Petition for Writ of Certiorari — United States ex rel. Haycock v. Hughes Aircraft Co.

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Suprerme Court, U.B.

ran 8 2

9861399 mar 5 1997,

No. QfFICE OF THE Custis

In The

Supreme Court of the United States

October Term, 1996

UNITED STATES OF AMERICA ex. rel. Don H. Haycock,

Petitioner,

HUGHES AIRCRAFT COMPANY,

Respondent.

Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

Law offices of

Don H. Haycock AND ASSOCIATES

Don H. Haycocx

7321 Westlawn Avenue

Los Angeles, California 90045

(310) 641-3921

Counsel for Petitioner and Relator

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Should this court reverse the trial and appellate court

rulings that approves an unlawful labor-charging practice

of Hughes Aircraft Company, to which there is no legal

support, and which violates federal regulations to which

both petitioner’s (relator’s) expert and Hughes Aircraft

Company experts agree are exclusive and mandatory.

Also, is the due process clause of the Fifth Amend-

ment violated when the district court awards attorney

fees and costs based on their approval of this unlawful

labor-charging practice without a requested hearing and

without any evidence or legal authority to support this

ruling.

LIST OF PARTIES

Hughes Aircraft Company (Defendant)

Post Office Box 80028

Los Angeles, California 90081

Represented by:

McKENNA & CUNEO

444 South Flower Street, 8th Floor

Los Angeles, California 90071

Don H. Haycock (Relator and Petitioner)

Represented by:

Law Offices Of

DON H. HAYCOCK AND ASSOCIATES

7321 Westlawn Avenue

Los Angeles California, 90045

VI.

VII.

ili

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES. 66.02. 60cccecsenes vi

JURISDICTIONAL STATEMENT ............. 1

CONSTITUTIONAL PROVISIONS FEDERAL

STATUTES AND FEDERAL REGULATIONS

OP. Saba eies esse tenses eve Cie bh Ea ENO? 1

PR CUE TEE GPP GHAI as kc ey ct mans esses oes 6

PRG ae TT AMIENS Sok ko bd bee hale ones vans 6

B. ALL EXPERTS AGREE COMPLIANCE

WITH THESE FEDERAL REGULATIONS

IS THE ONLY LAWFUL WAY OVERHEAD

LABOR CAN BE CHARGED DIRECTLY

TO GOVERNMENT CONTRACTS........ 11

C. THE HUGHES’ UNLAWFUL LABOR-

CPSC SALUAS BA BIG 665 8 ots ssc eens ees 14

D. HUGHES ACKNOWLEDGED NON-

COMPLIANCE WITH THESE FEDERAL.

DRE 58-6 069 5 va KI Ake bd oe ows 16

E. TRIAL COURT FAILED TO CONSIDER

AND RULE ON THE UNLAWFULNESS

OF HUGHES’ LABOR-CHARGING PRAC-

TABLE OF CONTENTS -—- Continued

Page

F. THE APPELLATE COURT RULINGS

WERE BASED ON SPECULATIONS AND

SUPPOSITIONS THAT BRUNMIER AND

SLATER KNEW AND APPROVED THE

HUGHES’ UNLAWFUL LABOR-CHARG-

EEGGS Ere RN 4 A eo 4 TRS NC RR SRER TORSO

VII. REASONS FOR GRANTING THE WRIT.....

A. CERTIORARI SHOULD BE GRANTED TO

CORRECT THE LOWER COURTS ABUSE

OF DISCRETION IN GRANTING

HUGHES SUMMARY JUDGMENT AND

ATTORNEY FEES AND COSTS..........

B. CERTIORARI SHOULD BE GRANTED SO

DAMAGES MAY BE PROVED UNDER

THE RELEVANT STATUTES .............

C. CERTIORARI SHOULD BE GRANTED TO

CORRECT THE NINTH CIRCUIT’S MIS-

INTERPRETATION AND MIS-APPLICA-

TION OF FEDERAL REGULATIONS.....

D. CERTIORARI SHOULD BE GRANTED

BECAUSE THE AWARD OF ATTORNEY

FEES AND COSTS VIOLATED THE DUE

PROCESS PROVISION OF THE FIFTH

pv: ee are re iy aps paneer

VES. CTIA a nav so eC VATS rae Mes eer ceere

Appendix

Appellate Court Order Rejecting Hearing in Banc

we Meee rire) Sereer. oes Pee eee App.

Memorandum (Order) of Appellate Court...... App.

Summary Judgment Order ...............eeees. App.

TABLE OF CONTENTS — Continued

Page

Order Awarding Attorneys’ Fees....... seis e ys App. 8

Order Denying Motion for Reconsideration..... App. 14

Declaration of Peter Elliott..............ceeee0- App. 16

Declaration of Allan E. Brunmier .............. App. 37

Declaration of Robert Meyers................5. App. 57

Declaration of Dudley P. Slater ................ App. 64

TABLE OF AUTHORITIES

Page

CASES

Barber v. Hawaii (9th Cir. 1994) 42 F.3d 1185......... 25

Bloomgarden v. Cover (CA DC 1973) 479 F.2d 201 .... 27

Carter v. Stanton (1972) 405 U.S. 669 ................ 27

Doff v. Brunswick Corp. (9th Cir. 1966) 372 F.2d 801 .... 27

Hartman v. American News Co. (7th Cir. 1948) 171

ee.) FE Pann Perri ers CE rE ion, gf ie, cay 27

Hunt v. National Broadcasting Co. Inc. (9th Cir.

1909) O72 P.Ad TOV: «nc cava stds censceger ness adees 26

Koepke v. Fontecchio (9th Cir. 1949) 177 F.2d 125..... 27

Robinson v. Fauver (2nd Cir. 1996) 932 F.Supp. 639 .... 29

Thompson v. City of Louisville (1960) 362 U.S. 199.... 29

Tri-County Industries, Inc. Co. v. District of Columbia

(DC 1996) 962 PSs. By cnc usyecieaicnvean tomes 29

United States v. Dinerstein (2nd Cir. 1960) 362 F.2d

a RR coe oy Sar Laas A LAR. oe MENIAL RS Di SoS Ra a 9

United States v. McConney (9th Cir. 1984) 782 F.2d

SNGS ois c dace cdcdesevedevabeiehbateudsstecwiates 25

United States v. Uber (6th Cir. 1962) 303 F.2d 462..... 9

Zepeda v. United States I.N.S. (9th Cir. 1983) 753

ha, Bryer ee ere rere yh, yee PK Ceres 26

FEDERAL STATUTES

10 USC 2306 Truth in Negotiations................. 6, 28

SS UBS SIR vicdinie ccc cicecsnseetias gianna tiasnds ahah 6

Sh TI. S720 Tee CA och cc ueeakewthensees 1, 9, 28

31 USC 3730 Civil Action for False Claims... .2, 6, 10, 28

—————Se eee"

vii

TABLE OF AUTHORITIES — Continued

Page

FEDERAL REGULATIONS

4 Code of Federal Regulations,

Chapter Ii, Subchapter C io... cceecete coves 5, 42

Part 331.50 Contract Clause............08. 5, 12, 15

Part 351.120 Amendment to Disclosure State-

NE 6 Gewese aa UREA Od Osa 04 eed aici ekethawe 6, 15

4 Code of Federal Regulations,

Chapter 31, Sub hapter G 2... ccceesscecsveces 4, 16

PRE Ee POR sc oscevcewhernsusstceedsene 4, 16

Part 401.40 Fundamental Requirements........ 4, 16

Part 401.50 Techniques for Application.......... 16

48 Code of Federal Regulations,

MO BLK V a Naiveinds dus bass core deueedwkeseans G44 6

ne eee Ee I gk a oo wo cas Gwe bao owed oe 6

ee See SEE eg ce tude wadebeeesenss 6

48 Code of Federal Regulations,

a eer 3, 11, 13, 15

CONSTITUTIONAL PROVISIONS

United States Constitution, Amendment V..... 1, 29,

Na a a ee . user wy oP oan om . = ee - =

JURISDICTIONAL STATEMENT

The judgment of the Court of Appeals was entered on

October 6, 1996 and Petitioner’s timely Petition for Rehear-

ing and Suggestion for Rehearing En Banc was rejected on

December 6, 1996 (see App. 1 and 2). Jurisdiction of this court

is invoked pursuant to 28 U.S.C. 1254(1).

CONSTITUTIONAL PROVISIONS FEDERAL ;

STATUTES AND FEDERAL :

REGULATIONS INVOLVED

Constitutional Provisions

U.S. Constitution, Amendment V

No person shall be . . . deprived of . . . property

without due process of law...

Statutes

31 USC 3729 False Claims

(a) Liability for certain acts. Any person who -

(1) knowingly presents, or causes to be pre-

sented, to an officer or employee of the United States

Government or a member of the Armed Forces of the

United States a false or fraudulent claim for payment or

approval;

(2) Knowingly makes, uses, or causes to be

made or used, a false record or statement to get a false or

fraudulent claim paid or approved by the government;

+ * *

is liable to the United States Government for a civil

penalty of not less that $5,000 and not more that $10,000

ee ee ee

plus 3 times the amount of damages which the Govern-

ment sustains because of the act of that person...

31 USC 3730 Civil Actions for False Claim

(b) Actions by private persons. A person may

bring a civil action for a violation of section 3729 for the

person and for the United States Government. The action

shall be brought in the name of the Government...

* * *

(c)(3) If the Government elects not to proceed

with the action, the person who initiated the action shall

have the right to conduct the action.

* * *

(d)(4) If the Government does not proceed with

the action and the person bringing the action conducts

the action, the court may award to the defendant its q

reasonable attorneys’ fees and expenses if the defendant

prevails in the action and the court finds that the claim of

the person bringing the action was clearly frivolous,

clearly vexatious, or brought primarily for purposes of ;

harassment.

10 USC 2306 Truth in Negotiations S

(f)(1) A prime contractor or any subcontractor

shall be required to submit cost or pricing data under the

circumstances listed below, and shall be required to cer- ‘

tify that, to the best of such contractor’s or subcontractors ;

knowledge and belief, the cost or pricing data submitted :

was accurate, complete and current:

(A) before the award of any prime contract is

under this chapter [10 USC 2301] entered into after using

procedures other than sealed bid procedures...

(B) before the pricing of any contract

change or modification .. .

(C)

(D)

Regulations

48 Code of Federal Regulations Chapter I Part 52.230-4

(CAS Clause 52-230-4)

For the purpose of administering the Cost Account-

ing Standards (CAS) requirements under this contract,

the contractor shall take the steps outlined in (a) through

(f) below:

(a) Submit to the cognizant Contracting Officer a

description of any accounting change, the potential

impact of the change on contracts containing a CAS

clause, and if not obviously immaterial, a general dollar

magnitude cost impact analysis of the change which dis-

places the potential shift of costs between CAS-covered

contracts by contract type...

(b) submit a cost impact proposal in the form and

manner specified by the cognizant Contracting Officer

within 60 days after the date of determination of the

adequacy and compliance of a change submitted pur-

suant to (a) above. If the above proposal is not submitted

within the specified time . . . an amount not to exceed 10

percent of each payment made after that date may be

withheld until such time as a proposal has been provided

in the form and manner specified by the cognizant Con-

tracting Officer.

amendments. .

(d)

(e) Notify the Contracting Officer in writing of any

adjustments required to subcontracts .. .

4 Code of Federal Regulations, Chapter III, Sub-Chapter G

COST ACCOUNTING STANDARDS - CONSISTENCY

IN ESTIMATING, ACCUMULATING AND

REPORTING COSTS

Part 401.20 Purpose. The purpose of this Cost

Accounting Standard is to insure that each contractor’s

practices used in estimating costs for a proposal are con-

sistent with costs accounting practices used by him in

accumulating and reporting costs. Consistency in the

application of cost accounting practices is necessary to

enhance the likelihood that comparable transactions are

treated alike. With respect to individual contracts, the

consistent application of cost accounting practices will

facilitate the preparation of reliable cost estimates used in

pricing a proposal and their comparison with the costs of

performance of the resulting contract. Such comparisons

provide one important basis for financial control over

costs during contract performance and aid in establishing

accountability for costs in the manner agreed to by both

parties at the time of contracting. The comparisons also

provide an improved basis for evaluating estimating

capabilities.

Part 401.40 Fundamental Requirements.

(a) A contractor’s practices used in estimating costs

in pricing a proposal shall be consistent with his cost

accounting practices used in accumulating and reporting

cost.

a ae ——

a A RN a

(b) A contractors cost accounting practices used in

accumulating and reporting actual costs for a contract

shall be consistent with his practices used in estimating

costs in pricing the related proposal.

(c)

Part 401.50 Techniques for Application. .. . costs

estimated for proposal purposes shall be presented in

such a manner and in such detail that any significant cost

can be compared with the actual cost accumulated and

reported therefor. In any event the cost accounting prac-

tices used in estimating costs in pricing a proposal and in

accumulating and reporting costs on the resulting con-

tract shall be consistent with respect to: (1) The classifica-

tion of elements or functions of cost as direct or indirect; and,

(3) the methods of allocating indirect costs to the contract.

(italics added)

4 Code of Federal Regulations, Chapter III, Sub-Chapter C

Part 331.50 Contract Clause. ... the clause set forth

below shall be inserted in all negotiated national defense

prime contracts and subcontracts.

+ + *

(2) Follow consistently his cost accounting practices

in accumulating and reporting contract performance cost

data concerning this contract. If any change in cost

accounting practices is made for purposes of any contract

or subcontract subject to Cost Accounting Standards

Board requirements, the change must be applied prospec-

tively to this contract, and the Disclosure Statement must

be amended accordingly. If the contract price or cost

allowance of this contract is affected by such changes,

adjustments shall be made...

* * *

(4)(B) Negotiate with the contracting officer to

determine the terms and conditions under which a

change may be made to a cost accounting practice...

Part 351.120 Amendment of Disclosure Statement.

(a) Disclosure Statements must be amended when

disclosed practices are changed to comply with new Cost

Accounting Standards...

48 Code of Federal Regulations, Chapter I

Part 31.202 Direct Costs. (a) A direct cost is any cost

that can be identified specifically with a particular final

cost objective .. .

Part 31.203 Indirect Costs. (a) An indirect cost is any

cost not directly identified with a single, final cost object,

but identified with two or more final cost objectives or an

intermediate cost objective. It is not subject to treatment as

a direct cost. (italics added)

STATEMENT OF CASE

A. INTRODUCTION

This is a qui tam action brought against Hughes

Aircraft Company for fraudulent labor charging practices

in violation of the False Claim Act 31 USC 3129; and the

Truth in Negotiations Act 10 USC 2306. This action

charges Hughes with violating these federal statutes by

knowingly charging the labor of overhead employees

directly to contracts with the United States government

without complying with the mandated federal regula-

tions identified herein.

The Hughes’ Systems Engineering Laboratory, or

SEL, is charged with this fraudulent labor charging from

1984 through 1987 wherein petitioner was employed as

an Engineering Projects Manager and observed these

fraudulent practices. During this period SEL had approxi-

mately 650 employees that provided technical support to

other Hughes organization directly responsible for per-

forming contracts for the United States government. The

labor of substantially all of these employees, including

employees with overhead job classifications, was charged

directly to these contracts as direct costs.

This fraudulent labor-charging was accomplished in

two ways.

One way, by overhead employees being indis-

criminately directed by management to charge their labor

directly to government contracts in violation of Hughes

expressed labor charging practice. The Hughes “Atten-

dance and Labor Reporting” manual imposes strict pro-

cedures to ensure that only authorized employees charge

their labor directly to government contracts. This

includes prior written authorization directing these

employees to charge their labor to specific accounts on

these contracts; and, theirs and their supervisors certifica-

tion that their labor was charged to those specific

accounts in accordance with this authorization.

The second way, by overhead labor being charged to

a direct-labor-allocation-system (“allocation system”) that

distributed the labor of these overhead employees

directly to those government contracts comprising this

allocation system.

