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Regardless of what may have been the practice of other contractors and the fact that the contract did not require that a copy be delivered to the Air Force, except to the extent that records are subject to inspection by the Air Force at all reasonable times, the fact is that Buick-Oldsmobile-Pontiac assembly division made it a practice in accordance with a written procedure to deliver the second, third, and fourth copies of all purchase orders over $25,000 to the Air Force. Yours very truly,
A. F. POWER, Assistant General Counsel.
GENERAL MOTORS CORP.,
Detroit, Mich., August 10, 1957. Subject: Contract No. AF 33 (038)–18503, General Motors Corp. (Buick-Olds
mobile-Pontiac assembly divisioon). Lt. Col. GEORGE W. THOMPSON,
Chief, Pricing Staff Division, Deputy Director/Procurement, Headquarters,
(Attention MCPPB.) DEAR SIR: This is in reply to your letter of July 26, 1957, requesting information as to whether, prior to final agreement on pricing of the second segment of airplanes on September 11, 1954, the Air Force was in possession of data of any kind indicating that General Motors had commitments from suppliers for parts to be used for planes in the second segment at prices lower than those listed as estimated material cost in its proposal. We gave this information in our letter of October 25, 1956, to General Thurman, stating that copies of all purchase orders amounting to $25,000 or more were given to the Air Force representatives. Early in the F-84F program we provided that purchase order sets for the subject contract should be printed with copies No. 2, 3, and 4 allotted for the resident Air Force Audit Section. Our standard purchasing procedure at Kansas City (sec. III, p. 6, May 2, 1952) describing the preparation of purchase orders reads in part “The following copies are prepared:
"Copy No. 1 Original-Vendor.
“Copy No. 4 Audit Copy (for Resident Air Force Audit Section)." In addition, this procedure contains the following instructions (sec. III, p. 10, May 2, 1952):
SPECIAL REQUIREMENTS ON PUCHASE ORDERS (a) On orders over $25,000 Request for Approval of Expenditure Form KAP-526 is prepared in triplicate. These copies and a complete comparative cost breakdown of all bidders is made up and three audit copies of the purchase order are attached. All of these are then taken by the buyer to the Air Force office where signatures of the Air Force cost analyst and the Air Force contracting officer are obtained, approving the transaction. The administrative contracting officer acknowledged receipt of this procedure on January 2, 1953.
We know that the instructions were carried out throughout the contract performance. Prompt delivery of all purchase orders and revisions automatically supplied the Air Force representatives with the information on the second segment material commitments before the September 1954 pricing session.
However, even before our delivery of the copies Nos. 2, 3, and 4, any of these orders aggregating more than $25,000 (and most of them fell in this category) were submitted for approval and were approved by the local Air Force representatives at Kansas City as will be shown by the data requested in question (2) of your letter. The approvals indicate that these matters were known to Air Force representatives at dates ranging from August 8, 1951, to as late as August 1954.
We have reviewed all available purchase orders covering procurement from our vendors of second segment quantities of parts listed in the attachment to your letter. The enclosed schedule sets forth the results. Purchase order revisions were quite numerous, but in each case we have selected the revision which was in effect at the time of redetermining the second segment prices.
Your letter requested that our reply include the same information with respect to the particular purchase orders mentioned in the GAO report as having been redetermined prior to negotiation of the 228 airplane segment, and making up the total alleged price difference of $1,700,000. Only one purchase order was identified in the GAO report submitted to us. This was an order to Vendo, Inc., priced by us at $1,507, which is included in the attached schedule. The specific purchase orders used by the GAO in compiling the total alleged price difference of $1,700,000 have not been made known to us.
With respect to the information on the schedule, we have, except as noted therein, located in our files and currently examined all of the purchase orders, revisions, and signed forms designated as "Request for Approval of Expenditure (Purchase Orders, Subcontracts).” In other instances parts listed by the GAO were ordered in quantities under $25,000, in which cases purchase orders were not required by the Air Force and approvals were not obtained. At one time we were delivering to the local Air Force representatives copies of all purchase orders regardless of amount; but were asked by the Air Force to discontinue submitting those below $25,000. This was done without correspondence and we are unable at this time to reestablish the dates involved.
Air Force representatives who approved all but one of the purchase orders and purchase order revisions on the attached schedule were present at the redetermination meeting of the second segment on September 8, 9, 10, and 11, 1954, and the third segment redetermination meeting on March 23, 24, and 25, 1955.
If we can furnish any further information of assistance to you please call upon us. Yours very truly,
JOHN F. GORDON,
AFFIDAVIT STATE OF MICHIGAN,
County of Wayne, 88: H. W. Clapsaddle, being first duly sworn, deposes and says that he is and, throughout the periods during which the matters hereinafter occurred, was the Divisional Comptroller of Buick-Oldsmobile-Pontiac Assembly Division of General Motors Corporation and an Assistant Comptroller of General Motors Corporation, with powers and duties of the Comptroller limited to the activities of the aforementioned Division.
