O'Brien Gear & Mach. Co. v. US

• Decision Date: 24 January 1979
• Docket Number: No. 105-72.,105-72.
• Parties: O'BRIEN GEAR & MACHINE CO. v. The UNITED STATES.
• Court: U.S. Claims Court

591 F.2d 666

O'BRIEN GEAR & MACHINE CO. v. The UNITED STATES.

No. 105-72.

United States Court of Claims.

January 24, 1979.

David Davidson, Chicago, Ill., attorney of record, for plaintiff. Davidson & Schwartz, Chicago, Ill., of counsel.

Thomas W. Petersen, Washington, D.C., with whom was Asst. Atty. Gen., Barbara Allen Babcock, Washington, D.C., for defendant.

Before NICHOLS, KASHIWA and SMITH, Judges.

OPINION

PER CURIAM:

This case comes before the court on plaintiff's exceptions to the recommended decision of Trial Judge David Schwartz, filed August 16, 1977, pursuant to Rule 134(h), having been submitted to the court on the briefs and oral argument of counsel. Upon consideration thereof, since the court agrees with the trial judge's recommended decision, as hereinafter set forth,^* it hereby affirms and adopts the said decision as the basis for its judgment in this case. Accordingly, the court concludes and specifically finds that defendant's special plea in fraud is sustained and plaintiff's claim is adjudged forfeited to the United States pursuant to 28 U.S.C. § 2514. The petition is dismissed and judgment of forfeiture is entered on defendant's second counterclaim.

OPINION OF TRIAL JUDGE

SCHWARTZ, Trial Judge:

In this suit for redetermination of profits under the Renegotiation Act of 1951, 50 U.S.C.App. § 1211 et seq., as amended, the plaintiff maintains, as is customary, that its profits for the year under review were not excessive. The suit differs from most such suits, however, in that the primary issue concerns the honesty of the records presented by the plaintiff, on the pretrial and trial of the case, as proof of its profits.

The Government's main defense is a contention that plaintiff's proof as to its costs and profits, in its books and records and in its income tax return for the year under review, is false and fraudulent, and it having been knowingly presented in the attempted proof of the claim, the claim should be forfeited under 28 U.S.C. § 2514 (1970).¹ The defense is upheld, and the claim is forfeited. On the facts found in reaching the judgment of forfeiture, it is alternatively held that plaintiff has failed to make the prima facie case as to its costs and profits, required of it under Lykes Bros. S.S. Co. v. United States, 459 F.2d 1393, 1401, 198 Ct.Cl. 312, 326-27 (1972). In the event of a judgment of forfeiture, the Government has waived its counterclaim alleging excessive profits to an amount greater than determined by the Renegotiation Board. The waiver makes it unnecessary to consider the degree to which the production by the plaintiff of defective war material, shown by the record, constituted such an affirmative harm to the war effort as would affect the excessiveness of plaintiff's profits in the year under review, within the meaning and policy of the Renegotiation Act.

The plaintiff corporation, located in Highland Park, Illinois, is a manufacturer and supplier of gears and machine parts, most of which are sold to the Government for varied military uses. Raw materials, usually metals and alloys available in the commercial market, are obtained from a few regular suppliers, cut and machined in plaintiff's own shop as necessary, and then packaged for shipment. Special heat processing, where called for, is done by an outside plant.

Substantially all of the stock in plaintiff is owned by George C. O'Brien, plaintiff's founder and president, who supervises operations in the machine shop and does all the bidding. Company personnel consists of a controller; a treasurer, who was Mr. O'Brien's elderly mother; an office manager; a few clerical employees; and an average of 40 production employees. In plaintiff's fiscal year ending September 30, 1967, the year under review, plaintiff reported total sales of $1,966,845, of which $1,745,389 or 89 percent was renegotiable. Reported profits on the renegotiable sales were $203,534, a rate of 11.7 percent. Renegotiable profits as reconstructed in the findings of fact made after trial, to the extent plaintiff's books permitted reconstruction, were $363,770.

