Archive for July 16th, 2009
Empowering Oversight Agencies by necessity will make waves
If you don’t break some eggs, there will be no omelet.
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SEC Upsets Some as It Tries to Sharpen Teeth
Several Moves Draw In-House Criticism
By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, July 15, 2009
The Securities and Exchange Commission has begun moving far faster to stop financial scams and open investigations into potential wrongdoing than in the past, according to agency data, adopting an aggressive posture after it was sharply criticized about its oversight of Wall Street and failure to uncover Bernard Madoff’s massive fraud.
Since Mary Schapiro became chairman in January, for instance, the SEC has launched nearly as many formal investigations as it did in any of the past five years.
At the same time, Schapiro and her enforcement director, Robert Khuzami, have undertaken a series of personnel changes that employees say are causing turmoil within the enforcement division and posing a distraction from its work investigating financial crime. Khuzami has two meetings scheduled today with employees to discuss these moves.
The enforcement division — the largest at the SEC — is at center stage as the agency prepares to gain new responsibilities under the Obama administration’s proposed reworking of financial regulations. In testimony before Congress yesterday, Schapiro said the agency was keenly aware of its obligations. “There is an invigorating sense of urgency among the staff of the agency to demonstrate that we are up to the job,” she said. “Khuzami is reducing bureaucracy by streamlining management within the enforcement division, putting many more talented investigators directly to work on cases.”
Schapiro and Khuzami have pushed investigators to close old cases and focus more on those arising out of the financial crisis.
Since January, the SEC has filed several notable cases. It sued former executives of mortgage lender Countrywide Financial for allegedly failing to disclose the risks of its business practices to investors, and the agency has sued Reserve Management for allegedly deceiving investors in the money market fund company. The agency also sued a former executive of Beazer Homes for allegedly manipulating earnings and American Home Mortgage executives for allegedly concealing from investors the truth about the deteriorating condition of that company. And the SEC filed the first case involving credit-default swaps, opaque financial instruments that exacerbated the crisis.
“It’s pretty clear that the commission under its new leadership is moving more quickly and more aggressively — particularly in areas related to the financial crisis,” said Mark Schonfeld, a partner at Gibson Dunn & Crutcher and a former SEC enforcement official.
The commission has launched 224 formal investigations, more than double the number at this time last year and nearly as many as in any full year since at least 2004, according to SEC data. The number of emergency actions taken to stop fraud has more than doubled since the same period last year.
According to an analysis by Gibson Dunn & Crutcher, the SEC has filed cases against 527 defendants in the first six months of this year, compared with 317 last year.
The heightened activity has prompted renewed pride inside the enforcement division even as personnel changes are fueling disenchantment, employees say. One investigator described the feeling as “schizophrenic,” with staff concerned about the changes but pleased with Schapiro’s support for aggressive enforcement.
Senior SEC officials have decided, among other things, to eliminate a category of managers known as “branch chiefs” and to reduce the staff assigned to another known as “assistant directors.”
Agency officials say the changes are designed to direct fewer of the division’s resources to management and more to investigations. The SEC is notorious for a labyrinthine reporting structure that can dramatically prolong how long it takes for the agency to decide whether to pursue cases.
Khuzami was known as a deft manager while head of the white-collar unit in the U.S. Attorney’s Office in the Southern District of New York. At the SEC, he is planning for specialized groups to focus on particular types of financial wrongdoing.
But some enforcement lawyers say the plans amount to a pointless reshuffling of chairs when the agency is trying to focus its energies on cases linked to the financial crisis. These lawyers also say the plans ignore the merits of the current structure, for example assigning branch chiefs the role of investigating cases as well as managing staff.
Another concern among some enforcement lawyers is that three of the most important positions at the agency — the enforcement director, the deputy enforcement director and the head of the New York Office — have been filled this year by people with no SEC experience.
Khuzami bypassed an SEC veteran, Scott Friestad, to choose
Add comment July 16, 2009
Boeing lands two new contracts, not for airplanes
Thursday, July 9, 2009
Boeing wins $1.2M Air Force contract
St. Louis Business Journal
Boeing said Thursday it won a $1.2 million U.S. Air Force contract to study and improve networks’ response to cyber attacks.
Boeing, along with subsidiaries Federated Software Group and Tapestry Solutions, will demonstrate a test system that maintains positive command and control of cyber assets through automated alerts and actions. The system will enable the Air Force to perform its missions under all network conditions.
Work will be performed in Anaheim, Calif., and Herndon, Va.
Tapestry and FSG are among several companies Boeing acquired in 2008 to help Boeing grow in operations support and technology development.
A unit of Chicago-based Boeing Co., Integrated Defense Systems is one of the world’s largest space and defense businesses. Headquartered in St. Louis, Boeing Integrated Defense Systems is a $32 billion business with 70,000 employees worldwide.
