# Petition for Writ of Certiorari — Haycock, In re: (No. 97-200)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1997

## Text

Supreme Court, U.S.
FILED

97.200 JUL 30 1997

No. _oOffiCe OF THE CLERK

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 A Writ Of Mandamus To The United
States Ninth Circuit Appellate Court, And To The
Honorable Procter Hug Jr., The Honorable Andrew J.
Kleinfeld, The Honorable Thomas C. Nelson, And
The Honorable Claudia Wilken; And To The United
States District Court For The Central District Of
California, And To The Honorable Mathew William
Byrne, And The Honorable David V. Kenyon

¢

PETITION FOR A WRIT OF MANDAMUS

- =

Law offices of

Don H. Haycocx

Don H. Haycocx

7321 Westlawn Avenue
| 9 1997 Los Angeles, California 90045
Moy | (310) 641-3921

F sc THe CLERK
yeiLE YU eee
¢ san CME COURT, U.S.
SUPREME

.)

Counsel for Petitioner and Relator

— ~ t >
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

Should this court reverse the trial and appellate court
rulings that approve an unlawful labor-charging practice
of Hughes Aircraft Company of which the government
was unaware; to which there is no legal authority; and
which violates mandated Federal Regulations to which
defendant Hughes’ experts agree are exclusive and man-
datory.

Specifically, can Hughes arbitrarily, and without any
government involvement, charge the “indirect labor” of
overhead employees directly to government contracts as
“direct labor” in total disregard of mandated federal Reg-
ulations that require inter alia notice to, and approval by,
the responsible government representatives at Hughes?

Or - must Hughes reallocate overhead labor directly
to government contracts, as “direct labor” in compliance
with these mandated Federal Regulations — as the gov-
ernment representatives then at Hughes have declared;
and as have relator and his expert Peter Elliott declared
and argued. Particularly, when there is no authority
-approving any other practice.

Non-compliance with these federal regulations
imposes a severe cost impact to the government because
the cost of “direct labor” includes the cost of “indirect or
overhead labor.” (see page 8)

Relator repeatedly presented and argued in briefs to
the Honorable David V. Kenyon, the trial judge, that
compliance with mandated Federal Regulations was the
only lawful way overhead labor could be charged directly

ii
QUESTIONS PRESENTED - Continued

to government contracts as direct labor. Particularly, 48
Code of Federal Regulations, Chapter 1 Part 52-230-4,
also known as CAS (Cost Accounting Standard) Clause
52.230-4. (see page 3)

As Relator’s briefs and Excerpts of Records prove,
this CAS Clause, along with others, and their application,
was repeatedly presented and argued to Judge David V.
Kenyon prior to his summary judgment order, and order
awarding attorney fees:

CAS Clauses Relators’ Excerpts of Records (pages)
52-230-4(&5)* 333, 337, 351, 370, 391 and 393
351.60 216

331.60 237m, 237p, 237q, and 237v

401.20 237n

401.40 237n and 237v

418 225

However, Judge Kenyon granted summary judgment
and awarded attorney fees based exclusively on the dec-
larations of the two former government representatives
then at Hughes. They are Allan E. Brunmier, the Principal
contracting Officer, now a Hughes employee; and, Dud-
ley P. Slater, the Resident Auditor, now retired.

In making these rulings, Judge Kenyon misrepre-
sented the declared facts in these declarations; and,
falsely attributed to these declarants facts that they had

(* footnote: CAS Clause 52-230-5 became 52-230-4 in a 1987
revision without any significant change in the relevant provi-
sions.)

ill
QUESTIONS PRESENTED - Continued

not declared. Based on these falsities, Judge Kenyon
approved this unlawful practice and ruled that these man-
datory Federal Regulations were not applicable and Hughes
was not required to reallocate overhead labor in compliance
with them. (see pages App. 5, App. 8 and App. 14) Judge
Kenyon denied both parties requests for oral arguments
on this issue.