Charging an employee’s labor to the allocation sys-

tem required that employee’s job classification be re-

classified from overhead labor to direct labor in accor-

dance with these federal regulations. This re-classifica-

tion is mandatory whether the labor-charging is by

Hughes’ expressed labor charging practice, or by the

allocation system, as both Hughes and Petitioner’s expert

agree.

This strict control of overhead labor vis-a-vis labor

directly charged to government contracts, or direct labor,

is important because during this period - as Hughes has

acknowledged - the government paid Hughes for

employees charging their labor directly to government

contracts an additional 165.518 to 174.950 percent over

the actual cost of their labor. Of these percentages, 155.49

to 173.83 percent was to pay for the cost of overhead

labor. This is the table Hughes provided:

YEAR

“MULTIPLIER”

DESCRIPTION 1984 1985 1986

Labor Overhead

Engineering 155.49% 143.09% 173.83%

Cost of Money

CITE 09316 0026 00166

Engineering 31952 .24277 .21732

G&A Expenses 9.63 9.73 9.03

Profit** N/A N/A N/A

**Profit is not a

“multiplier”

or burden that is

added to direct

labor costs.

Knowingly charging unauthorized overhead labor to

the United States government as labor directly on govern-

ment contracts has been held a fraud under the False

Claim Act. United States v. Uber (6th Dist. 1962) 303 F.2d

462; United States v. Dinerstein (2nd Dist. 1960) 362 F.2d

852.

The trial court granted Hughes summary judgment,

and awarded attorney fees and costs, based solely on a

misinterpretation of the declarations of Hughes’ experts.

This misinterpretation resulted in both rejecting Hughes’

failure to comply with these federal regulations; and,

mistakenly concluding that the use of the government's

approval of the allocation system and Item 2.50 in the

disclosure statement justified Hughes’ unlawful labor-

charging practice. (See App. 5-13) The Hughes experts are

Dudley P. Slater and Allan E. Brunmier. During this

. period Mr. Slater was the Resident Auditor at Hughes

with the Defense Contract Audit Agency, he is now

retired; Mr. Brunmier was a member of the Air Force

Plant Representative Office and the Principal Contracting

Officer, he is now a Hughes employee. Petitioner’s

: expert, Peter Elliott, is an expert in this field as disclosed

in his declaration.

Gade cA tl St Sra ae

se fete cee

The declarations of both Hughes’ experts and peti-

tioner’s expert, Peter Elliott, concur that charging over-

head labor directly to government contracts must be in

compliance with these mandated federal regulations.

Both Slater’s and Brunmier’s declarations acknowl-

edge the government's approval of the allocation system,

and, describe and illustrate the procedure for re-classify-

ing overhead employees to direct labor so their labor can

be charged to the allocation system. Specifically, they

reveal “managers and secretaries” were re-classified in

compliance with these federal regulations. Although

generically correct. Brunmier’s declaration identifies only

five job-codes of technical managers and secretaries after

December 1985 as confirmed by Elliott’s declaration. Nei-

ther Brunmier’s or Slater’s declaration give blanket

approval — or even allude — to Hughes’ unlawful labor

charging practice ~- contrary to what the Ninth Circuit

courts concluded (Brunmier’s declaration is at App. 37;

Slater’s at App. 64; and, Elliott’s at App. 16)

Nonetheless, the trial court ruled that Item 2.50 of the

Disclosure Statement entitled Hughes to charge the labor

of any overhead employee directly to government con-

tracts if Hughes independently and unilaterally con-

cluded the labor of these individual employees

“benefited” all the contracts to which their labor was

charged. Item 2.50 is referred to in the trial court’s ruling

on App. 7 as page 71 of Brunmier’s declaration, and is

now App. 43 of Brunmier’s declaration. It is as follows:

Item 2.50

A direct labor account is maintained to collect

labor charges that are impractical to individu-

ally charge to specific contracts; but which

clearly benefit same. The account collects actual

labor cost incurred which is then applied to

contracts based upon the labor distribution of

supervised individuals.

The trial court granted Hughes summary judgment

and awarded attorney fees and costs under 31 USC 3730

based entirely on Slater’s and Brunmier’s declarations.

However, this court only considered in its ruling the

government’s approval of the allocation system and Item

——————— ee

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2.50 and did not address Hughes’ fraudulent labor-charg-

ing in violation of its “ Attendance and Labor Reporting”

practice, which admittedly would have been irrelevant

had this ruling been correct.

The appellate court summarily approved the trial

court’s ruling without any acknowledgment to the evi-

dence, law or issues expressed in appellant's briefs,

including mandatory compliance with these federal regu-

lations and Hughes’ failure to comply. From oral argu-

ment before the appellate panel it became evident that

this court’s ruling was based only on supposition and

speculation that Brunmier and Slater knew and approved

the Hughes unlawful practice. There is no evidence to

support this conclusion.

B. ALL EXPERTS AGREE COMPLIANCE

WITH THESE FEDERAL REGULATIONS

IS THE ONLY LAWFUL WAY OVERHEAD

LABOR CAN BE CHARGED DIRECTLY

TO GOVERNMENT CONTRACTS

The declaration of experts Peter Elliott, Allan Brun-

mier and Dudley Slater all confirm that compliance with

these Federal Regulations on both mandatory and exclu-

sively the only lawful way overhead labor can be charged

directly to government contracts. Specifically:

1. Prior notice to the government that the labor-

hours of overhead employees, within specific job classi-

fications will be charged directly to government contracts

(60) days before a specific date, as mandated by 48 CFR,

Ch. I, Part 52.230-4 (CAS Clause 52-230-4)

Elliott's declaration: App. 24

Slater's declaration: (paragraph no. 4)

“After initial submission of a Disclosure State-

ment, each time the contractor changes an

accounting practice, it is required to submit to

the DCAA and AFPRO an amended Disclosure

Statement at least 60 days before the effective

date of the proposed change.” (App. 66)

Brunmier’s declaration: Exhibit F is prior

notice to him from Slater to reclassify five job

classifications of technical managers from over-

head to direct so their labor could be charged

directly to government contracts (App. 49).

Exhibit H (App. 55) is Brunmier’s response

approving this reclassification form overhead to

direct of these five classification of technical

managers.

2. Filing with the government, each time the labor-

hours of overhead employees are to be changed directly

to government contracts, a CAS Disclosure Statement

Amendment designating both the accounting change of

the reclassification and its effective date; as mandated by

Title 4 CFR, Ch. III, sub-chapter C, Part 331.50 (CAS

Clause 331.50)

Elliott’s declaration: App. 27

Brunmier's declaration: Revised Disclosure

Statements to accounting changes of Hughes’

Cost Accounting Standards show compliance

with this Federal Regulations, as represented by

Exhibits B2, B3, C, G and H of Brunmier’s decla-

ration (App. 44, 45, 46, 53 and 55 respectively)

Slater’s declaration: (paragraph no. 4)

“Once the amended CAS Disclosure Statement

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is timely submitted to the government the pro-

posed changed may be effected even before the

contractor receives official approval for the

change.” (App. 66)

3. Filing with the government a cost impact study of

the cost impact on each government contract affected by

the accounting change, as mandated by 48 CFR, Ch. I Part

52.230-4 (CAS Clause 52-230-4)

Elliott’s declaration: App. 23, 24, 25, 28, 29

and 30

Brunmier’s declaration: (paragraph 12) “In

connection with this review [of Disclosure State-

ment], my office analyzed the expected cost

impact of the proposed changes ‘o determine

whether the changes would increase the cost to

the government of Hughes’ contract perfor-

mance.” (App. 40)

Slater’s declaration: (paragraph no. 10)

“Also in connection with my review of the

EDSG’s allocation system, my office analyzed

the [cost] impact of having various levels of lab

managers, assistant lab managers and their sec-

retaries across EDSG charge their time into a

pool [allocation system] ... ” (App. 69)

4. Reclassifying Hughes employees by job codes

from overhead to direct - and not as individual employees

as was the unlawful Hughes practice. This is mandated

by Item 3.1.0 of Hughes Disclosure Statements and the

declaration of Hughes Controller Paul Hendricks

Elliott's declaration: App. 33

Paul Hendricks’ declaration: (paragraph no.

5)” ... Item 3.1.0 of the EDSG’s Disclosure

Statement . . . maintained: Cost classification

guides lists [of] individual job classifications

and titles, and indicated whether the job is clas-

sified as direct or indirect.” (not in appendix)

Brunmier’s declaration: Exhibit F is for five

job codes of technical managers that Slater

requested be reclassified direct labor (App. 49)

Exhibit D, para. 4 (App. 47) is the Disclosure

Statement amendment for re-classifying secre-

taries so their labor can lawfully be changed to

the allocation system.

Slater’s declaration: (paragraphs 6, 7, 8 and

10, App. 59 and 60) “The allocation system at

issue during these discussions involved the

charging of time of lab managers and their sec-

retaries into the direct pool [allocation system].

In connection with my own analysis of the

EDSG lab managers and secretaries who were

planned to be placed on the allocation sys-

C. THE HUGHES’ UNLAWFUL

LABOR-CHARGING PRACTICE

This practice is described in the declaration of

Hughes Controller, Robert Meyers. (App. 57) Particularly

significant is his declaration that no notice was given the

government by Hughes unilaterally re-allocating the

labor of individual overhead employees directly to gov-

ernment contracts. Specifically:

Paragraph No. 10 (App. 60). “No employee

within any EDSG division could charge his or

her time to the allocation system unless he or

she had been formally authorized by the divi-

sion controller to do so, ..

”

isis tet Peery

Paragraph No. 11 (App. 61). “Each EDSG

division controller was responsible for authoriz-

ing employees within their division for inclu-

sion in the allocation system. .- . This

determination was made based upon a review of

each employee’s job classification, function and

assignments.”

Paragraph No. 14 (App. 62). “The program

managers generally disclosed the name runs on

a periodic basis to the customers, including the

government. This provided the customers with

knowledge as to which employees were charg-

ing to the contract both directly, as well as

through the allocation system.”

As Peter Elliott’s critique of Mr. Meyers declaration

reveals, this practice violates every mandated federal reg-

ulations for reallocating overhead labor directly to gov-

ernment contracts. Specifically:

1. 48 CFR, Ch. 1 Part 52-230-4 (FAR Clause 52-230-4)

is violated hecause there is no notice to the government

of Hughes request to charge the labor of specific job

codes of overhead employees directly to government con-

tracts.

2. 4 (CER, Ch. III, Subchapter C, Part 331.50 and Part

351.120 (FAR CAS Clauses 331.50 and 351.120) are vio-

lated because there is no CAS Disclosure Statement

Amendment designating the accounting change to reallo-

cate the labor of these overhead employees directly to

government contracts, and the date this reallocation is to

become effective.

3. FAR CAS Clauses 52-230-4 is further violated

because no cost impact study was performed of the cost

impact to affected government contract comprising the

allocation system.

4. 4 CFR, Ch. III, Subchapter G, Parts 401.20, 401.40

and 401.50 (FAR Clauses 401.20, 401.40 and 401.50) are

violated because Hughes’ practices of estimating costs for

a proposals are not consistent with the cost accounting

practices used in accumulating and reporting of costs.

5. Hughes violated Item 3.1.0 of its CAS Disclosure

Statement with the government by reallocating the over-

head labor of individual employees and not by the job

classifications of overhead employees as mandated by

Hughes’ Disclosure Statement.

D. HUGHES ACKNOWLEDGED NON-COMPLIANCE

WITH THESE FEDERAL REGULATIONS.

Because the labor of five job codes of technical man-

agers and secretaries after December 1985 were re-allo-

cated directly to government contracts in compliance

with these federal regulations, Hughes has claimed this

generically in all its pleadings and briefs as “managers

and secretaries.” Hughes makes no claim, nor do its

experts Brunmier and Slater, that the labor of other over-

head employees in other job classifications was reallo-

cated directly to government contracts in compliance

with these Federal Regulations.

However, the labor of substantially all other over-

head employees were charged directly to government

contracts. To explain, Hughes contends that compliance

with these Federal Regulations was not necessary because

Item 2.50 the Cost Accounting Disclosure Statements

approved by the government were sufficiently broad,

standing alone, that they could independently — and even

without any notice to the government — reallocate over-

head labor directly to government contracts. Hughes

relies totally on one clause of its disclosure statement,

Item 2.50 (App. 43, Exhibit C of Brunmier Declaration)

It is Hughes contention that Item 2.50:

“ls

put the government on notice that...

SEL . . . would allocate” those labor charges of

any employee Hughes decided benefited those

government contracts that comprised the alloca-

tion system.” (Hughes’ Statement of Uncon-

troverted Facts)

Also, Hughes re-affirmed this contention in oral

argument before the appellate panel on September 14,

1995:

“JUDGE NELSON: Mr. Haycock had two nails

up there, one of them labelled secretaries and

the other labelled managers. He would have

driven them into the lectern making the point

that the only thing thac was covered was man-

agers and secretaries. What's the short answer

to those nails?

“MR. GALLAGHER (Hughes Attorney): The

short answer is that the language of 2.5.0 says

direct pools will be utilized by persons whose

labor changes are impractical to individually

charge to specific contracts but which clearly

benefit same. It doesn’t say anything about man-

agers or secretaries. In fact, the declarations of

Mr. Slater and Mr. Brunmier both say that the

language covers all of the supervisory, manag-

erial, secretarial and other support personnel.

People other than engineers who were out actu-

ally designing ... ” (Page 19 of the transcript of

the oral argument before the panel on Septem-

ber 14, 1995.)

THIS STATEMENT IS NOT TRUE. Brunmier’s and

Slater’s declarations only approve, ” . . . the use of direct

allocation pools for charging the time of [Hughes’

employees]” as the trial court correctly stated in its sum-

mary judgment order and order awarding attorney fees.

These declarations do not approve the Hughes’ unlawful

labor-charging practice. Mistakenly the trial court did

approve Hughes’ unlawful practice by incorrectly con-

cluding Item 2.50 alone gave Hughes this right.

Since this overhead labor was charged directly to

those government contracts, it was subject to the 165.518

to 174.950 percent burden on direct labor.

E. TRIAL COURT FAILED TO CONSIDER

AND RULE ON THE UNLAWFULNESS OF

HUGHES’ LABOR-CHARGING PRACTICE

Both the trial court’s summary judgment order and

its order for attorney fees and costs was based entirely on

the declarations of Brunmier and Slater (App. 37 and 64

respectively). This reliance is expressed in these orders

(App. 5 and 8). This court mistakenly only addressed the

issue of whether the government approved the allocation

system; and, finding it did concluded that Item 2.50 enti-

tled Hughes to engage in its unlawful labor-charging

practice. By this erroneous conclusion, this court mis-

takenly attributed to Brunmier and Slater approval of this

practice. This conclusion was not in their declarations.

The introductory paragraphs of these orders

acknowledge these declarations as the single authority

for these orders, and then concluded each order as fol-

lows:

Summary Judgement Order

a“

_. the undisputed facts in the record

show that, according to the government officials

then responsible for ensuring that Hughes was

(1) properly charging its labor costs and (2) ade-

quately disclosing its charging policies, there

was full disclosure, discussion, consideration,

and approval of the use of direct allocation pool

for charging the time of managers, supervisors,

secretaries, and other support personnel. Slater

Decl. paras 6,7,8,10. &11, Brunmier Decl. para

13(c), (d); Defendant's reply of Jan. 19,1994 at

pp. 24-29... . And, the most important docu-

ment language — that which is set forth in

Hughes’ Disclosure Statements — is clearly not

limited in the way Plaintiff suggests, e.g. Brun-

mier decl. at p. 71. [Item 2.50] The record is thus

uncontroverted that the government had no

complaints, and was not in any way deceived or

defrauded, by Defendant Hughes’ Direct alloca-

tion pool cost charging system.”

Order Awarding Attorney Fees

“As this court found, both of such declar-

ants testified under oath that, during the 1983

through 1987 timeframe at issue in the com-

plaint, there was full disclosure, discussion, con-

sideration, and approval of the use of the direct

allocation pools for charging the time of man-

agers, supervisors, secretaries, and other support

personnel.”

