U.S. v. Leo

• Citation: 941 F.2d 181
• Decision Date: 25 July 1991
• Docket Number: Nos. 90-1582,90-1583,s. 90-1582
• Parties: 37 Cont.Cas.Fed. (CCH) P 76,177, 34 Fed. R. Evid. Serv. 715 UNITED STATES of America, Appellee, v. Gerald A. LEO, a/k/a "Bud," Appellant. UNITED STATES of America, Appellee, v. James BADOLATO, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 181

941 F.2d 181

37 Cont.Cas.Fed. (CCH) P 76,177, 34 Fed. R.

Evid. Serv. 715

UNITED STATES of America, Appellee, v. Gerald A. LEO, a/k/a "Bud," Appellant.

UNITED STATES of America, Appellee, v. James BADOLATO, Appellant.

Nos. 90-1582, 90-1583.

United States Court of Appeals Third Circuit.

Argued Jan. 23, 1991.

Decided July 25, 1991.

Seymour I. Toll (argued), Michele Langer, Teresa A. Wallace, Doron A. Henkin, Toll, Ebby & Langer, Philadelphia, Pa., for appellant Gerald A. Leo.

Gregory P. Miller (argued), Marc S. Raspanti, Adam Scaramella, Miller, Alfano & Raspanti, P.C., Philadelphia, Pa., for appellant James Badolato.

Michael J. Rotko, Acting U.S. Atty., Walter S. Batty, Jr., Asst. U.S. Atty., Chief of Appeals, Nicholas C. Harbist (argued), David M. Howard (argued), Asst. U.S. Attys., Philadelphia, Pa., for appellee.

Before BECKER and HUTCHINSON, Circuit Judges, and SMITH, District Judge. ^*

OPINION OF THE COURT

HUTCHINSON, Circuit Judge.

Co-defendants Gerald A. Leo (Leo) and James Badolato (Badolato) appeal from judgments of conviction and sentence entered against them following a jury trial in the United States District Court for the Eastern District of Pennsylvania. For the reasons set forth below, we will affirm the judgments.

I.

On November 29, 1988, a grand jury sitting in the United States District Court for the Eastern District of Pennsylvania handed up a 321-count indictment against Leo, Badolato and General Electric Corporation (General Electric), doing business as Management and Technical Services Company (MATSCO), on various charges related to alleged defense contract fraud and an alleged cover-up that followed. MATSCO was charged with five counts of mail fraud, see 18 U.S.C.A. § 1341 (West Supp.1991), and 312 counts of violating the criminal False Claims Act, see 18 U.S.C.A. § 287 (West Supp.1991). Leo was charged with five counts of mail fraud, one count of racketeering, see 18 U.S.C.A. § 1962 (West 1984 & Supp.1991), and two counts of making false statements to government agencies, see 18 U.S.C.A. § 1001 (West 1976). Badolato was charged with five counts of mail fraud, one count of racketeering, one count of making a false statement to a government agency and one count of endeavoring to obstruct Defense Department proceedings, see 18 U.S.C.A. § 1505 (West 1984). ¹

Jury selection began on October 30, 1989, and the trial commenced on November 14, 1989. Testimony at trial did not conclude until January 22, 1990. On February 2, 1990, the jury returned its verdict. It convicted MATSCO on four counts of mail fraud and 282 counts of violating the False Claims Act. It convicted Leo on four counts of mail fraud and one count of making a false statement; at the close of its case, the government had dismissed the other false statement charge against Leo. The jury also convicted Badolato on one false statement count and on the count that charged him with endeavoring to obstruct agency proceedings.

On July 26, 1990, the district court sentenced the three defendants. It accepted a joint recommendation from the government and MATSCO that MATSCO be sentenced to pay a $10,000,000.00 criminal fine. As part of the agreement, the government says that General Electric paid an additional $8,300,000.00 in civil damages and $11,700,000.00 to resolve other civil matters. General Electric also agreed not to appeal the district court's judgment of conviction and sentence. The district court sentenced Leo to ten months imprisonment on the mail fraud charges and ordered him to pay a $15,000.00 fine on the false statement conviction. The district court sentenced Badolato to five months imprisonment on the charge of endeavoring to obstruct agency proceedings and ordered him to pay a $10,000.00 fine on his false statement conviction.