The plaintiff had in 1970 been convicted in the U.S. District Court for the Northern District of Illinois on a number of counts of conspiracy with its president, Mr. O'Brien and with unnamed others to violate 18 U.S.C. §§ 286 and 287 in connection with Government contracts and other matters. The conspirators had between 1965 and 1968, among other things, submitted false claims against the United States in violation of 18 U.S.C. §§ 286 and 287 for payment of goods delivered under contracts for use in ships, airplanes, gun mounts and radar installations, with knowledge that the goods did not conform to the specifications and were inferior to those required; had willfully possessed and made false certificates of the testing of such goods; and in violation of 18 U.S.C. § 1503 had obstructed justice by removing from the plaintiff's files and willfully refusing to produce documents as commanded by a grand jury subpoena duces tecum.

Plaintiff's office manager and corporate secretary during the relevant period was one Julian M. Davis, who was employed throughout 1967 and until February 1968. His duties included supervision of accounts receivable and bank accounts. Davis was indicted with the plaintiff but was not tried.

On the trial of the present case, Davis testified that during 1967 Howard Williams, plaintiff's controller, using charcoal pencil, made out a number of checks to cash, and that he, Davis, cashed them, endorsing them in similar pencil. Davis would then either hand the cash to O'Brien or put it in his desk drawer. On the return of the check by the bank, following its payment, Williams would erase the pencilled name of the endorser and the word "cash," type in as payee the name of one of plaintiff's supplier companies, and stamp an endorsement in the name of that supplier, using a counterfeit rubber stamp. Corresponding entries would then be made in plaintiff's check register. Davis testified that the bogus stamps had been procured by Williams, using as models the rubber stamp on other, legitimate checks. Williams had prepared many such endorsement stamps but the only one that the witness could remember specifically was that for the Central Steel & Wire Company.

To substantiate these pretended payments, Davis continued, Williams caused to be printed a number of invoices in the names of plaintiff's suppliers, the pretended payees. Williams would type up such blank invoices to match the amount of the check, to give the appearance of actual purchases corresponding to the amount of the checks.

Davis testified that O'Brien, the plaintiff's president, procured a number of blank forms for the test certificates required by the "fast pay" procedure used in small purchases by the Defense Supply Agency, one of plaintiff's two Government customers. These O'Brien delivered to Davis to put in the company's vault. Certificates were filled out by Davis in the name of three or four of plaintiff's suppliers, one of them Central Steel & Wire Company. Davis would prepare the certificate, using information from the plaintiff's purchasing records, to give the false appearance that the supplier companies had actually tested the items.

In the time between the making and delivery of the bid and the award of a Government contract, Davis further testified, he modified bids to change their amount. These modifications were connected with what O'Brien called "pay offs" to Government buyers at the Electronics Supply Office of the Navy at Great Lakes, Illinois, the other of plaintiff's two Government customers. O'Brien would ask him to compute the difference between the original and the altered bid amounts, in order to determine the "commission" to these buyers.

Finally, Davis testified that sometime late in 1966 he was given a check for $10,000, ostensibly as a bonus, but that the auditing firm in charge of plaintiff's books directed him to cash the check, to declare the $10,000 as income and pay the tax thereon — about $2,500 — and to return the remainder to O'Brien. Plaintiff then recorded the $10,000 payment on its books as a bonus and declared it as an expense in its income tax return for either its fiscal year 1966 or 1967. Plaintiff's tax returns for both these years were introduced by it into evidence.

Davis' testimony was substantially a repetition of a statement he made to the authorities shortly after his indictment. His testimony on trial was given with every appearance of truth and is found to be credible and reliable.

The state of plaintiff's books and records was testified to by Mr. Ronald Cooper, an accountant with the FBI, in charge of the examination of the books and records submitted by plaintiff, in the pretrial of the present proceeding, for audit by the defendant. He testified to the confusion in plaintiff's books, which included unsupported entries, inconsistencies between tax forms and record entries and between checks and check registers. Numerous items in plaintiff's cash and bank accounts had no supporting documentation and lacked any indication of source, destination or vehicle of disbursement. In his opinion, plaintiff's books were not kept in accordance with generally accepted accounting principles. Mr. Cooper testified to the following specific matters.

He examined the check register for plaintiff's fiscal year 1967, with particular reference to an earlier Internal Revenue Service disallowance of $144,234 claimed on plaintiff's return for 1967 as a deduction on account of cost of goods sold. The $144,234 represented the sum of 31 checks described in plaintiff's check register as payments to suppliers. The cancelled checks themselves were missing from plaintiff's records, but a few of them were traced from bank microfilm records. The microfilms showed these checks to have been made out to cash and endorsed by Julian Davis, and were presumably actually treated in...