Mr. MAGNUSON. In other words, it is just as if you cashed in on life-insurance instead of drawing it. Mr. OLCOTT. They deducted it, and when we quit, we drew it back. Mr. MAGNUSON. You received all the benefits under the Civil Service Act. Mr. OLCOTT. Exactly, but we are completely divorced from anyMr. MAGNUSON (interposing). You aren't drawing a pension, just as if I had taken all the cash value out of my life insurance. Mr. OLCOTT. That is right. The CHAIRMAN. Now, Mr. Hinkel, I want you to have this record printed. Just as soon as it is printed, I want you to send it to Mr. Forrestal, Judge Patterson in the War Department and send it over to the Comptroller's office, send it to Mr. Clark of the Department of Justice, and send it to the Federal Trade Commission. Mr. HINKEL. And to the Department of Labor with regard to the Walsh-Healey Act. The CHAIRMAN. Yes; send it down there because they might be involved. Mr. HINKEL. All right, sir, we will see that that is done. The CHAIRMAN. You gentlemen are all excused, and we will take a recess until tomorrow morning at 10 o'clock when I want Mr. Ward, Mr. Scrimgeour and son, and Mr. Orr to be back here-tomorrow morning at 10 o'clock. (Whereupon, at 4:55 p. m., the committee recessed until 10 a. m., Thursday, July 16, 1942.) INVESTIGATION OF THE NAVAL DEFENSE PROGRAM THURSDAY, JULY 16, 1942 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 10:20 o'clock, pursuant to adjournment on Wednesday, July 15, in room 313, Old House Office Building, Representative Carl Vinson, Georgia, chairman, presiding. Present: Representative Carl Vinson, Georgia (chairman); Representatives Arthur B. Jenks, New Hampshire; William E. Hess, Ohio; William H. Sutphin, New Jersey; George J. Bates, Massachusetts; Beverly M. Vincent, Kentucky; Patrick H. Drewry, Virginia; James Wolfenden, Pennsylvania; William H. Wheat, Illinois; Edward V. Izac, California; Lansdale G. Sasscer, Maryland; Warren G. Magnuson, Washington, Ward Johnson, California; James W. Mott, Oregon. Also present: Thomas S. Hinkel, counsel; and William J. Shaughnessy, counsel. The CHAIRMAN. The meeting will come to order. Now I desire to submit in the record a statement that was prepared by Mr. Robert E. Kline, Special Assistant to the Under Secretary of the Navy, dated June 15: Attached is a memorandum setting forth the historical development of the covenant against contingent fees, which has been included in Navy contracts for many years. You will note that it had its origin during the last war at the suggestion of President Wilson. Here is a very fine statement showing what the Government and the various departments have been trying to do to put a stop to this contingent fee racket. I want this to go in the record at this point. (The statement by Mr. Kline referred to was received in evidence, marked "Exhibit No. 525," and is as follows:) RE CONTINGENT FEES AND COMMISSIONS Early in 1918 a great deal of publicity was given to the fact that brokers and agents were collecting contingent fees and commissions for allegedly obtaining Government contracts for their principals. On April 2, 1918, the Attorney General served notice on the public through a press release that the Department of Justice considered that contingent-fee contracts to solicit Government business were fraudulent. The Attorney General's statement appeared in newspapers throughout the country and read as follows: "On account of the 'cost-plus' contracts made during the present war, Attorney General Gregory is giving special consideration to problems likely to arise in connection therewith. "The Supreme Court has denounced profiteering, or the padding of costs in suits resulting from contracts analagous to the 'cost-plus' agreements. It is believed that these decisions place the burden of proof on the 'cost-plus' contractor whose contract is annulled on account of fraudulent padding. In a recent case, Crocker v. United States (240 U. S. 74), the Supreme Court held that no recovery could be had upon a Government contract tainted with fraud and rescinded by the proper officer of the Government on that ground. "The contractor may obtain a reasonable price for goods actually delivered and accepted by the Government, but he has the burden of proving what is a fair price. If prices be named in a contract annulled for fraud such prices are not taken as an admission by the Government and cannot be used by the contractor in establishing his claim. He must prove his case without assistance from the terms of his vitiated contract. The Supreme Court has denounced the procurement of Government contracts by agents employed on a contingent fee basis, declaring that there is no difference in principle between agreements to procure favors from legislative bodies and agreements to procure them in the shape of contracts from executive officers; that the no contract no fee arrangement suggests an attempt to use sinister and corrupt means. "The law meets the suggestion of evil, and strikes down the contract from its inception.' Following immediately on April 5, 1918, a second statement for the press was released by the Attorney General and read as follows: "Attorney General Gregory has been deluged with inquiries from individuals and associations as to whether they come within the legal definition of profiteers, contingent basis agents, or any others whose contracts could not be recovered upon in event of dispute. This is due to the statement given out by the Attorney General on April 2, in which reference was made to decisions rendered by the Supreme Court. "The inquirers have asked that the Department advise them whether they fall within the prohibited class. The law is fully discussed and the lines of demarkation set out in the cases of