To some, those statistics are surprising. Certainly, the Department of Justice has lodged scores of complaints and suits against defense contractors. And Stanley Soya, partner with Morrison & Foerster and former attorney for the Department of Defense's Office of the Inspector General, says bookkeeping is often a key element in DOD fraud cases.
"If you look at the kinds of problems that give rise to potential False Claims Act liability or potential False Statements Act liability," Soya says, "what you see is that the nature of that activity is in many instances the result of fraudulent accounting practices and problems with internal control systems."
But some SEC-watchers point out that the commission's well-documented lack of funds and manpower often leaves the agency with little choice but to focus on high-profile, winnable cases. Marion Koenigs, senior manager at Ten Eyck Associates and seven-year veteran of the SEC enforcement division, notes that the commission must prioritize investigations, particularly given the workload triggered by the passage of the Sarbanes-Oxley Act in 2002. The SEC staff, she points out, attempts to suss out if there is an egregious violation, or if an informant has them on "a wild goose chase."
Making that assessment could be tougher in a DOD-related case, given the sensitive nature of many defense projects. It's also unclear if the commission has the resources to successfully decipher the bookkeeping on black-box projects — or what kind of information they could get from targeted companies. "If they encountered problems getting documents under subpoena," Koenigs hypothesizes, "it would certainly slow up the case and might make it be less of a priority."
Backing off entirely, however, would probably depend a lot on "how the staff felt about the strength of the allegations," Koenigs says.
Five Days Off
But Gary Goodenow, a former Miami SEC staff member in the division of enforcement for six years, offers a different explanation for the apparent lack of commission action against defense contractors.
"The penalties for ripping off Uncle Sam are so draconian that an SEC inquiry pales into relative insignificance," notes Goodenow, who as senior counsel made the final recommendations on which cases the office would investigate. "If the possible fraud somehow touched their dealings with the DOD, and not just the market, then the SEC left the matter to the criminal enforcement experts."
Even then, defense contractors seem to get off relatively easy. According to a POGO study of 43 top federal contractors (mostly defense contractors), 16 of the companies have been convicted of a total of 28 criminal violations over the past dozen years. Mostly, the federal investigations have centered on procurement fraud.
General Electric, for example, is believed to have committed 63 violations and alleged violations during that time period and paid nearly $1 billion in fees, settlements, and restitution for the alleged abuses. During the same stretch of time, Lockheed Martin, Boeing, Raytheon, and Fluor, reportedly paid about $789 million to cover a total of 142 violations and alleged violations against the government.
While $1.8 billion over twelve years is not exactly small potatoes, it pales in comparison to the amount of money defense contractors pulled in from government contracts during that time. "[The fines] meted out are a pittance," says Tony Tinker, accounting professor at Baruch College, "especially the cases with accounting fraud, double billing, or misuse of overhead charges.
In fact, some critics charge that the restitution charges are essentially the cost of doing business in the defense industry. And despite the numerous charges levied against DOD suppliers in the Nineties, only one contractor was suspended or barred from doing business with the government.
In 1992, GE was suspended from receiving government contracts — for five days.
Stockton believes the lack of contractor debarment and suspension during the Nineties had a knock-on effect at the SEC. After watching scores of defense contractors come under fire — and then watching the same contractors escape debarment or suspension — he claims the SEC enforcement division staff became discouraged.
"They generally didn't believe that the Justice Department would take action against defense contractors," Stockton claims, "so it wasn't their favorite issue to be assigned to."
Plenty of Grief
SEC spokesman John Heine, however, is quick to dismiss claims that the commission's enforcement staff plays favorites or can be pressured. Says Heine: "We bring actions against parties who violate securities laws regardless of who they are and what business they're in."
But others aren't so sure the SEC is above it all. Tinker of Baruch College notes that Congress is charged with overseeing the SEC — a role that includes approving the commission's commissioners. "[The SEC is] set up in a way that they can be compromised and open to pressure," Tinker argues.
And Steven Artuso, an analyst at Pittsburg Research, points out that the SEC was late launching investigations into high-profile accounting scandals at Enron and Worldcom — and isn't likely to be ahead of the pack when it comes to DOD-related investigations. "You can't exactly expect the SEC to be on the ball with Defense," he argues, "especially when you consider there are links between the companies and other government agencies."
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