Mr. BATES. What was the material they furnished? Mr. HINKEL. Explosives of various kinds. "All types of pyrotechnics, loading of fuses, detonators, percussion elements, identification flares, landing flares, reconnaissance flares, railway signals, airplane starter cartridges, and so forth." The CHAIRMAN. The change of those specifications enabled you to get the business, didn't it? I am asking any one of you gentlemen. Mr. SHIRLEY. We did not. The change of specifications had nothing to do with securing the business. The CHAIRMAN. It didn't? Mr. SHIRLEY. The business in practically every instance has been awarded to us at a lower price, and after we got into production on many of these items, the Navy had developed quite a few of these things at Bellevue you might say in a tailor-made fashion. When we got into production we found that it was not practical to produce it in a production way. Mr. SUTPHIN. It is the usual custom, isn't it, to permit favorites to revise their prices? Mr. SHIRLEY. I don't know about a usual custom to revise the price. Mr. SUTPHIN. Yes. It happens sometimes, doesn't it, to reduce their price? Mr. Olcott, I believe, just testified according to that statement. Mr. SHIRLEY. We are speaking of design, sir. The CHAIRMAN. Go ahead, Mr. Hinkel. Mr. HINKEL. I have a photostatic reproduction of the break-down of expenses for the firm of Shirley, Olcott & Nichols for the years 1938 through the first 6 months of 1942. I ask you, Mr. Olcott, to identify that as being from your records, furnished to the committee. Mr. OLCOTT. Yes, sir; that is correct. Mr. HINKEL. I offer it in evidence. (Photostat of break-down referred to was received in evidence, marked "Exhibit No. 486," and is printed in the appendix of this volume.) The CHAIRMAN. In that break-down, does it show how much money has been spent for entertainment purposes? Mr. HINKEL. No, sir; that is not set down as a separate account. The CHAIRMAN. Read off his expense account. Mr. HINKEL. It is quite a list. I will read the totals. For the year 1938, the total receipts were $46,698. The CHAIRMAN. What year? Mr. HINKEL. Excuse me. For the year 1938, the total receipts were $68,893.62, of which $46,698.57 was profit, and then they received an additional $11,034.55 for commission received from Triumph Fuse & Fireworks Co. So the total was $57,783.36. In 1939 the total receipts were $86,975.17. The total profits were $63,783.47. In 1940 the total receipts were $171,970.04. The total profits were $138,392.50. For the year 1941, the total receipts were $603,493.73, and the total profits were $470,386.04. For the first 6 months of 1942 the total receipts were $764,341.80, and the total profit, $646,701.03. Mr. MOTT. What the chairman asked you about is their entertainment expense. Mr. ĤINKEL. There is no item in there that would show entertainment. Mr. MOTT. Then let me ask the witness, do you have any entertainment? Mr. OLCOTT. No, sir. Everything is in there that we spend. Mr. OLCOTT. Very little, very little. Mr. MOTT. How much? Mr. OLCOTT. I couldn't estimate how much. Mr. MOTT. What did the entertainment consist of? Mr. OLCOTT. The entertainment will consist of taking somebody out to lunch when you are talking business with them and you are talking over a problem and it comes 12:30 and you have an hour or two more to go. Someone will look at the clock, and it is time to go to lunch. "Well, let's go to the Occidental and have some lunch,' or, "Let's go here and have some lunch." Mr. MOTT. Does that include all of your entertainment expenditures? Mr. OLCOTT. That includes all except some very special occasions. Mr. MOTT. What did you do on special occasions? Mr. OLCOTT. I tell you one thing I have in mind that we have had every year, once a year, for years. The American Society of Naval Engineers have an annual meeting and banquet once a year, it was cut out this year on account of the war, at which time they send out invitations to all of the companies in the country that are doing business with the Navy or Coast Guard and invite you to attend this banquet and tell you that tables for 10 are provided and that the plate charge is so much a plate. Many of the companies-all of the large companies in the country that are doing business-will take a table or two tables, and invite guests who may be from the Government and may not be from the Government. Mr. HINKEL. Generally they are procurement officers of the various departments? Mr. OLCOTT. No; I would say they are generally technical people that you work with on these technical problems. Mr. MOTT. And they pay for their own dinner? Mr. OLCOTT. No. Mr. MOTT. You pay for it? Mr. OLCOTT. Yes, sir. Mr. MOTT. Do