GSA CONTRACT FRAUD INVESTIGATION

THURSDAY, JUNE 22, 1978

U.S. SENATE,

SUBCOMMITTEE ON FEDERAL SPENDING

PRACTICES AND OPEN GOVERNMENT,

COMMITTEE ON GOVERNMENTAL AFFAIRS

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 3302, Dirksen Senate Office Building, Senator Lawton Chiles (chairman of the subcommittee), presiding.

Present: Senators Chiles and Roth.

Staff members present: Ronald Chiodo, chief counsel, and staff director, and Peter Roman, professional staff member.

OPENING STATEMENT OF SENATOR CHILES

Senator CHILES. We will convene our hearing. Since its creation in 1949, the General Services Administration has had more than its share of trouble. Over the years, it has served as a kind of a graveyard for job seekers, with political connections, who the incoming adminis tration couldn't find a place to put somewhere else.

At the very top, the difficulty of running this unwieldy agency has created great frustration and a high turnover of most senior executives, which has in turn led to constantly changing policies and priorities. The great bulk of GSA's 40,000 employees have had to bear the burden and be content to hope for better times.

I am sure that today is the beginning of these better times because over the next few days, we intend to try to get an understanding of the magnitude of the current scandals, and more importantly, to try to see what senior GSA managers intend to do to clean GSA up and to make provisions to keep it clean.

GSA's role as the Government housekeeper and business agent is an enormous one. It maintains the 2,100 buildings that we own, and the 8,000 that we rent. The General Services Administration's rent bill alone is $500 million a year. There are 80,000 cars in the motor pool. It costs around $5 billion a year to keep all of this going, and a lot of the expenditures are made in thousands of small transactions, many of them by credit card.

Obviously with a system this big and with easy access to so much money and goods, it is inevitable that some people are going to try to misuse, probably successfully, misuse the system, but in this case, we are not talking about a few employees who are embarrassing their 40,000 colleagues and having little effect on the rest of us. Instead, appears that we are talking about a situation that has occurred during the period of time in which taxpayers have essentially mutinied

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and told public officials they have had quite enough waste and overspending, and they are in effect taking their bat and ball and going home.

We are also talking about tens of dozens of GSA and other Federal employees who are nothing better than common thieves and who have been systematically looting the public treasury of millions of dollars. Essentially we have a series of problems within GSA which involve employees at three levels. At the lower and middle levels we have employees who are openly stealing. Apparently, they have been doing this for years. Even worse, this morning as we sit here, some of them out there appear to still be stealing right now.

I am astonished that the recent GSA surveys show clear indications that right in the middle of the whole series of nationwide criminal investigations there are some employees that are so arrogant and/or so relaxed that they are carrying on today under the noses of the FBI. This self-confidence leads us to our second area of problems.

At GSA's middle level, there are a lot of employees there who are brazen enough to put in writing that GSA's only and sole mission is to provide pens and pencils and automobiles and redecorated offices of whatever quality that the agencies might desire. Audit controls, prudent spending, and security of money and materials appear to be alien concepts. Following their own rules is dismissed as red-tape, and not spending all the money they can get their hands on is regarded as inefficient.

However, the new Administrator, Mr. Jay Solomon, is demonstrating his concern with this concept of giving them everything they want and is in the process of introducing more prudent and more frugal management concepts.

Even more important, I think Mr. Solomon has demonstrated to me at least his deep and basic commitment to reform, by hiring an inspector general of the caliber of Mr. Vincent Alto. By giving Mr. Alto the authority and resources necessary to take major steps toward cleansing and reforming the agency, I think we have a public commitment to carry out the reforms which GSA has needed.

We intend to try to determine that that commitment is kept, and that meaningful results come from that commitment.

Since we are holding investigative hearings, I believe it would be appropriate to require sworn testimony for all witnesses. Our first witness this morning will be Mr. Robert Lowry, the president of Wibco, Inc., a Washington area painting firm. Mr. Lowry, would you step forward, please, to be sworn?

