Recent articles featured in “Competition Matters” have provided public purchasers with practical guidelines for avoiding common pitfalls that can harm the competitive bidding process. These guidelines have focused on detecting suspicious behavior that may indicate vendor collusion such as market allocation, bid rigging, or price fixing. However, even processes intended to help governmental entities obtain more competitive prices can have the opposite effect if unethical vendors take control. A recent case from New York provides an example of how collusive vendors can subvert a process originally intended to save taxpayer funds. It should serve as a warning to Ohio’s public purchasers.
Recently, many states and municipalities have tried maximizing taxpayer funds through the use of local development corporations or similar (typically nonprofit) entities. In connection with their work on public projects, local development corporations receive tax incentives and have less stringent public bidding requirements in order to minimize costs. Despite the cost-savings potential, vendors can take advantage of these entities if public purchasers do not exercise proper oversight.
In May 2016, a New York court sentenced several defendants on bid-rigging and public corruption charges for misusing local development corporations. The “ringleader” of the bid rigging scheme, Daniel Lynch, was sentenced to prison and ordered to pay $600,083 in restitution to Monroe County, New York. Lynch had been instrumental in helping the county establish local development corporations to manage two county projects: the overhaul of its emergency communications systems and the replacement of maintenance copiers and telephones. However, instead of using the process to minimize costs, Lynch colluded with several other defendants to steer projects to local development corporations that he created and to
inflate the county’s costs.
These local development corporations had borrowed millions of dollars to finance the county’s infrastructure projects. While several independent board members were appointed to oversee the two local development corporations, Lynch admitted in his plea bargain that he was able to manipulate the process by illegally diverting work to a company he created and to his former employer. He also confessed that he inflated contracts and used the proceeds to purchase personal televisions, a home computer, and a home alarm system.
Prosecutors in the New York case acknowledged that a lack of oversight of local development corporations and similar entities has the potential to harm the competitive bidding process.
Ohio public purchasers should conduct due diligence to ensure that vendors are not hijacking otherwise pro-competitive processes by inflating bid prices, submitting sham bids, or creating vendor entities for the purpose of diverting public funds. Public purchasers should review bids closely to determine if vendors are engaging in suspicious activity and to watch for potential red flags of collusion. (See the “
Red Flags of Collusion” series of articles in other editions of “Competition Matters.”)
If you would like to speak with someone from the Antitrust Section of the Ohio Attorney General’s Office about potential anticompetitive activity, please call 614-466-4328.