2 Holders Sue Cubic in Wake of Defense Probe
Two shareholders of Cubic Corp. sued the defense firm and its top officials on Thursday, saying it illegally used two industry consultants to bribe Pentagon officials “in return for secret information or favorable treatment.”
The legal action--filed against Cubic, its board members and officers, and defense industry consultants William Galvin and Donald Illeman--is the first of what is expected to be a flood of civil lawsuits stemming from the unfolding Pentagon procurement scandal.
Cubic officials would have no immediate comment on the lawsuit, a company spokesman said, and neither Illeman nor Galvin could be reached for their reaction.
Filed in U.S. District Court in San Diego, the lawsuit contends that San Diego-based Cubic “directly or indirectly” supplied money to Galvin and Illeman, who “served as conduits for the payment of illegal bribes and gratuities to Pentagon officials.”
In return, the lawsuit contends, the consultants got secret Pentagon information that Cubic subsequently used to win several Defense Department contracts, including a recent $108-million contract for air combat training systems.
Claims Stock Inflated
Cubic “participated in the wrongdoing” in order to “continue and prolong the illusion” that it was a market leader in the defense industry, the lawsuit says. And that illusion, it goes on to say, inflated the price of Cubic’s common stock and enhanced the value of Cubic executives’ stock options.
The suit alleges that officers and executives of Cubic violated various fraud statutes and the Racketeer-Influenced and Corrupt Organizations Act.
Cubic Founder and Chairman Walter J. Zable and his son William C. Zable, vice chairman, control about 33% of the company’s outstanding stock. A company spokesman said the Zables are not granting interviews.
Cubic is one of 16 defense firms whose offices were searched in June as part of the ongoing Justice Department investigation of Pentagon procurement fraud. No criminal charges have been filed, but prosecutors said they expect indictments this fall.
Attorneys expect a slew of lawsuits to be filed in the wake of the procurement investigation.
Union workers at a General Electric plant in Lynn, Mass., where 600 lost their jobs when the Navy awarded a jet engine contract to Pratt & Whitney, say they may file suit against the United Technologies subsidiary if the federal investigation substantiates charges that Pratt & Whitney used inside information to win the job.
Likewise, companies could sue competitors under the racketeering statute if the probe suggests that they lost business on account of another firm’s illegal conduct.
“There are going to be people who are going to be reading about how their competition was able to obtain contracts by means other than legitimate ones,” said John S. Pachter, a Vienna, Va., lawyer who is chairman of an American Bar Assn. committee on federal government contracting. “If it looks like fraudulent activity occured, it’s safe to assume some suits will be filed.”
Damages For Company
In the Cubic lawsuit, it is shareholders who are seeking payment of damages that would “go directly to the corporation itself,” explained San Diego attorney William Lerach, who filed the suit for shareholders Emmanual Liebman and Jane Celino. “This is a lawsuit on behalf of Cubic, the corporate entity, against its board of directors and consultants,” he said.
On June 14, investigators around the country searched premises of nearly three dozen defense contractors and defense industry consultants. That day, the FBI seized a six-inch stack of documents pertaining to the air combat training system program following a six-hour search of Cubic Defense Systems President C. C. (Sam) Wellborn’s office.
FBI agents also searched the offices of Galvin, a Washington, D. C.-based consultant who has done work for Cubic since at least 1983. And, according to a previously sealed federal affidavit that recently was released in Dallas, the FBI in December tapped the telephone of Illeman, a San Diego-based consultant. According to records of a 1982 divorce, Illeman in the past has worked for Cubic. Cubic would not comment on whether it ever paid Illeman for consulting services.
Staff writer Jim Schachter contributed to this article from Los Angeles.
