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Case 2.Canadian Department of National Defence

By Elizabeth Bennett Print this article Print

Using "shadow companies" with puppet CEOs and inflated or bogus invoices, a number of I.T. managers stand accused of ripping off their employers—in some instances, for tens of millions of dollars or more. The scam? It's called procurement

Case #2: Canadian Department of National Defence

The Target: The Department of National Defence (DND) is one of the few Canadian national institutions that come solely under the federal government; it is the only authority in matters of defense and protection of Canadian sovereignty. In 2004, DND's budget was $14 billion (Canadian), and it had 22,000 civilian employees and 85,000 military personnel, according to the DND Web site. It is headquartered in Ottawa.

The Subjects: Paul Champagne, former DND contracts manager; Ottawa businessmen Peter Mellon and Ignatius (Cholo) Manso.

For a mid-level government bureaucrat who worked as a contracting officer for the Canadian Department of National Defence (DND), Paul Champagne lived well. Champagne owned a two-acre estate on "Billionaire's Row" in Dunrobin, Ontario, a fashionable Ottawa suburb, complete with tennis courts, indoor swimming pool, a separate gym building and a four-car garage. And when he wanted to escape the frigid Canadian winter for a week or so, he had a house on a golf course in Florida as well as a seven-bedroom mansion with pool, gym and 200 feet of beachfront on Providenciales Island in the Turks and Caicos, according to published reports in the Ottawa Citizen and CBC News in Canada. When he was finally asked about his opulent lifestyle and the $20 million (Canadian) or so worth of real estate he'd amassed, Champagne told a reporter for Canadian television network CTV that he'd been lucky in the stock market.

Based on allegations contained in a civil suit filed against Champagne and two associates in the Ontario Superior Court of Justice in December 2005 by one of DND's principal vendors, Hewlett-Packard Canada, and criminal charges filed against him and his cohorts in late January by the Royal Canadian Mounted Police (RCMP), Baseline has been able to glimpse the inner workings of a scheme that the RCMP claims bilked Canadian taxpayers out of a sizable fortune. "It was a complex billing scheme that defrauded the Canadian government out of $105 million," RCMP spokeswoman Sgt. Monique Beauchamp says.

Neither the civil nor criminal case has gone to trial yet. In the former, Champagne and HP have reached an out-of-court settlement, while the other defendants in the HP civil case maintain their innocence, their lawyers told the Ottawa Citizen. In the criminal case, all of the defendants claim to be innocent, according to statements Champagne's lawyer, Michael Edelson, made to the Ottawa Citizen, and statements made to Baseline by lawyers of the other defendants in the case.

But according to HP's charges, from 1994 to 2003, Champagne was the point man in dealing with Hewlett-Packard Canada, one of DND's major hardware, software and information-technology services and maintenance vendors. Actually, Champagne started managing procurement relations with Digital Equipment Corp. (DEC), which was acquired by Compaq in 1998, continued his relationship with Compaq and then took over dealings with HP after it purchased Compaq in 2002. Throughout this period, Champagne was allegedly conducting invoicing fraud through a number of outside companies. According to HP's court documents, they include:

• The Baxter Group, a now-defunct company that specialized in selling secure information equipment such as Tempest computer systems (computers equipped with extra shielding to keep data signals from escaping and being picked up by eavesdroppers). Its principal owner, Peter Mellon, has known Champagne since the two were in high school together, HP claims.

• Vellis Solutions, a now-defunct shell company that HP alleges was established only to process invoices.

• E-Lite Canada (a.k.a. The Carnegie-Mellon Financial Group), another third-party I.T. company, also defunct.

• Avemore International Inc. (formerly Quarterdeck Consulting Inc.), which originally specialized in sales of security software, hardware and consulting, and then, as Avemore, provided funding for technology startups. Like Mellon, the company's CEO, Ignatius (Cholo) Manso, a former DND logistics officer, also had known Champagne, the RCMP claims.