you charge the expense of that-wait a minute. Mr. OLCOTT. That dinner will amount to probably the largest item of expense that we have that you could call entertainment. That happens once a year. The CHAIRMAN. You charge that against your income tax for operation of your business? Mr. ÖLCOTT. Yes, sir. The CHAIRMAN. That is right. Mr. OLCOTT. It is considered as a business affair. It is done openly. Mr. MOTT. You don't charge that to your clients. You take it out of your profits, don't you? 70533-42-pt. 7- -3 Mr. OLCOTT. We charge no expenses of any kind to our clients. We maintain our own expenses-our travel, which is our biggest item of expense. Mr. MOTT. What would you say that annual dinner costs you? Mr. OLCOTT. Oh, a couple of hundred dollars. Mr. BATES. That is customary with many engineering organizations. Mr. OLCOTT. Yes, sir. Mr. BATES. I have in mind, in particular, highway organizations. Mr. OLCOTT. It is customary. The CHAIRMAN. It seems to me these large fees would enable you to pay for it yourself. You feel that you are trying to push your clients a little bit too far if you ask them to pay for those things. Mr. OLCOTT. Since we have been in business, we have never asked our clients to pay for a telephone call The CHAIRMAN (interposing). That is right. Mr. OLCOTT. A telegram, or one penny of our expenses, even though we weren't making much money. The CHAIRMAN. Of course, it should be, because look at what fees you get. For instance, do you know what you are making? You are making $1,150 a day, each one of you gentlemen, from the first day of January down to the 30th day of June, when you made that check. You are sitting here in Washington City and making $1,150 a day-you 3 gentlemen-and the boys were dying at Bataan, Corregidor, on the Lerington and the Houston, at a dollar a day. I am going to see if I can't break this practice up. There is no justification for it. You people have built up a clientele here and created the impression that you have got to come to you people who have pull-and you have got pull. The very background that you have got has enabled you to get some 60 clients here and to sell their products and change the specifications to meet the demands that your companies could produce. We are going to have a bill in here just as soon as this hearing is over and pass a law, if we can, to stop this practice. Mr. BATES. Mr. Chairman, I understood Mr. Olcott to say a very important thing, that when these specifications are written, they are written so carelessly that you turn around to your organization and revise them so that the Government will not be cheated. Mr. OLCOTT. In some cases that has been true. Mr. OLCOTT (interposing). That is not general. Mr. BATES. From experience are drafted by competent engineers or at least ought to be, in the Navy Department. Do you want to leave that statement to rest in the record that the Navy Department officers in charge-you named two of them here in the Bureau of Ships or some other officers having to do with the drafting of specifications and the final approval, draft them so carelessly that you later discover them? Mr. OLCOTT. No, sir; not in the case of those people I mentioned. Mr. BATES. Those two officers or whoever drafts them. After all, whatever specifications are drafted in the Navy Department must clear through the hands of some superior officer for approval. Mr. OLCOTT. No, sir: I don't want to leave that impression because it is not so. Mr. BATES. That is what was left here. Mr. OLCOTT. I don't want to leave that thought because it is not so. The CHAIRMAN. Mr. Hinkel, have you a letter from the Comptroller General about the legality of all this? Mr. Hinkel, will you read that letter for the benefit of the committee? Mr. MAGNUSON. Before he reads that letter, may I ask the chairman a question? I believe there is a serious question here of criminal liability. The CHAIRMAN. We are going into that. Mr. MAGNUSON. In view of that, I am going to ask or hope that some member of the United States district attorney's office be here. and listen to the testimony. The CHAIRMAN. The district attorney's office is informed of these matters, and he has some of these people before the grand jury. We are going to put more matters before the grand jury, because we are going to stop this thing. If we can't stop it, we are going to pass a law to stop it. Read what the Comptroller said about the legality of these contracts. Mr. HINKEL. This is a letter of June 23, 1942, written by the Comptroller General of the United States to the Honorable the Secretary of the Navy, with regard to the Stone matter that was presented before this