As required when reviewing convictions, we recite the relevant facts in the light most favorable to the government. Cf. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 86 L.Ed. 680 (1942). The testimony at trial focused on a contract between the United States Army and MATSCO for the production of mobile battlefield computer systems housed in trailer-like vans. The system was called the Decentralized Automated Service Support System, more commonly known as DAS-3B. The indictment charged that Leo, a long-time General Electric employee who was responsible for the management of the materials and purchasing department for MATSCO, and Badolato, who was MATSCO's subcontracts manager, executed a scheme to defraud the Army out of millions of dollars on the contract in order to advance their standing within the company. Further, the indictment alleged that, after the contract between the Army and MATSCO was signed in June of 1983, Leo and Badolato committed various acts to hide the fraud from the Defense Department.

In 1979, the Army awarded MATSCO a competitive contract to build mobile computer systems that could be housed in trailer-like vans and used for logistical support for Army units around the world. The Army sent a team of specialists to the MATSCO plant in 1982 to assist in the development of an updated version of the van.

The contract called on MATSCO to produce 233 of the DAS-3B vans over five years. The contract also gave the government the option to purchase twenty-five more in the sixth year. It was known as a "firm fixed price contract." As we will now explain, the "firm fixed price" is initially not so firm and fixed. The 1962 amendments to the Armed Services Procurement Act of 1947 (Act), Pub.L. No. 87-653, 76 Stat. 528 (1962) (codified in scattered sections of 10 U.S.C.A.), ² and regulations promulgated under the Act applied to MATSCO's contract with the Army. Under the Act, a contractor must furnish the procuring agency a proposal that includes the contractor's best estimate of the costs the contractor expects to incur in making the product. See 10 U.S.C.A. § 2306(f)(1) (West 1983). Thus, the contractor must give its best estimate of anticipated material costs, labor, overhead, general and administrative expenses and then show its anticipated profit. The government and the contractor then negotiate over the amount of these projections as well as the appropriate percentage of total cost that should be added for profit in arriving at the final price. If the contractor's costs change before a final agreement is reached, the contractor must inform the Army. Once a final agreement is reached, the contractor must provide the Army with a Certificate of Current Cost, which certifies that all of the cost information provided to the Army as of the date of the final agreement is accurate, current and complete.

MATSCO's proposal on the DAS-3B contract was first submitted to the Army on January of 1983. MATSCO submitted a revised proposal in March of 1983. In accord with the instructions for the proposal, MATSCO promised the Army that it would update the prices upon which the proposal was based as negotiations with subcontractors continued.

The subcontract component of the proposal amounted to $156,715,300.00, based upon quotations received from subcontractors. The largest subcontract covered the Honeywell Information Systems computers to be placed into the vans. Aside from the computers, the March, 1983 proposal contained about $67,000,000.00 in estimated subcontract costs for thirty other subcontractors.

Leo's job at General Electric was purchasing for government contracts. He testified at trial that one of his strong points that helped him in that job was his vast knowledge of procurement and subcontract procedures and regulations, both government and commercial. See Joint Appendix (Jt. App.) at 837f. Among Leo's responsibilities was the preparation of updates on the proposal's cost estimates throughout the negotiation process. Leo testified that if the General Electric personnel principally responsible for negotiations with the Army over costs and prices needed any information about a subcontract's status, they would have to come to him.

Occasionally during the negotiations, Army negotiators asked General Electric negotiators whether there were any expected reductions in the subcontractor costs. The General Electric negotiators answered that with the exception of the Honeywell subcontract, there were no major reductions in subcontractor costs expected. This answer was based upon the information Leo relayed to General Electric negotiators.

On April 13, 1983, Leo himself briefed the Army negotiators. He told them that since the March, 1983 proposal certain subcontractor costs had gone up while others had gone down. On May 3 and 4, 1983, the Army and General Electric negotiated over the final estimate of subcontractor costs. During these final negotiations, Leo again represented that subcontractor costs apart from the Honeywell subcontract were basically unchanged from the March, 1983 estimate. Leo also proposed an additional $4,200,000.00 in subcontract costs he said were needed to cover what he called a "scope increase," which represented additional requirements not included in the March 1983 cost proposal.

Based on Leo's representation that subcontractor costs other than Honeywell's would remain about the same, the Army and General Electric agreed to a proposal under which MATSCO would reduce the $67,000,000.00 in proposed subcontract costs, which did not include Honeywell's cost, by six percent and would reduce the $4,200,000.00 scope increase by eight percent. Thus, the Army agreed to pay nearly $67,000,000.00 for the thirty subcontractors other than Honeywell. At the close of negotiations, Leo told the Army negotiators that the proposed reduction of expenses would be difficult to meet. On June 6, 1983, the date of the final price agreement, General Electric certified to the Army that as of June 2, 1983 all cost data were accurate, current and complete.

In fact, that was not the case. The government presented evidence at trial that Leo and...