Link: http://seattle.bizjournals.com/stlouis/stories/2009/07/06/daily53.html
Link: http://seattle.bizjournals.com/stlouis/stories/2009/07/06/daily8.html
Monday, July 6, 2009
Boeing gets $43M Navy contract
St. Louis Business Journal
Boeing Co. said Monday it was awarded a U.S. Navy contract worth $42.9 million, including options, to continue providing communications network design and technical engineering services on guided missile destroyers.
The five-year contract supports the AN/USQ-82 (V) Gigabit Ethernet and Fiber Optic Data Multiplex System (GEDMS / FODMS) program.
The deal is part of the Navy’s efforts to modernize the DDG-51 class guided missile destroyers.
GEDMS also is included in the Aegis weapon system package for various foreign navies.
The contract calls for Boeing to continue to enhance data multiplex system (DMS) networks, manage engineering changes, update technical documentation, and develop interface design documents for new and refurbished ships.
Boeing also will provide installation support, system configuration management, and land-based test sites and facilities for support operations.
The Naval Surface Warfare Center, Dahlgren Division in Dahlgren, Va., will manage the contract. Boeing’s C3 (Command, Control and Communications) Networks division will perform the work in Huntington Beach, Calif.
Chicago-based Boeing’s Integrated Defense Systems unit, headquartered in St. Louis, is a $32 billion business with 70,000 employees worldwide.
Add comment July 16, 2009
More Contract Growling: Negotiations at Boeing Again?
Wednesday, July 8, 2009
Labor has pivotal role in keeping 787 production in Washington
Puget Sound Business Journal (Seattle) – by Steve Wilhelm
Labor experts believe that Boeing’s largest union is more likely to agree to a contract extension than a semi-permanent no-strike clause.
The internet was buzzing Wednesday morning with reports that top Boeing Co. (NYSE: BA) management is demanding a union promise to refrain from striking as a condition of keeping the assembly of 787 jets in Washington.
This emerged as the latest round in the struggle over whether or not Boeing will keep manufacturing all its commercial aircraft in Washington, following Boeing’s July 7 announcement that it is buying the South Carolina facility of its prime 787 supplier Vought.
Extended labor contracts are becoming more common, especially in the recession, and might be a reasonable way for the union to respond to management’s need for stability, said Gary Chaison, professor of labor relations at Clark University in Worcester, Mass.
“Unions are more willing to reach an agreement that’s longer,” he said, adding that the average collective bargaining agreement is now four to five years.
“It makes sense for everybody. It makes sense for workers, because there won’t be times of confrontation for a while,” he said. “It makes sense for company, because it creates stability. It creates predictability, and it makes sense for both parties. I can’t see why there would be strong objections to it.”
A longer contract would automatically prevent a strike, because all contracts contain prohibitions against union strikes or company lockouts while they’re in effect.
What Chaison and others don’t expect is a union agreement to refrain from striking for an indefinite period of time.
“The strike is the only weapon that labor unions actually have. Giving up that weapon, it’s hard to know what they’d have left,” said Edward Greenberg, professor of political science at the University of Colorado, Boulder, and co-author of a soon-to-be-published book on Boeing labor relations.
Greenberg pointed to a parallel with the New York City bakery Stella d’Oro, which was locked in an 11-month strike with its workers and settled the dispute on July 7, but then promptly announced it was closing its Bronx factory.
“I think Boeing is serious, I think they’ve been leaving the state of Washington, and trying to find a more labor-friendly environment for a while,” Greenberg said. “I think that’s what all this global partnering thing is on the 787.”
Boeing’s newest contract with the International Association of Machinists and Aerospace Workers Local 751, approved in late 2008, is for four years, up from the normal three. That suggests that an even longer contract might be possible.
The contract followed a 57-day strike in the fall of 2008, which many observers consider a turning point in Boeing management’s view about the future of the company. In particular, since then the notion has spread that Boeing might choose a right-to-work state, especially in the Southeast, for a second 787 assembly line.
After Boeing moved its corporate headquarters to Chicago in 2000, the company has been losing its allegiance to the Northwest, and instead focusing on what locale will help it compete against Airbus as well as other up-and-coming aircraft builders.
“The purchase of the Vought plant demonstrates to me that the Boeing Co. is serious about doing whatever it deems necessary to increase efficiency and stay competitive in the global economy,” said Aaron Reardon, Snohomish County Executive. “They will do what is necessary to stay in business for another 100 years.”
Reardon adds that what he’s seen in his communication with Boeing executives is that this is a much more bottom-line company.
“This is a different Boeing Co.,” he said. “They don’t act twice, they don’t state their needs over and over in the hope someone will listen, they don’t waste time, they take very swift decisive action.”
Boeing spokesman Jim Proulx declined to confirm any discussions that Boeing officials may have had with congressional leaders.
U.S. Rep. Norm Dicks, D-Bremerton, spokesman George Behan said that Dicks had no more to say, after the latter’s comments were published in The Seattle Times early Wednesday.
In that interview, Dicks was quoted as saying “The whole thing comes down to, can they get a long-term agreement with the union, with a no-strike clause.”
Behan said, “He’s going to work with the delegation, the governor, labor leaders out there. We have pretty good relations with workers, with the labor unions.”
