CRISIS PLANNING: When Your Company Is In The Government’s “Crosshairs”

Outline
I. CEO’s Day Of Infamy
II.  Sea Change in S&D
III. Crisis Planning to Minimize Risk of Potential S&D
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A CEO’s Day Of Infamy
The processes that the company puts into place long before the Government’s ire often determines whether the
company is allowed to continue to do business with the Federal government.

The Most Likely Causes
1. Disgruntled employees
2. Employee
3. Ignorance
4. Affiliation
5. Misunderstanding

Disgruntled Employees
-In FY 2012, DOJ recovered nearly $5B in False Claims Act.
-Most of the recovery involved qui tam law suits brought to
employees.
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Disgruntled Employee Example #1
-Fired embezzling bookkeeper
-Bookkeeper “downloads” to DODIG
-Man years of Special Agent time devoted to investigating
-Axion suspended
-Axion acquitted
-Business essentially ruined

Disgruntled Employee Example #2
-Successful Huntsville 8(a) Company
-Largest contract was a subcontract with a top five government contractor
-Disgruntled employee claimed 8(a) had submitted false claims
-8(a) retained a retired SES attorney to conduct investigation
-Because of excellent “damage control,” no adverse impact


Employee Bad Judgment

If It Can Happen To Boeing....

Bad Judgment Example #1

-Boeing possessed a large amount of rival LM proprietary data during the 1998 Evolved Expendable Launch Vehicle (EELV) competition.
-The data was capable of providing great insight into LM cost and pricing
-Boeing waited four years to disclose the misconduct
-In July 2003, the Air Force suspended three of Boeing's Integrated Defense System business units

Bad Judgment Example #2
-In 2002, Boeing's CFO offered a job to Darleen Druyun, the Air Force chief acquisition official
-For a reduced sentence, Druyun admitted that she favored Boeing on multiple contracts because of favors granted by Boeing.
-Boeing’s CEO was forced to resign
-Contracts awarded to Boeing by Druyun were successfully protested
-The Air Force’s problems in awarded its tanker contract were largely attributable to the scandal


In June 2006, Boeing settled Example #1 and Example #2 collectively for $615 million
 
Bad Judgment = Bad Ethics

“I also went back and counted the number of vice presidents who have been separated from the company for ethics violations over the last few years. The total is 15.”
Boeing General Counsel (2006) 
Bad Judgment Example #3 (Local)
-Successful Huntsville large business
-Hires a “hard charging” retired officer to pursue approximately $25M contract
-Selected for award
-Disqualified because employee repeated contacted SSA and SSAC members
-Because of excellent “damage control,” no other adverse action against company 
Employee Ignorance

Ignorance Example #1
-Georgia company makes small arms training simulators
-Imports demilitarized small arms from Europe to insert laser beam firing
-Ignorant that ITAR applies
-Federal agents seize all records and most of inventory
-Delinquent on delivering products to clients
-Impact almost fatal to company

Ignorance Example #2
-In 1995, Coast Janitorial Service was awarded a contract at Redstone Arsenal for $19,128,277
-Coast’s Project Manager, “to keep overhead low,” did not pay employees who worked overtime time and a half
-Instead, Coast credited employee with “comp time” which was paid at regular hourly rates.
-DOL found SCA violation involving two employees at an amount of $6,596.
-Coastal responsible for “willful and deliberate” violations of supervisor
-Coast debarred for 3 years
-President, Mr. Grimes, debarred
-VP, Mr. Scott, debarred
Affiliation

Affiliation Example #1
-Taos acquired by Agility Defense and Government Services Inc.
-Agility owned by DGS, a Dutch Company
-PWC owned by PWC, a Kuwait Company

-A Special Security Agreement prohibited DGS for exercising control of Agility
-In 2009 PWC indicted for defrauding US Government of $6B
-Agility suspended as an affiliate of PWC
-Suspension Official rejected a management buy-out where officers in Agility would acquire 60% of company
-After 32 months, Judge Lynwood Smith gave summary judgment to lift suspension 
Misunderstanding

-1997 DESE Research awarded Army contract to support Kinetic Energy Anti-Satellite Weapon System Program
-DESE claimed as allowable cost meeting with members of Congress to increase funding
-When Army and DESE reached an impasse on whether costs were allowable, DESE was suspended
-USDC struck down finding the DESSE violated the False Claims Act
-USDC found expenses were unallowable lobbying costs and suspension was appropriate. 
II. Sea Change In S&D

-Number of DoD proposed suspensions & debarments almost doubled in first Obama Administration
-OMB Memo November 2011 stated agencies have not adequately used S&Ds
-In Sept 2011, the Council of the Inspectors General recommended increase use of S&D
-FAR §52.203-13 “Contractor Code of Business Ethics and Conduct”
-FRAPIIS 
III.  Crisis Planning to Minimize Risk of Potential S&D 

A. Prevent

B. Preparation
C. Reaction

Crisis Planning

DOJ’s Corporate Fraud Task Force“Aims High” –Convictions
-CEOs82
-Presidents85
-Vice Presidents 102
-CFOs36

A. Prevent
-The best prevention is an exceptional compliance program

-See Gabig’sPresentation on FAR §52.203-13

-Recommendation: Any corporation that derives significant revenue from government contracts should have a Board of Directors Compliance Committee (not unlike an Audit Committee or a Compensation Committee)

KELLOGG, BROWN & ROOT
COFC No. 09-351C, May 02, 2012


-KBR awarded food services contract at Camp Anaconda, Iraq.
-KBR submitted claims of ~ $11.5M
-Government sought forfeiture of claims arguing violation of Anti-Kickback Act
-Government proved that kickbacks were given to KBR employee, Mr. Hall
-KBR claimed no knowledge of kickbacks
-KBR awarded $11,79,505

-Two key facts favored KBR:

1. KBR “required employees to have training in professional responsibility and to sign agreements signifying that they would comply with KBR policies, which prohibited the acceptance of kickbacks.”

2. At trial, KBR “introduced, Mr. Hall’s signature page, whereby Mr. Hall had acknowledged that he had read, and would abide by, Halliburton’s Company Code of Business Conduct.”

C. Reaction
-Master the facts before the government —complete an internal investigation
-“Damage assessment” vital
-Present “solution” to government before government dictates
-Internal Investigation should be independent
--Appears more objective
--Distances senior management
--Use lawyers to protect report as attorney-client privilege
-Multiple agency involvement–Global settlement preferred but difficult to arrange
-Timely responses to agency vital for appearance of cooperation
-Risk of Obstruction of Justice–Arthur Andersen
- Notify insurance carrier
- Need for Board involvement
-Manage shareholder concern
-If public company, SEC complications
-Lead Counsel pursues an acceptable outcome
–-DOJ (declination or deferred prosecution)
–-Regulators (no action)Civil law suits (settle)
–-Suspension & Debarment(avoid)

Factors Considered By The Debarring Official
--Whether the contractor had effective standards of conduct and internal controls systems in place at the time.
--Whether the contractor brought the activity to the attention of the government in a timely manner
--Whether the contractor has fully investigated the circumstances surrounding the cause for debarment
--Whether the contractor cooperated fully with Government agencies during the investigation

Concluding Thought
-When you do business with the Sovereign, you risk incurring the Sovereign’s wrath.
-Plan like any other occupational hazard:

1. Prevent
2. Prepare
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