(a) The New York office of the Indiana corporation is regarded by Dougherty's employees as the office of the Liberian corporation, and as the "Cambodian project office." (b) The only bank account in the name of the Liberian corporation is at the State Bank of Albany, New York, but Baumann was instructed by Dougherty in preparing a balance sheet for the Liberian corporation to include the assets and liabilities of the New York office, including a bank account maintained at the Chemical Corn Exchange Bank in the name of the Indiana corporation. 3. Baumann was informed by Dougherty, and states it as general knowledge and belief in the Dougherty offices, that the Liberian corporation has a contract with Cambodia, although he is aware that ICA deals with the Indiana corporation as the holder of the contract. 4. Transfers of equipment among the several Dougherty companies were always made at book value, without either gain or loss recognized. 5. At the time of the sale of used equipment to Cambodia, the Indiana corporation owned no equipment. 6. The reference in the corporate records to "10 percent commission," discovered by GAO accountants, was made by Baumann, who assumed "commission" was a proper description; but his conclusion was based upon notations made by Doughtery on various checks marking them as "part of 10 percent." W. H. McPheters 1. Witmac Corp. is owned 50 percent by McPheters, and 50 percent by his wife. 2. Framak Corp. is owned 50 percent by McPheters wife and 50 percent by the daughter of A. F. Axelrod. 3. Witmac Corp. paid $5,486.15 to Miss Martha McPheters (aunt of McPheters), under a contract providing she would be paid for her services in introducing Witmac to Dougherty and urging Dougherty to retain the services of Witmac in selling his used equipment. McPheters testified that in fact her sole services in this connection consisted in showing him an advertisement run in a trade publication by one of the Dougherty firms. 4. May 10, 1956, Witmac was employed by the sole proprietorship under contract as exclusive selling agent for 6 months for a lot of used equipment owned by Dougherty, including the equipment later sold to Cambodia. This contract provided a commission of 121⁄2 percent if sale made by Witmac, and 71⁄2 percent if sale made by Dougherty. This contract authorized Witmac to sell at prices not less than 60 percent of current factory list prices for corresponding new equipment. 5. May 17, 1956, Witmac employed Agencia Industrial C. por A. (a Dominican corporation) under contract as exclusive subagent for the Caribbean area and South America, except Cuba. Agencia was to bear its own expenses, and Witmac (regardless of who actually sold the equipment) was to pay Agencia 50 percent of any moneys received from Dougherty after deducting expenses and other commissions. Under this contract, on advice of his attorney, McPheters paid $32,000 to Agencia after he received a commission from Dougherty. 6. McPheters invoiced Dougherty (invoice being addressed both to sole proprietorship and Liberian corporation, at Dougherty's suggestion) in the amount of $69,458.46, being 71⁄2 percent of the price at which the used equipment was sold to Cambodia. The invoice recites, as the basis for payment, "services for advising and directing rebuilding equipment to condition to sell and making attempts and offers to sell." McPheters testified, under interrogation, that he had not in fact had anything at all to do with rebuilding or refurbishing of equipment, that the invoice was to this extent false, and that he did not remember why he had phrased it in this way. 7. The invoice directs that payment be made in three checks, drawn as follows (payment was so made): Agencia Industrial, C. por A.. $32, 000 21, 000 16, 458 8. The corporate minutes of the Witmac Corp. also refer to the efforts of McPheters in "helping Dougherty recondition the equipment"; McPheters testified that this was also a false statement, but disclaimed responsibility for what appeared in the minutes, although he is president of the corporation and presided at the meeting at which this statement was made, allegedly by him. 9. McPheters made a verbal agreement with A. F. Axelrod (who was co-owner with him of Framak), that, in consideration of Axelrod's making efforts to sell Dougherty's equipment, Framak and Witmac would share equally any profits that might accrue to Witmac. 