Union officials did not return calls by deadline.
Chaison said he expects the question of how to respond to Boeing pressure will create fault lines within the union.
Some members will stand on principle, while others will be fearful of losing some of the best manufacturing jobs in the state.
“A lot of speculation is going to be involved on the union side if this is a good deal, bad deal, if it hampers them or is better than nothing,” Chaison said. “Most people would say, ‘These are not the times for a fight, and what we’re more interested in is the stability of the company, because that means the stability of our jobs.’”
Link: http://seattle.bizjournals.com/seattle/stories/2009/07/06/daily36.html
1 comment July 16, 2009
Boeing Sells New Configuration of F-18 Fighter Jet to Aussie’s
Wednesday, July 8, 2009
Boeing sells first Super Hornet to foreign military
St. Louis Business Journal – by Christopher Tritto
A member of the Royal Australian Air Force inspects a F/A-18F Super Hornet fighter jet at Wednesday’s ceremony marking Boeing’s first sale of the aircraft to a foreign military.
Boeing Co. officials unveiled the first of 24 F/A-18F Super Hornet fighter jets being built here and delivered to the Royal Australian Air Force over the next four years.
The order will generate about $1.3 billion in revenue, or about $51 million per plane, for Boeing’s St. Louis-based Integrated Defense Systems division. But software upgrades, maintenance and training services provided by Boeing are expected to bring the total price tag to $2 billion.
The F/A-18F delivered Wednesday is the first Super Hornet to be sold to a foreign military. Boeing IDS is competing for orders to supply similar F/A-18s to India, Greece, Brazil and Denmark, which combined are in the market for up to 306 fighter planes.
Wednesday’s ceremony at Boeing’s IDS headquarters in Berkeley included video presentations and remarks by Bob Gower, vice president of F/A/-18 programs at Boeing; George Roman, vice president of IDS government operations; IDS President and Chief Executive Jim Albaugh; St. Louis Mayor Francis Slay; Rear Admiral David Philman, director of air warfare for the U.S. Navy; and Air Marshal Mark Binskin, chief of the Royal Australian Air Force.
Hundreds of people, including Boeing employees, suppliers and local economic development officials, were on hand.
Boeing IDS is the second-largest employer in the region and the state of Missouri, with 16,000 workers. It posted revenue of $32.1 billion last year. The F/A-18 program involves 5,000 local Boeing employees, 304 supplier companies in Missouri and Illinois, and provides the region with an estimated economic impact of more than $1 billion.
ctritto@bizjournals.com
Link: http://seattle.bizjournals.com/stlouis/stories/2009/07/06/daily42.html
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Boeing’s Biofuel Group
Wow! It is nice to post a postive, socially responsible article about Boeing today! I wish it was a daily event. -GFS
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Monday, July 13, 2009, 9:03am PDT
Alaska Airlines joins Boeing’s biofuel group
Puget Sound Business Journal (Seattle)
Alaska Airlines has joined Boeing Co.’s Sustainable Aviation Fuel Users Group, which the aerospace giant formed to accelerate the commercialization of biofuels that can be used to power airplanes.
Alaska Airlines, a subsidiary of Alaska Air Group Inc. (NYE: ALK) of Seattle, joined along with British Airways, Cathay Pacific, TUIfly and Virgin Blue airlines.
Existing group members include Air France, Air New Zealand, All Nippon Airways, Cargolux, Gulf Air, Japan Airlines, KLM, SAS and Virgin Atlantic Airways.
According to Chicago-based Boeing (NYSE: BA), the group is “focused on making renewable fuel sources available that can reduce greenhouse gas emissions, while lessening commercial aviation’s dependence on fossil fuels and potentially reduce aviation sector exposure to fuel price volatility.”
For more information on the group, click here.
Link: http://seattle.bizjournals.com/seattle/stories/2009/07/13/daily5.html
Add comment July 16, 2009
Boeing’s Outsourcing Secrecy Problem
Boeing in trouble for $7.5 million contract fraud
Earlier this week, the United States Department of Justice filed a civil lawsuit against The Boeing Company for alleged price gouging. According to the Justice Department, Boeing unlawfully inflated the price tag by $7.5 million for manufacturing a missile decoy system designed for the Air Force’s B-1 bomber.
The lawsuit states that Boeing failed to disclose it would outsource the manufacturing of the majority of parts needed to create the Towed Decoy System – a tool for intercepting missiles fired at the B-1 – during contract negotiations. The company claimed, according to the suit, that it would instead build the parts in-house at a greater cost than required for outsourcing. Consequently, Boeing charged more for something they outsourced for less, and in effect, defrauded the government for the price difference.
The lawsuit alleges that the Air Force would have renegotiated a substantially lower price tag for the Towed Decoy System had Boeing informed them they intended to purchase most components at a lower cost.
“It’s a significant amount and, of course, it’s all taxpayer money,” Assistant U.S. Attorney Lisa Palombo told The Associated Press. “We make it a priority to collect all taxpayer funds that are obtained through fraud. We don’t make exceptions for anyone, individuals or large companies.”