That he has caused to be reviewed and has reviewed the General Accounting Office Compilation incorporated in the stenographic transcript of the Hearings before the Subcommittee for Special Investigations, House of Representatives Committee on Armed Services on August 21st and included on pages 795 through 806 of the stenographic transcript; that he understands that the General Accounting Office Compilation was submitted to substantiate its claim of overpricing in the "Estimated Material Costs" delivered by Buick-Oldsmobile-Pontiac Assembly Division to the Air Materiel Command on August 26, 1954, in support of its “Proposal for Redetermination of Prices of F84F Aircraft Produced on Contract No. AF 33 (038)-18503" dated July 15, 1954; that he understands that this Compilation, entitled "Comparison of Projected Outside Material Costs With Prices Known at the Time Proposal Submitted Second Seg. ment of 228 Planes" was based upon a review of Purchase Orders and Purchase Order Revisions in effect in September 1954, when contract prices were re determined.
That he further understands that in its Compilation, the General Accounting Office proceeded on the assumption that certain parts would have been used in the second segment of 228 airplanes; that based on this assumption, the General Accounting Office computed average prices for the parts listed ; that using these average prices, the General Accounting Office concluded that there was an excess of $1,718,045.97 in the "Estimated Material Costs” submitted by Buick-Oldsmobile-Pontiac Assembly Division over the prices for the listed parts, determined as aforesaid by the General Accounting Office, from Purchase Order records.
That in attempting to determine the accuracy of this Compilation, BuickOldsmobile-Pontiac Assembly Division endeavored to follow this same method of computation; that there were certain areas in which there was a difference between the unit prices and quantities selected by the General Accounting
Office and Buick-Oldsmobile-Pontiac Assembly Division; that this is due in part to a lack of knowledge by Buick-Oldsmobile-Pontiac Assembly Division of the complete data used by the General Accounting Office in the preparation of its Compilation.
That in reviewing the purchase orders applicable to the second segment of 228 airplanes, Buick-Oldsmobile-Pontiac Assembly Division applied the same method assumed to have been applied by the General Accounting Office and its review based on these purchase orders resulted in an excess of $1,627,901.98 as compared to the excess of $1,718,045.97 stated in the General Accounting Office Compilation; that Schedule 1 attached hereto and made a part hereof sets forth this comparison and the areas of difference between unit prices and quantities selected by the General Accounting Office and Buick-Oldsmobile-Pontiac Assembly Division referred to above.
That, generally, subcontractor prices for parts were negotiated and established so that certain preproduction and startup costs were reflected in the prices for parts to be used for the first segment of 71 airplanes; that with respect to certain parts to be supplied by two or more sources, the aggregate number of parts which reflected these preproduction and startup costs of these sources exceeded the number required for the first segment of 71 airplanes ; that in accounting for the cost of such of these parts as were furnished by one of these suppliers and used for the second segment of airplanes, it was deemed desirable for accounting and pricing consistency to include the preproduction and startup costs in the first segment—the same segment which included BuickOldsmobile-Pontiac Assembly Division's preproduction and startup costs; that accordingly Buick-Oldsmobile-Pontiac Assembly Division adjusted the prices on the excess quantity of such parts acquired from that supplier for the second segment of 228 airplanes by transferring the estimated preproduction and startup costs to the first segment of the prime contract.
That the foregoing applied to four of the part listed in the General Accounting Office compilation, described as follows: Part No.
Part Description 37W25000-11.
Flap Assembly. 37W25000-12_
Flap Assembly. 37W26001-501.
Aileron. That as a result of the foregoing accounting adjustment the costs of units of the first segment increased and the costs of units of the second segment decreased; that in addition costs, determined on the basis of accounting records, vary as between the first and second segments based upon allocation of parts usage as between the first and second segments but this variance is of relatively minor importance and amounts to less than $1,000.00.
That attached hereto and made a part hereof is Schedule 2 which compares the prices of the parts listed above as reflected by purchase orders and prices of such parts giving effect to cost adjustments referred to above as reflected by accounting entries on the books of Buick-Oldsmobile-Pontiac Assembly Division; that this comparison reflects an increase in the variance determined by the books of account of $375,351.47 over the variance calculated on the basis of purchase orders as shown in Schedule 1.
That the foregoing was reflected by accounting entries made in the books and records of Buick-Oldsmobile-Pontiac Assembly Division in October 1954; that prior thereto, and during the course of the audit of the retroactive segment, this proposed method of costing was disclosed by Buick-Oldsmobile-Pontiac Assembly Division to the representatives of the Auditor General of the Air Force, and that in the discussions with these representatives of the Auditor General of the "Estimate To Complete" which related to the retroactive seg. ment, Buick-Oldsmobile-Pontiac Assembly Division submitted a Schedule entitled "Proposed Retroactive Prices," which reflected these accounting adjustments.
That subsequently and as a result of the completion of price redeterminations with certain subcontractors, a revised "Estimate to Complete" was discussed with the Auditor General's representatives; that this revised estimate included this method of costing for these four parts; that this method of costing was reflected in Schedule No. 2 of the audit report entitled “Statement of Outside Material Costs with Comparison to Contractor's Estimate.”