10. McPheters testified that the check for $3,152.82, received from Dougherty, and identified by Dougherty as "part of 10 percent," had nothing to do with the sale of the equipment, but was "paid to me personally regarding some services that I was doing for Mr. Dougherty in attempting to gain a contract for his company in Cuba." The invoice for this payment lists a "consulting fee" of $2,500, and "expenses of" of $652.82; McPheters said he could not itemize the latter. 11. McPheters testified that he carried the $20,000 check from Dougherty to Axelrod merely as a convenience, that he had nothing to do with getting Dougherty to issue it, and that he did not know why it was paid. 12. Examination of the documentary evidence indicates two striking coincidences, not entirely consistent with the testimony of McPheters: (a) The chronology of Dougherty's checkbook indicates that he drew the Framak and Witmac checks (admittedly commissions), the Axelrod check and the McPheters check, all on October 27, 1956, and the Agencia check a few days later, on November 2, 1956. (b) When the Axelrod $20,000 is added to the McPheters $3,152.82 (a figure allegedly arrived at by adding a negotiated fee to an actual expenses figure of $652.82), the resulting figure is exactly 22 percent of the amount received by Dougherty for his used equipment in the sale to Cambodiaexact to the penny. Martha M. McPheters 1. Confirmed that she signed a contract with the Witmac Corp. and received payment thereunder of $5,486.15. 2. Confirmed that she had rendered no services under the contract other than showing her nephew, W. H. McPheters, an advertisement by Dougherty in an engineering magazine (there was no showing that this ad referred in any way to equipment sales). 3. Admitted, after considerable questioning, that she had first met Mr. A. L. Dougherty this date, in the committee hearing room, and that she had never corresponded with him or talked to him on the telephone. Abraham F. Axelrod 1. Owns 70 percent of a corporation, A. F. Axelrod Co., in which his wife and 2 daughters each own 10 percent. 2. A. F. Axelrod Co., invoiced Dougherty (sole proprietorship and Liberian corporation both, as McPheters had done) for $20,000, and received payment. Invoice was dated October 29, 1956, 2 days after payment was made; Axelrod said no invoice was requested until after he had received the check. The invoice recites the following basis for payment: "For services for planning, advising and devising methods of and arrangements for credit to facilitate payments for the procurement and shipment of equipment under A. L. Dougherty contracts." 3. Under questioning, Axelrod described these services as comprising (a) introducing Dougherty at the Chemical Corn Exchange Bank, where Dougherty obtained credit, and (b) numerous small services, like filling out forms and "following up." These latter services seem very like what is generally called expediting, for which Axelrod had a separate contract with Dougherty, under which he was paid some $17,000. 4. Axelrod states the $20,000 does not represent commission on the sale of the used equipment. He states that the only commission on the sale he received was his share of the profits of the Framak corporation. 5. Axelrod had submitted a bid to ICA on a contract to procure the equipment for the Cambodia highway. His bid was low, and he thought he was going to get the contract, until ICA decided that the construction contractor (Dougherty) should do his own procurement of equipment. When ICA told Axelrod that he was not going to get the contract, Hockenberry of ICA told him that ICA would recommend to the construction contractor that he give Axelrod the job of "buying and expediting" their equipment. Apparently both the expediting contract and what Axelrod refers to as the "credit services" agreement grew out of this arrangement. A. Leonard Dougherty 1. Dougherty was present during all of the foregoing testimony. He was asked if he found anything incorrect in the testimony, and he replied that he had not. 2. Dougherty testified that ICA had not known, so far as he was aware, of the payment of $90,000 plus in commissions. 3. Dougherty testified, when asked the basis for the $20,000 payment to Axelrod, "Axelrod did about what he testified. He introduced me to the Chemical Corn Exchange Bank." 4. Dougherty testified that he had mentioned the figure of 10 percent during the various conversations he had with McPheters and Axelrod, and that this. represented the dollar limit set in his own mind as to what he was going to pay for these several services. 