Evidence of Boeing’s actions originally came from whistle-blowers inside the organization that complained to their managers that the company was overcharging. The managers allegedly ignored the complaints and failed to tell their client, the Air Force.
Boeing spokesman Forrest Gossett told Business Week that the company disputes the allegations and believes it properly negotiated and fulfilled its contract with the Air Force.
But investigators from the Air Force’s Office of Special Investigations, the Defense Criminal Investigative Service, and auditors from the Defense Contract Audit Agency claim to have evidence of 140 incidents of over billing by Boeing, equating to $7.5 million in fraudulent charges. Under the False Claims Act, the government may recover up to three times the amount of the loss and enforce criminal penalties for each of the 140 incidents of fraud.
2 comments July 16, 2009
Tax Deductions on Fines Paid by Errant Defense Contractor?
Boeing Won’t Seek Tax Deduction Over Fraud Settlement
Boeing announced today it won’t seek a tax deduction on a $615 million settlement it reached with the government over allegations of criminal misconduct. Boeing had agreed to pay the settlement to avoid being charged for alleged hiring and contracting manipulation.
The U.S. Department of Justice had been criticized for agreeing to the settlement without clarifying if Boeing would be able to deduct the amount — a potential savings of about $200 million.
Sen. Charles Grassley (R-IA), Chairman of the Senate Finance Committee, said Boeing made “the right decision” by choosing not to deduct, but added that the Justice Department needs to pay greater attention to the tax consequences of such large settlements.
According to Sen. Grassley, “Any junior lawyer knows to look at a settlement’s tax treatment, yet Justice lawyers were asleep at the switch.”
Today’s announcement comes after Sen. Grassley and two colleagues, Sen. John McCain (R-AZ) and Sen. John Warner (R-VA), wrote in a letter to Attorney General Alberto Gonzalez earlier this month that it would be “unacceptable” if Boeing was able to write off the costs of the settlement, “thereby leaving the American taxpayer to effectively subsidize its misconduct.”
The letter also warned that “hearings may be warranted” if the final settlement was executed before the tax issue was resolved.
Link: http://blogs.abcnews.com/theblotter/2006/07/boeing_wont_see.html
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NASA Space Shuttle Fraud: Boeing to Pay Fine
FOR IMMEDIATE RELEASE
CIV
THURSDAY, NOVEMBER 9, 2000
(202) 514-2007
WWW.USDOJ.GOV
TDD (202) 514-1888
NASA SPACE SHUTTLE CONTRACTORS SETTLE FRAUD
ALLEGATIONS BOEING, UNITED SPACE
ALLIANCE TO PAY FINE
WASHINGTON, D.C. — The Boeing Company of Seattle and Houston-based United Space Alliance have agreed to pay a total of $825,000 and to give up their rights to $1.2 million in unpaid invoices to settle allegations relating to false claims submitted to the government between 1986 and 1992 under the National Aeronautics and Space Administration’s (NASA) Space Shuttle and Space Station Freedom programs, the Justice Department announced today.
At the time the false claims were submitted, Rockwell Space Operations Company (RSOC) – later purchased by Boeing – had a contract with NASA to manage the two programs. Omniplan Corporation – an RSOC subcontractor – allegedly engaged in numerous fraudulent schemes that resulted in overbilling the United States millions of dollars. In 1996, Boeing purchased RSOC and United Space Alliance took over management of the two NASA programs. Both companies assumed liability for RSOC’s misconduct and agreed to re-pay the overcharges.
In 1993, the United States sued Omniplan and secured a consent judgment, but the company went bankrupt before it was able to pay the full judgment. On January 11, 2000, the government filed a civil suit alleging that RSOC violated the False Claims Act by knowingly submitting to NASA the improper Omniplan invoices. The complaint alleged that RSOC knew or should have known that the subcontractor’s invoices contained false claims.
“Prime contractors cannot turn a blind eye to fraud by their subcontractors,” said Assistant Attorney General David W. Ogden of the Justice Department’s Civil Division. “They may not merely turn in subcontractor bills to the government without removing clearly unallowable costs.”
The government’s civil lawsuit alleged that between 1986 and 1993, RSOC told NASA that all of the costs of Omniplan were reasonable, allowable and allocable to the space agency contracts. However, the government alleged that the RSOC invoices included large amounts of fraudulent costs.
According to the suit, Omniplan commingled personal expenses with its corporate accounts, including operating a pizza delivery company out of a building RSOC was billing to NASA and established phony companies in order to lease buildings and equipment to itself at inflated values. The subcontractor also included in its general and administrative account, large amounts of personal expenses such as costs relating to personal homes, a ski lodge, expensive jewelry and numerous personal vacations to Argentina, Nepal and Singapore.
In 1995, the owner of Omniplan, Ralph Montijo, pleaded guilty to numerous felony violations of United States laws regarding Omniplan’s fraudulent practices, and he served two years in jail.
