. on the NSF subawards, and employed by

consulting company owned by Dr. O. (not disclosed) • Dr. O - Associate Dean who served as P.I. on the U.S. Department of Education grant, and

co-owner of consulting company providing evaluation services to school district (not disclosed0

• Ms. S - SDSU departmental administrator for sub and also paid by school district (not disclosed)

• Mr. R - Project coordinator on NSF grant at the school district, paid on other awards to SDSURF also under direction of Dr. L, and spouse of Dr. L (not disclosed)

• Mr. M - SDSURF data entry clerk on SDSURF sub, son of Dr. L (disclosed)• Dr. D - Assistant Superintendent of Business at school district, co-owner of consulting

company, evaluator on DED grant and spouse Dr. O (not disclosed)

• No disclosures were made regarding COI by any of the parties

• One of the P.I.’s prepared COI disclosure forms, but stated no conflicts existed

• Both P.I.’s employed their spouses; and the son of one P.I., for work performed on their grants

• No disclosures were made to SDSURF regarding familial ties

Next Steps

• Conducted formal interviews with P.I.’s and departmental administrator• Determined there were undisclosed financial conflicts of interest that

could be problematic• Required Dr. L and Dr. O to submit new detailed disclosure forms for

review.• Requested detailed description of services provided by Dr. M• Initiated stop work order on funds received from school district• Temporarily suspended employment relationship with P.I.’s and staff

person

Lesson #5“Take custody or secure all records related to

investigation as soon as possible.”

Ms. S sent e-mail notification to all faculty at satellite campus that she had been fired by SDSURF and would be taking a week of vacation to “clean up their files” and then would return them to the P.I.’s

SDSURF decided to send staff to satellite campus to secure all paper files and computers of Ms. S, Dr. O, Dr. L and other faculty members affiliated with the NSF and DED projects

Pivotal decision in our investigation and turning point with regards to how we proceeded in communicating with P.I.’s.

Initial Issues Identified

SDSURF interviewed key players, including staff at school district and learned the following:

• P.I.’s and administrative analyst had all been compensated by school district for grant related activities

• Both P.I.’s had been compensated through consulting company to evaluate grant related activities

Expansion of Internal Review

• We were notified by school district that Ms. S had returned last payment for services and indicated she no longer wanted to be involved

• Records recovered from Ms. S. included meticulous notes documenting falsification of records

• E-mails were recovered which indicated participation of Dr. M and Dr.’s O and L.

• Expanded internal review to include all funds under the direction of Dr. O and Dr. L. Subsequently expanded review again to include all funds at satellite campus where support was provided by Ms. S

• Hired retired sponsored research director to assist with detailed audit of records

Actions Taken

• Completed review of SDSURF systems to identify if there were other sponsors who were also SDSURF employees

• Rescinded all delegation of authority for programs administered by the satellite campus

• Terminated SDSURF employment relationships with key players• Notified all sponsors regarding the internal review being conducted• Notified campus and CSU Chancellor’s Office of steps taken• Hired additional staff to conduct a 100% review of expenditures on funds

managed at branch campus since 2002• Any expenditure that appeared as fraudulent was shared with federal

investigators as they were identified over the course of the internal review

For Those Who Love Statistics

Review included:• 144 sponsored project funds• 25 discretionary funds• $11,000,000 of expenditures • 9,000 + individual expenditure transactions • Tens of thousands of related supporting

documents

Additional Issues Identified

• Found evidence of deliberate circumvention of SDSURF policies and procedures

• Multiple instances of falsification of documents to bypass payroll processes

• Identified numerous scenarios where individuals who performed work on behalf of the projects were paid stipends as if they participated in the workshops and institutes

• Payments to individuals for services that had not taken place • Duplicate Travel reimbursements and false mileage claims• Falsification of timesheets regarding hours worked

Additional Controls Implemented

In order to strengthen internal controls, SDSURF implemented the following additional policies/processes:

• Developed name match detection process to match programmatic and grant officials identified as points of contact on award documents against SDSURF A/P payments and employees in payroll database

• Match detection process is run periodically as part of newly established fraud detection program to search for name matches. Name matches are researched to determine if there is a possible conflict

• Updated and strengthened enforcement of policies and procedures related to nepotism

• Implemented special fraud awareness training to sponsored research management and staff

• Enhance documentation requirements for stipends• Improved conflict of interest policies and training• Conducted additional training on Foundation policies and

procedures with remaining faculty at satellite campus• Continue to look for ways to improve processes, increase training

and create greater awareness of grant requirements

Lesson #6“Expect to be in it for the long haul”

• Unpredictable time-frame: short periods of intense field work followed by long periods of silence

• Five years since start of investigation• Currently in the process of finalizing

reimbursements to various funding agencies

So How Bad Was It?• $822,000 in questioned costs• $234,480 reimbursed to NSF• $134,134 reimbursed to DED• $278,000 under discussion with California institution• Smaller amounts to other organizations still to be

negotiated.• Hope to have completed all repayments by end of

fiscal year.

Lesson #7“Justice doesn’t always have the outcome you

expect or hope for.”• All three defendants pled guilty to felony

counts under plea bargain agreements• Ultimately, the institution is responsible for

the actions of its employees• No satisfaction – only lessons learned

Michèle G. GoetzAssociate Executive Director, Sponsored Research ServicesSDSU Research Foundation

mgoetz@foundation.sdsu.edu(619) 594-1862