Judge Kenyon specifically ruled:

1. That both Brunmier and slater approved this
Hughes labor-charging practice that totally disregarded
mandated Federal Regulations; that failed to in any way
involve the government; and, that only required Hughes
to unilaterally and independently decide that overhead
labor “benefited” the government contracts to which it
was reallocated, as Hughes claimed “Item 2.50” in their
disclosure statement permitted. (see pages 17, App. 5,
App. 8 and App. 14)

THE FACTS: Neither Brunmier or Slater refer to this
practice or indicate that they even knew about it. Neither
acknowledges “Item 2.50” as Judge Kenyon falsely states.
Both declarations very specifically refer to these mandated
Federal Regulations and Brunmier’s declaration very spec-
ifically reveals how they were applied in reallocating the
overhead labor of secretaries and five specific classifica-
tions of technical managers. Proof that Hughes knew how
overhead labor should lawfully be reallocated to direct.
(see page 11)

2. That Brunmier’s and Slater’s approval of the
“direct-labor-allocation system” entitled Hughes to

iv
QUESTIONS PRESENTED - Continued

engage in this unlawful labor-charging reallocation prac-
tice that Judge Kenyon approved and as described in No.
1, above.

THE FACTS: As Slater and Brunmier declare, their
approval of this allocation system only approved an alter-
nate method for reallocating overhead labor to direct
labor provided that this reallocation complies with mandated
Federal Regulations. Their approval of the cost allocation
system is not automatic approval of this unlawful Hughes
labor-charging method as Judge Kenyon falsely attributes
to them. If this were true, there would be no reason for
Brunmier to demonstrate that reallocating overhead labor
was done in compliance with these federal regulations. It
is this practice that their declarations confirm. (see page 11)

3. That Brunmier’s and Slater’s declarations
approved the reallocation to direct labor of specific job
classification of overhead employees, i.e. “supervisors
and other support personnel.”

THE FACTS: This assertion is totally false and a
fabrication as a reading of these declarations will reveal.
(see pages App. 37 and App. 64)

The appellate panel summarily republished Judge
Kenyon’s orders in their “memorandum” in ignorance of
Brunmier’s declaration and relator’s briefs.

The transcript of the oral argument reveals that only
the Honorable Andrew J. Kleinfeld spoke to this issue.
The two other members of the panel, the Honorable

a

QUESTIONS PRESENTED - Continued

Claudia Wilken remained silent throughout oral argu-
ment and the Honorable Thomas C. Nelson only spoke to
what was said during oral argument.

Judge Kleinfeld, and apparently the panel, sum-
marily disposed of this matter by erroneously conclud-
ing, as he did:

“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.” (see page 21)

Neither of the other two judges corrected this false
statement and Judge Kleinfeld would not have made it
had he read Brunmier’s declaration. (see page App. 37)
Brunmier did not approve the labor-charging (accounting)
practice that Judge Kenyon falsely attributed to him, and he
was not hired by the government to “” . . . look over the
accounting . . . ” Most importantly, Brunmier did not
conclude that “item 2.50” put the government on notice
that Hughes would engage in this practice, as this panel
was told by Hughes - and which they tacitly and docilely
accepted. Brunmier’s declaration never addressed “Item
2.50” as a reading of his declaration will prove. (see page
17)

Also had Judge Kleinfeld read relator’s briefs, he
would know Brunmier’s declaration was not disputed. (see
page 23) Rather it confirms relator’s claims.

The panel’s misrepresentation and false attributions
of evidence is presented in the Reasons for Granting the
Writ section on page 24.

vi

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.

Vii

TABLE OF CONTENTS

Page
QUBSIION PRESENTED ....ccsccecesccnsece i
Bee Bo Se re vi
py 8 8 ete yy: rrr Vii
TABLE OF AUTHORITIES. ......c.00cecseees ix
JURISDICTIONAL STATEMENT ............. 1

CONSTITUTIONAL PROVISIONS FEDERAL
STATUTES AND FEDERAL REGULATIONS

UIE os tana sds ence csssetnceeeeas 1
RPRE OMEN SIE GAD. cc eccccvsncestscesens 6
Fi. TERE EEE 650 C5 eh cheese tbeeneceees 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-
a Fi ey 7, ty ye ee 14

D. HUGHES ACKNOWLEDGED NON-
COMPLIANCE WITH THESE FEDERAL
NEE ic kdbbe shun ekah cndeunes 16

E. TRIAL COURT FAILED TO CONSIDER
AND RULE ON THE UNLAWFULNESS
OF HUGHES’ LABOR-CHARGING PRAC-
Pos re ar eer ry rye ee ee 17

Viii

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-

ee I BI oie 800-00 6555 eth hans a8
VII. REASONS FOR GRANTING THE WRIT .....
fj A RG S| ere eT errr er errr
Appendix

Appellate Court Order Rejecting Hearing in Banc
DS eS eer rrr eee ree ne App.
Memorandum (Order) of Appellate Court...... App.
Summary Judgment Order ........2.0ccesceeses App.
Order Awarding Attorneys’ Fees............... App.
Order Denying Motion for Reconsideration..... App.
Deciazation Of Peter Bitlet. ooo c ccs cccsceescees App.
Declaration of Allan E. Brunmier .............. App.
Declaration of Robert Meyers.................. App.