Under the False Claims Act, the government is entitled to treble damages plus civil penalties ranging from $5,000 to $10,000 per violation when a person or a company acts with either actual knowledge or with deliberate ignorance or reckless disregard for the truth.
The civil lawsuit resulted from an investigation by NASA Office of Inspector General, Office of Criminal Investigations, assisted by the Defense Contract Audit Agency.
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00-657
Link: http://www.usdoj.gov/opa/pr/2000/November/657civ.htm
Whistleblower Suits Limited in Court in Boeing Case (Update 5)
By Greg Stohr
March 27 (Bloomberg) — The U.S. Supreme Court limited the ability of whistleblowers to collect damages in suits claiming fraud against the federal government, siding with Boeing Co. in a case stemming from safety issues at a Colorado nuclear plant.
The court, voting 6-2, said retired engineer James S. Stone can’t share in a $4.2 million award he and the U.S. government had won in a suit against Rockwell International, now part of Boeing. The ruling, which reversed a lower court, might also bar Stone from collecting legal fees.
The decision reduces the incentive for individuals to press claims under the U.S. False Claims Act, which lets whistleblowers sue on behalf of the federal government and then share in any recovery. Although Chicago-based Boeing still will have to pay the full award, Stone won’t be able to collect any of it.
Stone accused the company of making false statements about environmental, health and safety activities at its Rocky Flats nuclear weapons facility outside Denver. The government later joined his suit against Rockwell.
The high court dispute centered on the requirement that whistleblowers be the “original source” of information about wrongdoing. The majority said Stone didn’t meet that requirement because the focus of the case shifted during the litigation and the jury’s findings against the company weren’t based on information he provided.
Independent Knowledge
“Stone did not have direct and independent knowledge of the information upon which his allegations were based,” Justice Antonin Scalia wrote for the court. Chief Justice John Roberts and Justices Anthony Kennedy, David Souter, Clarence Thomas and Samuel Alito joined Scalia in the majority.
Justices John Paul Stevens and Ruth Bader Ginsburg dissented, saying the majority had misinterpreted the False Claims Act. Stevens said the court should have focused on “the facts in the public domain at the time the action is commenced.”
The ruling likely will reduce “fishing expeditions” among relators, as whistleblowers are known under the False Claims Act, according to Peter Hutt, a government contracts lawyer at Miller & Chevalier in Washington.
“This decision will discourage relators from filing targeted actions and then seeking to recover on bases other than those on which they have first-hand knowledge,” Hutt said.
Iraq Contracts
Hutt said the ruling might affect pending cases claiming fraud by companies involved in the reconstruction of Iraq.
The National Whistleblower Center, a Washington-based group that helps whistleblowers, called the decision a “disastrous ruling” that has “cut the legs off of America’s most effective anti-fraud law.”
Boeing spokesman John Bernaden said the company is “very pleased” with the ruling. Boeing shares fell 31 cents to $90.52 as of 4:16 p.m. in trading on the New York Stock Exchange.
Stone’s lawyer, Maria Vullo, declined through a secretary to comment.
Stone worked at Rocky Flats until 1986, when he was laid off. While there, he questioned the company’s plan for disposing of toxic sludge by mixing into cement.
Soon after his departure, Stone began giving information to the Federal Bureau of Investigation and the Environmental Protection Agency about various environmental, safety and health problems at the plant. The government’s investigation culminated in 1992, when Rockwell pleaded guilty to 10 federal environmental violations.
In the civil case, a jury concluded that Rockwell had defrauded the government from April 1987 to September 1988, after Stone had left the company. The Denver-based 10th U.S. Circuit upheld the award.
The high court, in reviewing the case, declined to consider Boeing’s broader argument that the False Claims Act is unconstitutional.
The case is Rockwell v. United States, 05-1272.
To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.
Last Updated: March 27, 2007 16:19 EDT
Link: http://www.bloomberg.com/apps/news?pid=20601103&sid=aFZ1jMOcfNwo&refer=us
Add comment July 16, 2009
Review: Boeing Fraud Case
Boeing appeal on fraud claim to be heard by high court
By Greg Stohr
Bloomberg News
The U.S. Supreme Court will use a case involving Boeing to clarify the rules governing lawsuits by whistle-blowers who say they have evidence of fraud against the federal government.
Separately, heeding calls from Safeco and another insurer, the high court agreed to decide whether a lower court went too far in broadening consumer rights under a federal credit-reporting law.
In the Boeing case, the company’s Rockwell unit wants to overturn a $4.2 million award won by James Stone, a retired engineer who accused Rockwell of making false statements about environmental, health and safety activities at its Rocky Flats nuclear-weapons facility outside Denver.
Boeing contends the Denver-based 10th U.S. Circuit Court of Appeals made it too easy to win suits under the U.S. False Claims Act, which lets whistle-blowers sue on behalf of the federal government and then share in any recovery.
The dispute centers on the requirement that whistle-blowers be the “original source” of information about wrongdoing. Boeing said in its appeal that Stone possessed only “background” information.