In its suit, HP charges that Champagne would allegedly tell HP that DND needed, say, new communications security equipment and instruct HP to purchase it from one of the third-party vendors with whom Champagne was associated. The vendors in turn would mark up the invoice for "administrative costs," then send it on to HP, saying the equipment had been delivered, HP claims. Then, HP, which claims it was not aware of the connections between Champagne and the vendor, would send the bill on to the DND. In turn, DND, on Champagne's say-so, reimbursed the third-party vendor, which would kick back funds to Champagne.

The best part of this ongoing alleged scam—from a fraudster's viewpoint, at least—was that for the most part the services and equipment that Champagne ordered, HP alleges, were never delivered. And should anyone such as the HP account rep question Champage too closely about his dealings, he would tell them "that the work was confidential and in the interest of national security," HP claims.

According to public records from the Canadian Public Works Department, in January 2000 supply officers from the department, which is similar to the Government Accountability Office in the U.S., expressed concerns to Champagne and two other members of the procurement team about "high expenditure rates on the Tempest and non-Tempest hardware maintenance contracts, and requested official explanations from DND for these rates." For nearly three years, Public Works continued to investigate these concerns, according to public documents, frequently discussing them with Champagne. In the meantime, Champagne and his associates are said to have continued to rake in funds.

Resolution: The fallout from the DND affair has been significant. In its April 2, 2004, edition, the Canadian publication Computer Dealer News reported that the deputy minister of Public Works had sent HP a letter demanding it repay $160 million for which DND was fraudulently invoiced. The following month, HP Canada agreed to reimburse the Canadian government for $146 million, according to an HP 10-K filing with the SEC. Payment was made even though, HP spokesman Mahboob Jaffer stresses, no HP employees derived any improper benefits from the scheme and much of the fraud had occurred prior to HP's 2002 purchase of Compaq. "HP determined that it was important for HP to honor its contractual obligations, rather than engage in protracted litigation with the Government of Canada," the company explained in its 10-K statement.

Subsequently, the DND announced in a brief statement that HP "remains a valued I.T. supplier to the Canadian government" and helped the vendor prepare a civil lawsuit against Paul Champagne, Peter Mellon, Chulo Manso and several other vendors, Jaffer says. HP filed civil suit to recover the money it paid to the Canadian government.

Champagne settled the civil suit filed in the Ontario Superior Court of Justice in December 2005, according to Jaffer, with Champagne turning over "stocks and real estate," Jaffer says.

Both Manso and Mellon, however, are "fully defending" themselves against the suit and have filed defenses, their lawyers said in interviews with Canadian papers at the time.

Meanwhile, after a 2 _-year investigation, the RCMP charged Champagne with fraud, obtaining more than $105 million from the DND under false pretenses and money laundering, among other things, according to a Jan. 30, 2006, RCMP news release. Mellon was charged with two counts of fraud, Manson with one count.

Champagne no longer is residing in Ottawa and his lawyer, Michael Edelson, has not returned Baseline's calls.

Manso's lawyer, Robert Meagher, says, "It's still very early in the process, but at this point we intend to enter a not-guilty plea." Mellon has also relocated. His attorney, Leonard Shore, says his client intends to plead not guilty.

Canadian Department of National Defence (DND) Base Case

Headquarters: Major-General George R. Pearkes Building,101 Colonel By Drive, Ottawa, Ontario, Canada K1A 0K2

Phone: (613) 995-2534

Business: The mission of the Department of National Defence and the Canadian Forces is to defend Canada.

Chief Executive Officer: Gordon O'Connor, Minister of National Defence

Financials: DND had a $14 billion (Canadian) budget in 2004.

Incident: Working with third-party "shadow" vendors, a DND procurement officer allegedly defrauded the department of more than $100 million.

This article was originally published on 2006-06-07
Senior Writer
Elizabeth has been writing and reporting at Baselinesince its inaugural issue. Most recently, Liz helped Fortune 500 companies with their online strategies as a customer experience analyst at Creative Good. Prior to that, she worked in the organization practice at McKinsey & Co. She holds a B.A. from Vassar College.
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