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Deloitte-Sagitec Trade Secret Case Delays Jobless Aid Fixes (1)

Sept. 26, 2022, 5:14 PMUpdated: Sept. 26, 2022, 8:03 PM

The federal indictments of key executives at technology company Sagitec Solutions could delay or derail state efforts to modernize unemployment insurance systems, including in Kentucky, Ohio, and Texas.

Two Sagitec executives—David Gerald Minkkinen and Sivaraman Sambasivam—face federal charges alleging they took trade secrets from the UI processing system at Deloitte LLP, where they previously worked, used them to build Sagitec’s UI products, and lied to federal investigators about it.

The legal woes complicate modernization efforts after many state UI systems struggled to meet the challenges of the Covid-19 pandemic and the huge wave of unemployment claims that began in March 2020. State agencies and the laid-off workers seeking benefits faced claims-processing delays, problems with implementing newly created federal benefits, and an onslaught of fraudulent claims.

Even before this latest cause for delay, state UI systems weren’t upgrading fast enough to be ready if another recession hits in the near future.

“There really are just a handful of vendors. Deloitte and Sagitec are the top two,” said Alexa Tapia, unemployment insurance campaign coordinator with the National Employment Law Project and a former state official with the Kansas Department of Labor. “This is a significant impact on states. The process to modernize their systems is arduous, expensive and quite lengthy” even without delays resulting from a vendor’s legal troubles.

Kentucky, Ohio on Hold

Sagitec is or was involved in UI system replacements or upgrades in Kentucky, Ohio, and Texas, before news broke earlier this month that Kentucky’s early-stage project stalled because of the indictments. The executives were indicted Aug. 23 in federal court in West Virginia, following an investigation of a Sagitec project to revamp the UI systems in Maryland and West Virginia. The indictment says at least 11 Deloitte employees left and went to work for Sagitec between June 2013 and December 2015, just as Sagitec was launching its UI technology business line.

Ohio’s unemployment agency, which contracted with Sagitec, is “aware of the allegations and have put our project on hold while we consider the implications to our unemployment insurance modernization project,” agency spokesman Bill Teets said via email Monday.

The state first hired Sagitec in 2018 to replace and provide support for both the employer tax portion and the benefits and appeals processing portion of its UI system at a cost of $86 million. Sagitec announced in May 2022 it had completed the tax portion—after the project faced challenges due to the Covid-19 pandemic and its huge wage of unemployment claims—and would begin on the benefits and appeal system next.

Local news outlets in Kentucky, including the Lexington Herald-Leader, reported that the state would have to start over on soliciting bids from technology vendors after calling off its decision to use Sagitec, citing state labor official Jamie Link’s comments to lawmakers there Sept. 15. The state’s UI system upgrade was expected to cost $47.5 million and take 18 to 24 months to finish.

The Texas Workforce Commission also contracted with Sagitec—a deal that the company announced in July 2021—to replace both the tax and benefits and appeals portions of its system. Representatives of the Texas agency couldn’t immediately answer questions about the status of the project Monday morning.

Sagitec expects to be able to continue its UI system upgrades and fulfill its contracts with state agencies, Rick Deshler, a senior partner at Sagitec, said in a written statement Monday. He also noted the company’s contract indemnifies its clients, so that state agencies shouldn’t face any legal fallout.

“Sagitec was not indicted in this matter and there’s no indication that any other employees are the targets of the government’s investigators,” he said. “We are continuing to work with the government on this matter while our operations are unaffected: We are confident of our ability to meet our ongoing commitments to our customers.”

The case against the Sagitec executives is United States v. Minkkinen, S.D. W.Va., No. 2:22-cr-00163, 8/23/22

(Updated with comments from Alexa Tapia and more information on Ohio's contract with Sagitec)

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Genevieve Douglas at gdouglas@bloomberglaw.com;
Rebekah Mintzer at rmintzer@bloombergindustry.com