San Diego Union Tribune

February 11, 2005

Lawsuit says SAIC inflated contracts
Details emerging in three-year case

By Joe Cantlupe

WASHINGTON – Years after San Diego-based SAIC won an environmental cleanup contract at San Antonio's Kelly Air Force Base, Michael D. Woodlee thought something was amiss.

Woodlee, who was SAIC's project manager on the job, alleges that his company was earning far more profit on the $24 million effort than what was spelled out in its fixed-price contract. Instead of making a 9.5 percent profit as set forth in one order, for example, Woodlee figured the profit at 40 percent.

After SAIC's ethics committee allegedly ignored his complaints, Woodlee filed a federal whistle-blower lawsuit against the company in Texas three years ago. His allegations were filed in secret, as required under the False Claims Act.

But as details of the case emerged in recent weeks, the defense contractor also known as Science Applications International Corporation is dealing with more serious ramifications of Woodlee's complaint.

The Air Force took what could be the most dramatic step by issuing an unusual warning about SAIC to its contracting officials around the world. The Dec. 20 alert calls on Air Force negotiators to demand more information about SAIC's pricing, risks and labor in its bids on fixed-price contracts.

The warning followed a decision by the Justice Department to take over Woodlee's lawsuit.

In the suit, federal prosecutors allege that SAIC reaped an average profit of 27 percent for work done at the Kelly Air Force site, when the negotiated profit on eight separate projects ranged from 8 percent to 10 percent.

SAIC has responded to the government's double whammy with a spirited defense.

In a letter to the Air Force Office of General Counsel, SAIC senior vice president Douglas E. Scott said: "The allegations in the complaint are nothing more than unsubstantiated allegations, which SAIC believes to be factually incorrect and legally unfounded."

SAIC officials have denied any wrongdoing by the company, saying it properly uses "quantitative risk management" to determine possible cost overruns. Scott described the Justice Department lawsuit as "clearly erroneous."

But last week, William Wayne Justice, a senior U.S. district judge in San Antonio, rejected SAIC's request to dismiss the lawsuit.

SAIC also has asked the Air Force to withdraw its alert and argues: "By presenting such assertions to our Air Force customers in an inaccurate and conclusory fashion, the alert effectively 'convicts' SAIC without the benefit of a fair hearing and unjustifiably impairs our reputation and business interests."

The company, which reported net income of $351 million on total revenue of $6.7 billion in fiscal 2004, has $513 million in contracts with the Air Force.

John W. Polk, director of fraud remedies in the Air Force Office of the General Counsel, wrote in the alert that SAIC failed to "disclose full and accurate cost or pricing data."

In an interview, SAIC spokesman Jared Adams countered that, "The alert mischaracterizes the facts, issues and status of the case and unfairly impugns SAIC's ethics."

The government's lawsuit against SAIC contends that the company violated the Truth in Negotiations Act and the False Claims Act. The laws require government contractors to provide accurate pricing information to their federal clients.

Aside from the potential monetary damages, a violation could affect SAIC's ability to win future business with the Air Force or other government agencies, said Patrick Burns of Taxpayers Against Fraud, a group based in Washington. As a result, Burns said, government contractors across the country are watching the suit against SAIC closely.

"What's being alleged is padding contracts," Burns said. "SAIC can call it whatever it wants. A lot of people are going to be looking at this."

Woodlee alleged in his lawsuit that he had "direct and independent knowledge" of fraudulent practices while employed as a senior project geologist and project manager from 1994 to 2001.

"SAIC devised and implemented a scheme to fraudulently inflate its profits on contracts with the federal government in the Western District of Texas," Woodlee says in the lawsuit, which he filed in 2002.

Justice Department officials say in their lawsuit that the company "knowingly misrepresented and failed to disclose accurate, complete and current cost and pricing data and the truth about its expected costs and profits."

According to the lawsuit, the government "believes that SAIC is continuing to submit defective cost or pricing data in support of its pricing proposals." The suit alleges that the company inflated labor, subcontractor, material and timekeeping costs.

Neither Woodlee's attorneys nor the Justice Department would comment on the allegations.

But SAIC's Scott wrote in a letter to the Air Force's inspector general that the company is committed to complying with all its legal obligations.

"As someone well versed in the law of defective pricing, we believe you will find the Department of Justice's assertions to be, at the least, quite novel," Scott wrote to the Air Force. "We believe that an objective review of the facts and applicable law will validate our position."
Staff writer Bruce V. Bigelow contributed to this report.

»Next Story»