US v. Frequency Electronics, 93-CR-1261 (TCP).

• Citation: 862 F. Supp. 834
• Decision Date: 08 September 1994
• Docket Number: No. 93-CR-1261 (TCP).,93-CR-1261 (TCP).
• Parties: UNITED STATES of America, v. FREQUENCY ELECTRONICS, et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

862 F. Supp. 834

UNITED STATES of America, v. FREQUENCY ELECTRONICS, et al., Defendants.

No. 93-CR-1261 (TCP).

United States District Court, E.D. New York.

September 8, 1994.

COPYRIGHT MATERIAL OMITTED

Zachary W. Carter, U.S. Atty., E.D.N.Y., Brooklyn, NY (Peter J. Tomao and Charles D. Kleinberg, Asst. U.S. Attys., of counsel).

Charles A. Stillman and Peter Chavkin, Stillman, Friedman & Shaw, New York City, for defendant Frequency Electronics.

Herald Price Fahringer, Lipsitz, Green, Fahringer, Roll, Salisbury & Cambria, New York City, for defendant Martin Bloch.

Elkan Abramowitz, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York City, for defendant Abraham Lazar.

Michael Rosen, New York City, for defendant Harry Newman.

Robert L. Ellis, New York City, for defendant Marvin Norworth.

PLATT, Chief Judge.

Defendants have made a voluminous omnibus motion proffering a potpourri of theories mandating the dismissal of part or all of this criminal indictment. The first set of moving papers was addressed to the original indictment. The government superseded that indictment. Defendants then submitted a revised set of motion papers addressed to the superseding indictment. The points raised in both sets of papers that are not moot shall be decided herein. For the sake of congruity, this opinion shall follow the point numbering system utilized by the defendants in their moving papers.

I. BACKGROUND

Frequency Electronics, Inc., ("FEI"), is an electronics firm in the business of manufacturing quartz and atomic timing systems for government and commercial satellites and deep space probes. FEI was also responsible for manufacturing the advanced timing devices used to track Iraqi SCUD missiles during Operation Desert Storm.

The current indictment arises out of a series of top secret or Black government contracts for the manufacture of space satellites. The government contracted with a company known as TRW, Inc., ("TRW"), and TRW then subcontracted with a number of subcontractors one of which was FEI. FEI commenced work on what it code named the FOX projects beginning in April of 1987. It identified the six contracts as FEI project numbers 11368, 11369, 11370, 11527, 11494 and 11528.

The FOX contracts were not negotiated on a cost-plus basis but rather were what are known as fixed-price contracts. As such, remuneration for them would consist of a predetermined set fee, irrespective of FEI's actual cost outlay in completing the projects. Contracts of this nature typically provide for "milestone" payments consisting of a portion of the contract price to be paid to the subcontractor after it completes a certain portion of the project.

On February 2, 1988 TRW informed FEI that the government had terminated three of the FOX contracts for its convenience and sought to restructure the remaining three. Pursuant to the express terms of the FOX contracts, upon termination of a contract for the convenience of the government, FEI was required to generate settlement proposals. These proposals were to provide TRW with an accounting of FEI's costs that had been expended to date, in order for FEI to receive compensation for such costs.

FEI submitted settlement proposals to TRW for the fully terminated FEI project numbers 11368, 11494 and 11528 and contract pricing proposals for restructured FEI project numbers 11369, 11370 and 11527. The settlement proposals on the terminated contracts were not accepted by TRW, pursuant to which audits of the same were conducted by TRW employees and also by the Defense Contract Audit Agency ("DCAA"). Negotiations also continued with respect to the restructured contracts. FEI and TRW entered into amended subcontracts for the three restructured contracts on December 13, 1988. Certificates of Current Cost or Pricing Data were submitted to TRW in connection with the terminated contracts up until April of 1989.

The government in its superseding indictment filed on April 6, 1994 alleges inter alia that FEI at the direction of its officers and directors created false and inaccurate time records and accountings of work expended on the FOX contracts and thereafter destroyed the actual time records that had been maintained by its employees in furtherance of a scheme to submit inflated cost outlay claims on the FOX contracts and defraud the United States. The defendants deny any and all allegations of criminal conduct and move to dismiss the indictment.

POINT ONE — ENTRAPMENT BY ESTOPPEL

Defendants assert that the regulatory scheme governing settlement proposals for fixed price contracts terminated at the convenience of the government envisions that upon termination of such contracts, an accounting of cost outlays computed on a best estimate basis must be used. See 48 C.F.R. § 49.201(c)¹. With respect to the FOX contracts, the government knew that FEI did not keep accurate records of time spent on each project and thus had to estimate and often transfer costs from one project to another when asked to account for outlays pursuant to a contractual termination. The government responds that the gravamen of the indictment here is not that FEI estimated its costs but rather that it deliberately falsified and inflated its estimates. Further, the truth or falsity of such an allegation is a question of fact to be determined by a jury. This Court agrees.