“As this Court found in granting Hughes’

motion for summary judgment, the declarations

of the then-cognizant government officials

showed conclusively that Haycock’s allegations

had no merit and “the record is thus uncon-

troverted that the government had no com-

plaints, was not in any way deceived or

defrauded, by Defendant Hughes’ direct alloca-

tion pool cost charging system”

In both orders the court correctly interprets Brun-

mier’s and Slater’s declarations as providing only the:

“

. approval of the use of direct allocation

pools for charging the time of managers, super-

visors, secretaries, and other support personnel.”

This court then went on to mistakenly conclude that

Item 2.50 was the single vehicle for implementing the

“... use of direct allocations pools ...” Since this was

the Hughes unlawful practice, both orders approved the

Hughes’ unlawful labor-charging practice.

Neither Brunmier nor Slater state, or even intimate,

that Item 2.50 is this vehicle. Both declarations mandate

that compliance with these Federal Regulations is the only

vehicle for charging the labor of overhead employees

directly to Government contracts. Further, there is no

indication in either of these declarations that Brunmier

and Slater even were aware of the Hughes unlawful

practice and it provided no notice to them.

In denying petitioner’s motion for re-consideration,

the trial court acknowledged, and rejected, the claim that

the unlawful practice violated mandated Federal Regula-

tions. This is evident from the following statement in its

order denying reconsideration:

“The motion for reconsideration is predi-

cated on the declaration from Relator’s expert

vis-a-vis the substantive issues of whether

Hughes violated the False Claims Act. The dec-

laration is presented for the first time. Its sub-

stance consists mostly of the evidence already

presented to this court, and interpretation

thereof concluding that Hughes violated the

False Claim Act.” Rejection of this claim was

also acknowledged in the trial court’s summary

judgment order.

Contrary to what the trial court concluded and ruled,

there is no dispute between petitioner’s expert Peter

Elliott and Hughes’ experts Dudley P. Slater and Allan E.

Brunmier that compliance with these federal regulations

is both mandatory and exclusive.

F THE APPELLATE COURT RULINGS

WERE BASED ON SPECULATIONS AND

SUPPOSITIONS THAT BRUNMIER AND SLATER

KNEW AND APPROVED THE HUGHES’

UNLAWFUL LABOR-CHARGING PRACTICE

The appellate court summarily adopted the trial

courts orders without any discussion or reference to the

evidence, to the law or to the issues presented in peti-

tioner’s briefs (App. 2).

However, oral argument before the appellate panel

reveals their mistaken conclusion that Brunmier and

Slater both knew and approved Hughes unlawful prac-

tice.

JUDGE NELSON: (To Mr. Gallagher,

Hughes attorney) “I take it that the accounting

standard contemplated some downstream exer-

cise of discretion as to whether John Manager fit

within this change or not.”

MR. GALLAGHER: That’s correct.

This position is further indicated by JUDGE KLEIN-

FELD’S questions indicating his mis-interpretation of the

declarations of: Brunmier, Slater and Elliott:

JUDGE KLEINFELD: There’s part of your

brief I didn’t really understand. I was looking

for exactly what the lie was that Hughes Aircraft

allegedly told to the Government, under the

truth and negotiations act and the false claims

act, and I couldn’t figure it out. As far as I can

tell, you thought that some employees should

have been on direct billing instead of - or

should have been on overhead instead of having

their time billed directly. But the Government

said, no, Hughes told us what they were doing

and we approved it. I don’t understand what

the false claim is. ;

MR. HAYCOCK: I don’t understand. I

don’t believe the Government said that. I don’t

think the government took any position in this

at all. To my knowledge, they didn’t. I will get

to that issue as I go through what I have to offer

this morning for there is a misrepresentation as

to the federal regulations under which these

charges have been made.

JUDGE KLEINFELD: Well, I understood it

went a little beyond that. That this fellow Allan

Brunmier was hired by the Government to look

over the accounting and he thought it was okay

the way Hughes did it.

MR. HAYCOCK: No. Mr. Brunmier is an

employee of Hughes Aircraft Company. At the

time of this period, that this complaint arose, he

was the principal contracting officer represent-

ing the Government.

JUDGE KLEINFELD: And he says he

determined that the accounting system was in

accord with Government accounting practices

and would not have an adverse cost impact on

the Government.

MR. HAYCOCK: That's not what he said.

What he said was that Hughes had complied

with these provisions, these FAR [CAS] provi-

sions, which I’ve covered quite thoroughly in

my briefs and I won't go into. But basically it

has to do with when an accounting change is

made there has to be notification of the change.

Supposed to be 60 days in advance, supposed to

be a cost impact statement, and there’s sup-

posed to be an amended disclosure statement.

That’s what’s required and that is not in dis-

pute. My witnesses and Hughes’ expert wit-

nesses agree on that. That is required.

Now Mr. Brunmier, what he said in his dec-

laration is that Hughes complied with these FAR

regulations as to managers and secretaries. If

you read his declarations, the reference is made

to managers and secretaries.

Going further, if you go in to these declara-

tions that are filed by the experts of Hughes

Aircraft Company, Mr. Brunmier, Mr. Slater and

Mr. Hendricks [Hughes’ Controller] in their dec-

larations they talk specifically about managers

and secretaries. And there is no dispute that, in

a broad sense, managers and secretaries can

charge to these accounts because they were

approved according to these FAR [CAS] Regula-

tions. Hughes’ made a specific request for five

classifications of technical managers, and you

have to make these [requests] by job classifica-

tion . . . The Government approved it.

Hughes filed a cost impact statement. That’s

in Mr. Brunmier’s declaration. Hughes filed an

amended disclosure statement. They were

approved according to these FAR regulations.

The same with secretaries. Hughes acknowl-

edges that after December 1986, Hughes did the

same thing. This is all in the briefs. They noti-

fied the Government, they filed a cost impact

study, and they filed an amended return [dis-

clc_ _re statement].

So we don’t dispute that these people could

properly charge directly to government con-

tracts. .. . in Hughes’ motion to [for] summary

judgment, in their statements of undisputed

facts and conclusions of law, and it their...

summary judgment order, all specified man-

agers and secretaries. These other people

weren't mentioned.

JUDGE KLEINFELD: Is there some evi-

dence in the record to counter the Brunmier

declaration?

MR. HAYCOCK: Well, there’s the declara-

tion of my expert. The Brunmier declaration is

not really contested. It’s saying that declaration

supports this position. If you take managers and

secretaries in a broad sense, that’s accurate.

That’s accurate because he states what the law

is.

Mr. Slater, the former DCAA auditor, he

states exactly what it is. His declaration and my

expert’s declaration are mirror images. Mr.

Hendrick’s declarations is not contested .. .

Brunmier’s and Slater’s Declarations do not approve

the Hughes’ unlawful iabor-charging practice. Also,

Brunmier, Slater and Elliott all concur that compliance

with mandated Federal Regulations is required to re-

allocate overhead labor directly to Government contracts.

The Hughes practice does not do this and there is no

authority to support it.

REASONS FOR GRANTING THE WRIT

A. CERTIORARI SHOULD BE GRANTED TO COR-

RECT THE LOWER COURTS ABUSE OF DISCRE-

TION IN GRANTING HUGHES SUMMARY

JUDGMENT AND ATTORNEY FEES AND COSTS

The trial court abused its discretion in granting

Hughes motion for summary judgment and attorney fees

and costs; the appellate court abused its discretion by

summarily affirming the trial court’s ruling without refer-

ence or consideration of the evidence and mandatory

Federal Regulations for re-allocation overhead labor

directly to Government contracts. (see App. 2 to 13)

Granting Hughes summary judgment and awarding

attorneys’ fees and costs should be reviewed by the abuse

of discretion standards as to whether the lower courts

committed and error of law and/or of fact. Barber v.

Hawaii (9th Cir. 1994) 42 F.3d 1185; 1189; United States v.

McConney (9th Cir. 1984) 782 F.2d 1195, 1201; Appellate

Court’s ruling (see App. 3).

A court abuses its discretion by making an erroneous

interpretation of the law. Hunt v. National Broadcasting

Co., Inc. (9th Cir. 1989) 872 F.2d 289, 292. “The district

court may abuse its discretion several ways. First, the

court abused its discretion if it did not apply the correct

legal standard ... ” Hunt, supra, p. 292.

Abuse of discretion occurs when the lower courts rest

its decisions on a clearly erroneous finding of fact. Zepeda

v. United States I.N.S. (9th Cir. 1983) 753 F.2d 719, 725.

The lower courts made the following erroneous rul-

ings of law and facts:

1. The trial judge incorrectly concluded that the

Hughes labor-charging practice was proper, and Hughes

need not comply with the mandated Federal Regulations

in re-allocating overhead labor directly to Government

contracts - contrary to the declarations of their own

experts. Specifically, that the declarations of Slater and

Brunmier alone authorized Hughes to unilaterally, and

without compliance with mandated Federal Regulations

charge the time of “managers, supervisors, secretaries, and

other support personnel.” (see App. 7)

2. By the trial judge incorrectly concluding that

Hughes was not required to provide the Government

with: prior notice of accounting changes; cost impact

analyses; and, CAS Disclosure Statement Amendments,

as required by mandated Federal Regulations.

3. By the trial judge incorrectly concluding that

Hughes was making “full disclosure” of its labor-

charging practices to Brunmier and Slater, the then Gov-

ernment officials. Their declarations do not provide any

expressed or implied indication that they were even

aware of the unlawful Hughes labor-charging practice

and this practice does not include notification of it to

them. (See Robert Meyers declaration, App. 62 para. 14)

Lower courts’ summary judgment rulings may be set

aside if its order is opaque and unilluminating as to either

the relevant facts or law with respect to the merits of

appellant's claim. Carter v. Stanton (1972) 405 U.S. 669,

671. It is the district court’s duty to specify what facts are

established, and if it fails to do so, all of the issues as

framed by the pleadings are open for trial. Hartman v.

American News Co. (7th Cir. 1948) 171 F.2d 581, 584, cer-

tiorari denied (1949) 337 U.S. 707 [69 S.Ct. 1989]. Sum-

mary Judgement should be denied unless the moving

party can establish the facts on which he is entitled to

summary judgment under applicable principles of substan-

tive law. Bloomgarden v. Cover (CA DC 1973) 479 F.2d 201,

206; Koepke v. Fontecchio (9th Cir. 1949) 177 F.2d 125, 127.

The moving party has the burden of affirmatively demon-

strating that the responding camuot prevail as a matter of

law. This is true because the burden to show there is not a

genuine issue of material fact rests on the party moving

for summary judgment. Doff v. Brunswick Corp. (9th Cir.

1966) 372 F.2d 801, 813, Certiorari denied 1967) 389 U.S.

820 [88 S.Ct. 39].

The trial court violated congressional enactments of

Federal Law by disregarding mandated Federal Regula-

tions in its rulings of summary judgment and awarding

attorney fees and costs. The appellate court further reject-

ing these enactments by summarily affirming the trial

court’s rulings without any reference or consideration of

these mandated Federal Regulations. By granting this

writ these enactments will be properly interpreted and

enforced to carry-out the intent of congress; and, inform

Government contractors that arbitrarily charging over-

head labor directly to government contracts violates Fed-

eral Laws that will be enforced by the courts.

B. CERTIORARI SHOULD BE GRANTED SO DAM-

AGES MAY BE PROVED UNDER THE RELEVANT

STATUTES

The trial court’s summary judgment rulings denied

the Government the right to prove damages under: 31

USC 3729 False Claims: 31 USC 3730 Civil Actions for

Faise Claims; and, 10 USC 2306 Truth in Negotiations. As

presented herein, the trial court’s summary judgment

order was an abuse of discretion both as to the facts and

applicable law. The Government has the right to have this

judgment reversed and prove damages resulting from

this unlawful labor-charging practice.

C. CERTIORARI SHOULP BE GRANTED TO COR-

RECT THE NINTH CIRCUIT’S MIS-INTERPRETA-

TION AND MIS-APPLICATION OF FEDERAL

REGULATIONS

The Ninth Circuit courts’ approval of the unlawful

labor-charging practice is totally without any legal basis.

This ruling is an invitation to present and potential Gov-

ernment contractors to engage in this unlawful labor-

charging practice because the Ninth Circuit has approved

it. If not now, the time will clearly come when these

rulings must be reversed to comply with mandated Fed-

eral Regulations — as both Petitioner’s and Hughes’

experts concur. Petitioner urges that the time for this

action is now rather than later when the U.S. Government

has suffered further, and considerable, monetary dam-

ages from this unlawful labor-charging practice.

D. THE CERTIORARI SHOULD BE GRANTED

BECAUSE THE AWARD OF ATTORNEY FEES

AND COSTS VIOLATED THE DUE PROCESS

PROVISION OF THE FIFTH AMENDMENT

The Due Process provision of the Fifth Amendment

limits the actions of the Federal Government that would

deprive persons of “life, liberty or property” Robinson v.

Fauver (D.N.J. 1996) 932 F.Supp. 639. Due Process under

the Fifth Amendment are flexible and depend upon cir-

cumstances of a given case but require, at minimum,

some kind of notice and hearing before final deprivation

of property interest. Tri-County Industries, Inc. v. District of

Columbia (DC 1996) 932 F.Supp. 4.

On April 22, 1994 Petitioner filed with the District

Court “Request for Oral Argument on Defendant's

Motion to Tax Attorney Fees.” (Petitioner’s Excerpts of

Record No.126, page 396) This motion was denied.

A person has been denied Due Process when there is

no evidence to support taking his liberty, Thompson v. City

of Louisville (1960) 362 U.S. 199; 80 S.Ct. 624; 4 L.Ed. 2d

654.

Petitioner submits that he was denied Due Process by

the Trial Court denial of his request for a hearing. Also,

he was denied Due Process by the Trial Court awarding

attorney fees and costs on a mistaken understanding of

what the evidence proved. Specifically, that this court’s

approval of Hughes’ unlawful labor-charging was error

because there is no basis in the evidence on which court

relied to support such a conclusion. The Fifth Amend-

ment does not make any evidentiary distinction between

the deprivation of “property” and “liberty.”

The petitioner was denied due process under the

Fifth Amendment by being deprived of property without

due process of law in the court’s award of attorney fees

and costs.

CONCLUSION

Because the Ninth Circuit have disregarded manda-

ted Federal Regulations in approving an unlawful labor-

charging of Hughes Aircraft Company, the writ should be

granted to reverse the summary judgment ruling and

award of attorney fees and costs. This case should be

remanded back to the District Court for trial on the issue

of damages suffered by the Government by this unlawful

labor-charging practice.

Respectfully submitted,

Don H. Haycock,

Petitioner and Relator on behalf of

the United States Government

7321 Westlawn Avenue

Los Angeles, California 90045

(310) 641-3921

Boe VERO CLE

App. 1

APPENDIX 1

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF ) No. 94-55620

AMERICA, ex rel., DON H._ ) 94-55826

HAYCOCK, be eee

Plaintiff-Appellant, ; CV-90-01977-KN

v. ) ORDER

HUGHES AIRCRAFT ) (Filed Dec. 6, 1996)

COMPANY, '

)

Defendant-Appellee.

)

Before: T.G. NELSON and KLEINFELD, Circuit Judges,

and WILKEN, District Judge.”

The panel as constituted above has voted to deny the

petition for rehearing and to reject the suggestion for

rehearing en banc.

The full court has been advised of the suggestion for

rehearing en banc, and no judge of the court has

requested a vote on the suggestion for rehearing en banc.

Fed. R. App. P. 35(b).

The petition for rehearing is DENIED and the sugges-

tion for rehearing en banc is REJECTED.

* The Honorable Claudia Wilken, United States District

Judge for the Northern District of California, sitting by

designation.

App. 2

APPENDIX 2

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Defendant-Appellee.

