1
1
United States ex rel. Robinson and Holzrichter
v.
Northrop Grumman
Presented By
James Holzrichter
Michael Behn
2
Progress Payment Certification: One of 807 from Northrop
to United States
Typical: October 11, 1988
9. Paid costs eligible under progress payment clause…
“ I certify that the above statement with attachment has
been prepared from the books and records of the above
named contractor in accordance with the contract and
the instructions hereon, and to the best of my knowledge
and belief, that it is correct…”
3
2
4
Letter: From DCAA to Northrop’s
George Luper, Director,
Government Relations
January 22, 1988
“In accordance with Deputy Assistant Secretary
of Defense for Procurements, 10 December
1987 memorandum, we need immediate
answers to these questions concerning key
elements necessary for NCDSD’s material
accounting system to be acceptable for
Government contract costing purposes.”
5
“a. What is currently wrong with your system?
b. How and when are you going to correct it?”
Letter: From DCAA to Northrop’s
George Luper, Director,
Government Relations
January 22, 1988
6
“…NCDSD has found that the Material Management
and Accounting System is generally compliant with the
M/MAS key elements criteria.”
Letter From Duane Emling
To Michael W. Paulini, U.S.
Divisional Administrative
Contracting Officer,
May 9, 1988
3
7
Memo From Jack McNaughton
To Russell Bercier
March 27, 1989
“This situation is untenable in light of potential progress
payment withholds.”
8
A Walk Through Northrop’s Long-Secret Files
9
Memo: Duane Emling, Manager,
Material Accounting, Finance
June 20, 1986
“Integrity of the Inventory Management System
is questionable, at best…”
4
10
Memo: Ken Chapman, Manager,
Material Accounting Systems
January 6, 1987
“Per your verbal request, the following represents the
action that I believe should be taken to alleviate the
problems contained in our material system:”
11
Memo: Ken Chapman, Manager,
Material Accounting Systems
January 6, 1987
“Production Accountability
• Scrap
• Inventory Transfers
• Engineering Change Orders
• As Required Material
• Residual
• Issues
• Adjustments
• Shop Order Requirements
• MBOM vs. EBOM
• Borrow/Pay Back”
12
Memo: Ken Chapman, Manager,
Material Accounting Systems
January 6, 1987
“As you can see, the tasks outlined above encompass
all material systems…”
5
13
Q: So did you find the Inventory Management System to be unreliable?
A: The Inventory management System had data problems.
Q: And did those data problems make it more difficult for you to gather up the data you needed within Northrop’s Finance Department?
A: Yes.
Q: So the Inventory Management System was not adequate for your purposes. Is that correct?
A: The accuracy of the system was not acceptable.
Deposition Ken Chapman, March 22, 2002
14
Memo: Ken Chapman, Manager,
Material Accounting Systems
January 6, 1987
“We have had most of these problems for at
least ten years and to enhance these systems
in two years is a major undertaking.”
15
Memo From Duane Emling to Ed Foley,
VP Finance, and McNaughton
March 29, 1989
“Attached is an example of what happens when insufficient resources are
applied to the issue of system integrity. For the illustrated part the following
issues are identifiable:
1. Negative on-hand balance.
2. Insufficient on-hand/on-order to cover requirements.
3. Issues 5 times acceptances.
4. Scrap 4 times acceptances.
5. Cycle counts 6 times acceptances.
6. Issues, scrap, and cycle counts overstated by 200,000 pieces.
7. Error corrected by cycle count adjustment rather correction of actual error.”
6
16
Internal View Graph Presentation
August 5, 1987
“*AVAILABLE DATA HAS INSUFFICIENT INTEGRITY*”
17
“Comment:
No matter what programs we install to deal with
material accounting, they are useless if the data is
generally invalid.”
Internal View Graph Presentation
August 5, 1987
18
B-1/135 UPDATE
“ PROBLEMS EVERYWHERE”
Internal View Graph Presentation
August 5, 1987
7
19
Memo From Duane Emling
To Russel Bercier
December 22, 1987
“…I found two major discrepancies between the On
Order conditions showing in the PM and PT systems.”
20
Memo From Duane Emling
To Russel Bercier
December 22, 1987
On Order
P/N PT PM
151-000571-102 1072 0
019-005536-002 1681 97
21
Deposition Wallace Solberg, Division
Manager & Chief Executive
Officer, Northrop
“…we were afflicted by the GIGO problem.
