ALSCO-HARVARD FRAUD LITIGATION

• Decision Date: 21 August 1981
• Docket Number: Civ. A. No. 659-71.
• Citation: 523 F. Supp. 790
• Parties: ALSCO-HARVARD FRAUD LITIGATION Consolidated Cases.
• Court: U.S. District Court — District of Columbia

523 F. Supp. 790

ALSCO-HARVARD FRAUD LITIGATION Consolidated Cases.

Civ. A. No. 659-71.

United States District Court, District of Columbia.

August 21, 1981.

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Alexander Younger, Washington, D. C., for plaintiff.

Edward F. Canfield, Washington, D. C., for defendant A. L. Stone.

Francis Rosenbaum, pro se.

MEMORANDUM

OBERDORFER, District Judge.

I. INTRODUCTION

In this civil action, plaintiff United States has moved for summary judgment against defendants Andrew L. Stone and Francis N. Rosenbaum. Both defendants have been charged with violations of the False Claims Act, 31 U.S.C. § 231 (1976); breach of warranty; liability under the doctrine of "recoupment of public funds paid by mistake"; and violations of the Anti-Kickback Act, 41 U.S.C. §§ 51 et seq. (1976). In addition, the Government seeks imposition of a constructive trust upon certain property that allegedly is traceable to defendants' wrongful acts. Plaintiff's claims are set forth in a First Amended Complaint filed with this Court, and in a First Amended Complaint filed in the United States District Court for the Eastern District of Missouri.¹ The actions have been consolidated here by the Judicial Panel on Multidistrict Litigation because both actions arise out of a common factual background of alleged fraud against the United States Government.² The other suits that were part of this Multidistrict Litigation have been terminated;³ only the United States' actions against defendants Stone and Rosenbaum remain. In addition, the United States Tax Court has under advisement the report of Special Trial Judge Caldwell in Rosenbaum, et al. v. Commissioner, Docket Nos. 5199-72, 5200-72, 5311-72, 5312-72, and 2460-75.

For reasons stated below, the Court grants plaintiff's motion for summary judgment in part, and denies it in part.

II. BACKGROUND FACTS

Plaintiff's claims against defendants Stone and Rosenbaum are based upon an alleged scheme of fraudulent conduct in the sale of 2.75-inch rocket launchers to the Navy during the years 1962 through 1968 by Chromcraft Corporation (hereinafter "Chromcraft") and its corporate successor, Alsco, Inc.⁴ The fraudulent conduct is alleged to have occurred in connection with two components of the rocket launchers: the electrical assemblies, which relate to the mechanism by which the rockets are fired, and the fairings, which are the molded fibre nose cone and aft attachments to the launchers. In its Complaints, plaintiff has alleged that Stone and Rosenbaum, who were the president of Chromcraft and its special counsel respectively, submitted or caused to be submitted to the Navy inflated cost data regarding the electrical assemblies and fairings, as a result of which the Navy overpaid Chromcraft, with the overpayments accruing to defendants. Plaintiff suggests the defendants' scheme is segregable into three distinct phases: 1) the "Scientific/Bregman" stage; 2) the "Republic" stage; and 3) the "Western Molded" stage.

A. The Scientific/Bregman Stage

During the first phase of the scheme, which occurred between March 1963 and December 31, 1965, Stone and Rosenbaum allegedly submitted or caused to be submitted inflated cost data regarding electrical assemblies through the use of two subcontractors, Scientific Electronics, Limited (hereinafter "Scientific") and Bregman Electronics, Inc. (hereinafter "Bregman"). The Government contends that Scientific and Bregman were "dummy" corporations established by Stone and Rosenbaum and subject to their control.

According to plaintiff, defendants represented to the Navy that they had purchased completed electrical assemblies from Scientific and Bregman for prices independently set by those subcontractors. In fact, however, the Government alleges that Scientific and Bregman were sham corporations that created false invoices for Chromcraft and accumulated the resulting payments from Chromcraft for the use and benefit of Stone and Rosenbaum. Specifically, the Government contends that the electrical assemblies for the launchers were assembled not by Scientific and Bregman but instead by Robert L. Wolf and Associates (hereinafter "Wolf") with raw materials that Chromcraft purchased from other vendors and supplied directly to Wolf without charge. The purchase orders addressed to Wolf were, however, typed on Scientific and, later, on Bregman stationery. Wolf would bill the work for his assembly services on invoices addressed to Scientific and Bregman but actually delivered to Chromcraft. Scientific and Bregman would then pay the Wolf invoices out of money received from Chromcraft. Stone's secretary would, at Stone's direction, in turn type quotation letters whereby Scientific and Bregman purported to quote prices for the electrical assemblies to Chromcraft. Chromcraft would then respond to Scientific's and Bregman's quotations by preparing purchase orders, responsive invoices per the quoted prices, as well as receiving reports reflecting the receipt of the units at Chromcraft's plant. The prices set forth in these fictitious Bregman and Scientific quotation letters, invoices and corresponding Chromcraft purchase orders were included in the cost data furnished by Stone to the Government and were in fact paid by the Government under the contracts awarded Chromcraft. These prices were substantially higher than the combined amount in fact paid to Wolf for assembly charges and to other vendors for the raw materials supplied to Wolf.

