Prosecution Unfair, Company Claims : Rockwell Says U.S. Abuses Disclosure Program

A federal program encouraging the defense industry to voluntarily report irregularities in military contracts has been used to gather evidence to criminally prosecute participating firms, Rockwell International Corp. has claimed.

The complaint that the highlytouted program has been administered unfairly is contained in Rockwell’s defense of criminal fraud charges pending against its Seal Beach Satellite and Space Electronics Division and two former officials of the division.

A federal grand jury, in a 25-count indictment in January, alleged that Rockwell double-billed the Air Force for $337,000 in repair costs as part of a $1.2-billion contract for developing a satellite navigation system.

It is the first prosecution in the nation of a defense contractor claiming to have participated in the Voluntary Disclosure Program, a Department of Defense plan that encourages contractors to report suspected fraud. The program was inspired by the presidential Blue Ribbon Commission on Defense Management.

Shield Promised

Plan guidelines promise, without guaranteeing, that prompt disclosure, along with other actions showing “contractor integrity,” would shield all but the most serious fraud cases from criminal prosecution.

The aerospace giant claims that it voluntarily and fully disclosed the circumstances of the case to the Air Force, repaid the money, fired one manager and disciplined another.

Federal prosecutors stated that Rockwell tried to conceal the fraud and mislead auditors. In January, U.S. Atty. Robert C. Bonner personally announced the indictments, calling Rockwell’s actions “particularly egregious and disturbing.”

The Rockwell case is the only instance to date in which a contractor has claimed that the government reneged on promises made in the disclosure program, according to a source in the Defense Department.

So far, there have been nearly 100 instances of voluntary disclosure, according to the Inspector General’s Office of the Department of Defense, which oversees the program.

Seeking to encourage disclosure, the Department of Defense asked the nation’s 87 largest defense suppliers to join the program in August, 1986. Guidelines were published describing circumstances in which the department would not push for criminal prosecution, and procedures were laid down for making the decision.

Defense officials have the authority to suspend contractors or bar them from work with the government. Only the Department of Justice, however, has the power to decide who is criminally prosecuted.

“It’s not an amnesty program, where you come in and all your sins are forgiven,” said one Defense Department official. “You can’t go out and admit to any crime and expect that all will be forgiven.”

Voluntary Disclosure

According to the guidelines, contractors receive favorable consideration if they disclose irregularities voluntarily, cooperate fully, provide access to relevant records and take corrective action.

Those “are strong indications of an attitude of contractor integrity even in the wake of disclosures of potential criminal liability,” according to an August, 1986, letter by Deputy Defense Secretary William H. Taft IV.

For contractors who participate, Taft pledged quick resolution of their cases and promised that defense officials would notify federal prosecutors of the extent of the cooperation.

In the Seal Beach case, Rockwell claims that Bonner’s decision to prosecute “breaches the government’s implied promise not to prosecute volunteers as a result of their voluntary disclosures, absent aggravating circumstances.” Included is a copy of a letter dated last October from Deputy Inspector General Derek J. Vander Schaaf to the Justice Department calling the Rockwell matter a case of voluntary disclosure and specifically requesting consultation before making any decision to prosecute.

In addition, Rockwell alleged that a promised review of its case before prosecution by a special unit in the Justice Department did not take place.

Ultimately, the government’s position on Rockwell’s status as a volunteer “was altered” without explanation, according to a statement filed in U.S. District Court by Rockwell Vice President John R. Stocker.

The amount found to have been overcharged represents the unexpected cost of repairs of components of NAVSTAR satellites under a development subcontract. Rockwell and a subcontractor could not agree over who should bear the cost, according to court papers.

Disputed Repair Costs

After the satellite system was developed, Rockwell dealt with the same subcontractor to produce the parts under a separate deal. The still-disputed repair costs were allegedly covered in the new contract, allowing Rockwell to recoup the amount from the government.

The questionable charge was first discovered in a routine audit of the $42-million subcontract by the Defense Contract Auditing Agency.

Rockwell investigated, concluded its employees had acted improperly, offered to repay the government, and fired and disciplined the managers involved, according to lawyers for the firm.

The manager of the subcontract division, Robert Zavodnik, also a defendant in the criminal case, was fired. Donald Carter, then director of material and also a defendant, was suspended and then removed from procurement matters, according to Rockwell.

Rockwell contends that government auditors had no idea how the overcharge had occurred. All information came from Rockwell’s own investigation, which it freely shared with DCAA auditors and the Air Force Office of Special Investigations, according to the firm.

Basis for Indictments

That information is the basis for the indictments, Rockwell lawyers claim.

Rockwell has asked that the charges be dismissed. “The bringing of this indictment can only undermine this goal (voluntary disclosure), shatter contractor confidence in the program and lead to still more highly complex defense contractor cases,” according to papers Rockwell filed in the case.

Both prosecutors and Defense Department officials declined to comment on the case.

But one official with the Inspector General’s office called the disclosure program “a success,” saying that “contractors are showing confidence in the program, and they’re being treated fairly.” He said the Justice Department can’t be expected “to turn away from crime.”