5. When asked what the purpose was in setting up the Liberian corporation and handling the equipment sale so that the proceeds accrued to that corporation, Dougherty replied: "To end up in the 25-percent long-term capital gain tax." 6. Dougherty also advised that in fact the Cambodian contract has been assigned by the Indiana corporation to the Liberian corporation without the knowledge of ICA or the Royal Government of Cambodia. There are contract provisions requiring advance written approval for assignment. Mr. HARDY. It is after 12 o'clock. The House is in session. I think we are going to have to adjourn. Now, there is one point at which I think we need to add to the summary of the testimony, at least insofar as Mr. Dougherty is concerned. He did take one exception to the testimony that had been presented earlier, which was not touched on in this summary of testimony, and it had to do with the availability of new equipment in which Mr. Dougherty did disagree with testimony which had been presented earlier. The House is in session. The committee will stand adjourned to reconvene in this room at 2 o'clock. (Whereupon, at 12:09 p. m., the hearing was recessed, to reconvene at 2 p. m.) AFTERNOON SESSION Mr. HARDY. The subcommittee will come to order. Mr. Graham. (Whereupon, Mr. Donald H. Graham was duly sworn by Mr. Hardy.) TESTIMONY OF DONALD H. GRAHAM, VICE PRESIDENT, MICHAEL BAKER, JR., INC. Mr. REDDAN. Please give the reporter your full name and address, please. Mr. GRAHAM. Donald H. Graham, 733 Sixth Street, Beaver, Pa. Mr. GRAHAM. Michael Baker, Jr., Inc. Mr. REDDAN. In what capacity, sir? Mr. GRAHAM. Vice president in charge of our overseas division. Mr. GRAHAM. Rochester, Pa. Mr. REDDAN. And you are represented here by counsel today? Mr. HARDY. Mr. Graham, have you had made available to you a copy of the subcommittee rules? If you have not, let's give him a copy now. Mr. REDDAN. Will you give the reporter Mr. Ray's address, please? Mr. RAY. 640 Fourth Street, Beaver, Pa. Mr. REDDAN. Now, Mr. Graham, I show you a Thermofax copy of a letter dated August 31, 1956, and ask you Mr. HARDY. Let me interrupt a minute. Mr. Graham, I want to hand you a copy of the House rules and the rules of the Government Operations Committee as they pertain to the operation of this subcommittee, just for your reference, and maybe Mr. Ray would want to familiarize himself with them, if he has not already done it. All right, Mr. Reddan. Go ahead. Mr. REDDAN. Did you receive the original of that, or have you seen the original of that letter? Mr. GRAHAM. Yes. Mr. REDDAN. And what is that letter? Mr. GRAHAM. This is a letter from ICA asking us to inspect a certain list of used equipment owned by A. L. Dougherty Corp., which they were considering purchasing for the Cambodian highway. Mr. REDDAN. Mr. Chairman, may we receive in the record this letter as exhibit No. 23, a letter of August 31, 1956, to Michael Baker? Mr. HARDY. Without objection, so ordered. (The document referred to was introduced into the record as exhibit 23, and follows:) EXHIBIT 23-LETTER (AIRMAIL SPECIAL) FROM H. H. DREANY, CHIEF, INDUSTRIAL PROCUREMENT DIVISION, INTERNATIONAL COOPERATIONS ADMINISTRATION, TO MICHAEL BAKER, JR., INC., AUGUST 31, 1956 MICHAEL BAKER, JR. INC., Baker Building, Rochester, Pa. AUGUST 31, 1956. GENTLEMEN: This is to authorize you, in accordance with the terms of your contract with the Government of Cambodia, to inspect certain rehabilitated and new equipment which is being considered for purchase and use on the Phom Penh Cambodia Highway. In conversation with Messrs. Bonner and Hockenberry on August 29th you affirmed the statement that your company considers this work as part of your responsibilities under the contract and that no additional fee is to be paid for these services. Of course, salaries, transportation and subsistence costs will be defrayed as provided for in the contract. We have recently concluded a Supplemental Letter of Agreement with A. L. Dougherty Overseas, Inc., which we hope will permit them to take most of the necessary initial steps to start full-scale operations some time during the latter part of October. These steps provide among