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

20
24
29

aoumN -

14
16
37
57
64

ix
TABLE OF AUTHORITIES

CASES

Labay 0. rigwWes (1957) S52 U.S. 2EF 2. cic ccccccvecees 28
Los Angeles Brush Co. v. James, 272 U.S. 701 (1927) .... 28

Panama Canal Co. v. Grace Line Inc., 356 U.S. 309
REE os cy eee eo ak 25 sale Soe oe ee mn eae A De Ke 28

Plum Tree Inc. v. Stockmen (CA3 1973) 488 F.2d 754. .28, 29
Storage Technology v. U.S. Dist. Court (CA 10 1991)

ee ee ee en ee en ae 29
United States v. Dinerstein (2nd Cir. 1960) 362 F.2d

ts ir heen CP baa ca eas Waly eae MRR AG Eek 8
United States v. Mehrmanesh (1980 CA 9 Ariz.) 652

PRR rad et eee ON Pe ae a 28
United States v. Uber (6th Cir. 1962) 303 F.2d 462..... 8

FEDERAL STATUTES

10 USC 2306 Truth in Negotiations...............64. 2, 6
dh. EE A eR a Ar ee ae a 6
Be es ee Pe Oe oii oe voor cerdctandbadesn es 1
31 USC 3730 Civil Action for False Claims.......... 2, 10

FEDERAL REGULATIONS

4 Code of Federal Regulations,
oe ek | 8 eer eT eT eer eer 5, 12

Part 331.50 Contract Clause............... > ta, 20

Part 351.120 Amendment to Disclosure State-
No cd ak eR ae SEs o ERR ERNE EOS 6, 15

TABLE OF AUTHORITIES - Continued

Page
4 Code of Federal Regulations,

Chapter III, Sub-Chapter G..................... 4, 16
FUE See FN no 5 hie 5e cain 4c i.ye Siinen ness 4, 16
Part 401.40 Fundamental Requirements........ 4, 16
Part 401.50 Techniques for Application........ 5, 16

48 Code of Federal Regulations,

ef Peete SRT Te eee ee Cree e eT Tee Te 6
PO eee EN SID oe toiw Saeed ewee son ees 6
go ee Sa | eee eee Tees eres 6

48 Code of Federal Regulations,
Chapter 1, Part S224... .....5...: 3, 11, bz, 14, 15

CONSTITUTIONAL PROVISIONS

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

1

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. 1651.

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
plus 3 times the amount of damages which the Govern-
ment sustains because of the act of that person...

2
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
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

(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
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.

(c) agrée to appropriate contract and subcontract

amendments...

(d)
(e) Notify the Contracting Officer in writing of any
adjustments required to subcontracts . . .

4
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.

(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)

5

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...

6

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

7

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.

8

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 00316 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.

Diner pee

9

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.

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)

10

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 misrepresentations and false attribu-
tions of facts in Slater’s and Brunmier’s declarations. This
court only considered the government’s approval of the
allocation system and “Item 2.50” and did not address
Hughes’ fraudulent labor-charging in violation of its
“Attendance and Labor Reporting” practice.

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

11

the Hughes unlawful practice. There is absolutely no evi-
dence 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.

12

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. II[, 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

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 to 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

iS

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-
ar as

14

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, .

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 because there is no notice to the government
of Hughes request to charge the labor of specific job

15

codes of overhead employees directly to government con-
tracts.

2. 4CFR, 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. 4CFR, 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 overhead

16

employees in other job classifications was reallocated 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:

“ .. . 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 that 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

ee —————aEEEEeEeEEEe——eEeE——EEE

17

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. The trial court wrongly approved
Hughes’ unlawful practice by concluding “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

18

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

19

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:

20

“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.”

21

MR. GALLAGHER: That’s correct.