UNITED STATES OF ) No. 94-55620

AMERICA, ex rel., DON H._ ) 94-55826

HAYCOCK, ) ne me

Plaintiff-Appellant, CV-90-01977-KN

v. ) MEMORANDUM*

HUGHES AIRCRAFT ) (Filed Oct. 6, 1996)

COMPANY,

)

Appeal from the United States District Court for the

Central District of California David V. Kenyon, District

Judge, Presiding

Argued and Submitted September 15, 1995

Pasadena, California

Before: T.G. NELSON and KLEINFELD, Circuit Judges,

and WILKEN, District Judge.**

After reviewing the record de novo, Jesinger v. Nevada

Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994), we

conclude that Haycock presented no evidence of fraud or

* This disposition is not appropriate for publication and

may not be cited to or by the courts of this circuit except as

provided by Ninth Circuit Rule 36-3. ;

** The Honorable Claudia Wilken, United States District

Judge for the Northern District of California, sitting by

designation.

App. 3

false statement. We are unable to identify, in the evidence

submitted, fraudulent allocations of employees to the

direct as opposed to the indirect categories, double bill-

ing, or fraudulent accounting practices. Nor can we iden-

tify a cost accounting standard which Appellee was

required to follow and did not follow. There is no evi-

dence in the record which we have been able to find to

show that Appellee improperly classified any indirect

costs as direct costs, or overcharged for any of the fringe

benefits and other entitlements associated with waiver

costs. Whatever may have been arguable was disclosed to

and approved by the government, so far as the evidence

in the record shows.

Nor is there any evidence in the record to show a

false certification under the Truth in Negotiations Act, 10

U.S.C. § 2306a(a), or false statement of cost or pricing

data. 10 U.S.C. § 2306a(a)(2).

The district judge had discretion to award attorney's

fees if it found that the relator’s claim was “clearly frivo-

lous,” 31 U.S.C. § 3730(d)(4), and it did. This standard is

met if “the plaintiff continued to litigate after” his claim

“clearly became” groundless or without foundation.

Hughes v. Rowe, 449 U.S. 5, 15 (1980). Our review of the

attorneys’ fees award is limited by the abuse of discretion

standard. In re Washington Public Power Supply System, 19

F.3d 1291, 1296-97 (9th Cir. 1994). The district court was

within its discretion in awarding attorneys’ fees, as it did,

for the period after Hughes served on the relator declara-

tions of the relevant government officials showing that

the cost allocation system was known to, and approved

by, the government.

App. 4

The district court’s denial of his motion for recon-

sideration of the attorneys’ fees award is reviewed for

abuse of discretion. Barber v. Hawaii, 42 F.3d 1185, 1198

(9th Cir. 1994). The court was within its discretion in

concluding the expert witness declaration filed by Hay-

cock added nothing new on the question whether the

relator should have stopped litigating after the dis-

closures which showed absence of fraud or false state-

ment.

Appellee’s request for attorneys’ fees on appeal is

denied. See Fed. R. App. P. 38; Amwest Mortg. Corp. v.

Grady, 925 F.2d 1162, 11 5, (9th Cir. 1991) (attorneys fees

not awarded where appeal not “clearly meritless”).

AFFIRMED.

App. 5

APPENDIX 3

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CV 90-1977 KN

ORDER Re: Motion to

Dismiss and Motions

for Summary Judgment

(Filed Mar. 4, 1994)

United States of America

ex rel Don H. Haycock,

Plaintiff,

Hughes Aircraft Company,

)

Defendant. )

)

Based on the papers submitted, the Court rules as

follows:

1. The Court does not decide Defendant’s motion to

dismiss portions of the Second Amended Complaint

(“SAC”) based on the statute of limitations because Plain-

tiff’s underlying claims lack merit and therefore, as dis-

cussed below, granting Defendant’s motion for summary

judgment disposes of this case.

* * *

2. Plaintiff’s motion for summary judgment is

DENIED. The best that can be said of Plaintiff’s papers is

that they are misguided, the assertions made are unsup-

ported by admissible evidence, and in form they fail to

comply with the Federal and Local Civil Rules. The Court

is given little if any guidance as to where to look for

support for Plaintiff’s assertions; and, despite the fact

that the Court has undertaken to discover admissible

evidence which might support Plaintiff’s arguments by

App. 6

independently reviewing the mass of documentation sub-

mitted, no such evidence can be found. At most, Plaintiff

has put forth evidence that Defendant’s employees

charged their time on an allocation basis. The problem is

that as Defendant convincingly explains in its motion for

summary judgment, this allocation system was disclosed

to, and investigated and approved by, the government.

3. Defendant’s motion for summary judgment is

GRANTED. In addition to adopting the vast majority of

Defendant’s Statement of Uncontroverted Facts and con-

clusions of Law, and signing Defendant’s proposed Order

granting summary judgment (with one paragraph excep-

ted), the Court adds the following observations:

The crux of Plaintiff’s dispute with Defen-

dant’s theory of the case appears to be that any

disclosure by Hughes and/or approval by the

government of using the allocation system of

+ * *

Charging certain labor costs was limited to a

small number of specific categories of technical

managers and therefore did not include any

other supervisory or manager-level employees

or their secretaries. Such a reading of the record

may be understandable if one looks only at cer-

tain documents (and for this reason the Court

does not find it appropriate to impose sanctions

against Plaintiff).2 Nevertheless, other than

2 For example, in a letter of August 24, 1983, Hughes’

controller wrote to the government mentioning the

reclassification of “assistant, associate and laboratory and

department managers.” Brunmier Decl. I at 65. Mr. Slater’s

Report of April 25, 1984, and Mr. Brunmier’s memo of May 10,

1984, also both referred only to reclassification of specific

App. 7

Plaintiff's unsupported assertions to the con-

trary, the undisputed facts in the record show

that, according to the government officials then

responsible for ensuring that Hughes was (1)

properly charging its labor costs and (2) ade-

quately disclosing its charging policies, there

was full disclosure, discussion, consideration,

and approval of the use of direct allocation

pools for charging the time of managers, super-

visors, secretaries,and other support personnel.

Slater Decl. 116, 7, 8, 10, & 11; Brunmier Decl.,

q13(c), (d); Defendant’s Reply of January 19,

1994 at pp. 24-29. Plaintiff has offered no evi-

dence to contradict or question the testimony of

these declarants (nor, apparently, has Plaintiff

deposed them). And, the most important docu-

ment language — that which is set forth in

Hughes’ Disclosure Statements — is clearly not

limited in the way Plaintiff suggests. E.g. Brun-

mier Decl. at p. 71. [Item 2.50] The record is thus

uncontroverted that the government had no

complaints, and was not in any way deceived or

defrauded, by Defendant Hughes’ direct alloca-

tion pool cost charging system.

IT IS SO ORDERED.

DATED: March 4, 1994

/s/ David _V. Kenyon

DAVID V. KENYON

UNITED STATES

DISTRICT JUDGE

categories of managers. Id. at 184, 188. And, no explicit mention

of secretarial time was made until the December, 1986

Disclosure Statement. Id. at 173.

App. 8

APPENDIX 4

JAMES J. GALLAGHER

FRED D. HEATHER

SUSAN B. MYERS

DANA F. GARDNER

McKENNA & CUNEO

444 South Flower Street, 8th Floor

Los Angeles, California 90071-2909

(213) 688-1000

Attorneys for Defendant,

HUGHES AIRCRAFT COMPANY

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

UNITED STATES

OF AMERICA ex rel.

DON H. HAYCOCK,

Plaintiff,

CASE NO. CV 90-1977 KN

(Tx)

(kas)

fPROPOSED} ORDER

GRANTING MOTION FOR

AWARD OF ATTORNEYS’

FEES PURSUANT TO 31

U.S.C. § 3730(d)(4), FED. R.

CIV, P. 11 AND LOCAL

RULE 16.10

(Filed May 9, 1994)

VS.

HUGHES AIRCRAFT

COMPANY,

Defendant.

On April 7, 1994, defendant Hughes Aircraft Com-

pany (“Hughes”) filed its Motion for Award of Attorneys’

Fees Pursuant to 31 U.S.C. § 3730(d)(4), Fed. R. Civ. P. 11

and Local Rule 16.10.

BASED ON THE PAPERS SUBMITTED, THE COURT

RULES as follows:

App. 9

FACTS

Relator, Don H. Haycock, filed a qui tam lawsuit

under the False Claims Act, 31 U.S.C. § 3729 et seq.,

against Hughes in April 1990. After the original and a

first amended complaint were dismissed on Hughes’

motion for lack of particularity under Rule 9(b), Haycock

filed a Second Amended Complaint in October 1992. In

his complaint, Haycock alleged that Hughes violated the

False Claims Act by charging the labor hours of certain

employees working in Hughes’ Systems Engineering Lab-

oratory (“SEL”) of the Electro-Optical and Data Systems

Group (“EDSG”) in a manner that was inconsistent with

what Hughes had disclosed to the government in its CAS

Disclosure Statements during the period from 1983

through 1987.

During discovery, Haycock testified that prior to fil-

ing his lawsuit, he had never read Hughes’ CAS Dis-

closure Statements, was unaware of what Hughes had

disclosed to the government pertaining to the method of

labor charging for SEL employees and was uninvolved in

Hughes’ determination of which SEL employees should

charge directly to contracts and which should charge to

indirect accounts. During discovery, it became clear that

Haycock had not even been aware of the use by SEL

employees of an “allocation system” of timecharging,

whereby the employees charged all of their labor time to

one account number, which was then spread by a com-

puterized algorithm across a predetermined base of con-

tracts benefited by the labor efforts of such employees.

Toward the end of discovery, Haycock stated in a letter to

Hughes’ counsel that, if what the Hughes’ witnesses had

been saying in their depositions was true — that the

App. 10

government was aware of the method of timecharging to

direct accounts through an allocation system used in the

SEL and had approved that system — then he would have

no case and would have to “fold”. In reliance on that

representation, although Haycock had never requested

such documents from Hughes, Hughes voluntarily pro-

vided to Haycock its CAS Disclosure Statements for the

relevant timeframe and the government’s approval let-

ters, which showed that the timecharging method of char-

ging certain employees’ time directly to contracts through

an allocation system had been disclosed to and approved

by the government.

Even after receiving the documentary evidence prov-

ing that Haycock’s allegations were without merit, Hay-

cock refused to drop his case and, instead, on December

20, 1993, filed a summary judgment motion in support of

which he provided no admissible evidence whatsoever.

Also on December 20, 1993, Hughes served on Haycock

its motion for summary judgment, together with accom-

panying declarations and exhibits, which included a dec-

laration of the former Resident Auditor of the Defense

Contract Audit Agency with cognizance over the

accounting and timecharging practices at issue in Hay-

cock’s complaint and a declaration of the former Princi-

pal Administrative Contracting Officer (“PACO”) of the

Air Force Plant Representative Office. who had respon-

sibility for ensuring that Hughes was properly charging

its labor costs in compliance with the applicable cost

standards and adequately disclosing its charging policies.

Attached as exhibits to the PACO’s declaration were the

approval letters he had sent to Hughes in 1984 pertaining

to Hughes timecharging practices, as disclosed in its CAS

;

[

}

App. 11

Disclosure Statements for 1983 (which timecharging prac-

tices relevant to the issues in the case at bar remained

largely unchanged during the rest of the 1980's).

As this Court found, both of such declarants testified

under oath that, during the 1983 through 1937 timeframe

at issue in the complaint, “there was full disclosure,

discussion, consideration, and approval of the use of

direct allocation pools for charging the time of managers,

supervisors, secretaries, and other support personnel.” (Court

Order Re: Motion to Dismiss and Motions for Summary

Judgment, Case No. CV 90-1977 KN, entered March 8,

1994, p. 4 (“Court Order”).)

Notwithstanding the declarations of the then-cogni-

zant government officials showing definitively that

Hughes had disclosed the allocation system at issue in

the complaint to the government and had received the

government's approval for using that system of

timecharging throughout the EDSG, Haycock refused to

dismiss his case. Thereafter, Haycock’s conduct in con-

tinuing the litigation, which was clearly for no other

purpose than to harass Hughes, forced Hughes to expend

significant resources in defending itself, including

responding to Haycock’s wholly unsupported summary

judgment and to his equally meritless opposition to

Hughes’ motion for summary judgment, appearing at a

hearing on a discovery motion brought by Haycock at

which Haycock inexplicably failed to appear, and prepar-

ing and filing statutorily-required pretrial documents in

preparation for the pretrial conference that was sched-

uled to take place shortly after the Court took the parties’

summary judgment papers under submission.

App. 12

As this Court found in granting Hughes’ motion for

summary judgment, the declarations of the then-cogni-

zant government officials showed conclusively that Hay-

cock’s allegations had no merit and that “the record in

thus uncontroverted that the government had no com-

plaints, was not in any way deceived or defrauded, by

Defendant Hughes’ direct allocation pool cost charging

system.” (Court Order, p. 5.)

DISCUSSION

By the present motion, Hughes seeks to recover its

attorneys fees and costs expended in defending this law-

suit since December 20, 1993 (the date of service of the

declarations of the individuals who were the then-cogni-

zant government officials) on the grounds that Haycock’s

continuance of the litigation and refusal to dismiss his

case, despite the fact that he clearly had no evidence to

support his allegations or controvert the sworn testimony

of the then-cognizant government officials, was done for

no purpose other than to harass Hughes. As of that date,

it was evident that Haycock’s lawsuit was clearly frivo-

ious, clearly vexatious and clearly maintained for pur-

poses of harassment. As such, Hughes is entitled to

recovery of its attorneys fees and costs pursuant to 31

U.S.C. § 3730(d)(4) ard-Federat Rute-of-€ivit Procedure

tt Kas (United States ex rel. Herbert v. National Academy of

Sciences, 1992 U.S. Dist. LEXIS 14063 (D.D.C. 1992); Davis

v. Mason County, 927 F. 2d 1473, 1488 (9th Cir.), cert.

denied, _.. US. , 112 S. Ct. 275, 116 L.Ed. 2d 227

(1991).)

App. 13

CONCLUSION

For all of the foregoing reasons, the Court HEREBY

GRANTS Hughes’ Motion for Attorneys’ Fees. Hughes is

hereby awarded $ 146,754.59 in attorneys’ fees and

expenses.

Dated: MAY -9 1994 /s/ DAVID V. KENYON

United States

District Judge

Presented by:

McKenna & Cuneo

JAMES J. GALLAGHER

FRED D. HEATHER

SUSAN B. MYERS

DANA F. GARDNER

By: /s/ Susan B. Myers

Susan B. Myers

App. 14

APPENDIX 5

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES -—- GENERAL

Case No. CV 90-1977 Kn Date June 1, 1994

Title United States, ex rel. Donald H. Haycock

v. Hughes Aircraft Company

DOCKET ENTRY

PRESENT:

HON. DAVID V. KENYON, JUDGE

Lenora Pulliam None

Deputy Clerk Court Reporter

ATTORNEYS PRESENT ATTORNEYS PRESENT

FOR PLAINTIFFS: FOR DEFENDANTS:

None None

PROCEEDINGS:

IN CHAMBERS:

The Court has received Relator Haycock’s

motion for reconsideration of the Court’s Order

awarding attorneys fees to Defendant Hughes.

The motion for reconsideration is predicated on

a declaration from Relator’s expert vis-a-vis the

substantive issues of whether Hughes violated

the False Claims Act. The declaration is pre-

sented for the first time. Its substance consists

mostly of a review of the evidence already pre-

sented to this Court, and an interpretation

thereof concluding that Hughes violated the

False Claims Act.

App. 15

The Court has already ruled - based on the

only evidence timely submitted - that Relator

failed to prove that there were any False Claims

Act violations. The Court also found that the

Defendant was entitled to attorneys fees begin-

ning at the time it was made clear to Relator that

no violations had occurred.

At this point, the Court is not inclined to

reconsider either earlier ruling based on this so-

called “new” evidence. Enough attorney time

has already been expended litigating this case. If

Relator thinks this Court has erred in its deter-

minations, he is free to appeal. Accordingly, the

Court will not require Hughes to file an opposi-

tion to Relator’s reconsideration motion, which

the Court hereby DENIES.

IT IS SO ORDERED.

