Federal Lawsuit Adds to AMS Woes

The $350 million lawsuit filed July 17 against American Management Systems Inc. by a federal agency for alleged failure to perform is the latest in a string of legal conflicts, which are casting a pall on the company's operations.

Not only is AMS facing legal trouble with the Federal Retirement Thrift Investment Board, but the Fairfax, Va., integrator is also experiencing problems with two state information technology systems ? in Ohio and Vermont ? that have prompted investigations and a lawsuit. These problems come less than a year after the company settled a large lawsuit with Mississippi.

Elizabeth Ready, the auditor of accounts for Vermont, said July 20 that significant problems cropping up in the state tax department's new automated system are causing her to consider investigating the $14 million system created by AMS.

Ready said she was aware of AMS' $185 million settlement last year with Mississippi, following the failed implementation of a tax system there, and she has been keeping abreast of developments in Ohio, where AMS has been named as a defendant in a class action lawsuit over the processing of child support payments.

"Whenever you see the magnitude of problems we've had here in Vermont, you want to look at everything," Ready said. "It would not be right to blame the company for any of these problems at this point, but surely it would be appropriate to take a look."

AMS officials did not respond to requests from Washington Technology seeking comments regarding the allegations against the company.

The Vermont tax system has been slow to process income tax returns, Ready said. It also has generated some 23,000 erroneous letters to taxpayers. Most of the letters had no material impact on the recipients, she said, but the cost of the incorrect mail and the confusion created are significant.

"I'm not impugning the company at all, [but] I begin to wonder if there are similarities between the problems here," Ready said. She was referring to the problems that dogged AMS on a project to create a customized record-keeping system based on a commercial product for the Federal Retirement Thrift Investment Board.

The board, which administers a savings program for federal workers, awarded the $30 million contract to AMS in May 1997. It terminated the contract and filed suit in U.S. District Court July 17, alleging that AMS failed to meet numerous delivery schedules and misled the board about its ability to deliver the finalized system.

The lawsuit asks for $50 million in actual damages and $300 million in punitive damages.

In a prepared statement released July 17, AMS officials strongly denied the charges and said they will fight the lawsuit. They also contend they tried unsuccessfully to meet with the board and resolve problems with the system.

"We expected to have a meeting, [but] we got the termination and lawsuit. I'm really angry at this turn of events," said Acting Chief Executive William Purdy during the company's scheduled quarterly conference call with analysts July 20. "I fully believe we could have turned [the situation] around with the cooperation of the board."

The system's ballooning costs, which have risen to an estimated $90 million, are the result of the numerous changes and additional writing of computer code requested by the retirement board, AMS officials said. Purdy said the lawsuit is an attempt by the agency to shift responsibility for delays and significant cost overruns from itself to AMS.

Despite the company's defense of its actions, many people said they are troubled by AMS' recurring problems.

"This seems like what happened in Mississippi. ... It seems like they were given a fair chance on this thing," said Tom Meagher, vice president of equity research with BB&T Capital Markets, Richmond, Va. "It's uncanny the way this company can explode once a year. There's three quarters of building the stock, [then] one quarter will send it into the toilet."

Against the backdrop of the federal lawsuit, AMS is caught up in a class action lawsuit filed in Ohio in late May by the Toledo chapter of the Association for Children for Enforcement of Support, a national advocacy group. That lawsuit alleges that a statewide child support collection and payment system set up and operated by the Department of Job and Family Services, AMS and Bank One does not comply with federal and state standards.

The water is further muddied by an investigation conducted by Ohio's Office of Inspector General that found the former director of the agency improperly obtained consulting deals with AMS and another major systems integrator soon after leaving government employ.

The inspector general's office found that AMS received more than $100 million in unbid contracts from the Ohio agency in 1998 and 1999.

The inspector general's report concluded there appears to be "no obvious improprieties" in the way AMS obtained and managed its contracts. However, the former agency director may have violated the state's revolving door policy, which requires government officials to wait one year before representing clients on matters they were involved in while on the state payroll.