NEW YORK, March 14 (Reuters) - Computer contractor SAIC will pay New York City more than $500 million under a deal to resolve its role in a fraudulent scheme that overcharged the city for a payroll time-keeping system, officials said on Wednesday.

"This resolution is - as far as our office is aware - the largest in history for any city or state fraud," Preet Bharara, the U.S. attorney for the Southern District of New York, said at a news conference with Mayor Michael Bloomberg. "The city will be made whole," Bharara added.

Science Applications International Corp, a Fortune 500 company with 41,000 employees, was hired in 2000 as the primary contractor for New York's CityTime project, which automated time-keeping for city employees.

Critics say city employees could have done the work far less expensively. Bills spiraled out of control over the years, hitting $692 million, and city investigators brought federal prosecutors into the probe after uncovering payments routed through shell companies.

"If you attempt to defraud the public, you will be found and you will regret it and you will face justice," said Bloomberg, who took office in 2002.

SAIC agreed to pay $370.4 million in restitution to the city, as well as a penalty of $130 million, according to a deferred prosecution agreement made public on Wednesday. The city will get $96 million of the penalty, with the rest going to the federal government.

In addition, New York City will not have to pay about $40 million of the bills it was charged.

SAIC, which gets 93 percent of its business from government contracts, also consented to the filing of a charge accusing it of conspiring to commit wire fraud.

Federal prosecutors have also seized or placed liens on $52 million of assets from eight criminal defendants. If prosecutors win their cases against these individuals, the total recovery could approach $600 million, Bharara said. A subcontractor, called Technodyne, also is a criminal defendant.

FRAUDSTERS' FIELD DAY

SAIC, which agreed to new whistleblower protections and other ethics safeguards, had expected to make a profit of about $60 million from CityTime, Bharara said.

The company "placed profit ahead of principle time and time again ... that is why we insisted that the company pay from its own pocket every penny," said Bharara.

Investigators "uncovered ... a fraudsters' field day that lasted seven years," he said.

Bloomberg said New York did get a money-saving, "functioning" time-keeping system that is now used by about 160,000 employees, which is a little over half of the city work force.

CityTime's final cost will range from $134 million to $186 million, depending whether the frozen bank accounts and properties of the eight criminal defendants become part of any restitution.

SAIC agreed to continue to cooperate in the probe for another three years or the end of the legal process, including any prosecutions or appeals. The company's legal challenges are not yet over as the prosecutors can still probe SAIC for criminal tax violations.

"The company avoided outright indictment only because of its full cooperation with the investigation, its lack of history of similar conduct, and its commitment to making things right and making sure nothing like this ever happens again at SAIC," Bharara said.

(Reporting by Joan Gralla and Jonathan Stempel)

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