Crocker v. United States (240 U. S., 74), Trist v. Child, (23 Wallace 441), and Tool Company v. Norris (2 Wallace 45). "The last-named case arose out of a situation developed during the Civil War and describes the actions of those seeking governmental contracts, as will be seen from the following statement taken from the Supreme Court reports: This "In July, 1861, the Providence Tool Co., a corporation created under the laws of Rhode Island, entered into a contract with the Government, through the Secretary of War, to deliver to officers of the United States, within certain stated periods, 25,000 muskets, of a specified pattern at the rate of $20 a musket. contract was procured through the exertions of Norris, the plaintiff in the court below, and the defendant in error in this court, upon a previous agreement with the corporation, through its managing agent, that in case he obtained a contract of this kind he should receive compensation for his services proportionate to its extent. 'Norris himself, it appeared-though not having any imputation on his moral character was a person who had led a somewhat miscellaneous sort of a life, in Europe and America. Soon after the rebellion broke out he found himself in Washington. He was there without any special purpose, but as he stated, with a view of "making business-anything generally"; "soliciting acquaintances"; "getting letters"; "getting an office," etc. Finding that the Government was in need of arms to suppress the rebellion, which had now become organized, he applied to the Providence Tool Co., already mentioned, to see if they wanted a job, and made the contingent sort of contract with them just referred to. He then set himself to work at what he called, "concentrating influence at the War Department"; that is to say, to getting letters from people who might be supposed to have influence with Mr. Cameron, at that time Secretary of War, recommending him to his objects. Among other means, he applied to the Rhode Island Senators, Messrs. Anthony and Simmons, with whom he had got acquainted, to go with him to the War Office. Mr. Anthony declined to go, stating that since he had been Senator he had been applied to some hundred times in like manner, and had invariably declined; thinking it discreditable to any Senator to intermeddle with the business of the departments. "You will certainly not decline to go with me, and introduce me to the Secretary, and to state that the Providence Tool Co. is a responsible corporation." "I will give you a note," said Mr. Anthony. "I do not want a note" was the reply; "I want the weight of your presence with me. I want the influence of a Senator." "Well," said Mr. Anthony, "go to Simmons." By one means and another, Norris got influential introduction to Mr. Secretary Cameron, and got the contract, a very profitable one; the Secretary, whom on leaving he warmly thanked, "hoping that he would make a great deal of money out of it." "In this case, the Supreme Court of the United States held that the contract was void as against public policy and that, therefore, Norris could not recover. "On June 18, 1918, Attorney General Gregory wrote to the heads of all executive departments of the Government setting forth a form of covenant and directing that this covenant be included in all Government contracts at the request of President Wilson. This letter read as follows: "Hon. JOSEPHUS DANIELS, "Secretary of the Navy. "'SIR: A situation which has arisen in the matter of Government contracts seems to me to require summary action. Owing to the tremendous increase in Government business and the speed with which it must be executed, some manufacturers because of ignorance or misinformation have thought it necessary to negotiate with the Government through contract brokers or contingent-fee operators. It follows that the system requires a contractor in making his estimate to load his bid with the contingent-fee item. The courts have universally condemned the contingent-fee contract. The methods employed by the contingent-fee operator are often insidious and reprehensible, and, in view of the fact that the average fee is 5 percent, the resulting cost to the Government is very great. As a means of breaking up this practice I have prepared the following form of covenant, which the President requests shall be inserted in all Government contracts: ""The contractor expressly warrants that he has employed no third person to solicit or obtain this contract in his behalf, or to cause or procure the same to be obtained upon compensation in any way contingent, in whole or in part, upon such procurement; and that he has not paid, or promised or agreed to pay, to any third person in consideration of such procurement or in compensation for services in connection therewith, any brokerage, commission, or percentage upon the amount receivable by him hereunder; and that he has not, in estimating the contract price demanded by him, included any sum by reason of any such brokerage, commission, or percentage; and that all moneys payable to him hereunder are free from obligation to any other person for services rendered, or supposed to have been rendered, in the procurement of this contract. He further agrees that any breach or this warranty shall constitute adequate cause for the annulment of this contract by the United States, and that the United States may retain to its own use from any sums due or to become due thereunder an amount equal to any brokerage, commission, or percentage so paid, or agreed to be paid." 'This covenant, in addition to the requirement or section 3722 (p. 735 R. S.) will, it is believed, synchronize the action of officials of your department with that of the contractor who is prohibited by section 3737 R. S. from transferring his contract or order, or any interest therein, to any other party. 