App. 16

APPENDIX 6

Don H. Haycock,

Attorney at Law

7321 Westlawn Avenue

Los Angeles, CA 90045

ON BEHALF OF, AND FOR , PLAINTIFF

UNITED STATES OF AMERICA

UNITED STATES DISTRICT COURT FOR THE

CENTRAL DISTRICT OF CALIFORNIA

EX REL. DON H. NO. 90 1977

HAYCOCK KN(TX)

UNITED STATES OF

AMERICA DECLARATION OF

EXPERT WITNESS

Plaintiff, PETER ELLIOTT

VS,

HUGHES AIRCRAFT

COMPANY

Defendant.

I, PETER ELLIOTT, declare as follows: I make this

declaration on behalf of the Relator in this lawsuit, Don

H. Haycock, with whom I have consulted and advised

regarding the time charging practices of defendant

Hughes Aircraft Company (“HUGHES”) and agreed to

offer the following testimony at the trial of this lawsuit,

should that have occurred.

I make this declaration as an expert in the field of

government contracting, and particularly with regard to

government regulations of cost accounting standards,

requirements and violations. My qualifications as an

EE OR

App. 17

expert in this field is presented in part A, The Experience,

Training and Education of Peter Elliott.

I have personal knowledge of the Federal Regula-

tions and Requirements that I have applied to the facts

disclosed in the documents that I have relied upon, and

as disclosed to me by Relator, both as referenced herein. |

can competently testify under oath of the conclusions I

have made herein based upon these facts.

THE EXPERIENCE, TRAINING AND

EDUCATION OF PETER ELLIOTT

PETER ELLIOTT, CPA, is President/Senior Executive

Accountant, with Peter Elliott Accountancy Corporation

(PEAC), Inc. and also President of Government Contracts

Advisory and Litigation Support Services Corporation

(GCALSS). PEAC is a firm which provides accounting,

auditing, and tax services, and specialized consulting

services in Government contracts, grants and termina-

tions. These services are designed to assist clients in

resolving contractual disputes and termination problems,

and in improving client’s accounting systems consistent

with Federal contract, grant, regulations and cost

accounting standards requirements.

Mr. Elliott’s prior affiliations as a Consultant include

Contracts Advisory Services, Astro Vista Inc., and with

the Department of Government Contracts of Peat, Mar-

wick, Mitchell & Co. in the Los Angeles office. His princi-

ple area of assistance relating to management and

accounting systems include (1) preparation of proposals,

(2) preparation and negotiation of cost and insurance

App. 18

claims, (3) accounting records reconstruction, and (4)

determination of allowable costs against contracts and

grants, including development of rates for indirect cost

recovery in accordance with various government agencies

regulations.

During his career Mr. Elliott has had diverse experi-

ence such as: Industrial Engineering Assistant; Computer

Programer [sic]; Military Pilot; Military Aircraft and

Engine Mechanic; Auditor, Public; Auditor, Government;

owner of an accounting firm providing a full spectrum of

service including tax and auditing services.

His most recent experience over and above the usual

proposals, terminations, systems and accounting matters -

are Board of Contract Appeals Cases, including Value

Engineering, Equal Access to Justice Act, Equitable

Adjustment of Contracts, and commercial litigation sup-

port. He has been qualified and appeared as an expert

witness before the Armed Services Board of Contract

Appeals and the California Superior Court and has been

qualified as an expert witness before the Federal District

Court of Los Angeles.

Mr. Elliott received his BS in Accounting from Cali-

fornia State Polytechnic College, an AA in Mathematics

and Science from Chaffey College, and has done post

graduate work in Business Finance at the California State

University, Fullerton. He is a Certified Public Accountant

in California and a member of the California Society of

Certified Public Accountants, the American Institute of

Certified Public Accountants, and the National Contract

Management Ascociation.

App. 19

INFORMATIONAL SOURCES

Following are the factual and authoritative sources of

information on which I have relied in making my evalua-

tions and conclusions stated in this declaration:

1. Declarations of Allan E. Brunmier. Mr. Brunmier

states that he was a member of the Air Force Plant

Representative Office (“AFPRO”), the governmental

agency primarily responsible for the administration of

government contracts from 1967 to 1986. During this

period he states that he had cognizance over the Hughes

facilities located in El Segundo, California, which include

the time charging practices of the organization chal-

lenged in this lawsuit, the Systems Engineering Labora-

tory (“SEL”). In 1982 he states that he became the

Principal Administrative Contracting Officer (PACO)

with responsibility for overseeing all the contract admin-

istrative functions of the AFPRO, including pricing, busi-

ness management and contract administration. This

included the Electro-Optical and Data Systems Group, the

parent of the SEL. He is now an employee of Hughes.

Mr. Brunmier provided two declarations, one on

December 20, 1993 and one on January 13, 1994. In his

December 20, 1993 declaration he provided the chronol-

ogy of the notices, correspondence and cost impact analy-

ses performed by Hughes pursuant to the Amendments

Hughes made to the Cost Accounting Standards (“CAS”)

Disclosure Statements (“Disclosure Statements”) from

October 1983 through to December 1986. (However, it is

noted that in 1986 Mr. Brunmier declares that he left

government service and started working for Rockwell

App. 20

International, Inc.) This includes relevant dates when

Hughes informed the government of Disclosure State-

ment Amendments and the required Cost Impact Pro-

posals Hughes submitted, or when then should have been

submitted, under FAR clause 52.230-4, Administration of

Cost Accounting Standards (1984 through 1987), the appli-

cable FAR clauses during this period from October 1983

through to December 1987. The FAR Clause 52-230-4 was

revised in 1992 and these provisions were incorporated in

FAR Clause 52-230-4 without any changes to these

requirements. The pertinent portions of FAR Clauses of

52.230-4 that were in effect from October 1983 through

December 1987 are presented on App. 26 herein. The

April 1984 Revision did not change these requirements

from the revision in effect in October 1983.

Mr. Brunmier’s December 20, 1993 declaration will be

referenced throughout this declaration.

2. Declaration of Hughes Employee Robert Meyers.

From 1979 to 1986 Mr. Meyers states he was the Division

Controller of two Hughes Divisions, both within EDSG.

In this capacity he managed the finance departments of

these divisions, one being the parent division to the SEL.

3. Declaration of Dudley P. Slater. From 1983 until

1988 Mr. Slater states that he was assigned to the Defense

Contract Audit Agency (“DCAA”) office of Hughes as

Resident Auditor with cognizance over all audit func-

tions. From 1983 to 1985 he had specific responsibility of

EDSG, the parent organization of the organization which

is the subject of this lawsuit, the SEL.

App. 21

4. The Following Representations of Relator.

(a). That from November 1984, or before, secre-

taries time in the SEL was being charged to allocated

direct via a computerized system that Hughes refers to as

the “allocation system.”

(b). That in the last quarter of 1984 and beyond

the time of indirect SEL employees, other than secretaries

and technical laboratory and department managers, was

also being charged to allocated direct via the “allocation

system.”

(c). That from the first part of 1984 the time of

non-technical department managers in the SEL was being

charged to allocated direct via the “allocation system.”

5. Government Laws and Regulations

(1). 31 U.S.C. 3730 The False Claims Act

(2). FAR Paragraph 30.401 (CAS 401) Cost Account-

ing Standard — Consistency in Estimating, Accu-

mulating and Reporting Costs

(3). FAR Paragraph 30.401.20 (CAS 401.20) Purpose

(4). FAR Paragraph 30.401.40 (CAS 401.40) Funda-

mental requirements

(5). FAR Paragraph 30.401.50 (CAS 401.50) Tech-

niques for application

(6). FAR Clause 52-230-4 (1984-1987 Revisions)

ADMINISTRATION OF COST ACCOUNTING

STANDARDS

(7). Title 4, Code of Federal Regulations. Chapter III,

General Accounting Office (CASB), January 3;

1983 Rev.

App. 22

(a). Para. 331.50 Contract Clause — Cost Account-

ing Standards

(b). Para. 331.71 Materiality

(c). Para. 351.130 Instructions and information

GOVERNMENT REGULATIONS AND

REQUIREMENTS FOR COMPLIANT

ACCOUNTING OF CONTRACT COSTS

1. Hughes Knew How to Effect Accounting

Changes. An important issue is whether the time charg-

ing practice of certain Hughes employees in the SEL from

1983 through to 1987 resulted in the violation of FAR

Paragraph 30.401 (or preceding regulation) “Cost Account-

ing Standards — consistency in estimating, accumulating and

reporting costs.” And, if so, was it done intentionally and

what liability does this impose?

The time charging practice involved charging the

time of formally indirect employees to “allocated direct”

via the “allocation system” which included a data base

made up of contracts in which some of the SEL

employees were properly authorized to charge direct. The

expressed criteria for selecting these contracts to which

the indirect SEL employees time would be charged as

“allocated direct” was, “ .. . the totality of the contracts

to which employees supervised by the lab managers

charged their time.” (See Declaration of Robert Meyers,

App. 60 para 9)

Hughes claims the practice of redistributing indirect

labor to “allocated direct” was disclosed by a CAS Dis-

closure Statement Amendment of October 31, 1983 and

App. 23

that this disclosure was sufficiently broad to authorize an

allocation based on the ” . . . labor distribution of super-

vised individuals.” The disclosure is as follows: (Item No.

2.5.0 of Disclosure Statement Amendment of October 31,

1983)

“Y. Other

A direct labor account is maintained to collect

labor charges that are impractical to individu-

ally charge to specific contracts, but which

clearly benefit same. The account collects actual

labor cost incurred which is then applied to

contracts based upon the labor distribution of

supervised individuals.” (Brunmier’s declara-

tion, Appendix 7 Exhibit B1, page App. 43.)

Hughes also submitted a Cost Impact Proposal (state-

ment) to the government, for its review and acceptance,

which included in this “allocation system” only five spec-

ific job classifications of technical laboratory and depart-

ment managers. On April 25, 1984 the Defense Contract

Audit Agency (“DCAA”) reviewed this cost impact state-

ment (See Brunmier’s declaration, Appendix 7, Exhibit F

page App. 49). On May 10, 1984 the Principal Administra-

tive Officer also accepted this cost impact statement (See

Brunmier’s Declaration, Appendix 7, Exhibit H pages

App. 55 & 56)

Clearly, Hughes knew the FAR regulations for imple-

menting accounting changes to its CAS covered contracts.

Particularly, that a Cost Impact Proposal is required and

must be reviewed and accepted by the government repre-

sentative responsible for Hughes contracting activities.

As presented, this is mandated by FAR Clause 52-230-4,

which would have been included in all CAS covered

contracts in 1983 to 1987:

App. 24

“52-230-4 Administration of Cost Account-

ing Standards.

For the purpose of administering the Cost

Accounting Standards (CAS) requirements

under this contract, the Contractor shall take the

steps outlined in (a) through (f) below:

(a). Submit to the cognizant Contracting

Officer a description of any accounting change,

the potential impact of the change on contracts

containing a CAS clause, and if not obviously

immaterial, a general dollar magnitude cost

impact analysis of the change which displaces

the potential shift of costs between CAS-covered

contracts by contract type (i.e. firm-fixed-price,

incentive, cost-plus-fixed-fee, etc.) and other

contractor business activity. As related to CAS-

covered contracts, the analysis should display

the potential impact of funds of the various

Agencies/Departments (i.e., Department of

Energy, National Aeronautics and Space Admin-

istration, Army, Navy, Air Force, other Depart-

ment of Defense, other Government) as follows:

(b). Submit a cost impact proposal in the

form and manner specified by the cognizant

Contracting Officer within 60 days (or such

other date as may be mutually agreed to) after

the date of determination of the adequacy and

compliance of a change submitted pursuant to

(a) above. If the above proposal is not submitted |

within the specified time, or any extension

granted by the cognizant Contracting Officer, an

amount not to exceed 10 percent of each pay-

ment made after that date may be withheld until

such time as a proposal has been provided in

the form and manner specified by the cognizant

Contracting Officer.”

sdeermrennienenenetianiiaaiiiiaaial

App. 25

It has been revealed that three of Hughes time charg-

ing practices changes violated this provision by not sub-

mitting to the government a Cost Impact Proposal when

these additional indirect employees were reclassified

“allocated direct” and included in the “allocation sys-

tem.”

The cost effect of not notifying the government of

changes in accounting practices, and providing a Cost

Impact Proposal, is that an inconsistency is created in the

way costs are estimated, and the way actual costs are

accumulated and reported. This is the expressed purpose

of FAR Paragraph 30.401, which states as its purpose;

“401.20 Purpose

The purpose for this Cost Accounting Stan-

dard is to insure that each contractor’s practices

used in estimating cost for a proposal are consis-

tent with cost accounting practices used by him

in accumulating and reporting costs. Consis-

tency in the application of cost accounting prac-

tices is necessary to enhance the likelihood that

comparable transactions are treated alike... ”

A Contractor violates FAR CAS 401 when he pro-

poses estimated costs as indirect and then, without infor-

ming the government, by the prescribed notice, cost

impact and Disclosure Statement Amendment, he accu-

mulates and reports those costs as direct costs. This

causes inaccuracies in the pricing and costing processes

that the requirements of FAR CAS 401.40 would preclude:

App. 26

“401.40 Fundamental Requirement

(a) A contractor’s practice used in estimat-

ing costs in pricing a proposal shall be consis-

tent with his cost accounting practices used in

accumulating and reporting costs.

(b) A contractor’s cost accounting prac-

tices used in accumulating and reporting actual

costs for a contract shall be consistent with his

practices used in estimating in pricing the

related proposal.

Be he teas

FAR CAS 401.50 describes how this requirement of

consistency of costs shall be applied:

“401.50 Techniques for Application.

(a) ... costs estimated for proposal pur-

poses shall be presented in such a manner and

in such detail that any significant cost can be |

compared with the actual cost accumulated and |

reported therefore. In any event the cost |

accounting practices in estimating costs in pric-

ing a proposal and in accumulating and report-

ing costs on the resulting contract shall be

consistent with respect to:

(1) The classification of elements or

functions of cost as direct or indirect;

(2) the indirect cost pool to which

each element or function of cost is charged

or proposed to be charged; and,

(3) the method of allocating indirect

costs to the contract.”

If an accounting change is made that affects how

costs are estimated, and how they are accumulated and

App. 27

reported, the change must be applied prospectively to the

affected contract and an equitable adjustment negotiated

for each affected contract (4 Code of Federal Regulations,

Chapter III, para. 331.50(a)(4), (1983 Rev.)

Therefore, the issue is whether or not Hughes vio-

lated FAR CAS, Part 401 by charging the time of indirect

employees to “allocated direct”, without following the

prescribed procedure and an analyses of the cost impact

to each affected contract, as mandated by FAR clause

52-230-4,

THE TIME OF FIVE CLASSIFICATIONS OF

INDIRECT TECHNICAL MANAGERS WAS PROPERLY

CHARGED TO ALLOCATED INDIRECT

On October 4, 1983 Hughes submitted an amended

Disclosure Statement Amendment for the Electro-Optical

and Data Systems Group (“EDSG”) Engineering Divisions

dated October 31, 1983 (Brunmier’s declaration, Appen-

dix 7 Exhibits B2, B3 and F pages App. 44, 45 and 49

respectively). This Amendment included an accounting

change that incorporated reclassifying five (5) specific Job

Codes of technical laboratory and department managers

so their time could be charged to “allocated direct,” spec-

ifically:

Job Code Title / Description

21823 Manager Technical Department

11002 Assistant Manager, Tech. Dept.

12428 Associate Manager, Tech. Dept.

11008 Assistant Manager, Tech. Lab.

12457 Associate Manager, Tech. lab.

App. 28

A Cost Impact Proposal (statement) was

provided, and on April 25, 1984 (Exhibit F of Brunmier’s

Declaration, page App. 49) there was a response from the

office of the Resident Auditor, Dudley P. Slater, accepting

the cost impact analyses; and, the reclassification from

indirect to direct of the five job codes of laboratory and

department technical managers. After the effective date

of the Disclosure Statement Amendment the time charges

of the managers having one of these job code classifica-

tions could properly and lawfully be charged to “allo-

cated direct” via the “allocation system.” This acceptance

did not extend to any other employees. Although the

government accepted the Cost Impact Proposal (state-

ment) six months after submittal of the Disclosure State-

ment Amendment the date relates back to the date of the

Disclosure Statement Amendment of October 31, 1983.