Q. The which problem?
A. The GIGO problem.
Q. Which problem is that?
A. Garbage in, garbage out.”
8
22
Memo From McNaughton
To Wallace Solberg
October 23, 1987
“Arthur Young and Co. Compliance Review Activity
The consulting division of Arthur Young & Co. was engaged by
DSD to perform a compliance review of material systems,
procedures, and practices.
A final report highlighting twelve findings and documenting a first
level of the DSD material planning and control system environment
was distributed to Council members, Burks Terry and yourself.”
23
Report: Arthur Young Audit Report to
Northrop
January, 1989
“Severe remedial action is necessary”
24
Report: Arthur Young Audit Report to
Northrop
January, 1989
“The real issue that must be tackled is the
change required in the system of people,
practices, policies and management
attitudes”
9
25
Memo Horrocks to Watts
January 30, 1988
“The Division President [has
told management that]
‘systems are a necessary evil
and have no effect on the
economic well being of the
organization’”
26
Memo Horrocks to Watts
January 30, 1988
“The work we’re doing is about as enthusiastically
received as results of an AIDS test”
27
Memo Duane Emling, Northrop
to Michael Paulini, DoD
December 1, 1988
“This criteria element requires the contractor to
have a system description describing the operation
of its MMAS system. With the assistance of Arthur
Young and Company, NCDSD has fully
documented its existing MMAS system.”
10
28
What Northrop Was Saying to the United States Government
29
“THE MANUFACTURING TRACKING
SYSTEMS ARE SUFFICIENT”
“THE PROCESS IS EFFICIENT, ACCURATE
AND EFFECTIVE”
Presentation Northrop to United States
May 6, 1985
30
“…NCDSD has found that the Material Management
and Accounting System is generally compliant with the
M/MAS key elements criteria.”
Letter From Duane Emling
To Michael W. Paulini, U.S.
Divisional Administrative
Contracting Officer,
May 9, 1988
11
31
Memo George Luper, Director of
Government Relations
to Robert Carey, Supervisory
Auditor, U.S. Defense Contract
Audit Agency (DCAA)
November 29, 1988
“1. Inventory Accuracy
NCDSD has clearly demonstrated the general
accuracy of its inventory system to DCAA…”
32
Memo Duane Emling
to Michael Paulini
December 1, 1988
“NCDSD concludes that is has generally
completed an acceptable demonstration of its
MMAS system.”
33
Northrop’s Cover-Up
12
34
Memo From Duane Emling to Foley,
Lindsay, and McNaughton
March 29, 1989
“NCDSD should begin discussing this issue before the
customer begins asking for answers.”
35
Memo From Jack McNaughton
To Wallace Solberg
October 6, 1988
“I personally have some doubt that our present
systems with defined enhancements are adequate to
withstand a continued rigorous DCAA system
review….”
36
Memo: From Emling to Foley, Lindsay,
and McNaughton
April 4, 1989
“Another report indicates a rapidly growing
number of data imbalances…”
13
37
Memo: From McNaughton
To Bercier and Emling
May 3, 1989
“With millions of dollars of potentially unsupportable
attrition data at stake, and concurrently the prospect
and risk of the Division’s MMAS system not able to
support accurate attrition reporting of millions of
dollars more, I consider this situation grave.”
38
Internal Northrop Presentation
February, 1986
“PARs – OR WHAT WILL THE CUSTOMER ACCEPT AS
REASONS
(WE CAN’T TELL THE TRUTH)
IN OTHER WORDS, WE SHOULD TRAIN THE CAMs TO
VIOLATE THE SYSTEM WITHIN THE GUIDELINES OF
THE SYSTEM DESCRIPTION”
39
Distribution List MCS Steering Committee
February 1986
“D. Emling …
A. Selen …
S. Licata …
J. McNaughton …
W. Solberg …”
14
40
Minutes From MCS Steering
Committee Meeting
March 7, 1986
“… He suggested that the Steering Committee not
release possibly damaging information with such a
wide distribution.”
41
Memo: From McNaughton
To Wallace Solberg
October 23, 1987
“…objectives of [Material Management Council]
activities are to: …
Position DSD to be able to respond positively
and proactively to DCAA’s imminent material
systems audit plans and investigations…
management approval will be sought to proceed
in executing the necessary retroactive transfer
adjustments.”