'Very truly yours, ""T. W. GREGORY, Attorney General.'" Immediately following this direction of the Attorney General made at the request of the President, a great many protests were lodged with the Department of Justice by heads of the executive departments, by manufacturers, and by sales agencies and commission brokers. There is a great mass of material in the Department of Justice files on these complaints and the reasons given therefor, but the Attorney General was firm in stating that this covenant as originally included in Government contracts was all-inclusive and a warranty which prohibited any and all commissions or contingent fees to agents or brokers for sales to or contracts with the Government irrespective of whether or not the sales agency was well established and bona fide. The War Department was particularly anxious not to be required to include this original covenant in all of its contracts and in a memorandum dated July 6, 1918, from Gen. Hugh S. Johnson to Edward R. Stettinius, Second Assistant Secretary of War, suggestions were made for relaxing this requirement as to certain War Department contracts. On July 5, 1918, and again on July 6, the Honorable Newton D. Baker, Secretary of War, wrote to the Attorney General submitting these suggestions and requesting that certain selling agencies, in the textile industry specifically, be exempted so that this covenant against contingent fees should not apply to them. The Attorney General, in a reply to the Secretary of War on July 11, requested that exceptions be made only in individual cases and not by industry or classes. He also requested that the matter be taken up by the Secretary of War with the President directly. The Secretary of War wrote the President on August 9, 1918 and the following day this reply was addressed by the President in reply: "Hon. NEWTON D. BAKER, "Secretary of War. "MY DEAR BAKER: I have your letter of yesterday about the covenant to be incorporated in all supply contracts for the purpose of excluding contingent-fee operators and any others who may seek to trade upon their supposed influence or held out expectations of preferential consideration. Huston Thompson had brought the matter to my attention a few days ago and had presented very frankly and I dare say quite fully the difficulties that you apprise me of in your letter. I suggested to him that inasmuch as our single object was to prevent the contingent fee based upon no real service whatever, he reconsider the phraseology of the covenant so as to make it clear just what we were intending to exclude, because I do not only agree with you that the ordinary trade processes to which you allude should not be interfered with but I do not think that there was any intention to interfere with them. In short, I do not think they would be in breach of the covenant. "I do not know whether he successfully rephrased the covenant or not, but it occurs to me that if he did not, your office and the office of the Attorney General could easily agree upon a proviso which could be used by way of additional definition in the contracts entered into by the Supply Bureaus of the War Depart ment. "Cordially and faithfully yours, WOODROW WILSON." The Department of Commerce also complained a great deal about the original covenant as did the United States Railroad Administration. Much difficulty was experienced with this form of covenant, as it developed that a great many manufacturers doing business with the Government sold their products through agencies compensated on a commission basis. The matter was, therefore, again called to the attention of the President by the then Attorney General, A. Mitchell Palmer. In a cablegram from Paris, dated February 15, 1919, addressed to Joseph P. Tumulty, the President said: "Answering Palmer's message about the covenant against commissions now inserted in all Government contracts, I understood some time ago that it was concluded that those covenants should not invalidate contracts obtained through bona fide commercial representatives or agencies by an established business process everywhere recognized. "WOODROW WILSON." Thereafter on April 18, 1919, the Attorney General again wrote to the heads of all executive departments of the Government authorizing them to alter the original covenant by a proviso excluding bona fide established commercial representatives or agents. This letter reads as follows: "Hon. JOSEPHUS DANIELS, "Secretary of the Navy, Washington, D. C. "DEAR MR. SECRETARY: I have the honor to call your attention to the covenant intended to prevent the payment of illegal commissions which, by direction of the President, is now being inserted in all Government contracts. The President has now authorized a modification of this covenant to the end that it may not invalidate contracts obtained through bona fide commercial representatives or agencies by an established business process everywhere recognized. With his approval, therefore, I have prepared a proviso which he authorizes to be attached to all such covenants as follows: "Provided, however, it is understood that this covenant does not apply to the selling of goods through a bona fide commercial representative employed by the contractor in the regular course of his business in dealing with customers other than the Government and whose compensation, is paid, in whole or in part, by commissions on sales made, nor to the selling of goods through established commercial or selling agents or agencies regularly engaged in selling such goods.' "I think this proviso will meet all just objections that have been made to the covenant now in use. "Respectfully, "ALEX C. KING, |