Senator Roth has appeared, and he will make an opening statement, and Mr. Lowry, if you would just have a seat for a minute, we will be delighted to hear from Senator Roth.

OPENING STATEMENT OF SENATOR ROTH

Senator ROTH. Mr. Chairman, I appreciate your holding these 2 days of hearings on a matter which I feel is of such great importance for a well-managed government.

In March when I called for an investigation into alleged fraudulent practices in the General Services Administration, the only aspect of this problem that had been exposed was contracts, but since the initial revelation, we have learned that apparently the abuses are much

broader. The reports have detailed misuse of Government credit cards and supply stores; a policy of freewheeling spending at the end of the last fiscal year has been revealed.

I find it very disturbing that there is no indication of how pervasive these problems may be. It seems as though a Pandora's box has been opened, and we can only hope that all the horrors have finally escaped. The indignation felt by taxpayers over Government spending that is fraught with fraud and mismanagement is certainly somewhat justified by these apparent reports of GSA activities. I believe what has been called a taxpayer's revolt is not only a refusal to pay high taxes, but a concern to fund Government in which there are such practices.

We are indebted to the Washington Post for their excellent investigative reporting. It is unfortunate that once again Congress must rely so heavily upon the press to uncover wrongdoing in Government.

I believe the last time Congress had hearings on GSA was in the House in 1967. This is a classic example of the need for a systematic plan for program evaluation. If it provides Congress with a mechanism for responsible, meaningful oversight, I think it would help discourage these kinds of mismanagement and fraud, and certainly uncover it if they did occur.

Thank you, Mr. Chairman.

Senator CHILES. Thank you, Senator Roth.

Do you swear that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. LowRY. I do.

Senator CHILES. You are accompanied by your attorneys this morning, Mr. Thomas W. Holland and Mr. Lorin H. Bleecker. Before we ask you questions, I want you to understand that I will understand that your appearance here today is voluntary and that you are not being compelled to speak here. Is that correct?

Mr. LowRY. Yes, sir.

Senator CHILES. Do you understand that this subcommittee has not and will not offer you any kind of immunity for your testimony? Mr. LowRY. Yes, sir.

Senator CHILES. I understand that you have a generally outlined or prepared statement. Would you like to go ahead and begin with that?

Mr. LowRY. Yes, sir.

TESTIMONY OF ROBERT A. LOWRY, PRESIDENT, WIBCO, INC., ACCOMPANIED BY LORIN H. BLEECKER AND THOMAS W. HOLLAND OF THE FIRM OF HOLLAND AND BLEECKER

Mr. LowRY. Mr. Chairman, Senator, as I have already indicated, my name is Robert Lowry. I am currently a resident of the State of Maryland and have been a lifelong resident of the metropolitan area. I am a painter by trade and have been engaged in the paintingcontracting field for most of my adult life. Moreover, my father was similarly employed.

Senator CHILES. You are going to have to pull that speaker up a little bit closer and speak a little more into it so that we will be able to hear

you.

Mr. LowRY. Moreover, my father was similarly employed, and as a result, I used to enjoy a close personal working relationship with many of my competitors.

Before going into the heart of the matter for which you have invited me here today, I want to extend my thanks to you for providing this forum, this hearing. Your inquiry is the culmination of a 4-year effort on my part to bring before the U.S. Government the blatant thievery being carried on by certain Government employees in collusion with unscrupulous contractors.

In 1971, I ceased participating in the illicit activities. By 1974, I could no longer bid competitively on GSA contracts simply because I would not participate in the fraud. In early 1975 my company was, as a result, out of business and for the first time in 25 years in the trade, I was unemployed.

So that this record may be clear, I can sit here today and describe my course of conduct which regularly included the performance of numerous illicit activities in as great detail as you would like. As you probably are aware, my attorneys have obtained for me immunity from prosecution in the current investigation being conducted by the Federal Government.