Hughes notified the government, provided a cost impact

statement and a Disclosure Statement Amendment.

This Amendment, for reclassifying these technical

manager “allocated direct,” is as follows: (Disclosure

Statement Amendment of October 31, 1983, Item 2.50)

“Y. Other

A direct labor account is maintained to collect

labor charges that are impractical to individu-

ally charge to specific contracts, both which

clearly benefit same. The account collects actual

labor cost incurred which is then applied to

contracts based upon the labor distribution of

supervised individuals.”

App. 29

THERE WAS NO RECLASSIFICATION OF INDIRECT

NON-TECHNICAL MANAGERS FOR THEIR TIME

TO BE CHARGED TO ALLOCATED DIRECT

The government's response to the Cost Impact Pro-

posal (statement) of April 25, 1984, referenced in D,

above, makes no reference to non-technical laboratory or

department managers and secretaries being included

with the specific five classifications of technical managers

(Appendix 7, Exhibit H of Brunmier’s Declaration page

App. 55). There is no cost impact analyses (statement) or

any indication the government has even been notified,

with the exception of secretaries on December 30, 1985, of

their reclassification to “allocated direct”. For any of

these non-technical managers to charge their time to the

“allocation system” would be contrary to the require-

ments of the Cost Accounting Standards.

Hughes cannot slip them in under the CAS Dis-

closure Statement Amendment just because it is claimed

that it is broad enough to include them. 4 Code of Federal

Regulations, Chapter III, para. 351.130 (1983 Rev.) clearly

prohibits this:

“351.130 Instructions and Information.

practice by a contractor does not determine the

allowability of particular items of cost. Irrespec-

tive of the practices disclosed by a contractor,

the question of whether or not, or the extent to

which, a specific element of cost is allowed

under a contract remains for consideration in

each specific instance. Contractors are cautioned

that the determination ef the allowability of cost

App. 30

items will remain a responsibility of the con-

tracting officers pursuant to the provisions of

the applicable procurement regulations.”

The August 24, 1983 letter recitation of T.L. Dough-

erty, Controller (Appendix 7 Exhibit B3 of Brunmier’s

Declaration page App. 45) that these non-technical man-

agers are included. in the “allocation system” is not mate-

rial since there was no Cost Impact Proposal (statement)

submitted to the government identifying the cost impact

of their inclusion (See 52-230-4 Administration of Cost

Accounting Standard herein.) Also, the same recitation of

Allan E. Brunmier in his letter of May 10, 1984 (Appendix

7 Exhibit H of Brunmier’s Declaration page App. 55) is

equally not material and can only be a mistaken assump-

tion by him that they were included. Since Hughes had

previously submitted the Cost Impact Proposals (state-

ment) for five job classifications of technical managers

and later secretaries, that the DCAA Auditors accepted,

Hughes and their employees knew the required practice

for reclassifying employees to “allocated direct” in order

to charge their time via the “allocation system.” They

were to treat the reclassification of indirect non-technical

managers as an accounting change. It was an accounting

change since these non-technical managers were now

being charged direct. Further, they now are estimated as

indirect while their actual costs were being accumulated

and reported as direct.

When a contractor is fully covered by Cost Account-

ing Standards, a Contracting Officer cannot by edict con-

clude there is no cost impact without a cost impact

analyses (statement). Every accounting change requires a

Disclosure Statement Amendment that documents the

SS A

App. 31

date that the accounting change, for which it was pre-

pared, is to become effective; and should describe the

accounting change. Hughes did prepare and submit a

Disclosure Statement Amendment incorporating technical

managers (by job classification) and secretaries with cost

impact statements. This practice should have been fol-

lowed for each job classification and every individual

that was reclassified to the “allocated direct” category or

classification.. Hughes was reclassifying employees to

“allocated direct” based only on an arbitrary determina-

tion by the Division Controllers that it was authorized by

an employee’s “ . . . job classification, function and

assignment.” Without a cost impact analyses for each of

these reclassification the practice is contrary to Cost

Accounting Standards under government regulations

relating to cost estimating. (See Appendix 8 para. 11 of

Robert Meyers’ Declaration at page App. 61) I am skepti-

cal that this procedure is authorized in the Hughes prac-

tices on time-charging as Mr. Meyer states in his

declaration. (Appendix 8 of his Declaration at page App.

57)

Without a Disclosure Statement Amendment and a

cost impact analyses, changes in the classification of non-

technical managers from indirect to direct in order for

them to charge their time direct to contract via the

“allocation system” violates Cost Accounting Standards.

THE CHARGING OF SECRETARIES’ TIME

FROM INDIRECT TO ALLOCATED DIRECT UP TO

DECEMBER 30, 1985 WAS IMPROPER

On August 28, 1986 Hughes submitted by letter a

Disclosure Statement, dated December 30, 1985, to amend

App. 32

the CAS Disclosure Statement, dated October 1, 1984, to

reclassify secretaries from indirect to direct so their time

could be charged to “allocated direct” via the “allocation

system” (Brunmier’s declaration, Appendix 7 Exhibit D

page App. 47) This reclassification was not indicated in

the October 31, 1983 Disclosure Statement or in the Octo-

ber 1, 1984 Disclosure Statement. This Amendment is as

follows: (Disclosure Statement Amendment dated Decem-

ber 30, 1985, Item No. 2.5.0)

“Y. Other

A direct labor account is maintained to collect

labor charges that are impractical to individu-

ally charge to specific contracts, but which

clearly benefit same. The accounts collect actual

labor cost incurred which is then applied to

contracts based upon the labor distribution of

supervised individuals. Secretaries reporting to

individuals who are direct will also be classified

direct.”

The above referenced letter of August 28, 1986 makes

the following statement regarding a Cost Impact Proposal

(statement):

“The cost impact statement for the changes

was submitted December 1985.” (For the

December 30, 1985 Disclosure Statement Revi-

sion)

However, if the time of secretaries was already being

charged to “allocated direct” via the “allocation system”

prior to the effective date of this Disclosure Statement

Amendment of December 30, 1985, this would be a viola-

tion of the Cost Accounting Standards if during this

period there had been no disclosed accounting change

related to the secretarial job classifications.

THE MOST OBVIOUS VIOLATION OF FAR CAS 401

IS ROBERT MEYERS’ ADMISSION OF

RECLASSIFYING EMPLOYEES FROM INDIRECT

TO DIRECT IN ORDER TO CHARGE THEIR

TIME VIA THE “ALLOCATION SYSTEM”

App. 33

)

_ aE

Mr. Meyers acknowledges in his declaration (Appen-

dix 8, page App. 57) that it was the duty of the division

controller to “formally authorize” employees to change

their classification from indirect to “allocated direct” and

charge their time to contract direct via the “allocation

system.” (Appendix 8, para. 10 page App. 60) Mr. Meyers

further states in his declaration:

“11. Each EDSG division controller was

responsible for authorizing employees within

their division for inclusion in the allocation sys-

tem and the supervised employees over which

the supervisor’s time would be allocated. This

determination was made based upon a review of

each employee’s job classification, function and

assignment. Pursuant to EDSG practices, autho-

rized lab managers and their secretaries were

eligible to be on the allocation system.” (Appen-

dix 8, page App. 61)

By this practice it appears the EDSG division control-

lers were arbitrarily reclassifying indirect employees, to

“allocated direct” for inclusion in the “allocation system,”

based on considerations other than the disclosed job clas-

sifications. There is no Disclosure Statement Amendment

App. 34

that identifies this practice and there has been no identi-

fied Disclosure Statement made to the government for

such an accounting change which we are aware. Also, the

government should not approve such broad discretion,

since each job classification would have to be identified

(as they had previously disclosed) before being

reclassified under the provisions of FAR Contract Clause

52-230-4. This practice could result in a cost impact to

each of the CAS Covered contracts each of these indirect

employee, that was reclassified from indirect to “allo-

cated direct,” and charged time “allocated direct” via the

“allocation system.” As presented above, FAR CAS 401

prohibits this change without a Disclosure Statement

Revision and a cost impact analyses. The cost for these

indirect employees cannot be estimated as indirect, then

during the performance periods of these contracts arbi-

trarily reclassified direct so actual costs will be accumu-

lated and reported as if they were direct employees.

Under the above stated FAR Paragraphs and Clauses, and

other regulations discussed above, there should have

been both a cost impact analyses, and a Disclosure State-

ment revision effective on the date of the job classification

change from indirect to direct for each of these

employees. It appears that the Cost Accounting Standards

requirements and the cost impact analyses were not satis-

fied, as indicated by 4 Code of Federal Regulations, Chapter

Ill, para. 331.71. (1983 Rev.)

“331.71 Materiality

(3) The relationship between a cost item

and a cost objective. Direct cost items, especially

if the amounts are themselves part of a base for

ee ee ee eee ee eS eee

App. 35

allocation of indirect, will normally have more

impact than the same amount of indirect costs.”

Contract indirect costs are generally determined by

multiplying the number of estimated Direct Labor Dollars

by an overhead or burden rate, thereby giving a sufficient

estimate to cover the overhead. Clearly, it could be to

Hughes advantage to exchange indirect labor for direct

labor, as in the reclassification to “allocated direct.” was

doing with the correct mix of cost-type and fixed-price

contracts.

As presented above, the only job classifications dis-

closed for charging to “allocated direct” via the “alloca-

tion system” are those five specific classifications of

technical managers after October 31, 1983 and their secre-

taries after December 30, 1985. Any Hughes practices

permitting the divisions controller to randomly assign

employees to the “allocation system;” or, authorize other

than the five job classifications and their secretaries to

charge direct labor via the “allocation system” is in viola-

tion of FAR CAS 401.

CONCLUSION

Based on the information provided me, it is my opin-

ion that the United States government would be entitled

to assess damages under 31 U.S.C. The False Claims Act

for:

(a). The cost impact of the SEL secretaries charging

direct via the “allocation system” prior to December 30,

1985;

App. 36

(b). The cost impact of non-technical indirect SEL

laboratory and department managers charging direct via

the “allocation system,”

(c). The cost impact of all indirect job classifications

whose time was charged to allocated direct at the direc-

tion of the Division Controllers, which has not been dis-

closed to the government.

I DECLARE UNDER PENALTY OF PERJURY THAT

THE FOREGOING IS TRUE AND CORRECT, AND FUR-

THER DECLARE THAT THIS DECLARATION WAS EXE-

CUTED ON MAY 31, 1994 IN SANTA ANA, CALIFORNIA.

/s/ Peter Elliott

PETER ELLIOTT

‘

iy E

App. 37

APPENDIX 7

JAMES J. GALLAGHER

FRED D. HEATHER

SUSAN B. MYERS

DANA F. GARDNER

McKENNA & CUNEO

444 South Flower Street, 8th Floor

Los Angeles, California 90071-2909

(213) 688-1000

Attorneys for Defendant,

HUGHES AIRCRAFT COMPANY

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CASE NO. CV 90-1977

KN (Tx)

DECLARATION OF

ALLAN E. BRUNMIER

SUBMITTED IN SUPPORT

UNITED STATES OF __—+?)

)

- ! OF HUGHES AIRCRAFT

)

AMERICA ex rel. DON

H. HAYCOCK,

Plaintiff,

HUGHES AIRCRAFT COMPANY’S MOTION

COMPANY, FOR SUMMARY

Defendant. JUDGMENT

I, Allan E. Brunmier, declare as follows:

1. I make this Declaration on behalf of Hughes Air-

craft Company (“Hughes”). I have personal knowledge of

the following and if necessary could testify competently

thereto.

2. I was a member of the Air Force Plant Represen-

tative Office (“AFPRO”), the governmental agency

App. 38

assigned primary responsibility for the administration of

government contracts, from 1967 to 1986. Throughout this

time, I had cognizance over the Hughes Aircraft Com-

pany facilities located in El Segundo, California, which

are at issue in this suit.

3. From 1967 to 1975, I served in the Pricing Branch

of the AFPRO at Hughes El Segundo, as a price analyst;

at that time, my duties included reviewing Hughes’ con-

tract proposals. From 1975 to 1982, I served in the Busi-

ness Management Branch of the AFPRO at Hughes El

Segundo, and was responsible for reviewing and nego-

tiating Hughes’ forward pricing and final overhead rates

and costs. The Defense Contract Audit Agency (“DCAA”)

provided audit support for those functions. During the

latter part of that timeframe, I was promoted to the

Branch Chief of the AFPRO Business Management

Branch.

4. In 1982, I was promoted to be the Chief of the

Contract Administration Division of the AFPRO at

Hughes El Segundo and the Principal Administrative

Contracting Officer (“PACO”). As the PACO, I was

responsible for overseeing all of the contract administra-

tive functions of the AFPRO, including pricing, business

management and contract administration. In this capac-

ity, I had cognizance over several business units of

Hughes, including the Electro-Optical and Data Systems

Group (“EDSG”).

5. In 1986, I left government service and accepted a

position with Rockwell International, Inc. I held that

position until 1991 when I accepted my current position

App. 39

as Senior Government Accounting Specialist for Hughes

Aircraft Company.

6. In November, 1982, Hughes submitted to my

office Cost Accounting Standards Disclosure Statements

(“Disclosure Statements”) for the EDSG’s Manufacturing

Division, Engineering Division and the group home

office. The EDSG Manufacturing Division Disclosure

Statement disclosed, inter alia, a new accounting practice

pursuant to which various direct labor pools would be

maintained to collect labor charges, including supervision

labor, to be distributed on the basis of the labor distribu-

tion of supervised employees. The concept and practice

of such supervisory “allocation pools” were subsequently

adopted (as of October 1983) in the EDSG Engineering

Division. This accounting treatment was also incorpo-

rated into the consolidated EDSG CAS Disclosure State-

ment issued on October 1, 1984.

7. Attached hereto as Exhibit A is a true and correct

copy of the EDSG Manufacturing Division CAS Dis-

closure Statement, dated January 3, 1983.

8. Attached hereto as Exhibit B is a true and correct

copy of portions of the EDSG Engineering Division CAS

Disclosure Statement, dated October 31, 1983.

9. Attached hereto as Exhibit C is a true and correct

copy of the EDSG CAS Disclosure Statement dated Octo-

ber 1, 1984.

10. Attached hereto as Exhibit D is a true and cor-

rect copy of the portions of the EDSG CAS Disclosure

Statement, dated December 30, 1985.

App. 40

11. Attached hereto as Exhibit E is a true and cor-

rect copy of portions of the EDSG CAS Disclosure State-

ment, dated December 29, 1986.

12. As required by the Cost Accounting Standards

(“CAS”), my office reviewed these Disclosure Statements

to determine whether the accounting practices disclosed

therein were: (1) adequately described in the Disclosure

Statements, and (2) compliant with the Cost Accounting

Standards. In connection with this review, my office

analyzed the expected cost impact of the proposed

changes, to determine whether the changes would

increase cost to the government of Hughes’ contract per-

formance.

13. In connection with my review of the Disclosure

Statements’ adequacy and compliance with the Cost

Accounting Standards, I determined as follows:

(a.) that the direct allocation pool practice dis-

closed was consistent with CAS 418, which provides for

the designation of so-called “blanket costs,” defined as

costs that are accumulated in intermediate “cost pools”

and then reallocated to contracts as direct costs;

(b.) that the direct allocation pool practice dis-

closed was consistent with the AFPRO’s preference that

costs be charged directly to contracts, rather than indi-

rectly, wherever administratively feasible;

(c.) that the direct allocation pool practice dis-

closed would increase the accuracy of time-charging by

supervisors, lab managers and their secretaries, because

it would fairly allocate the labor costs of these employees

across the totality of the contracts benefited, in direct

;

App. 41

proportion to the charges to each contract made by the

supervised employees;

(d.) that the direct allocation pool practice dis-

closed would improve the consistency of timecharging,

because it would eliminate the arbitrary exercise of judg-

ment of individual managers and secretaries as to

whether particular tasks were properly charged as

“direct” or “indirect” costs; and

(e.) that the direct allocation pool practice dis-

closed would not have any adverse cost impact on the

government.

