EMC Faces Justice Department Pricing Probe - EnterpriseStorageForum.com

EMC Faces Justice Department Pricing Probe

Data storage giant EMC (NYSE: EMC) is facing a federal investigation and lawsuit over its pricing and contract practices, according to documents released yesterday.

EMC revealed the U.S. Justice Department investigation in its annual report filed with the SEC yesterday, and the Justice Department announced that it has intervened in a lawsuit against EMC.

The lawsuit accuses EMC of "failing to disclose its commercial pricing practices during negotiation of its General Services Administration (GSA) contracts and of providing improper payments and other things of value to Systems Integrators and other Alliance Partners on contracts with government agencies," according to the Justice Department press release.

The suit was filed in U.S. District Court in Little Rock, Ark., by Norman Rille and Neal Roberts under the whistleblower provisions of the False Claims Act. Rille and Roberts alleged that EMC submitted false claims for hardware and services "on numerous government contracts from the late 1990s to the present."

The suit claims that EMC "made payments of money and other things of value (alliance benefits) to a number of systems integration consultants and other alliance partners with whom it had alliance relationships."

The Justice Department alleges "that these alliance relationships and the resulting alliance benefits paid by EMC amount to kickbacks and undisclosed conflict of interest relationships."

The government also charges that EMC made false statements to the GSA about its commercial pricing practices to get higher prices on contracts, "thereby overcharging federal agencies purchasing EMC products and services," the press release said.

EMC's SEC filing said the Justice Department is investigating the company's fee arrangements with systems integrators and other partners in federal government transactions and the company's "compliance with the terms and conditions of certain agreements pursuant to which we sold products and services to the federal government, including potential violations of the False Claims Act." The probe overlaps with a previous audit by the GSA "concerning our recordkeeping and pricing practices under a schedule agreement we entered into with GSA in November 1999, which, following several extensions, expired in June 2007."

EMC said it has cooperated with the investigation and audit and "engaged in discussions aimed at resolving this matter without any admission or finding of liability on the part of EMC. We believe that we have meritorious factual and legal defenses to the allegations raised and, if the matter is not resolved and proceeds to litigation, we intend to defend vigorously. If the matter proceeds to litigation, possible sanctions include an award of damages, including treble damages, fines, penalties and other sanctions, including suspension or debarment from sales to the federal government."

EMC isn't the first IT vendor to face such charges. IBM (NYSE: IBM), for one, settled similar charges in August 2007 for $3 million. Accenture (NYSE: ACN), HP (NYSE: HPQ) and Sun Microsystems (NASDAQ: JAVA) have faced similar complaints.

Enterprise Strategy Group senior analyst Brian Babineau said that "after a decade or so, the GSA is finally completing some audits around how several technology vendors sold products to various government agencies via the GSA schedule. The government is now getting around to identifying issues it has with how some of these technology vendors priced their solutions and executed the sales agreements and are handing out fines and penalties. Not surprisingly, many of the technology vendors are not happy with these findings and are arguing."

NetApp (NASDAQ: NTAP) went through a similar process and appears to have settled, said Babineau.

"This event is really a non-event, just as it is in the NetApp case, because it involved business that was conducted several years back and almost all technology companies, including EMC and NetApp, have taken steps to improve their GSA sales process since then," he said.

But StorageIO Group founder and senior analyst Greg Schulz wondered if the government was just getting started. "If that's the case, one has to wonder who's next, and how big the boiler will be when the government finally gets around to the really big fish," he said.

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