Also, in a case closely watched by insurers and others, the high court agreed to hear appeals from Seattle-based Safeco and Berkshire Hathaway’s Geico unit. The companies are fighting class-action suits by consumers who sought quotes, weren’t offered the lowest rates and now say they weren’t told the insurer was relying on their low credit scores.
The companies say the 9th U.S. Circuit Court of Appeals made it too easy for consumers to win damages in suits against insurers, mortgage lenders and other financial-services companies. The San Francisco-based appeals court also imposed new disclosure requirements on companies under the Fair Credit Reporting Act.
The consumers accuse the companies of violating a provision in the law that requires notification of people who are treated adversely on the basis of credit history. Companies contend that provision doesn’t apply simply because a consumer requests a quote or applies for insurance and doesn’t receive the lowest rate.
Copyright © 2006 The Seattle Times Company
Link: http://community.seattletimes.nwsource.com/archive/?date=20060927&slug=boeingcase27
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Boeing v. The U.S. Air Force
Background posted here. Please click link to view entire legal document
Link: http://www.ll.georgetown.edu/federal/judicial/fed/opinions/01opinions/01-1011.html
United States Court of Appeals for the Federal Circuit
01-1011
BOEING NORTH AMERICAN, INC.,
Appellant,
v.
James G. Roche, SECRETARY OF THE AIR FORCE,
Appellee.
Terry L. Albertson, Crowell & Moring LLP, of Washington DC, for appellant. Of counsel were Scott James Preston and Richard J. Ney, of Chadbourne & Parke, of Los Angeles, California.
Lawrence N. Minch, Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, for appellee. On the brief were Stuart E. Schiffer, Acting Assistant Attorney General; David M. Cohen, Director; Deborah A. Bynum, Assistant Director; and J. Mark Powell, Attorney.
Clarence T. Kipps, Jr., Miller & Chevalier, Chartered, of Washington, DC, for amicus curiae. Of counsel was Lynda Troutman O’Sullivan.
Appealed from: Armed Services Board of Contract Appeals
United States Court of Appeals for the Federal Circuit
01-1011
BOEING NORTH AMERICAN, INC.,
Appellant,
v.
James G. Roche, SECRETARY OF THE AIR FORCE,
Appellee.
___________________________
DECIDED: July 29, 2002
___________________________
Before LOURIE, Circuit Judge, ARCHER, Senior Circuit Judge, and DYK, Circuit Judge.
DYK, Circuit Judge.
Acting en banc, the court today vacated the March 15, 2002, judgment in this case, and the panel’s original opinion, which is reported at 283 F.3d 1320 (Fed. Cir. 2002), was withdrawn. The en banc court reassigned the opinion to the panel for revision. The panel’s original opinion is revised as follows:
Boeing North American, Inc. (“Boeing”) appeals from the decision of the Armed Services Board of Contract Appeals (“Board”) disallowing legal costs incurred in 1989, 1990, and 1991 for defending a shareholder derivative suit. Boeing North American, Inc., ASBCA No. 49994 00-2 BCA ¶ 30,970 (June 8, 2000). Because the Board applied the wrong legal standard when disallowing the costs and failed to make an assessment of the contractor’s likelihood of prevailing in its defense of the shareholder suit, we vacate and remand for further proceedings.
BACKGROUND
In December 1996 Rockwell International Corp. (“Rockwell”) merged with a wholly-owned subsidiary of The Boeing Company and changed its name to Boeing North American, Inc. Before the merger, Rockwell was a large defense and aerospace contractor. Among the many contracts Rockwell had with the federal government was Contract No. F04704-90-C-0016 (“contract 16”), awarded by the United States Air Force to Rockwell on March 5, 1990, for inertial measurement units for use in missiles. Contract 16 included both firm fixed-price and cost-reimbursable line items, and had a total value of over $100 million.
The allowability of costs generally, and of selected costs in particular, is covered by subpart 31.2 of the Federal Acquisition Regulations (“FAR”) .[1][1] Contract 16 explicitly incorporated by reference numerous FAR provisions, including FAR § 52.216-7. That provision provided, inter alia, for reimbursement of costs “determined to be allowable by the Contracting Officer in accordance with subpart 31.2 of the Federal Acquisition Regulation[s] . . . .” Rockwell sought reimbursement of its legal defense costs incurred in the defense of a shareholder derivative action and of the plaintiffs’ legal costs that Rockwell paid. The government urged that the costs were not allowable. The background of the dispute is as follows.
In June 1989 four Rockwell shareholders filed a shareholder derivative complaint in Los Angeles County Superior Court. Citron v. Beall, No. C728809 (Cal. Super. Ct., filed June 26, 1989) (“Citron”). The suit was brought against fourteen directors of the corporation (some of whom were also officers) and 200 unidentified “John Does” who were “officers, directors and other members of management and employees, who were involved in the wrongdoing complained of.” The gravamen of the complaint was that the “defendants knowingly, recklessly, or culpably breached their fiduciary duties to the [c]orporation by . . . failing to establish internal controls sufficient to insure that the [c]orporation’s business was carried on in a lawful manner . . . .”[2][2] On this appeal, the parties agree that the five instances of underlying misconduct alleged in the Citron suit were as follows.