42
DCIS Investigative Report (Interview of CH-05)
(Petra Schiller, Supervisor of
Material Verification)
August 27, 1988
“CH-05 explained that Northrop discovered it could
not accurately track ordered parts which were later
scrapped or returned to the vendor.”
15
43
DCIS Investigative Report (Interview of CH-05)
August 27, 1988
“…the computer reported more parts
purchased than were really delivered or
ordered.”
44
DCIS Investigative Report (Interview of CH-05)
August 27, 1988
“…(DOD) was overcharged for parts because some
of the parts that Northrop billed the DOD for were
never actually purchased by Northrop.”
45
DCIS Investigative Report (Interview of CH-05)
August 27, 1988
“CH-05 said management at Northrop is very
concerned that the DOD may become aware of the
‘financial reconciliation’ program. CH-05 elucidated
by stating the primary purpose of the program is to
fool the DOD when it reviews Northrop’s business
records. CH-05 said Northrop is trying to juggle the
books of different programs in an attempt to mislead
the government inspectors and auditors.”
16
46
Memo: From Susan Licata, Manager of
Material Systems, to Duane
Emling and Ken Chapman
October 23, 1987
“The reconciliation process should be
summarized by noting the appropriate
adjustments to input and output
(Attachment D). Any resultant
discrepancies between On-Hand and the
physical count shall be allocated back to
the oldest PA’s and written off as scrap.”
47
“Example
Calculated
PA On Hand Actual Scrap
4743 10 0 10
Recommended adjustments will be turned
over to Team One for input to the system.”
Memo: From Susan Licata, Manager of
Material Systems, to Duane
Emling and Ken Chapman
October 23, 1987
48
Letter: From D. Emling to M. Paulini
May 31, 1988
“Northrop Corporation, Defense Systems Division
(NCDSD), herein submits the plan to conduct a
detailed demonstration/audit of NCDSD’s Material
Management and Accounting System (MMAS).”
17
49
Letter: From D. Emling to M. Paulini
May 31, 1988
“Each of the selected part numbers will be traced
through the entire MMAS system.…During the
conduct of these traces, it will be necessary for
NCDSD to cycle count the selected parts. DCAA
will be invited to participate in the cycle count. Any
data corrections identified will be included in the
documentation package. Such corrections will be
reviewed with DCAA prior to input to the system.”
50
Memo: From Duane Emling to
R. Davenport
December 16, 1987
“Clean Up”
What can be done to clean up any bad data
which may exist in the report before DSD has
to turn the report over to the auditors?”
51
Memorandum From: S. Licata
To: D. Emling
August 8, 1988
“Having completed subject on 15 of 50 parts, the
following discrepancies are noted for further internal
review and/or correction. These discrepancies are
over and above those reported to the DCAA during
the walk-through.”
18
52
Memorandum From: S. Licata
To: D. Emling
September 2, 1988
“Of the 30 parts covered to date, 22 do not
balance out.”
53
Letter From: Duane Emling
to: Michael W. Paulini,
October 13, 1988
“…herein submits the results/findings of the
completed audit…
DCAA participated in all cycle counts…”
54
Letter From: Duane Emling
to: Michael W. Paulini,
October 13, 1988
“On-hand Cycle Count Results Accuracy
‘A’ Parts 99.9%
‘B’ Parts 99.7%
These results are all within the inventory
accuracy guideline of 95% specified in the
key element criteria.”
19
55
Letter From: Duane Emling
to: Michael W. Paulini,
October 13, 1988
“The results of the compiled data indicate
that key element criteria pertaining to
inventory and BOM accuracy have been met.
These statistical measures support the main
objective of the audit—demonstrating
material accountability.”
56
“INCORRECT COUNTS
39%”
Report: Arthur Young Audit Report to
Northrop
January, 1989
57
“INCORRECT COUNTS
15%”
Report: Arthur Young Audit Report to
Northrop
January, 1989
20
58
Memo: From Duane Emling
June 18, 1987
“I have prepared an initial analysis of each of
the 10 potential deficiencies. These are
included as Attachment D. This analysis was
prepared in a very positive manner. It was
intended to demonstrate that DSD’s systems
are compliant with current regulations.”