This position is further indicated by JUDGE KLEIN-
FELD’S questions revealing his ignorance of the declara-
tions 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. |
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 deter-
mined that the accounting system was in accord with

22

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.

POR RE AN SG mw ree |

23

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-
closure 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 evidence
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 labor-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.

24
REASONS FOR GRANTING THE WRIT

Federal law grants relator, on behalf of the federal
government, the right to appeal federal trial court’s
orders. This right is denied when the rulings of the three
judges on the appellate panel: totally disregards evi-
dence; misrepresent evidence; and, approve conclusions
based on fabricated evidence.

The appellate panel perfunctorily republished the
trial court’s orders in their “memorandum.” This “mem-
orandum” is therefore subject to the same charges of
falsity and misrepresentation as Judge Kenyon’s orders.

Judges Kleinfeld, Nelson and Wilken either did not
read the evidence before them, or chose to disregard it.
Particularly, what Brunmier and Slater actually declared
in their declarations - which is the only cited authority
for all rulings by both courts.

Following are the appellate panel’s rulings and the
undisputed facts that prove the falsities and misrepresenta-
tions of these rulings:

APPELLATE PANEL’S RULING. “ ... nor can we
identify a cost accounting standard which appellee was
required to follow and did not follow.” (see page App. 3)

Undisputed Fact: The declaration of Brunmier,
Slater and relator’s expert, Peter Elliott, all confirm that
the reallocation of overhead labor to direct — must comply
with mandated Federal Regulations. (see page 11)

Undisputed Fact: Brunmier’s and Slater’s decla-
rations do not address, or even imply, that the govern-
ment approved the reallocation of classifications of
overhead employees to direct labor — other than secre-
taries after December 1985 and five “Job Codes” of tech-
nical managers, as a reading of their declarations will
prove. (see pages 37 & 64)

a

25

Undisputed Fact: Contrary to this ruling, in
Hughes’ Excerpts of Records and in all documents
Hughes filed with the trial court, does Hughes claim that
Brunmier’s and Slater’s declarations approved the real-
location to “direct” of any other overhead employees
than “secretaries and managers.” The appellate panel
would also have found this in Relator’s appellate briefs
that reference these documents.

Undisputed Fact: Hughes has repeatedly acknowl-
edged that it reallocates overhead labor directly to govern-
ment contracts in total disregard of government
regulations — because “Item 2.50” is sufficiently broad to
permit this for all overhead labor. (see pages 17 & 57)

Undisputed Fact: Contrary to this ruling, the
declarations of Brunmier and Slater do not grant blanket
approval — or any approval - for Hughes to reallocate
overhead labor to “direct” for all overhead employees
solely by the existence of “Item 2.50” which totally disre-
gards federal regulations. This ruling fabricates what
Brunmier and Slater declared and a reading of their dec-
larations will prove that they don’t even mention or refer
to “Item 2.50”.

Undisputed Fact: Hughes Disclosure Statement
with the government requires that the reallocation of
overhead labor to direct must be by job classification. There
is no authority for Hughes’ charging the government for
direct labor of “individual” overhead employees that are
assigned to the cost allocation system Under “Item 2.50”
as declared by Hughes’ controller Robert Meyers. (see
page 57). The panel would have found this proof in
Relator’s appellate briefs that reference his Excerpts of
Records.

26

APPELLATE PANEL'S RULING. “Whatever may have
been arguable was disclosed to the approved by the
government [Brunmier and Slater].” (see page App. 3)

Undisputed Fact: There is absolutely no evidence,
or any indication that either Brunmier or Slater even
knew of Hughes reallocating overhead labor to direct in
total disregard of the mandated Federal Regulations.
They most certainly did not approve it as a reading of their
declarations will prove. For these courts to assert that
Brunmier and Slater approved Hughes reallocation of
overhead labor under “Item 2.50” is both a gross misrep-
resentation of their declarations and a fabrication of evi-
dence.