14. On April 25, 1984, the DCAA transmitted to my

office its Report on Adequacy and Compliance Review of

Disclosure Statement Revision (“Report”) for the October

31, 1983 EDSG Engineering Division CAS Disclosure

Statement, which set forth the DCAA’s findings that the

disclosed accounting practice changes regarding the

implementation of the allocation pool system were ade-

quately disclosed and compliant with the Cost Account-

ing Standards. A true and correct copy of the DCAA’s

Report, dated April 25, 1984, is attached hereto as Exhibit

15. On May 1, 1984, I issued to Hughes a letter

which formally approved the accounting practice changes

disclosed in the three November 1982 EDSG CAS Dis-

closure Statements. This letter reflected my finding that

the accounting practices disclosed in the CAS Disclosure

Statements, which had been implemented as of January 3,

1983, were adequately disclosed and complied with the

Cost Accounting Standards. A true and correct copy of

App. 42

my approval letter, dated May 1, 1984, to Hughes is

attached hereto as Exhibit G.

16. On May 10, 1984, I issued to Hughes a letter

which formally approved the accounting practice changes

disclosed in the October 31, 1983 EDSG Engineering Divi-

sion CAS Disclosure Statement. This letter reflected my

finding that the accounting practices disclosed in that

CAS Disclosure Statement, which had been implemented

as of October 31, 1983, were adequately disclosed and

complied with the Cost Accounting Standards. A true

and correct copy of my approval letter, dated May 10,

1984, to Hughes is attached hereto as Exhibit H.

17. Throughout my tenure as the PACO, I continued

routinely to approve Disclosure Statements submitted by

Hughes that included a description of direct allocation

pools, such as described above.

18. Disclosure of the allocation practice used by

EDSG in the EDSG CAS Disclosure Statements precludes

a Truth in Negotiations Act (defective pricing) violation

with respect to the use of that practice, since the practice

was adequately disclosed and complied with the Cost

Accounting Standards.

I declare under penalty of perjury under the laws of

the United States of America and the State of California

that the foregoing is true and correct.

Executed this 17 day of December, 1993 at Los

Angeles, California.

/s/ Allan E. Brunmier

ALLAN E. BRUNMIER

A MS, 0"

App. 43

(Exhibit B1 of Brunmier’s Declaration)

Exhibit B1

i Revised

‘ Date 31 October 1983

COST ACCOUNTING CONTINUATION SHEET

STANDARDS BOARD Page 5a of 40 Pages

pers perc Name of Reporting Unit

STATEMENT EDSG - Engineering

REQUIRED BY PUBLIC Pictalans

LAW 91-379

Item Item Description

No.

2.5.0 Y. Other

Contd

A direct labor account is maintained to collect

labor charges that are impractical to individually

charge to specific contracts, but which clearly

benefit same. The account collects actual labor

cost incurred which is then applied to contracts

based upon the labor distribution of supervised

individuals.

App. 44

(Exhibit B2 of Brunmier’s Declaration)

Exhibit B2

HUGHES AIRCRAFT COMPANY -

4 October 1983

SUBJECT: Cost Accounting Standards Disclosure

Statement

TO: Air Force Plant Representative

Hughes Aircraft Company

Attn: (TM) A. Brunmier (PACO)

El Segundo, CA 90245

Hughes Aircraft Company, in accordance with Sub-

ject Regulations (4 CFR 351.120), submits the attached

Disclosure Statement Amendment for the EDSG - Engi-

neering Divisions, dated 31 October 1983.

The Disclosure Statement contains trade secrets and

commercial or financial information which is privileged and

confidential. Accordingly, the filing of Disclosure Statements

is specifically conditioned on the Government's agreement to

treat each and every Disclosure Statement as confidential

information (4 CFR 351.40(d)). Further, it is requested that

the information be protected and not released outside the

Government as provided tor in DAR 3-1203(f).

HUGHES AIRCRAFT COMPANY

/s/ Paul L. Hendricks, Jr.

P. L. Hendricks, Jr., Manager

Government Accounting

TCR:smh

Attachment: a/s

ce: D. Slater

App. 45

(Exhibit B3 of Brunmier’s Declaration)

Exhibit B3

(213) 616-1375 HUGHES

HUGHES AIRCRAFT COMPANY

ELECTRO-OPTICAL & DATA SYSTEMS GROUP

PO BOX 902

EL SEGUNDO CA 90245

24 August 1983

In reply refer to: 7011.83/F007

Subject: Electro-Optical & Data Systems

Group

Engineering Burden Center CASB

Disclosure Statement for 31 October

1983.

To: Mr. Allan E. Brunmier

Air Force Plant Representative’s

Office

Hughes Aircraft Company

P.O. Box 92463

Building C2, Mail Station C140

El Segundo, California 90245

As we discussed earlier, the EDSG Engineering Burden

Center disclosure statement now incorporates the follow-

ing minor accounting change. (See attachment 1).

Effective 31 October 1983, assistant, associate and labora-

tory and department managers will be reclassified as

direct employees. Their labor dollars will be allocated

based on the direct hours charged of those employees

directly under their supervision. This change will provide

a more proper costing of direct supervision to the benefit-

ting activity. Attachment 2 is a detailed analysis showing

the immateriality of this change to existing contracts.

App. 46

The EDSG Engineering Burden Center rates for 1983 and

forward will be revised to incorporate this change by 1

September 1983.

Attachments

/s/ T. L. Dougherty

T. L. Dougherty, Controller

Electro-Optical & Data Sys-

tems Group

Exhibit C

HUGHES AIRCRAFT COMPANY

5 October 1984

SUBJECT: Cost Accounting Standards Disclosure

Statement

TO: Air Force Plant Representative

Hughes Aircraft Company

Attention: (TM) A. Brunmier (PACO)

El Segundo, CA 90245

Hughes Aircraft Company, in accordance with Sub-

ject Regulations (4 CFR 351.120), submits a revised Dis-

closure Statement for Electro-Optical & Data Systems

Group, dated 1 October 1984.

The Disclosure Statement contains trade secrets and

commercial or financial information which is privileged

and confidential. Accordingly, the filing of Disclosure

Statements is specifically conditioned on the confidential

information (CFR 351.40(d)). Further, it is requested that

App. 47

the information be protected and not released outside the

Government as provided for in FAR 30.201.4.

This Disclosure Statement is a merger of EDSG Engi-

neering, Manufacturing and Group Office Disclosure

Statements.

HUGHES AIRCRAFT COMPANY

/s/ P. L. Hendricks, Jr.

P. L. Hendricks, Jr., Manager

Government Accounting

smh:TCR

Exhibit D

28 August 1986

HUGHES

AIRCRAFT COMPANY

Subsidiary of GM Hughes Electronics

SUBJECT: Cost Accounting Standards Disclosure State-

ment Electro-Optical and Data Systems

Group

TO: Air Force Plant Representative

Hughes Aircraft Company

Attention: (TM) R. F. Kornmann (PACO)

El Segundo, CA 90245

Hughes Aircraft Company, in accordance with Subject

Regulations (4 CFR 351.120), submits a Disclosure State-

ment Amendment for Electro-Optical and Data Systems

Group, dated 30 December 1985.

App. 48

The Disclosure Statement contains trade secrets and com-

mercial or financial information which is privileged and

confidential. Accordingly, the filing of Disclosure State-

ments is specifically conditioned on the Government's

agreement to treat each and every Disclosure Statement

as confidential information (CFR 351.40(c). Further, it is

requested that the information be protected and not

released outside the Government as provided for in FAR

30.201-4.

This revision incorporates the following changes:

1. Update name change, year and date change.

2. Incorporates revisions to Section VII regarding pen-

sion costs, a corporate responsibility, as requested by

the Corporate Administrative Contracting Officer, Mr.

D. Sneed, who approved these changes on 14 January

1986.

3. The minimum dollar capltetization amount effective

1989 fiscal year.

4. Descriptions, allocation base and pools to be charged

for certain functions as described in summary of Dis-

closure Statement changes.

5. Revision to base for allocating domestic and foreign

selling costs.

The cost impact statement for the changes was submitted

December 1985.

HUGHES AIRCRAFT COMPANY

/s/ D. G. IMlegible

for P. L. Hendricks, Jr., Manager

Government Accounting

cc: D. P. Slater (DCAA)

BO BRERA near ee,

App. 49

(Exhibit F of Brunmier’s Declaration)

Exhibit F

[SEAL]

DEFENSE CONTRACT AUDIT AGENCY

LOS ANGELES REGION

EL SEGUNDO RESIDENT OFFICE

HUGHES AIRCRAFT COMPANY

200 N. SEPULVEDA BLVD (C2/C130)

EL SEGUNDO, CA 90245

IN REPLY REFER TO APR 25 1984

4521

/TB/FH/daj

762.440/4A441203

SUBJECT: Report on Adequacy and Compliance Review

of Disclosure Statement Revision

Effective 31 October 1983

Electro-Optical and Data Systems Group

Engineering Divisions

Hughes Aircraft Company

El Segundo, California

Audit Report No. 4521-4A441203

TO: Air Force Plant Representative Office,

AFCMD (AFSC)

Attention: Mr. Allan E. Brunmier, Principal

Administrative Contracting Offi-

cer (PACO)

Hughes Aircraft Company

El Segundo, CA 90245

1. Purpose and Scope.

a. The purpose of our review was to determine

whether the subject revised Disclosure Statement effec-

tive 31 October 1983 adequately describes the cost

App. 50

(Exhibit F of Brunmier’s Declaration)

accounting practices which the contractor proposes to use

in the performance of its Governments contracts. Concur-

rently, we reviewed the revised practices to determine

whether they comply with applicable Cost Accounting

Standards and DAR Section XV.

b. The review was performed in accordance with gen-

erally accepted auditing standards and included such tests of

the contractor’s data and records and such other auditing

procedures we considered necessary in the circumstances.

The requirements contained in Cost Accounting Standards

Board Regulations, Part 351, as implemented by DAR

3-809(c)(5)(i) and (ii) and 3-1205(d)(1), were used as criteria

in ascertaining the adequacy and compliance of the subject

contractor’s revisions.

2. Summary Evaluation.

a. The subject Disclosure Statement revision reflects

the reclassification from indirect to direct of the following

managerial employees:

Job Code Title / Description

21823 Manager Technical Department

11002 Assistant Manager Technical

Department

12428 Associate Manager Technical

Department

11008 Assistant Manager Technical Labo-

ratory

12457 Associate Manager Technical Lab-

oratory

App. 51

(Exhibit F of Brunmier’s Declaration)

The labor costs of these employees will be distributed

to cost objectives based on the labor hours charged to cost

objectives by their subordinates.

This timekeeping practice implemented by EDSG as

of 31 October 1983 has been in use by the major HAC

Groups for some time. The purpose is to provide proper

costing of direct supervision to the benefiting ‘activities.

b. Adequacy. In our option, the subject revision ade-

quately describes the contractor’s cost accounting prac-

tices.

c. Compliance. Our review disclosed no instances of

noncompliance with CAS or DAR Section XV in the cost

accounting practices reflected in the revised Disclosure

Statement.

d. Cost Impact. The contractor’s cost impact state-

ment indicated a net decrease of costs allocable to Gov-

ernment CAS covered contracts of $49,000. Based on our

review of the impact statement and supporting data, we

take no exception to the methodology and the base data

used by the contractor in calculating the cost impact on

CAS covered Government contracts.

e. Recommendation. The contractor advised that the

EDSG’s timekeeping instructions provide, or will pro-

vide, that managers whose labor costs are distributed to

cost objectives on the basis of labor hours charged to cost

objectives by their subordinates shall request to be

removed from the time distribution system whenever

their labor effort is primarily dedicated to a specific con-

tract or a CITE project (e.g. IR&D project leader) for an

extended period of time. Upon the termination of such

App. 52

(Exhibit F of Brunmier’s Declaration)

projects the employee shall request re-instatement in the

time distribution system.

We recommend that EDSG be requested to furnish

AFPRO/DCAA copies of the applicable written

timekeeping practices.

f. This review was limited to ascertaining the ade-

quacy and compliance of the subject revised Disclosure

Statement. Accordingly, we express no opinion as to

whether the revised disclosed practices are proper,

approved or agreed to for pricing proposals, accumulat-

ing cost or reporting contract performance data.

3. Concluding Remark. Additional audit assistance will

be furnished as required.

DEFENSE CONTRACT

AUDIT AGENCY

/s/ Timothy P. Baum

for DUDLEY P. SLATER, Resident

Auditor

Copy furnished

AFPRO CAS Monitor (L. Sabala)

DCAA —- RST - CAS Monitor

~ RAM B

—- CAC Network

App. 53

(Exhibit G of Brunmier’s Declaration)

Exhibit G

DEPARTMENT OF THE AIR FORCE

DET 36, AF CONTRACT MGT DIV. AF PLANT

REPRESENTATIVE OFC (AFSC)

HUGHES AIRCRAFT COMPANY, P.O. BOX 92463

[SEAL] LOS ANGELES, CA 90009

REPLY TO ATTN OF

TMO/Sabala/414-6454 1 May 1984

SUBJECT

Disclosure Statement Amendments - Voluntary

Changes

RECEIVED

Hughes Aircraft Company MAY 3 1984

Attn: Mr. J Stanley Crum

Vice President and Controller

El] Segundo, CA 90245 GOVERNMENT

ACCOUNTING

Pursuant to FAR Part 30, I have reviewed the following

disclosure statement amendments:

Date Effective

Submitted Date

Electro-Optical and Data

Systems Group-Group

Office 12 Nov 823 Jan 83

Electro-Optical and Data

Systems Group-

Engineering Div 12 Nov 82 = 3: Jan 83

Electro-Optical and Data

Systems Group-

Manufacturing Div 16 Nov 82 = 3: Jan 83

App. 54

(Exhibit G of Brunmier’s Declaration)

These disclosure statement amendments contained many

disclosed changes, of which, the major change was the

establishment of a group-wide material overhead pool.

Based on the facts contained in the above amendments, I

have determined that these disclosure statement amend-

ments are adequate and in compliance with Cost

Accounting Standards. This determination does not pre-

vent its revocation, withdrawal or reconsideration if sub-

sequent facts indicate that some aspects of the above

amendments are not in compliance. It is my opinion the

disclosed accounting changes do not result in any net

increased cost to Government CAS covered contracts;

therefore, no contract adjustments are required.

/s/ Allan E Brunmier

ALLAN E BRUNMIER

Principal Administrative

Contracting Officer

Cy to: DCAA/El Segundo

HAC/Mr P L Hendricks, Jr.

HAC/Mr T L Dougherty

HAC/Mr A N Kennedy

HAC/Mr D M Gledhill

App. 55

(Exhibit H of Brunmier’s Declaration)

Exhibit H

DEPARTMENT OF THE AIR FORCE

DET 36, AF CONTRACT MGT DIV. AF PLANT

REPRESENTATIVE OFC (AFSC)

HUGHES AIRCRAFT COMPANY, P.O. BOX 92463

LOS ANGELES, CA 90009

[SEAL] RECEIVED

REPLY TO ATTN OF B aco Nang Beg B

TMO/Sabala/(213)414-6454 Fh oneal

10 May 1984

SUBJECT

Disclosure Statement

Amendment-Electro-

Optical & Data Systems

Group Engineering Divi-

sions

Hughes Aircraft Com-

pany

Attn: Mr. J. Stanley

Crum

Vice President

and Controller

El Segundo, CA 90245

Pursuant to FAR Part 30, I have reviewed the Disclosure

Statement for the Electro-Optical & Data Systems Group

Engineering Divisions as amended 31 October 1983. This

amendment reflects the reclassification of assistant and

associate laboratory and department managers from indi-

rect to direct employees. Based on the facts contained in

App. 56

(Exhibit H of Brunmier’s Declaration)

the above amendment, I have determined that this dis-

closure statement is adequate and in compliance with

Cost Accounting Standards. This determination does not

prevent its revocation, withdrawal or reconsideration if

subsequent facts indicate that some aspects of the amend-

ment are not in compliance. In my opinion the disclosed

changes in the above amendment will have no significant

cost impact on Government CAS covered contracts; there-

for I am not requesting a detailed total cost impact state-

ment. No further action regarding the disclosed changes

is required.