other things for delivery of practically all of the remaining essential construction equipment and the sending of 30 men to Cambodia not later than September 20, 1956, to direct the construction of camp facilities, to develop methods of handling and servicing the equipment on order, and to perform certain clearing operations. Under the first Letter Agreement dated July 6, 1956, as you know, they were authorized to purchase the long lead items of construction equipment. This equipment is to be shipped out of New York some time early in September. In obtaining proposals from the machinery manufacturers, they have determined that practically all of the equipment required for full-scale operation can be obtained in time, except for certain essential items which unfortunately make up the hard core of the heavy earth-moving machinery. They have called this fact to our attention and after considerable discussion with them, we have determined that our only recourse is to investigate the equipment available in the yards of the contractor, A. L. Dougherty Company. The equipment we have in mind is as follows: Rebuilt and Guaranteed Equipment 15 Ea. 13-17 cu. yd. Bottom Dump Euclid Earth Movers 9 Ea. 18-23 cu. yd. Euclid Pneumatic Tired Earth Moving Scrapers 4 Ea. No. 12 Caterpillar Motor Graders 10 Ea. D-18 Caterpillar Tractors with Dozers New Equipment 2 Ea. 21⁄2 cu. yd. 80-D Northwest Shovels Mr. A. L. Dougherty states that present bids from manufacturers or suppliers on the above equipment call for delivery in mid-1957, which is entirely too late to be of any use to this year's construction program in Cambodia. The contractor is offering the Euclid bottom dumps, the Euclid scrapers, and the No. 12 meter graders at 65 percent of present list price and at 70 percent of present list price for the D-6 tractors. In the case of the new Northwest shovels, they are asking for current list or replacement cost, whichever is less, since they are new items of equipment. In the case of the used equipment, contractor offers a new equipment guarantee of 60 days against defective workmanship; and in case of latent defects in engines, transmissions, or differentials, contractor will make repairs without cost to the Government. They also propose to provide two spare engines, two spare transmissions, and rebulding kits for the differentials at no cost to the Government during the guarantee period, but expect that what equipment has not been used at the end of the guarantee period will be purchased by the Government at 75 percent of factory list price. In view of the fact that such satisfactory progress is being made in contract negotiations so we can possibly expect full-scale construction by the end of October and, since the above-mentioned equipment is unobtainable until after the end of the construction season in 1957, we are of the opinion that we should purchase this available equipment for the Phnom Penh job, provided that (1) you are satisfied that the equipment is in satisfactory operating condition and that it represents the kind of equipment essential to the construction operation; and (2) that the offering price is fair and reasonable at standard market value. Some of this equipment is located in Chicago and the remainder in Albany, New York. By calling A. L. Dougherty at 420 Lexington Avenue, New York, New York. (Murray Hill 4-5317), they will be only too willing to make all the arrangements for you to visit their yards. We hope you can arrange to make the inspection at the earliest possible time, because if the equipment is found satisfactory, we will move it out on one of the first ships traveling to Cambodia. Please submit your report as soon as possible. Sincerely yours, H. H. DREANY, Chief, Industrial Procurement Division. Mr. REDDAN. Mr. Graham, this letter listed certain equipment which you were to inspect at Albany and at Mr. GRAHAM. Chicago. Mr. REDDAN. Hammond, Ind.; is that right, sir? Mr. GRAHAM. Well, I do not know that it was Hammond, but Chicago, for all intents and purposes. Mr. REDDAN. Yes. And the letter lists the equipment by types, and I read at the bottom of page 1: Rebuilt and guaranteed equipment: 15 each, 13-17 cubic yard bottom dump Euclid earth movers; 9 each, 18-23 cubic yard Euclid pneumatic tired earthmoving scrapers; 4 each, No. 12 Caterpillar motor graders; 10 each, D-8 Caterpillar tractors with dozers. 24700-58-pt. 1-17 |