59
Deposition: Duane Emling regarding
that same Memo
July 26, 1996
“Q. …When you prepared this draft response
to the DCAA MRP survey, did you attempt to
prepare it as accurately as possible? Let me
rephrase it. Did you strive to make the
statements in this document accurate?
A. They would have been accurate, not
necessarily complete.”
60
Deposition: Duane Emling regarding
that same Memo
July 26, 1996
“Q. Why not complete?
A. Because, as I said, as the cover letter
says, they are couched in very positive terms
so it’s a document that demonstrates how our
systems are compliant. It doesn’t address
issues that might exist with respect to non-
compliance.”
21
61
Memo: From Duane Emling to
E. Foley and G. Luper
March 25, 1986
“CAS 401 Cost Impact Audit”
“The recommendations contained in this audit
report are both proper and reasonable
considering the amount of material DSD
procures each year. We really should take
action to begin to account completely for
material. It really is in our best interest.”
62
Memo: From Duane Emling to
E. Foley and G. Luper
March 25, 1986
“Action:
I believe that we are probably better off to
directly attack the audit…”
63
Letter: From George Luper to
Contracting Officer Karen Boyle
May 26, 1987
“Audit reports are suppose[d] to reflect facts and
documentation not supposition or slander. When question-
able methods are used to perform an audit, wild and com-
pletely false accusations such as this should certainly not be
published. This demonstrates an adversarial position with no
regard for the potential harm which could be inflicted upon
NCDSD’s reputation.”
22
64
Letter: From J.W. Topham to
Supervisory Auditor Robert J.
Carey
August 11, 1988
“NCDSD objects to continual
harassment on topics that have been
addressed and documented over and
over again.”
65
Letter: From Duane Emling to
Robert Carey
October 4, 1988
“Northrop Corporation Defense Systems Division
(NCDSD) has reviewed your audit report. We are
stunned with your evaluation of our Material
Management Accounting System.”
66
Proposal Development Handbook
March 11, 1989
“The famous bank robber Willy Sutton was asked,
“Why did you rob the bank.”
He responded, “Because that is where the money is”
23
67
Deposition: Karen Sarley
July 2, 2002
“THE WITNESS: Yesterday when I saw these
documents for the first time I was hurt. I was
questioning my own feelings about relying on people
and assuming people were truthful and honest.
But today I’m more angry than anything else, I
guess. Because these people were not only lying to
us, meaning the people within the office there, they
were lying to their own government and to the people
of the United States…”
68
69
Wall Street Journal Feature Article
April 19, 2004
24
70
United States ex rel. Robinson and Holzrichter
v.
Northrop Grumman
Presented By
James Holzrichter
Michael Behn
71
The ZSR-62 Fraud
72
MIL-STD-1521 Definition of Critical Design
Review
December 21, 1981
“This review shall be conducted for each CI when
detail design is essentially complete. The purpose
of this review will be to (1) determine that the detail
design of the CI under review satisfies the
performance and engineering specialty
requirements of the CI development specifications”
25
73
Deposition Testimony William W. Ledger
April 8, 2002
“The critical design review up there had just
finished. Ed Hecht and some individuals came in
through the one secured entrance, and as he was
walking by my cube, which sat right on the main
aisle, I heard him say, okay, we lied our teeth off,
now it’s time to make these lies come true.”
74
Deposition Gary N. Iversen
November 29, 2004
Q: So when the government is assessing what
the progress is on a given contract, they are
looking at the totality of various contract or
customer requirements. Correct? Such as
what’s it costing, correct? They’re looking at
lots of different things together, right?
A: Sure.
75
Deposition Gary N. Iversen
November 29, 2004
Q: What’s the schedule, are we on schedule or not,
correct?
A: Correct.
Q: Okay, Is the appropriate amount of work needed to
complete going into the contract. Right?
A: Correct.
Q: And they’re looking at the technical engineering
issues, correct?
A: That’s what the government program manager
does. That’s their job.
26
76
Q: So all these various aspects of a complicated program do join together, right?
A: They do join together.
Q: Engineering costs, scheduling, identifying problems, correcting problems, they all merge together, correct?
A: They all merge together…
Deposition Raymond L. Sheen, November 29, 2004
77
ZSR-62 Program Management Plan Northrop
November 7, 1985
Management Control Systems (MCS)...