APPELLATE PANEL'S RULING. “The district court
was within its discretion in awarding attorney fees, as it
did, for the period after Hughes served the relator decla-
rations of the relevant government officials [Brunmier
and Slater] showing the cost allocation system was
known to, and approved by, the government.” (see page
App. 3)

Undisputed Fact: As Brunmier and Slater
declare, their approval of the “cost allocation system” has
absolutely no relevance to the issue before this court.
Which is, whether Hughes can reallocate overhead labor
in total disregard to mandated Federal Regulations. Their
declarations are proof that before overhead labor is allo-
cated to the “cost allocation system” it must first be reallo-
cated to direct labor in compliance with mandated Federal
Regulations as a reading of their declarations will prove.
(see pages App. 37 & App. 64)

Undisputed Fact: Regarding the “cost allocation
system” relator’s complaint provides: “In 1985 funds
from ... programs SEL .. . contributed “direct labor”

27

were commingled to pay the salaries of . . . administrative
employees engaged exclusively in ‘overhead’ work.” (see
Complaint, par. 11, p. 7) “This resulted in the Govern-
ment being overcharged.” (see Complaint, para. 12, p. 8)
“Management personnel of SEL . . . willfully and know-
ingly directed ‘overhead’ or ‘indirect’ employee . . . to
charge their time to ‘direct labor’ accounts . . . [which]
resulted in . . . fraudulent time-charging claims being
made on the U.S. Government.” (see Complaint, para. 5,
p-3)

These charges have been proven. There is no basis for
the panel to conclude, as did the trial court, that the govern-
ment’s approval of the “cost allocation system” totally defeated
relator’s claims. This is patently absurd.

Undisputed Fact: The declaration of Peter Elliott,
relator’s expert, completely confirms the declarations of
Brunmier and Slater on the relevance of the governments
approval of the “cost allocation system.” (see page App.
16) ;

Undisputed Fact: There is no evidence to contra-
dict the declarations of Brunmier, Slater and Elliott on
this issue and this ruling both misrepresents this evi-
dence and fabricates evidence this is not included in
these declarations.

APPELLATE PANEL'S RULING. ” . . . we conclude
that Haycock presented no evidence of fraud or false
statement. We are unable to identify ... fraudulent
allocation of employees to the direct as opposed to the
indirect categories, . . . or fraudulent accounting prac-
tices.” (see App. 2)

Undisputed Fact: Brunmier’s declaration is proof
that Hughes reallocated secretaries and five “Job Codes”
of technical managers from overhead status to direct — in

28

full compliance with mandated Federal Regulations — and
nothing more. He does not acknowledge any other man-
ner by which overhead labor can be allocated to direct, as
a reading of this declaration will prove.

Undisputed Fact: Hughes reallocated the labor of
overhead employees directly to government contracts
under “Item 2.50” wherein compliance with these regula-
tions was disregarded. Specifically including, as proved
in Relator’s briefs and excerpts of records of print-outs of
the “cost allocation system,” Personnel Administrators,
Business Operation Employees, Non-Technical Managers,
Training Administrator, and secretaries prior to Decem-
ber 1985. (ER page 241)

Undisputed Fact: The government pays more for
direct labor than overhead labor because the cost of over-
head labor is included as part of direct labor. (see page 8)

Undisputed Fact: Hughes reallocated overhead
labor both in compliance with mandated Federal Regula-
tions; and, by disregarding these regulations. The govern-
ment [Brunmier and Slater] only expressed knowledge
about Hughes’ reallocation in compliance with these reg-
ulations, as a reading of their declarations prove.

The Hughes labor reallocation practice under “Item
2.50” and as described by Hughes’ controller Robert
Meyers, is unlawful because: there is no authority for this
practice, there is no compliance with mandated Federal
Regulations; there is no evidence that the government is
aware of this practice; and, this practice results in the
government being overcharged.

Its approval by Judge Kenyon and by the appellate
panel is a rejection of the practice mandated by Federal
Regulations for reallocating overhead labor to direct
labor.

OSE Re eae ee ee, a eee i

29

Mandamus is proper when a lower court’s order is
without any substantiating evidence. Plum Tree Inc. v.
Stockmen (CA 3 1973) 488 F.2d 754. And where the lower
court has made a clear and indisputable mistake. United
States v. Mehrmanesh (1980 CA 9 Ariz.) 652 F.2d 766.
Mandamus was granted where the district judge dis-
played a persistent disregard for the rules of law. (civil
procedure) LaBay v. Howes Leather Co., 352 U.S. 249 (1957).

