SignOnSanDiego.com > News > Business -- Pact aided by Cunningham is challenged

Fla. software company seeks an accounting
By Marcus Stern
COPLEY NEWS SERVICE
July 29, 2005

A Florida software company will ask a San Diego receivership judge today to order an accounting of $3.5 million in federal money that Rep. Randy "Duke" Cunningham helped a small group of political contributors and constituents obtain through a contract with the Internal Revenue Service.

Integrated Actuarial Services of Ormond Beach, Fla., says the Rancho Santa Fe Republican, acting in his role as a member of the House Appropriations Committee, pressed the IRS to pursue an auditing project that led to a contract benefiting the San Diego group.

The group, which includes two residents of Cunningham's district, incorporated in 1999 as First Auditors for the express purpose of pursuing the IRS auditing contract. None of them had an accounting background, and First Auditors had no other projects or clients.

IAS, the Florida company, claims that First Auditors acted as little more than a shell company and used a Washington lobbyist and Cunningham's help to win the contract. IAS also claims that First Auditors improperly pocketed most of the money the IRS paid out in connection with the auditing contract, despite having almost no responsibilities under it.

First Auditors denies any wrongdoing but is resisting an audit of how it spent the roughly $3.5 million it received from the IRS before the agency decided not to renew the program earlier this year.

The cancellation came against the backdrop of IAS complaints to the IRS that First Auditors was not making payments to IAS. The software company had developed the specialized actuarial software needed to complete the contract and, acting as a subcontractor, was doing all of the work, including training, updates and support.

Kenneth Noorigian, a San Diego bankruptcy attorney and one of three principals of First Auditors, said the company had assumed all the risk and had borne the cost of waging a lobbying effort in Washington to create the federal program.

An undetermined amount of the $3.5 million the IRS paid First Auditors under the contract went to cover lobbying expenditures, legal fees and travel costs incurred by First Auditors before the contract began, he said.

First Auditors relied on loans and investors until 2003, when it received its first disbursement under the IRS contract. It geared its activities during that time toward building support in Congress and the IRS for the auditing program that led to the contract.

After the IRS canceled the program and the contract, First Auditors went into receivership. Today, IAS will urge receivership Judge John Meyer to find out how First Auditors spent the taxpayers' money before he closes the books on the company and its finances.

"There will be no final resolution of this until we find out where the money went," said IAS Vice President James Kavanagh.

Kavanagh, a software writer, and his brother Brian, an actuary, developed the actuarial software that is the basis for the program and the contract. They are former residents of Coronado.

Cunningham, who wrote at least five letters to the IRS commissioner between 2001 and 2003 urging the agency to sign a contract for the program, wasn't available for comment. But his attorney, Lee Blalack, who said he knew nothing of the project, said he was certain his client would support an accounting by the judge.

"If public money is involved, then I am sure he would support an accounting," Blalack said of Cunningham. "It's like asking if he supports apple pie."

First Auditors' three principals and their Washington lobbyist donated a total of $11,600 to Cunningham's campaign and political action committee between 2001 and 2005.

Of the principals, Noorigian gave Cunningham's campaign $5,500. San Diego attorney Michael Dicks contributed $2,000 to his campaign and an additional $1,500 to his leadership PAC, American Prosperity PAC, and Irwin Mandel gave Cunningham $1,000. Lobbyist Stephen Amitay, who masterminded First Auditors' lobbying campaign, gave him $1,600.

Among the letters Cunningham wrote to two successive IRS commissioners on behalf of First Auditors was one to Charles Rosotti dated May 16, 2001, in which he wrote, "I would like to request a meeting with you on behalf of my constituents, the principals of First Auditors' L.L.C., of San Diego."

Other Cunningham letters sought updates on the program, which he said he was following "anxiously."

Cunningham was instrumental in getting language into the appropriations committee report accompanying the annual IRS funding bills in 2002, 2003 and 2004 that called on the agency to spend $3 million, $4 million and $4 million, respectively, on the project.

About $5 million was spent – including $3.5 million paid to First Auditors and $1.5 million spent internally by the IRS – before the IRS halted the program.

The program was supposed to save taxpayers potentially billions of dollars each year by giving the IRS the ability for the first time to audit deductions claimed by the insurance industry for money set aside to pay off expected life insurance claims.

The IRS hasn't reported any savings under the program. Noorigian and Amitay blame the failure on poor management by the IRS. Kavanagh blames First Auditors for not making the payments so that IAS could continue the needed support and updates.