“MCS is the primary method for measuring and
controlling cost and schedule to achieve overall
program requirements”
78
Internal Northrop Presentation
February, 1986
“PARs – OR WHAT WILL THE CUSTOMER ACCEPT AS
REASONS
(WE CAN’T TELL THE TRUTH)
IN OTHER WORDS, WE SHOULD TRAIN THE CAMs TO
VIOLATE THE SYSTEM WITHIN THE GUIDELINES OF
THE SYSTEM DESCRIPTION”
“PRACTICAL MCS TRAINING”
27
79
MCS Training Manual
“WHAT NOT TO SAY ON A PAR!”
80
MCS Training Manual
“Cost variance was caused by
accounting system”
“WHAT NOT TO SAY ON A PAR!”
81
MCS Training Manual
“Schedule variance is caused by
behind schedule condition”.
“WHAT NOT TO SAY ON A PAR!”
28
82
MCS Training Manual
“Material scheduled cannot
realistically track on schedule”
“WHAT NOT TO SAY ON A PAR!”
83
MCS Training Manual
“Material cost analysis indicates
an overrun”
“WHAT NOT TO SAY ON A PAR!”
84
ZSR-62 Program Management Plan Northrop
November 7, 1985
“Critical Design Review (CDR). The CDR is
scheduled 5 months after completion of the PDR,
when the design is complete,…Manufacture of the
FSD (full scale development) models will
commence upon approval of the CDR.”
29
85
Deposition: James L. Howe
January 16, 1997
“A. I started making assignments … devise a power
supply …”
“A. I had to dig it out … the specs.”
“A. … I determined that the specs were practically
worthless.”
86
Documentation: Subcontractor Review and
Comment Sheet
February 19, 1986
“Doc. Title:
Test Requirement Document for CPU ROM”
General Comments
1. Excessive TBDs. Preliminary data should be used
to make this document credible.”
87
Memo: To W. Dobricky (240A)
regarding ZITS Testing
March 4, 1988
“ Receiver specifications are
TBD at this time.”
30
88
Notes: Unknown author handwritten
notes outlining lessons learned
“Premature release of design to
production…”
“Playing factory before it’s time”
“Failure to maintain design and production
documentation current.”
89
Note: From G. Kotecki to R. Marquis
August 31, 1990
“Incomplete electrical information. Designs were
started with known shortages of information such as
incomplete schematics, parts lists, and component
sheets.”
90
“…Commander of the F-117 Test Force, Deputy Director
of the B-2 Program, Program Director for Aerospace
Surveillance and Radio Systems, Deputy for Strategic
Systems USAF, Acquisition Professional Staff Member
for the House Armed Services Committee, and Chief
Technical Officer for the Office of the Secretary of
Defense Airborne Reconnaissance Office.”
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
31
91
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
“I conclude that the ZSR-62 contract with Northrop
Defense Systems Division (hereinafter “DSD”) would
have been terminated for cause and that the United
States of America was induced through misrepresenta-
tions to continue funding this program.”
92
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
“At the time of the Oct 85 CDR, DSD misrepresented its
progress on the ZSR-62 design, and did not meet the
essentially complete standard, as required by MIL-STD-
1521A.”
93
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
“Even though DSD was required to use a management
control system (MCS) to evaluate schedule and cost
progress on the ZSR-62 contract, it was instructing its
cost accounting managers and others to misrepresent
the compliance of the system and the data within the
system. It is my opinion that Northrop engaged in
significant misconduct and fraud.”
32
94
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
“Had the actual technical progress on the ZSR-62 been
known at the time of the CDR, October 1985, particularly
in light of pervasive project misrepresentations and
fraud, the ZSR-62 contract would have been terminated
for cause by the B-2 program office before there was a
delta CDR.”
95
Col. Roger Mosley Report to United States
Department of Justice
January, 2005
“Every dollar paid to DSD after CDR was obtained by
fraud. Had the fraud been known to the United States,
DSD would not have been paid $253 million for post-
CDR claims.”
96
Deposition: Karen Sarley,
U.S. Divisional Administrative
Contracting Officer
July 2, 2002
“Q. Could you, for the record, just describe your
feelings about the information in the documents that
you learned of yesterday for the first time?
…objection, form and foundation.”
33
97
Deposition: Karen Sarley
July 2, 2002
“These were important parts that we were making,
costing a lot of money, costing taxpayers a lot of
money. I think it’s despicable.