First, the government brought a civil suit under the False Claims Act, 31 U.S.C. § 3730, alleging that Rockwell fraudulently mischarged the government for work performed on a Space Shuttle contract in 1975-77. In 1982, Rockwell entered a consent decree to settle the suit, under which it agreed to pay a $500,000 fine and to take corrective action to ensure that Rockwell would not make false claims or conspire to defraud the government in the future. Second, the government brought criminal charges against Rockwell for making false statements under 18 U.S.C. § 1001 in connection with work performed under a government contract in 1982. Rockwell pled guilty to this charge and was fined $1 million. Third, the government alleged that Rockwell had engaged in defective pricing related to a 1982-83 Global Positioning System subcontract. A grand jury indicted Rockwell and two Rockwell employees, charging them with fraud, mail fraud, and willfully making false statements. Rockwell pled guilty to two counts of the indictment under a plea agreement and was fined $5.5 million. Fourth, a civil qui tam lawsuit was filed against Rockwell on behalf of the government under the False Claims Act, charging the company with permitting employees to use government assets for personal gain in 1984. In addition to the qui tam suit, the government convened a grand jury but decided not to prosecute Rockwell. The civil suit apparently was also dismissed. Fifth, Rockwell was the subject of a Department of Justice investigation of alleged illegal hazardous waste dumping and other environmental law violations between 1975 and 1989. In March 1992, after settlement of the Citron lawsuit, Rockwell pled guilty to four felony violations of the Resource Conservation and Recovery Act, one felony and five misdemeanor violations of the Clean Water Act, and agreed to pay a criminal fine of $18.5 million.
Rockwell responded to the Citron complaint by retaining counsel to represent the corporation in the suit and by hiring separate counsel to represent the director defendants named in the complaint, as required by Rockwell’s by-laws. Rockwell also formed a special litigation committee (“SLC”) (composed of three members of Rockwell’s Board of Directors who were not named as defendants in the complaint) to investigate and report on the Citron allegations. The SLC also hired separate legal counsel to assist in the investigation and provide independent legal advice. In July 1990 the SLC prepared a report summarizing its conclusion that the Citron lawsuit was not reasonably likely to succeed and would be disruptive to Rockwell’s ongoing businesses and that prosecution of the suit was not in the best interest of Rockwell or its shareholders. The SLC report recommended that Rockwell’s counsel take steps to obtain a dismissal in favor of all defendants.
Defendants moved for summary judgment and submitted the SLC report in support of their motion. The court denied the summary judgment motion on July 16, 1991, because it was “not satisfied that there is ‘no triable issue as to any material fact,’ as to the good faith, the independence and the quality and character of the investigation of the Special Litigation Committee . . . .” Order at 1. In denying defendant’s motion, the court stated “it would appear that, were this a trial, defendants would prevail on the present state of the record (though plaintiffs’ counsel will quickly note that the proceeding[s] so far have hamstrung their discovery efforts).” Id. at 2.
Subsequently, on October 28, 1991, Rockwell and the Citron plaintiffs entered into a settlement agreement. In that agreement, the Rockwell defendants “vigorously den[ied] all liability with respect to any and all of the purported facts or claims alleged in the Complaint . . . .” Settlement Agreement at 4. Pursuant to the agreement, Rockwell agreed to maintain an Audit Committee that would, for at least three years, “meet at least annually with [Rockwell’s] Vice President [of] Contracts, Pricing & Subcontracts to review policies and procedures and training programs designed to effect compliance with the laws and regulations applicable to federal government contracts.” Id. at 7. Also pursuant to the agreement, Rockwell agreed to pay plaintiffs’ attorneys’ fees of up to $1.5 million. On October 29, 1991, the court dismissed the Citron action with prejudice based on the settlement between the parties. The dismissal order, drafted by the parties and approved by the court, dismissed the complaint on the merits, released the defendants from liability for all claims that were, or might have been, asserted in the lawsuit, and awarded plaintiffs $1.4 million in legal fees and costs. The dismissal order additionally required Rockwell to indemnify the defendant directors against any expenses and legal fees incurred in connection with the lawsuit to the “fullest extent permitted” by the applicable Delaware law.[3][3] Under Delaware law, a corporation has the power to indemnify a director-defendant if the director “acted in good faith and in a manner the [director] reasonably believed to be in or not opposed to the best interests of the corporation.” 8 Del. C. § 145(a) & (b) (2000).
In total, between 1989 and 1991, Rockwell incurred approximately $4,576,000 of legal fees and costs associated with the Citron action, including costs incurred for representing Rockwell, for representing the director defendants, for legal counsel to the SLC, and for reimbursement of the plaintiffs’ legal fees and costs. Rockwell included these costs as general and administrative (“G&A”) costs in its home office overhead for fiscal years 1989, 1990, and 1991, and it claimed reimbursement for a portion of the costs under its various contracts with the government. Rockwell allocated 33.2% of these costs to its cost-type and flexibly-priced government work and 66.8% of the costs to its commercial and firm-fixed-price work. Rockwell subsequently submitted a certified claim for $161.91 to the contracting officer based upon the share of the Citron costs included in the G&A expenses allocated to contract 16. The parties agreed to treat this as a test case and stipulated that the Board’s decision regarding the allowability of these costs to contract 16 would govern the allowability for all relevant contracts.