Ordinarily mandamus will only issue to compel per-
formance of ministerial duties. Panama Canal Co. v. Grace
Line Inc., 356 U.S. 309, 318 (1958). However, where the
abuse of discretion by a lower court is so aggravated, the
court may grant mandamus. Los Angeles Brush Co. v.
James, 272 U.S. 701, 706 (1927). Mandamus may also be
granted where the lower court so abused its discretion as
to constitute usurpation of power. Storage Technology
Corp. v. U.S. Dist. Court (CA 10 1991) 934 F.2d 244.

CONCLUSION

Because Judge Kenyon only considered the declara-
tions of Brunmier and Slater in his orders, which were
summarily republished by the appellate panel, this
request for writ of mandamus was limited to responding
to his, and the appellate panel’s, misrepresentations of
these declarations; and, their fabrication of evidence
attributed to these declarations.

For this reason, a writ of mandamus is the only
available remedy to compel the members of the appellate
panel, Justices Andrew V. Kleinfeld, Thomas G. Nelson
and Claudia Wilken, to account, justify and explain why
their “memorandum” incorporates Judge Kenyon’s mis-
representations and fabrications of Brunmier’s and

30

Slater’s declarations; and, ignores relator’s and Hughes’
appellate briefs.

Although, Relator believes that the conduct of this
panel amounts to a persistent disregard of the rules of
law under LaBay, it was certainly an abuse of discretion
under Panama Canal Co. and the writ should be granted.
Accordingly, Relator requests a writ of mandamus that
orders these Justices, and these courts, to issue a proper
ruling on liability based on an accurate and truthful repre-
sentation and comprehension of all the evidence produced
by both parties. Not to base a ruling on the evidence is an
abuse of discretion under Plum Tree Inc.

Since both parties stipulated to a bifurcated trial and
that their summary judgment motions would be to the
issue of liability only, and this is all that was addressed
by the trial court, the appellate panel’s ruling should be
to this issue only. Relator, on behalf of the government,
should then have the right to prove damages.

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

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, | oe
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

UNITED STATES OF ) No. 94-55620
AMERICA, ex rel., DON H._ ) 94-55826
HAYCOCK, , Dr bee
Plaintiff-Appellant, CV-90-01977-KN

v. ) MEMORANDUM*
HUGHES AIRCRAFT ) (Filed Oct. 6, 1996)
COMPANY,

)

Defendant-Appellee.

—_

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, 1165, (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,

V.

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 betow, granting Defendant’s motion for summary
judgment disposes of this case.

* * x

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

*. 7 *

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. {16, 7, 8, 10, & 11; Brunmier Decl.,
Y13(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.

i i ee i a a a

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 1987 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-
lous, 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) amcd-Federat Rute-of €rvit 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, __ U.S. __, 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.

aaa ieee

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.

me ee ee ee ee ee ee”

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

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. I
can competently testify under oath of the conclusions I
have made herein based upon these facts.

A.

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
€ertified Public Accountants, the American Institute of
Certified Public Accountants, and the National Contract
Management Association.

App. 19

B.
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 1,
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

C.

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
“aliocated 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.”

I;

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’§ cost accounting prac-
tices used in accumulating and reporting actual
costs for a contract shal \be consistent with his
practices used in estimating in pricing the
related proposal.

es

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,

D.

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

E.

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, -eferenced 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.

(c) The disclosure of a cost accounting
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 of 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

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.

F.

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

App. 33

period there had been no disclosed accounting change
related to the secretarial job classifications.

G.

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”

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

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.

H.
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

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
OF HUGHES AIRCRAFT
COMPANY’S MOTION
FOR SUMMARY
JUDGMENT

UNITED STATES OF
AMERICA ex rel. DON
H. HAYCOCK,

)

)

)

Plaintiff,
vs. )
)

)

)

)

)

HUGHES AIRCRAFT
COMPANY,

Defendant.

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

Sn Rae

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
F.

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

App. 43

(Exhibit B1 of Brunmier’s Declaration)
Exhibit B1

Revised
Date 31 October 1983

COST ACCOUNTING CONTINUATION SHEET
STANDARDS BOARD Page 5a of 40 Pages

DISCLOSURE Name of Reporting Unit

STATEMENT rting
REQUIRED BY PUBLIC x seppncating
LAW 91-379
Item Item Description
No.
25.0 Y. Other
Contd.

A direct labor account is maintained to collect
labor chaiges 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
individuas.

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 for 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
cc: 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-VH 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 capitalization 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1163%3A1. Public record. Not legal advice.