Some 4 years ago, I began a letterwriting campaign in which I wrote letters to the General Services Administration officials, the Justice Department, the FBI, the U.S. Attorney, and even the President of the United States in an effort to bring this criminal conduct to the surface. Additionally, I initiated formal protests of these contracts prior to their award.

Mr. Chairman, today is the very first public forum in which these issues are being raised. This is most significant since I would estimate the cost to the taxpayer of these illicit activities to be millions upon millions of dollars per year.

Since I am aware of the time constraints imposed upon this committee, I have chosen to highlight a few examples of illicit conduct which have regularly gone on over the years to substantiate my claims of gross criminal activity.

Moreover, since many of the schemes used to defraud the taxpayer are very sophisticated and since one must have a working knowledge of Government contracting procedures to fully comprehend the systematic bribery, I have chosen to bring before you the most elementary types of fraud which have been practiced.

However, I want to assure you, Mr. Chairman, that I stand ready to respond to any questions you may have today or in the future.

From 1968 until 1971, most GSA maintenance work had been performed through informal contracts. Informal contracts, as you may know, are contracts of a face value of $2,000 or less. These would be awarded by the building managers under an informal bid system. In practice, two or three contractors would decide among themselves who would get a contract on a given day, and each contractor would bid up to the $2,000 limit, their bids being separated only by a couple dollars or several dollars.

Until late 1970, in order to get work under such informal contracts, the contractors made a practice of paying off GSA building managers by taking them to lavish lunches, sponsoring parties, paying cash, picking up the bills for their vacation, and in many cases, providing them with prostitutes.

By late 1971, it became obvious even to GSA that such informal contracts actually spawned these fraudulent practices. In an effort to purge the system of such abuse, GSA devised a new system of term contracts for building maintenance whereby interested contractors would bid to perform maintenance on given buildings on an annual basis. In actuality, these term contracts did nothing to curtail the fraudulent practices which arose under the informal contracts. In fact, there can be no question that the fraudulent practices only increased with the advent of the term contract. This is because the individual building managers were reposed with the authority of specifying what work would be done under the contract, checking to insure that the specified work was done, and finally, authorizing payment for the work allegedly done.

This system made it possible for these dishonest building managers to function as judge, jury and hangman. By mid-1974, it was impossible to submit a successful bid without first having knowledge of what the involved building manager wished to take by way of cash, gifts, favors, trips and female companionship. Therefore, an arrangement would have to be made with the building manager before an actual bid was submitted.

In 1974, another new element was introduced into the bidding of these contracts, which provided a new scheme. At this time, unbalanced bids came into vogue in the area of term contracting. By their very nature, unbalanced bids are not responsive to the bid invitations. This kind of unbalanced bidding appears to yield the lowest bid, if one focuses only on the bottom line of the bid sheet.

In actuality, the unscrupulous contractors, acting in concert with the building managers, used this system to defraud the Government of millions and millions of dollars. This increased the fraud because the favored contractors were advised by the building managers in advance of bid day as to which items on a bid sheet would, in reality, be used, and which would not be.

Thus if you knew a building manager would never request you to perform a certain type of work, you could assign an unreasonably low unit price to that element, thereby lowering your aggregate bid price.

In addition, the unsavory relationship between the favored contractors and the building managers had by this time become so entrenched that it had become a widespread practice for building managers to authorize, allegedly inspect, and certify for payment literally millions of dollars of work which was never performed.

An example of the misuse of unbalanced bidding to which I refer no doubt will help you to understand this practice.

If by collusion a contractor knows that the building manager will not request one-coat painting, even though the invitation to bid specifies that 1 million square feet of one-coat work will be done, it will permit the contractor to place on the bid sheet an unreasonably low unit price for one-coat work, thereby getting the low bottom line and assuring the contract award. Once the contract has been awarded, the building manager will then authorize only two-coat work which in the bid solicitation was specified as 100,000 square feet, but which, in reality, will be written to 1 million or 2 million square feet. Naturally, this will increase the contractor's receipts dramatically if, as was normal practice, he bids two-coat work at excessively high prices.