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Apple convinced the U.S. SEC to buy overpriced servers and equipment.  (Source: Top 500)

In the end the pricey hardware and services from Apple and its partner suffered from "bugs" and the project "quickly went downhill from there."  (Source: Getty Images)

Republicans in Congress are hoping to leverage the probe into the waste to kill financial reform legislation.  (Source: Bloomberg)
Company convinced government agency to buy expensive equipment, overpay on a no-bid contract

Government waste, corruption, and, yes, every tech geek's favorite whipping boy, Apple, Inc. (AAPL) were all complicit in a sad tale of bureaucratic waste, according to the results of a probe by U.S. Security and Exchange Commission (SEC) Inspector General David Kotz.

I. Apple Sells the Government on an Expensive Proposal

In its effort to grow its business and achieve greater profitability, Apple in recent years has looked to expand outside its mastered realm of consumer electronics and enter into the world of business solutions.

Under the leadership of Christopher Cox, the SEC chair appointed by former President George W. Bush, the agency looked to aggressively expand its high tech presence, in an effort to avoid the data backup and storage woes that embarrassed it during the financial crisis.

The agency was ensorcelled by a particularly enigmatic Apple salesman who assured them that his company could provide them with the most competitive, best performing systems.

By 2008, according to the probe documents obtained by a Reuters Freedom of Information Act (FOIA) filing, the agency had fallen head over heels for Apple.  It gave the company blanket authorization to make a number of large purchases, which federal regulations state should have been thoroughly reviewed and approved first.  In addition to skipping reviews and approvals on the purchases, the SEC also improperly shared confidential financial information with Apple.

But Apple was not alone.  It jumped on the opportunity to promote a data storage solutions provider, Cloverleaf Communications, with which it had close ties.  The SEC had never done business with Cloverleaf, but convinced by that same Apple salesman, blindly entered a no-bid contract with the service provider.

Again, these actions were in gross violation of federal contracting procedures, but the agency ignored that, convinced it would see great results.

II. Poor Quality, Budget Overflows

Mr. Kotz writes that when the SEC eventually tried to test its newly acquired hardware and services, it was beset by "bugs" in the installation and setup process.  According the report, the project "quickly went downhill from there."

Despite all the money it spent, the agency reportedly was met with little sympathy from Apple ("You're installing it wrong", perhaps?) and Cloverleaf's new owners Dot Hill Systems.

Frustrated, SEC employees looked to bring up the issues to their supervisor, hoping for solutions.  According to the report the supervisor ordered them "this information doesn't leave this room" and then stormed out of the room.

Two years later and under the new leadership of SEC Chairwoman Mary Schapiro, an Obama appointee, Mr. Kotz began digging up the details of what went wrong.  He estimates that the failed project cost U.S. taxpayers at least $1M USD, much of which went directly into the coffers of Apple and Cloverleaf.

Mr. Kotz writes that the SEC's actions seem particular foolish given that Cloverleaf was "more expensive than other, better-known and less risky alternatives."

SEC spokesman John Nester released a subdued statement, commenting that the agency agrees with Mr. Kotz’s findings and is promising to improve.  He commented, "[The SEC is] taking steps to improve our policies and controls over purchases of information technology solutions, including pre-purchase review by management's technology and business oversight committees."

Apple and Dot Hill both have refused to comment on their payout at the expense of U.S. taxpayers.

III. Bad Timing

While the waste seems large by an individual's standards, the dollar figures seem small compared to Apple's billion dollar profits or the government's billions in spending.  However, while the carelessness may have cost a mere fraction of a percent of the government budget, it's troublesome because it's indicative of broader issues.

The SEC also reportedly may have lost money on a bid to rent 900,000 square feet of office space after it failed to secure the necessary Congressional funding.

The SEC Investigator General plans to make his findings public shortly, including other examples of SEC waste.

Reportedly, Congressional Republicans are looking to use the probe as ammunition to try to starve the SEC of funding; making cuts to its budget.

The real reason behind the desire to make those cuts appears to be the desire to kill the Dodd-Frank financial overhaul law, a financial bill that passed in the wake of the recent recession.

Implementing the oversight needed to enforce the new law would be relatively expensive.  The SEC is requesting $222M USD, a 16 percent increase to $1.407B USD for the fiscal 2012 that begins October 1.





"I'd be pissed too, but you didn't have to go all Minority Report on his ass!" -- Jon Stewart on police raiding Gizmodo editor Jason Chen's home













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