Q. And that is your view based upon the documents?
…objection, form and foundation
THE WITNESS: That’s right.”
98
What They Said / Where They Ended Up
Wallace Solberg: Vice President & General Manager
Admits MMAS system was “garbage in, garbage out”
Promoted from head of Defense System
Division to head Northrop’s largest division
Elected to Northrop’s Board of Directors
•
•
•
99
What They Said / Where They Ended Up
Jack McNaughton: Vice President of Administration
“I personally have some doubt that our present
systems… are adequate to withstand … DCAA
system review…”
Seeks Solberg’s approval in “executing the
necessary retroactive transfer adjustments”
Remained Vice President at Northrop
until retirement in 1989
•
•
•
34
100
What They Said / Where They Ended Up
Duane Emling: Director of Material Accounting, Finance
Admits responses were “couched in very positive
terms. . .we didn’t necessarily say what was wrong
with the system”.
“The recommendations contained in this audit report
are both proper and reasonable…I believe that we
are probably better off to directly attack the audit.”
Repeatedly represents to U.S. that Material
Management Accounting System is excellent
•
•
•
101
What They Said / Where They Ended Up
•
•
Duane Emling: Director of Material Accounting, Finance
Obtains fully satisfactory performance
evaluation for “minimiz[ing] penalties
imposed by customer based on review of
material accounting system”.
Remained at Northrop as a Director of
Material Accounting until leaving in 1996.
102
What They Said / Where They Ended Up
Sue Licata: Manager of Material Systems, Finance
“discrepancies between On-hand and the
physical count shall be allocated back to
the oldest PA’s and written off as scrap…”;
…“these discrepancies are over and above
those reported to DCAA during the walk-
through…”
•
•
35
103
What They Said / Where They Ended Up
Sue Licata: Manager of Material Systems, Finance
Manager of budgeting and expense
control
Voluntarily leaves Northrop in 1994
•
•
104
What They Said / Where They Ended Up
•
Amy Selen: Manager of Administration, Product Assurance
Tells 38 senior managers “We can’t tell
the truth… We should instruct our
CAMs [cost accounting managers] to
violate the system within the system
guidelines”…
Maintained manager position
Voluntarily leaves Northrop in 1990
•
•
105
What They Said / Where They Ended Up
•
George Luper: Director of Government Relations
Northrop has “clearly demonstrated
the. . . accuracy of its inventory
systems to DCAA”…
Promoted to Director of Administration
Leaves Northrop in 1994
•
•
36
106
What They Said / Where They Ended Up
Rex Robinson: Test Engineer
Directly informs five senior managers,
including Solberg, of widespread
fraud;
Including false claims of progress for
the ZSR 62
107
What They Said / Where They Ended Up
Rex Robinson: Test Engineer
• Begins receiving terrible performance reviews
• Removed from classified projects
• Laid off by Northrop
• Never again able to find work in his field
• Lived off the charity of friends and family
• Dies of cancer in 2003, penniless, in a trailer, in the New Mexican desert.
108
What They Said / Where They Ended Up
Jim Holzrichter: Internal Auditor
Directly informs two managers,
including Amy Selen, of widespread
fraud, including cover up of actual
accounting data, excess inventory
and other fraudulent schemes
37
109
What They Said / Where They Ended Up
• Followed by Northrop investigators (including to bathroom)
• Ostracized by Supervisors
• Office and personal affects removed
• Told not to further damage the company
• Cut off from computer system
• Constructively discharged
• Unable to obtain work in his field
Jim Holzrichter: Internal Auditor
110
What They Said / Where They Ended Up
• Lived in homeless shelter (Jim, wife and four kids)
• Finds part time work (gas station and delivering newspapers)
• Now employed supervising a newspaper delivery route
Jim Holzrichter: Internal Auditor
111
Northrop’s Defenses and Other Practical Problems
38
112
Progress Payment Certification: One of 807 from Northrop
to United States
Typical: October 11, 1988
“Paid costs eligible under progress payment clause…
I certify that the above statement with attachment has
been prepared from the books and records of the above
named contractor in accordance with the contract and
the instructions hereon, and to the best of my knowledge
and belief, that it is correct…”
113
Q: One of Northrop’s other experts in this case, Raymond Sheen, testified earlier this week that a contractor could not certify its progress bills if it did not have any Inventory Management System. Do you agree with that?