committee several weeks ago. The CHAIRMAN. And I may say the Stone case is before the grand jury now. Mr. HINKEL (reading). MY DEAR MR. KNOX: An examination of the testimony taken by the House Committee on Naval Affairs, which is investigating the Navy Department's war contracts, indicates that one Alexander H. Stone, formerly an employee of the Federal Housing Administration, negotiated for, and may have been instrumental in, the consummation of certain contracts between the Navy Department and the following concerns: Thereafter he lists seven concerns. It is further made to appear that Mr. Stone rendered services to those concerns as a new employee engaged for the purposes of the particular contracts, and not as a prior employee of the concerns regularly engaged in furtherance of their business and affairs; that the conditions of his special employment provided that he should, and he did, receive weekly drawing accounts in stipulated sums, which weekly payments were, or are to be, deducted from sums due or to become due him under contingent fee contracts in amounts equal to 5 percent of the full contract prices when the contracts are completely performed by Mr. Stone's principals; that Mr. Stone and his principals made and entered into written agreements of the tenor and effect stated; and that, as appears from examination of many of the agreements between the Navy Department and the concerns above mentioned, there were inserted therein express warranties that the contracts had not been negotiated and consummated pursuant to, or in connection with, any agreements for the payment of contingent fees. It is held by the courts that contingent-fee contracts such as those above mentioned are against public policy and void; and that payments pursuant thereto may not be properly made. (See Providence Tool Co. v. Norris, 2 Wall. 45; Meguire v. Corwine, 101 U. S. 108; Hazleton v. Sheckles, 202 U. S. 71; Crocker v. United States, 240 U. S. 74; Oscanyan v. Winchester Repeating Arms Co., 103 U. S. 261; and the numerous other cases therein cited.) Accordingly, it is requested that all future vouchers for the payment of funds to the above-mentioned concerns, or any of them, be referred to this office for direct settlement, pending further advice in this matter. Sincerely yours, LINDSAY C. WARREN. (The letter dated June 23, 1942, with attached letter to the Secretary of the Navy from the Comptroller General, dated June 23, 1942, was received in evidence and marked "Exhibit No. 487.") The CHAIRMAN. Offer in evidence the three checks, showing that these gentlemen divided among themselves two-hundred-and-someodd-thousand dollars over the last 6 months. Mr. HINKEL. I ask you gentlemen to identify these checks, made out to each of you and the endorsements thereon, as having been received by you. Mr. SHIRLEY. Yes. Mr. HINKEL. These are five checks, one to Mr. A. F. Shirley, dated December 31, 1941, in the sum of $106,196.48. Was this for last year's operation? Mr. SHIRLEY. Yes. Mr. HINKEL. Signed by F. B. Olcott. I suppose you are the fiscal officer for the firm? Is that right? Mr. OLCOTT. That is right. I write out the checks. Mr. HINKEL. I offer that in evidence. A check dated December 31, 1941, made out to F. B. Olcott, signed by F. B. Olcott, in the amount of $106,196.49. I offer that in evidence. Mr. Nichols, did you receive a similar check? We weren't able to find it. Mr. NICHOLS. Yes, I got one. I can show you my passbook, if you want it. The CHAIRMAN. You got a check for the same amount for last year? Mr. NICHOLS. I got it, but I don't know where it is. The CHAIRMAN. You got the same amount as your partners got for 1941? Mr. NICHOLS. I very definitely did, sir. The CHAIRMAN. All right. Mr. HINKEL. I have three checks, all dated June 30, 1942, all signed by F. B. Olcott, and made payable respectively to A. F. Shirley, F. B. Ölcott, and F. C. Nichols, each check in the amount of $208,211.94. Mr. BATES. What date was that? Mr. HINKEL. June 30, 1942. Mr. BATES. That was for the first 6 months of the year? Mr. HINKEL. Yes, sir. The CHAIRMAN. Wait 1 minute. We have all those contracts with the different companies here, haven't we? Mr. HINKEL. Yes, sir. The CHAIRMAN. We won't offer them in evidence. Mr. HINKEL. I would like to offer the checks in evidence, not to be printed. (Photostats of the five checks referred to were received in evidence, marked "Exhibit No. 488," and are filed with the committee.) The CHAIRMAN. Now, what is the future business for the balance of the year? Mr. OLCOTT. I beg your pardon? The CHAIRMAN. What is the future business, based upon the contracts that are out now that haven't been settled? |