SEC alleges Paradyne won social security deal with fraud

When the Social Security Administration (SSA) was accepting bids for a new computer system two years ago, it required the bidding companies to demonstrate ''a scrambler,'' which transmits confidential information in a manner that won't permit interception of it.

The Paradyne Corporation of Largo, Fla., which was bidding on the system, demonstrated such a device.

Unfortunately, according to the Securities and Exchange Commission (SEC), the Paradyne device was nothing more than ''an empty box with blinking lights.'' As such it was part of a fraud, the SEC alleges, that Paradyne pulled in winning the $100 million computer contract.

In a complaint filed in Tampa, Fla., the SEC charges that when the company demonstrated its computer system to the SSA, it had actually never built such a system. Instead, the SEC alleges, the company took a computer that was built by Digital Equipment Corporation and put Paradyne labels on the parts. The relabeled parts were then placed inside a Paradyne cabinet. Later, after the company won the contract, the SEC says, the equipment was built so quickly it did not work properly.

The SEC apparently received its information from a former employee of Paradyne who had gone to work for a competitor and now has the SEC as a customer.

In producing the scrambler system, the Atlanta office of the SEC said, Paradyne had ''never designed, developed, or manufactured such a device compatible with the system to be demonstrated.'' Thus, as the official demonstration date approached, the SEC charges, ''two engineers were instructed by management to 'dummy' an encryptor to be demonstrated to the SSA officials.'' The dummy was a ''simple electrical circuit, labeled to appear to be a systems encryptor. When it was turned on, it looked like an encryptor. But its only working parts were lights seen from the outside, giving the appearance of an operable device.'' But the SEC noted that the encryption device, called a P-2811 , was basically an empty box.

Because of this, the SEC has charged the company with fraud and deceit in filing its financial statements. The commission is seeking a temporary and permanent injunction to prevent the company from further violations.

The company, in a statement released March 25, said, ''While its board of directors had not yet had an opportunity to review the allegations of the complaint nor considered its response to those allegations, Paradyne believes it competed for and won the contract with the SSA fairly and that its performance under the contract has generally been satisfactory to the SSA.''