A: I’ve never seen that situation where there’s not even an informal one.
Q: I don’t think he had either.
A: My view would be [that] it would be highly unlikely that one could. I guess it’s possible that it was such a simple contract with one product that it didn’t require a system, but by and large I would expect you to need an inventory system.
Deposition Avram Tucker, July 10th, 2003
114
Q: I don’t think he had either.
A: My view would be [that] it would be highly unlikely that one could. I guess it’s possible that it was such a simple contract with one product that it didn’t require a system, but by and large I would expect you to need an inventory system.
Q: Can [a] contractor progress bill having just a highly accurate procurement system but no Inventory Management System?
A: It would be unlikely that they could, but it’s possible that they don’t even make transfers and the products are always used on the same program it was purchased for, and in those circumstances I think that they would be able to bill or they may be able to.
Deposition Avram Tucker, July 10th, 2003
39
115
Q: Right. Regardless of what type of system they have, they must have something beyond just an accurate procurement system to comply with those provisions, correct?
A: Again, we’ve talked about exceptions to that, but I think as a general proposition some type of inventory system would be required for a sophisticated contractor working with the government.
Deposition Avram Tucker, July 10th, 2003
116
Q: Do you know how a contractor could comply with generally accepted accounting principles without having an inventory management system?
A: I think all the contractors had inventory management systems so I would assume that they comply. But you need an inventory management system to comply with GAAP.
Deposition Gary N. Iverson, July 7th, 2003
117
Q: Now, in terms of defense contracting environment, can a contractor certify progress billings without any inventory control system?
A: I’ve never had the experience… I don’t think so, but I’m not positive of that and I’ve never seen that, never had that experience.
Q: So it not, is it fair to say that it’s not your opinion that a defense contractor can certify progress billings without any inventory control?
A: Yes.
Deposition Raymond Sheen, July 7th, 2003
40
118
Memo: Duane Emling, Manager,
Material Accounting, Finance
June 20, 1986
“Integrity of the Inventory Management System
is questionable, at best…”
119
Memo: From Duane Emling
To Russell Bercier
June 22, 1987
“Based on our initial evaluations of the IM System, it is our
conclusion that the basic level of data accuracy is
insufficient to support a successful completion of DSD’s
agreement with DCAS. We do not believe that generation
of additional reports or other physical enhancements to the
system will be sufficient to demonstrate material
accountability by P.A.”
120
Memo From McNaughton
To Wallace Solberg
October 23, 1987
“IM System Data Integrity
A significant problem currently exists in the inventory
management database… ”
41
121
Q: So did you find the Inventory Management System to be unreliable?
A: The Inventory management System had data problems.
Q: And did those data problems make it more difficult for you to gather up the data you needed within Northrop’s Finance Department?
A: Yes.
Q: So the Inventory Management System was not adequate for your purposes. Is that correct?
A: The accuracy of the system was not acceptable.
Deposition Ken Chapman, March 22, 2002
122
Res Judicata
Does Not Apply
123
Res Judicata Does Not Apply
• In the history of this litigation, Northrop failed to assert Res Judicata as an affirmative defense.
• Under both Seventh Circuit and Judge Guzman’s rulings in other cases, the defense is waived.
42
124
“Res judicata is an affirmative defense which, unless
raised by the defendant in his answer, is considered
waived. Fed.R.Civ.P. 8(c). Defendant did not raise res
judicata in his answer…”
Marcus v. Sullivan, 926 F.2d 604 (7th Cir. 1991)
125
“Rule 8(c) provides that ‘[i]n a pleading to a preceding
pleading, a party shall set forth affirmatively…estoppel
…[and] res judicata…’ Fed.R.Civ.P. 8(c). Thus, ‘[r]es
judicata is an affirmative defense which, unless raised
by the defendant in his answer, is considered waived.’”
Administrative Committee v. Alexander 2001 WL 32874 (N.D.Ill.), Jan. 12, 2001, Judge Guzman
126
Judge Guzman has already stated he views the
res judicata defense in this case as involving
“shades of gray, and within those shades of
gray lie possibilities for reasonable inferences,
which means a jury trial.”
Judge Guzman: United States of America ex rel. Robinson v Northrop Grumman Corp.,
April 26, 2004
43
127
Unfavorable Publicity