War Dance: Will SEC Go Light on DOD Contractors?

The increasing importance of the military supply chain has some wondering if defense contractors will get an easier ride from the Securities and Exchange Commission.

It’s been a long time — 18 years, to be exact — since the CFO at a high-profile defense contractor resigned because of a dog. But Peter Stockton remembers it like it was yesterday.

In the spring of 1985, Stockton, then chief investigator for the House Energy Commerce Committee’s subcommittee on oversight and investigation, was in the middle of a $2 billion fraud case against General Dynamics for cost overruns on the 688 attack submarine. The evidence was mounting: Stockton says audiotapes had the company’s CEO and chairman talking about stock manipulation and “how he was going to screw the Navy.” The Securities and Exchange Commission also subpoenaed 45 boxes’ worth of records from General Dynamics.

But it was the subcommittee’s subpoena of one overhead claims voucher that started a firestorm of controversy and ultimately forced out the company’s CFO and CEO. The voucher showed that a vice president at General Dynamics had boarded his dog at a kennel when the executive flew off to a board meeting — and then charged the expense to the U.S. government. Recalls Stockton: “There was just an outcry over that [overhead abuse] issue.”

These days, with U.S. troops slugging it out in Iraq, there’s scant attention given to the accounting practices of DOD contractors. In fact, the only question being asked of munitions makers right now is whether their products work as advertised.

Even then, the U.S. government doesn’t appear overly eager to shine a light on black-box projects. In late February, for example, a judge tossed out a seven-year-old suit against TRW alleging that the defense contractor falsified 1996 test results of its antimissile defense system. The reason for the dismissal? Reportedly, government attorneys argued that documents requested by TRW for its defense could jeopardize national security.

The veil of secrecy that shrouds many black-box projects appears to extend to the accounting for some of those projects as well. A number of government agencies oversee the bookkeeping on defense projects. But in an audit of spending for fiscal year 2000, the Pentagon’s Inspector General’s Office found $1.1 trillion in bookkeeping entries that could not be tracked or justified.

Moreover, it’s nearly impossible to determine how much information defense oversight agencies share with the Securities and Exchange Commission, the regulatory body charged with vouchsafing the accounting of publicly traded companies. And given the heightened role of defense contractors in President Bush’s war on terrorism — and the growing importance of the military-supply chain in the ongoing struggle in Iraq — some critics wonder if the SEC would have the temerity to launch a rear-guard assault on a Department of Defense contractor.

Dina Rasor is one of those asking that question. Rasor, head of the military reform project of the National Whistleblower Center, doubts that the SEC will investigate DOD contractors while shots are being fired in the Middle East. “Right now,” she says, “it’s probably hard for the SEC to go after defense contactors because we’re on a war footing.”

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