The Government also contends that defendants used fictitious invoices from foreign companies to siphon the illegal profits thus made out of Scientific and Bregman. The invoices came to Scientific and Bregman from several Swiss and Liechtenstein entities, and purported to be for raw materials shipped to the dummy corporations. Scientific and Bregman paid the invoices, allegedly upon instructions from Stone and Rosenbaum. It is undisputed that the checks were negotiated by the Swiss and Liechtenstein entities, and the proceeds were remitted to Swiss bank accounts in which, according to plaintiff, Stone and Rosenbaum purportedly held concealed interests.

Defendants counter this characterization of the Scientific/Bregman phase by contending that both Scientific and Bregman were formed as bona-fide attempts by Chromcraft to obtain a "second supplier" (in addition to Wolf) of the electrical assemblies needed for the rocket launchers. They allege that neither entity was controlled by Stone or Rosenbaum, except insofar as both companies relied extensively on Chromcraft's business. Moreover, defendants suggest that Scientific's and Bregman's use of Wolf as a vendor of electrical assemblies was known to both Chromcraft and the Navy, and not objected to by either. Wolf was to be the supplier until Scientific and Bregman could become geared up as a second supplier, an event that in the eyes of defendants unfortunately never transpired. Instead, Wolf was the only supplier of assemblies during this period, and it utilized raw materials supplied directly by Chromcraft and on occasion "drop shipped" completed assemblies at Chromcraft's plant, despite working through Scientific and Bregman. Wolf's relationship with Chromcraft was not out of the ordinary, according to defendants, and its contact with Chromcraft did not violate its role as a bona-fide subvendor of Scientific and Bregman.

As for the siphoning of excess profits to Swiss bank accounts, Stone and Rosenbaum do not dispute the Government's demonstration of the flow of funds but attempt instead to explain that Scientific and Bregman accumulated sizeable bank accounts not because of any excess profits, but because Chromcraft did not bill the companies for raw materials used in the electrical assemblies, materials that Chromcraft supplied to Wolf directly. Scientific and Bregman paid for the raw materials upon receiving invoices from foreign companies, and the monies found their way into Swiss accounts, accounts that defendants allege they did not control and/or use to their own use and benefit.

B. The Republic Stage

In late 1965 and early 1966 the "Scientific/Bregman" phase ended with Chromcraft's discontinuance of Bregman as a subcontractor. At about that time, defendants allegedly used Falrock Corporation (hereinafter "Falrock"), a corporation they allegedly controlled, to acquire 62 per cent of the outstanding common stock of Republic Electronics Industries Corporation (hereinafter "Republic"). Republic was an ongoing electronics manufacturer that was in financial difficulty and ripe for a takeover. Falrock's interest in Republic allegedly was financed by funds that had been siphoned off Scientific's and Bregman's fund of excess profits and deposited in a secret Swiss bank account.⁵

Upon acquiring control of Republic, the Government contends, defendants used it in much the same way as they allegedly had used Scientific and Bregman to raise artificially the prices ultimately charged to the Navy for rocket launchers. Specifically, plaintiff alleges that Stone and Rosenbaum caused Chromcraft (and then Alsco) to represent to the Navy that Republic manufactured the launchers' electrical components in their entirety, and sold them to Chromcraft and Alsco at specified prices which were included in the total contract prices which the Navy paid. In fact, however, Chromcraft and Alsco allegedly continued the practice of directly purchasing raw materials and supplying them at no cost to Wolf who remained the undisclosed assembler for virtually all of the electrical components produced during the Republic phase. As in the Scientific/Bregman phase, Republic's prices were substantially higher than the cost of the raw materials plus Wolf's assembly charge. In addition, the Government contends that Republic fabricated invoices and quotation letters for Chromcraft and that Chromcraft in turn submitted false purchase orders to Republic, all hiding the fact that Wolf was...