Solidly etched in our legal foundation is the notion that an indictment need only be valid on its face to withstand a motion to dismiss, irrespective of the extrinsic evidence or lack thereof in support of the charges alleged therein. See Costello v. United States, 350 U.S. 359, 363, 76 S.Ct. 406, 408, 100 L.Ed. 397 (1956), United States v. Critzer, 951 F.2d 306, 307 (11th Cir.1992). As the government validly points out here, there are many cases involving fixed price contracts that have crowded our criminal court dockets. See, e.g., United States v. White, 765 F.2d 1469 (11th Cir.1985); Maxwell v. United States, 277 F.2d 481 (6th Cir.1960). These cases all necessarily involve the critical question of whether the defendants acted with the requisite criminal intent to have engaged in the crime of defrauding the government. As such they constitute questions of fact for a jury and may not properly be determined by the Court on a motion to dismiss.

In Maxwell the United States Court of Appeals for the Sixth Circuit concluded that after a trial on the merits, the District Court should have dismissed the indictment. See Maxwell, 277 F.2d at 510-11. The Court felt that there was absolutely no evidence presented at trial that demonstrated that the claims submitted to the government were the result of an intricate conspiracy to defraud, in violation of 18 U.S.C. § 371. Id. at 501. Thus the Sixth Circuit reversed with instructions to discharge the defendants. Id.

The facts of the Maxwell case are strikingly similar to those at bar. Defendants are accused with conspiring to defraud the government in violation of § 371.² This crime requires willful misconduct. Should a trial of the charges alleged in the superseding indictment prove that the defendants did not act with the requisite criminal intent, this Court will have no difficulty in granting a motion for a directed verdict at that time. Any such direction prior to a trial of the issues on the merits, however, would be premature and improper.

POINT TWO — COUNTS TWO THROUGH FIVE ARE BARRED BY THE EX POST FACTO CLAUSE

The defendants argue that Counts Two through Five of the superseding indictment violate the Ex post facto clause of the United States Constitution in that they charge the defendants with criminal conduct that was committed prior to the enactment of the Act that criminalized such conduct. Specifically, defendants note that the Major Frauds Act was enacted on November 19, 1988. The superseding indictment charges the defendants with executing or attempting to execute a scheme to defraud the United States by submitting false claims for payment in conjunction with the FOX contracts that defendants claim were fully submitted as of August 25, 1988. Thus defendants argue that an ex post facto violation has occurred. The government alleges that the scheme to defraud here extended beyond November 19, 1988, by reason of the submission of two false invoices on April 19, 1989, one requesting payment on FEI Project No. 11368 (Count Two) and the other on FEI Project 11494 (Count Three) and signing restructured subcontract papers (Counts Four and Five) on December 13, 1988. This Court agrees.

The Ex post facto clause of the United States Constitution³ embraces the notion that individuals must be accorded fair warning of what type of conduct shall subject them to criminal punishment. See Marks v. United States, 430 U.S. 188, 191-92, 97 S.Ct. 990, 992-93, 51 L.Ed.2d 260 (1977); Cummings v. The State of Missouri, 71 U.S. (4 Wall) 277, 325-26, 18 L.Ed. 356 (1867). It mandates that a law criminalizing conduct have solely a prospective effect. See Weaver v. Graham, 450 U.S. 24, 29-30, 101 S.Ct. 960, 964-65, 67 L.Ed.2d 17 (1981). A law will be ex post facto if it applies to events occurring before its enactment and is detrimental to the offender. See Lindsey v. Washington, 301 U.S. 397, 401, 57 S.Ct. 797, 799, 81 L.Ed. 1182 (1937). Any ex post facto analyses then must focus on the inquiry of whether the law attempts to change the consequences of acts completed before its effective date.

The Major Frauds Act is codified at 18 U.S.C. § 1031 and was enacted on November 19, 1988. Its stated purpose as articulated within the legislative history accompanying the bill was to curtail the ubiquitous and rampant fraud in the defense procurement area, "born of greed in the private sector and inefficiency and acquiescence by the Federal Government." Pub.L. No. 101-123, 1989 U.S.C.C.A.N. 593. It criminalizes the knowing execution or attempted execution of a scheme or artifice in order to defraud the government.⁴ In...