/s/ Allan E Brunmier

ALLAN E. BRUNMIER

Principal Administrative

Contracting Officer

Cy to: DCAA/El Segundo

HAC/Mr. P.L. Hendricks, Jr.

HAC/Mr. T.L. Dougherty

a eer

App. 57

APPENDIX 8

JAMES J. GALLAGHER

FRED D. HEATHER

SUSAN B. MYERS

DANA F. GARDNER

McKENNA & CUNEO

444 South Flower Street, 8th Floor

Los Angeles. California 90071-2909

(213) 688-100U

Attorneys for Defendant,

HUGHES AIRCRAFT COMPANY

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

UNITED STATES OF

AMERICA ex rel.

DON H. HAYCOCK,

Plaintiff,

CASE NO. CV 90-1977

KN (Tx)

DECLARATION OF

ROBERT MEYERS

SUBMITTED IN SUPPORT

OF HUGHES AIRCRAFT

COMPANY’S MOTION

FOR SUMMARY

JUDGMENT FILED

)

VS. )

)

Defendant. ) CONCURRENTLY

)

HUGHES AIRCRAFT

COMPANY,

HEREWITH HUGHES

AIRCRAFT COMPANY,

DATE: January 24, 1993

TIME: 9:30 a.m.

CTRM: Hon. Judge David

V. Kenyon

App. 58

I, Robert Meyers, declare as follows:

1. I am an employee of Hughes Aircraft Company

(“Hughes”), and am currently employed at Hughes’ cor-

porate offices. I have personal knowledge of the facts set

forth in this Declaration and if necessary could testify

competently thereto under oath.

2. I was assigned to Hughes’ Electro-Optical and

Data Systems Group (“EDSG”) in 1979 and, from 1979 to

1986, I was the Division Controller for two different

divisions within EDSG. In this capacity, I was responsible

for managing the finance departments of these divisions.

3. In 1986, 1 was promoted to Assistant Group Con-

troller of EDSG and, in 1989, to EDSG Group Controller.

4. Throughout the late 1970's, most of the EDSG lab

managers who were responsible for supervising

employees who worked on a variety of contracts (i.e.,

those who ultimately ended up on the “direct allocation

pool” system), were classified “indirect” and charged

their time to indirect accounts. The primary tasks per-

formed by these supervisors included troubleshooting,

insuring adequate staffing for supervised contracts, and

assisting subordinates to resolve technical problems.

These supervisors also performed some ancillary admin-

istrative and personnel duties.

5. The time charged by these “indirect superiors” to

indirect accounts was allocated across all the contracts on

which EDSG employees worked. As a result, this time

was allocated to a much broader group of contracts than

was supported by their efforts.

ere wre: Tee te Sere

App. 59

6. It was felt that there was a better causal beneficial

relationship for distribution of the labor time of super-

visors. Thus, in the late 1970s, EDSG management (of

which I was a part) began searching for a way to distrib-

ute the labor hours of lab managers more equitably over

the actual contracts benefited, such that such labor hours

were spread across all of the supervised contracts.

7. In connection with this search, EDSG manage-

ment considered requiring managers to charge their time

directly to the particular contracts they supported

through their supervisory efforts each given day, accord-

ing to the number of hours spent working directly on

those contracts. During this timeframe, however, these

managers were supervising the labor efforts of several

and potentially hundreds of employees, who were work-

ing on potentially several hundred contracts or charge

numbers. A system of direct charging, therefore, would

have required managers to assess on a daily basis which

of several hundred account numbers was associated with

each direct task, as well as whether their tasks were

“direct” or indirect”. Such system would have required a

significant daily data-gathering exercise and manual

allocation of time to the appropriate charge numbers.

This method could also require a supervisor to fill out

tens of timecards weekly. Management believed this sys-

tem would be administratively unfeasible and costly. In

addition, the accuracy of the timecharge allocations by

the individual supervisors would be difficult to audit,

would put an undue burden on a supervisor to maintain

the manual system and would lack controls to prevent

manipulation.

App. 60

8. Because of the problems inherent in this pro-

posed system, EDSG management turned to a concept of

“direct labor pools” set up earlier at other Hughes’ orga-

nizations. Pursuant to this direct pool system, the time of

supervisory employees whose labor benefited a definable

group of contracts designated by the employees super-

vised by such supervisors was charged to a single

account number and then “allocated” across the contracts

on which their subordinates worked. In that way, the

labor hours of these supervisory employees was allocated

only to those contracts benefited by the managers’

administrative/supervisory efforts, rather than to all con-

tracts on which EDSG worked.

9. Following an analysis of the direct allocation pool

systems already implemented elsewhere within Hughes,

EDSG devised a system of direct allocation pools based

on a fusion of these systems. Like the systems in place

elsewhere within Hughes, the direct allocation system

proposed for use at EDSG was designed to fairly appor-

tion the labor time of lab managers and their secretaries

across the totality of the contracts to which employees

supervised by the lab managers charged their time. After

this system was disclosed to and approved by the govern-

ment, it was employed throughout EDSG, including in

the Systems Engineering Lab.

10. No employee within any EDSG division could

charge his or her time to the allocation system unless he

or she had been formally authorized by the division

controller to do so, because the timecharges of any non-

authorized employee who attempted to charge his time to

the allocation system would have been rejected by

Hughes’ computerized timekeeping system. Moreover, no

ik NS. pitino ee

App. 61

employee who was on the allocation system could charge

to any account number other than that used for the

allocation system pool, except to charge holiday, vacation

or sick-leave time.

11. Each EDSG division controller was responsible

for authorizing employees within their division for inclu-

sion in the allocation system and the supervised

employees over which the supervisor’s time would be

allocated. This determination was made based upon a

review of each employee’s job classification, function and

assignments. Pursuant to EDSG practices, authorized lab

managers and their secretaries were eligible to be on the

EDSG allocation system.

12. The allocation system was implemented as fol-

lows:

e Employees were required to submit a

timecard each week, which identified each of

the contracts on which they worked by

account number and by the time spent work-

ing on each contract.

e Hughes’ centralized timekeeping organiza-

tion was responsible for entering the

timecharge and account number data from

all the employees’ timecards into a central-

ized computer.

e The total hours worked by each employee

authorized to charge his or her time through

the allocation system also were input into the

centralized computer via weekly timecards

submitted by those employees. These hours

then were allocated by the computer over the

contracts to which the supervised employees

had charged their time, in proportion to the

App. 62

amount of time charged to each contract by

the supervised employees.

Thus, for example: If Supervised Employee A

charged 40 hours in a week to Contract X, Supervised

Employee B charged 40 hours in the same week to Con-

tract Y, and Supervised Employee C charged 40 hours for

that week to Contract Z, and their supervisor charged 40

hours in the same week to the allocation system, then the

computer system would automatically spread the super-

visor’s time in equal proportions (i.e., 13.33 hours each)

to each of Contracts X, Y and Z.

Because the supervisors on the allocation system

supervised not merely three, but as many as several

hundred employees, the labor hours of the supervisors

were spread across the potentially hundreds of contracts

to which their subordinates charged their time, in the

appropriate percentages.

13. The determination of the appropriate percentage

by which the allocation system employees’ time would be

spread to the contracts was not inade by an individual,

but was made automatically by the computer program

utilized by Hughes’ central timekeeping organization,

and was based upon the actual hours and contracts

charged by the supervised employees.

14. Ona regular basis, Hughes’ central timekeeping

organization generated computer print-outs (known as

“name runs”) which they distributed to the program

managers in charge of the performance of individual

contracts. These name runs indicated the amounts of time

each employee had charged time the contracts during a

given period. The name runs also identified which

App. 63

employees were on the allocation system, and how much

of thei time was being allocated to the contract through

the allocation system. The program managers generally

disclosed the name runs on a periodic basis to the cus-

tomers, including the government. This proviced the cus-

tomers with knowledge as to which employees were

charging to the contract both directly, as well as through

the allocation system.

I declare under penalty of perjury under the laws of

the United States and the State of California that the

foregoing is true and correct.

Executed this 17 day of December, 1993, at Los

Angeles, California.

/s/ Robert Meyers

ROBERT MEYERS

App. 64

APPENDIX 9

JAMES J. GALLAGHER

FRED D. HEATHER

SUSAN B. MYERS

DANA F. GARDNER

McKENNA & CUNEO

444 South Flower Street, 8th Floor

Los Angeles, California 90071-2909

(213) 688-1000

Attorneys for Defendant,

HUGHES AIRCRAFT COMPANY

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

UNITED STATES OF )

AMERICA ex rel. DON H)

HAYCOCK, )

Plaintiff,

Vs.

HUGHES AIRCRAFT

COMPANY,

Defendant.

)

CASE NO. CV 90-1977

KN (Tx)

DECLARATION OF

DUDLEY P. SLATER

SUBMITTED IN SUPPORT

OF HUGHES AIRCRAFT

COMPANY’S MOTION

FOR SUMMARY

JUDGMENT FILED

CONCURRENTLY

HEREWITH

DATE: January 24, 1993

TIME: 9:30 a.m.

CTRM: Hon. David V.

Kenyon

App. 65

I, Dudley P. Slater, declare as follows:

1. I am a retired government employee, having

served from 1966 to 1988 with the Defense Contract Audit

Agency (“DCAA”), the government agency with primary

responsibility for conducting audits of bid proposals and

requests for payments submitted by government defense

contractors. I have personal knowledge of the following,

and if necessary could testify competently thereto.

2. From August 1983 until 1988, I was assigned to

the DCAA office at Hughes Aircraft Company, El

Segundo (“Hughes”) as the Resident Auditor, with cogni-

zance over all audit functions. From 1983 to 1985, I had

responsibility over the following Hughes’ business orga-

nizations/segn ents: Electro-Optical and Data Systems

Group (“EDSG”), Radar Systems Group (“RSG”), unclas-

sified Space & Communications Group, and Corporate.

Concurrently with my job functions as Resident Auditor,

I was the Contract Audit Coordinator, with responsibility

for all audit functions involving more than one segment

of Hughes. In about the spring of 1985, the DCAA/El

Segundo office was reorganized and another auditor took

over the responsibility for EDSG and for the Unclassified

Space & Communications Group. From that juncture until

my retirement in 1988, I retained cognizance over Hughes

RSG and Corporate.

3. Pursuant to the Cost Accounting Standards

(“CAS”), prior to the first time a contractor submits a bid

to work on a government contract, the contractor must

submit to the DCAA and the Air Force Plant Representa-

tive Office (“AFPRO”) a Cost Accounting Standards Dis-

closure Statement (“Disclosure Statement”), which details

App. 66

the accounting practices utilized by the contractor. Dis-

closure to the government of the coritractor’s accounting

practices made in the CAS Disclosure Statement is made

at the level of the “business unit” that contracts to per-

form the effort requested by the government; a more

specific disclosure with respect to each and every sub-

organization under that “business unit” is not required,

so long as the accounting practices of such sub-organiza-

tions are adequately described in the CAS Disclosure

Statements.

4. After initial submission of a Disclosure Statement

each time the contractor changes an accounting practice,

it is required to submit to the DCAA and AFPRO an

amended Disclosure Statement at least 60 days before the

effective date of the proposed change. Thereafter, DCAA

and AFPRO study the change, and either approve or

reject it. Once the amended CAS Disclosure Statement is

timely submitted to the government, the proposed

change may be effected even before the contractor

receives official approval for the change.

5. Among my responsibilities as DCAA Resident

Auditor was to audit and review CAS Disclosure State-

ments submitted by the Hughes organizations over which

I had cognizance, including EDSG. In reviewing those

CAS Disclosure Statements, my office analyzed whether

the practices described in the Disclosure Statements ade-

quately described Hughes’ actual accounting practices,

and whether they were compliant with the Cost Account-

ing Standards. In conducting this review, my office evalu-

ated the actual accounting practices in use by the

business units within EDSG to determine whether such

ee oe

at a

App. 67

accounting practices were adequately disclosed in

Hughes’ CAS Disclosure Statements.

6. In connection with my review of the Hughes’

EDSG’s CAS Disclosure Statements, I recall several dis-

cussions with the then-Assistant Group Controller of the

EDSG, Al Kennedy, about the implementation of direct

allocation pools throughout EDSG. During these discus-

sions with Mr. Kennedy and other Hughes’ personnel

about this allocation system, the applicability of such a

system to several “labs” organized within EDSG, whose

employees worked on numerous contracts, at any given

time, was discussed specifically. The allocation system at

issue during these discussions involved the charging of

time of lab managers and their secretaries into a direct

pool, and then allocating this time over the cost objec-

tives/contracts to which the lab employees being super-

vised by those lab managers charged their direct labor

time.

7. In connection with my own analysis of the EDSG

allocation system, I knew gerierally the functions of the

EDSG lab managers and secretaries who were proposed

to be placed on the allocation system. Based upon my

knowledge of how the organizations within EDSG func-

tioned, I understood that, while the bulk of the labor

efforts of the lab managers and their support personnel

specifically benefited identifiable contracts, (i.e., direct

labor functions), a small portion of the labor efforts of

those individuals was devoted to generic administrative

and supervisory tasks not specifically related to any con-

tract. In my discussions with Hughes’ personnel about

the EDSG allocation system, I also was aware of the fact

that because there is a grey area in distinguishing among

App. 68

functions that are clearly identifiable as “direct” labor,

and those clearly identifiable as “indirect” (based on the

fact that the FAR definitions of direct costs —- which

include labor costs - and indirect costs —- which include

labor costs - are so broad), the lab managers and their

staffs and secretaries, prior to the implementation of the

allocation system, were having to make individual judg-

ment calls as to whether each particular function they

performed should be charged as a direct cost to a specific

contract (or contracts), or as an indirect cost to an indirect

account (which would then spread that employee’s time

over all the contracts being performed at that time by

Hughes).

Because individual judgments were being made by

different individuals, the distribution of those employees’

timecharges was not necessarily consistent.

8. As I understood it, the rationale behind the

implementation of the allocation system for EDSG was to

eliminate the problems inherent in the system of relying

on the individual lab managers and their support staffs to

make their own judgment calls about how their time

should be charged and, instead, to have all of the labor

time of those employees charged to an allocation pool. In

that manner, all of the timecharges of the manager/secre-

taries on the allocation system would be consistently

spread to the cost objectives/contracts that were in the

base of charges made by the employees being supervised

by that lab manager, which is precisely what is required

by the Cost Accounting Standards.

9. In connection with the discussions with Hughes

about the EDSG allocation system, I reviewed specific

App. 69

written finance practices prepared by Hughes which

detailed the implementation of that system, which was a

group-wide system that did not differentiate between the

various sub-organizations and “labs” which utilized that

system.

10. Also in connection with my review of EDSG’s

allocation system, my office analyzed the impact of hav-

ing various levels of lab managers, assistant lab managers

and their secretaries across EDSG charge their time into a

pool which then spread the time charges of those

employees to direct accounts based on the timecharges

made to such accounts by the employees who were

supervised by the lab managers and who were working

on specific contract assignments associated with those

account numbers.

11. After analyzing the allocation system that was

disclosed in Hughes’ EDSG CAS Disclosure Statements,

my office determined that the allocation system increased

the consistency and accuracy of timecharging of the lab

managers and their staffs and, based upon that deter-

mination, our office (as well as the AFPRO) concluded

that the allocation system by disclosed in EDSG’s, CAS

Disclosure Statements complied with the Cost Account-

ing Standards.

12. Based on these findings, I made a formal recom-

mendation to Allen Brunmier, the Principal Administra-

tive Contracting Officer, that the direct allocation pool

system be approved.

I declare under penalty of perjury under the laws of

the United States and the State of California that the

foregoing is true and correct.

App. 70

Executed this 16 of December, 1993, at Los Angeles,

California.

/s/ Dudley P. Slater

DUDLEY P. SLATER

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.