On May 15, 1996, the contracting officer issued a final decision disallowing the costs Rockwell claimed. (“Final Decision”). The contracting officer concluded that the costs were unreasonable under FAR § 31.201-3,[4][4] and therefore unallowable, because “Rockwell violated its ‘responsibilities to the Government . . . and the public at large.’” Final Decision at 1 (quoting FAR § 31.201-3(b)(3)). The contracting officer additionally disallowed the costs, pursuant to FAR § 31.204(c), which provides that allowability of costs not specifically addressed by the FAR is to be based on the principles of the FAR and the “treatment of similar or related . . . items [that are specifically addressed under the FAR].” The contracting officer found Rockwell’s legal costs to be “similar or related” to the costs incurred in connection with or related to mischarging of costs on government contracts, which are expressly unallowable under FAR § 31.205-15, and “similar or related” to costs for the unsuccessful defense of fraud charges, which are expressly unallowable under FAR § 31.205-47. Final Decision at 3.
Rockwell appealed the contracting officer’s final decision to the Armed Services Board of Contract Appeals. The parties elected to submit the appeal on the record without a hearing. In its appeal to the Board, Boeing, as Rockwell’s successor-in-interest, argued that Rockwell’s costs were allowable because (i) the costs were ordinary, necessary, and allowable “professional services” costs under FAR § 31.205-33(b); (ii) the costs were reasonable in relation to the services rendered, pursuant to FAR §§ 31.201-3 and 31.205-33(b); (iii) the costs were allocable to the contract because they conferred benefit to the contract, in accordance with FAR § 31.201-4; and (iv) the costs were not limited or disallowed by any FAR cost principles. Boeing North American, Inc., slip op. at 10.
While the appeal was pending, this court decided Caldera v. Northrop Worldwide Aircraft Services, Inc., 192 F.3d 962 (Fed. Cir. 1999), and the Board required supplemental briefing concerning the impact of that case. In Northrop, we addressed the question whether certain legal costs were “allowable costs,” 192 F.3d at 972, when the costs related to the defense of an action charging that the contractor wrongfully terminated several employees because the employees refused to participate in fraud against the United States. In that action, a state court found that the employees had been wrongfully terminated because they refused to commit fraud against the government. Id. at 965. The majority of our opinion was directed to the question whether the state court had determined that Northrop committed fraud and, if so, whether that determination should be given collateral estoppel effect in Northrop’s suit to recover its legal defense costs. In a brief portion of our opinion, we concluded that recovery of the contractor’s legal costs was not allowable because those costs were not allocable. Id. at 972. They were not allocable under FAR § 31.201-4 “because the government did not benefit from [the contractor’s] defense of the [state court] lawsuit . . . .” Id. at 972-73.
The Board denied Boeing’s appeal in this case based on Northrop because there could be “no benefit to the Government in a contractor’s defense of a third party lawsuit in which the contractor’s prior violations of federal laws and regulations were an integral element of the third party[’s] allegations.” Boeing North American, slip op. at 13. The Board reasoned that “but for” Rockwell’s wrongdoing the Citron suit would not have been brought, and the costs would not have been incurred.
This timely appeal followed. We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1295(a)(10).
[1][1] Federal Acquisition Regulations are codified in Title 48 of the Code of Federal Regulations. Because Boeing contests the allowability of costs incurred in 1989, 1990, and 1991, the FAR provisions in effect during those years are relevant. Unless otherwise indicated, the relevant FAR provisions in effect as of October 1, 1989, did not change in 1990 or 1991. Also, unless otherwise indicated, all references to the FAR refer to the FAR in effect on that October 1, 1989, date.
[2][2] Compl. ¶ 14. The complaint alleged that the named defendants were “controlling persons of Rockwell and had the power and influence, and exercised the same, to cause Rockwell to engage in the illegal practices complained of” and that the unidentified defendants aided, abetted, and participated in the wrongful acts and conduct. Id. ¶¶ 16-17. However, in their joint statement of facts here, the parties stipulated that the Citron “[c]omplaint did not directly allege that the director-defendants participated in, or had prior knowledge of, any of the . . . instances of wrongdoing” described in the complaint. Jt. Statement of Facts ¶ 14.
[3][3] The Dismissal Order provided in pertinent part that “Rockwell shall indemnify the Director-Defendants against expenses (including attorneys’ fees) actually and reasonably incurred in connection with the Action to the fullest extent permitted by the laws of the State of Delaware.” Dismissal Order ¶ 8.
[4][4] FAR § 31.201-3 provides standards under which the reasonableness of a cost is determined. Reasonableness is one factor in determining the allowability of a cost under FAR § 31.201-2.
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