FORMER HIGH-RANKING OFFICER IN
CITY'S DEPARTMENT OF BUILDING INSPECTION
PLEADS GUILTY TO PUBLIC CORRUPTION CHARGES AND
AGREES TO COOPERATE IN CONTINUING INVESTIGATION

Mr. Armstrong, age 38 of Daly City, California, was the Manager of Information Technology at the City's Department of Building Inspection (DBI).  In pleading guilty, Mr. Armstrong admitted that he engaged in a long-running scheme to steal more than $504,000 in public funds.  He did so by funneling $483,000 in payments to himself through two approved City vendors and then accepting another $22,000 in  illegal kickbacks from a separate City subcontractor.  Mr. Armstrong also admitted that he obstructed a criminal investigation of his conduct when he tried to persuade the businessman who had paid him kickbacks to create phony documents and lie to investigators about the reason for the  payments.

Under the plea agreement, Mr. Armstrong pled guilty to all counts pending against him and agreed to pay restitution to the City of San Francisco in the amount of $504,000.  Mr. Armstrong also agreed to cooperate in the government's investigation.

The Phony Invoicing Scheme.  As detailed in his plea agreement, Mr. Armstrong carried out the false invoicing fraud by creating a sham company, called Monarch Enterprises, to pose as a subcontractor doing actual computer-related work at DBI.  Because Monarch was not an authorized City vendor, it could not receive payments directly from the City.  As a result, Mr. Armstrong persuaded two approved information technology vendors – Cobra Solutions, Inc., based in San Francisco, and Government Computer Sales, Inc. (GCSI), based in Washington State – to process Monarch's billings on a "pass-through" basis, for which they received a percentage fee.

Under this arrangement, Cobra and GCSI invoiced the City for the phantom Monarch work.  Mr. Armstrong, in turn, falsely certified on behalf of the City that the work had been performed, and thereby authorized payment on the invoices.  In fact, Monarch did not perform any work for the City.  After Cobra and GCSI received their checks from the City, they forwarded the funds to a Monarch bank account controlled by Mr. Armstrong.

Using Cobra as the "pass-through," Mr. Armstrong stole approximately $243,000 from the City during 1999 and 2000.   Then, using GCSI, he stole an additional $240,000 in 2000 and 2001.  Mr. Armstrong used the ill-gotten gains for personal expenditures.

The Kickback Scheme.  Mr. Armstrong also acknowledged that he received $21,870 in kickbacks from a City subcontractor called Semantics Consulting.  Mr. Armstrong admitted that he helped Semantics get hired to work as a subcontractor on a software development project under his supervision at DBI, and later used his official position to help Semantics get paid for the work it had performed – ultimately, finding another City vendor to pay the company on a "pass-through" basis.  For his efforts, Mr. Armstrong acknowledged that he received four checks totaling $21,870 from the President of Semantics, several of which were made payable to another sham business Mr. Armstrong had created, called Mindstorm Technologies.

Obstruction of Justice.  In early February 2003, Mr. Armstrong was named in a civil lawsuit, filed by the San Francisco City Attorney's Office, alleging that Mr. Armstrong had, among other things, received kickbacks from the president of Semantics Consulting.   The first newspaper accounts of the lawsuit also reported that the City Attorney's Office had  referred the matter to the U.S. Attorney's Office for investigation.  In pleading guilty, Mr. Armstrong acknowledged that, after learning this, he met with the president of Semantics and tried to persuade him to lie to the authorities to cover up the illegal kickbacks.  In particular, Mr. Armstrong tried to convince the president of Semantics to create phony invoices and other paperwork to support the false claim that the checks between them resulted from the sale of artwork and from consulting work Armstrong's company had done for Semantics. 

United States Attorney Kevin V. Ryan said, in announcing the guilty plea: "Officials who abuse their power for personal gain undermine public faith in our institutions of government.  They deserve to be vigorously prosecuted for their betrayal of the public's trust.  In this case, San Francisco City Attorney Dennis Herrera and the City Attorney's Office deserve tremendous credit for uncovering this misconduct and bringing it to our attention, as does the FBI, for launching an immediate, aggressive, and enormously effective investigation.  This has enabled us to hold Mr. Armstrong accountable for these serious crimes in the space of just a few months.  This case is a great example of what can be accomplished when federal and state authorities communicate and work together."

San Francisco FBI Special Agent in Charge Mark Mershon said, "Today's guilty plea demonstrates the very high priority that the FBI places on investigating serious violations of the public trust at all levels of government – federal, state, and local.  The rapid success of this ongoing investigation is due in large part to the thorough, effective, and persistent investigation conducted by the San Francisco City Attorney's Office for over a year before the FBI's involvement in this case."

Mr. Armstrong pled guilty this afternoon before United States District Judge Maxine M. Chesney.  His sentencing is scheduled for October 15, 2003 before Judge Chesney in San Francisco federal court.  The maximum statutory penalty for each mail fraud and wire fraud count is five years in prison, a fine of $250,000 or twice the amount of unlawful gain to Mr. Armstrong, plus restitution.  In addition, the maximum statutory penalty for obstruction of justice is 10 years in prison and a fine of $250,000.  The actual sentence, however, will be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and will be imposed in the discretion of the Court.

The prosecution is the result of a four-month investigation by agents of the Federal Bureau of Investigation.  Miles F. Ehrlich is the Assistant U.S. Attorney who prosecuted the case, and is overseeing the continuing investigation, with the assistance of Legal Assistant Lori Lucchetti. 

The case against Marcus Armstrong was initiated as a result of the investigative efforts of the San Francisco City Attorney's Office, who then referred the case to federal authorities.