Sometime in 2002, a manager at I.B.M., which was working on a large project to wire New York City schools for the Internet, noticed something unusual about payments the company was making for some workers.  The payments, investigators said this week, were going through a company called Lanham Enterprises, which was owned by Willard Lanham, the same person who was directing the wiring project for the city.  The manager asked a colleague if this was proper, according to a report by the office of the special investigator for city schools. The colleague said others at I.B.M. were also concerned, with one saying he “did not trust Lanham.” But Mr. Lanham, known as Ross, assured I.B.M. that he had spoken with a supervisor at the Education Department, who “was O.K. with it,” and the matter was taken no further. The supervisor would later tell investigators he did not recall such a conversation.  It was the first of several warning signs about Mr. Lanham, whom investigators have accused of stealing $3.6 million from the city through marked-up billings using a complex scheme of contractors and subcontractors, including I.B.M. and Verizon. But because of Mr. Lanham’s unchecked power over the project, which the city was paying him $200,000 a year to oversee, virtually all of the suspicions came to naught.  The companies assumed that if Mr. Lanham said it was fine, the city had approved it.  The case, which comes on the heels of an $80 million fraud prosecution involving consultants on another city project, the CityTime automated payroll system, illustrates again the vast amounts of money the city is spending on technology, and the trust it was putting in independent consultants. The Education Department said that once Mr. Lanham’s activities came to light, it added controls to prevent a recurrence.  On his weekly radio show on Friday, Mayor Michael R. Bloomberg called the alleged theft “unconscionable.”  “Whenever there’s fraud, you can look back and say, ‘We should have looked there,’ ” he said. “But keep in mind the city has a budget of $65 billion a year, with lots and lots of contracts and lots of opportunities.”  The Department of Education has vowed to recover the money, Verizon and I.B.M. have pledged to cooperate with the investigation and Mr. Lanham, through his lawyer, professed his innocence after he surrendered to federal authorities on Thursday on charges of theft and fraud.  Mr. Lanham’s lawyer, Joseph W. Ryan Jr., said Friday that the time it took the city to fire him “should be interpreted as a sign that he acted in good faith and within the law.”  During the six-year period when the authorities say he stole the money, Mr. Lanham was apparently left to operate on his own. “It is difficult to understand how the D.O.E. could allow so much power to reside in a consultant, even an honest one, which Mr. Lanham was not,” the city’s investigative report said.  The authorities said Mr. Lanham eventually hired five workers, including his brother Robert, to do data entry and billing analysis on the project, paying them $30 to $70 as consultants through Lanham Enterprises.  Lanham Enterprises would then submit highly marked-up bills to another company, which in turn submitted marked-up bills to Verizon or I.B.M. Those companies then marked the bills up further when they submitted them to the department at rates as high as $290 an hour, according to investigators. The city’s report suggests that the companies marked up the bills with Mr. Lanham’s approval. None of the companies have been accused of any crime.  As the invoices traveled from one company to the next, the actual work performed by the five employees became more muddled and harder to discern.  Lanham Enterprises described them as “telecommunications consultants” on its bills. The companies that paid Lanham often billed Verizon or I.B.M for “consulting services,” but Verizon’s bills to the department did not refer consultants. According to the report, the bills mentioned things like “installations-integration services” and referred to the consultants as “multiple” or “various” on the spreadsheets that were supposed to have detailed the nature of the work. Still, the city paid the bills.  A Verizon manager acknowledged to investigators that Mr. Lanham had threatened to steer its work to I.B.M. if Verizon did not agree to use one of the intermediary companies, Custom Computer Specialists of Hauppauge, that Mr. Lanham wanted them to use.  In 2006, the president of a company that had managed the project before Mr. Lanham called the Education Department and accused him of receiving kickbacks from the companies with which he worked. Mr. Lanham was dismissed in 2008, but it took more than two years to build a criminal case against him.
Payment procedures for a New York City schools Internet wiring project involving Willard Lanhamâs Lanham Enterprises raised the suspicions of a manager at I.B.M.