That in the consideration of the foregoing, Buick-Oldsmobile-Pontiac Assembly Division desires to restate its position that this was not a cost reimbursement type of contract; that it was in fact a fixed price subject to price redetermination type of contract; and that in the price redetermination negotiations the parties negotiated price and not segregated cost elements.
That the Compilation of the General Accounting Office is directed at the "Estimated Material Costs” submitted by Buick-Oldsmobile-Pontiac Assembly Division in support of a proposed unit price of $442,890 for the second segment of 228 airplanes; that this price was not the negotiated price for these air. planes; that the ultimate unit price negotiated was $420,000; that the facts with respect to the negotiation of the proposed prices and the prices ultimately agreed to are set forth in the letter of October 25, 1956, addressed by John F. Gordon to Brigadier General William T. Thurman, set forth on pages 73 through 80 of the transcript, reading in part as follows:
“* * * At the opening of the conference on September 8, 1954, a revised proposed price of $440,000.00 was submitted by the contractor. This reduced price reflected the elimination of certain cost which took place after the first proposal was submitted in July. The first three days and part of the fourth day of the conference were spent in reviewing and discussing the Air Force Audit Reports covering both Fisher Body Division and Buick-Oldsmobile-Pontiac Assembly Division, the Contracting Officer's comments on cost and operations, and the detailed price buildup of the proposal of the Buick-Oldsmobile Pontiac Assembly Division. On the fourth day, September 11, 1954, the Air Force submitted its first counter proposal on price. There then followed an exchange of suggested prices and a final determination and agreement on the price of $120,000.00 per plane. This represented an aggregate reduction through negotiation of approximately $4,560.00 in the price of the second seg. ment of 228 planes from the price proposed by the contractor at the commencement of negotiations."
H. W. CLAPSADDLE. Subscribed and sworn to before me this 10th day of September 1957.
VIRGINIA H. MILLAGE,
Notary Public, Wayne County, Michigan. My commission expires November 29, 1957.
WASHINGTON, D. C., October 14, 1957. Hon. F. EDWARD HÉBERT, Chairman, Special Investigations Subcommittee,
Committee on Armed Services, House of Representatives. DEAR MR. CHAIRMAN : Reference is made to your letter of July 19, 1957, and the hearings on our report to Congress on Air Force contract AF33 (038)-18503 with General Motors Co., Buick-Oldsmobile-Pontiac assembly division, Kansas City, Kans. We have been advised informally that at this time you have no plans for holding further hearings this year.
You will recall that some of the matters raised by our examination of this contract involved legal questions which are properly for consideration by the Department of Justice. With this in mind and in order to fully discharge our responsibilities with regard to protecting the Government's interest, we have formally referred the matter to the Department of Justice.
In order that you may be fully apprised of the current status of this matter within the General Accounting Office, we are enclosing a copy of our letter to the Attorney General formally transmitting this matter for his consideration. Sincerely yours,
FRANK H. WEITZEL, Acting Comptroller General of the United States.
WASIIINGTON, D. C., October 11, 1957. The honorable the ATTORNEY GENERAL.
DEAR MR. ATTORNEY GENERAL: There is transmitted herewith for appropriate action a claim against the Buick-Oldsmobile-Pontiac assembly division of General Motors Corp. arising out of misrepresentations made by it to the Air Force in connection with the pricing of F-84F airplanes under contract No. AF33 (038) – 18503.
Two copies of our audit report to the Congress on our review of this contract are enclosed. The facts relating to the misrepresentation involved are set forth at pages 5–7 of the report, indicating an overstatement of $1,700,000 by the contractor. Two photostatic copies of the contractor's price proposal and supplement thereto are enclosed. Hearings on the report have been held by the Subcommittee on Special Investigations of the House Armed Services Committee, and we understand further hearings may be held after Congress returns. A transcript of the complete hearings to date is enclosed. There are also enclosed 2 copies of the reply dated August 2, 1957, which we received from the Air Force in response to our inquiry of July 8, 1957 (appendix D to our report). Also, with reference to questions 4 and 5 of our inquiry, there is enclosed 1 copy of an affidavit and other information furnished to the subcommittee by General Motor's letter dated September 10, 1957, wherein General Motors advises that there was an additional overstatement of $375,000, bringing the total amount to some $2 million. The testimony of Mr. B. D. Leofburrow, the chief price negotiator for the Air Force, gives more detailed support for the statements made in paragraph 6 of the Air Force letter of August 2, 1957.
On the basis of the above-mentioned information, it is our belief that there was a misrepresentation of material facts to the Air Force, that the Air Force officials negotiating the prices of the first and second segments of airplanes relied upon such misrepresentations, and that the Government was damaged thereby, presumptively in the amount of $2 million, raising a question of recovery for civil fraud. You may also wish to consider the possibility of criminal liability on the part of the contractor or its employees.
The Renegotiation Board has been furnished copies of our audit report and has been following the hearings. We understand that the Board now has under consideration the profits made by General Motors during 1955, and has expressed interest in the $2 million in question.
We will be glad to consult with representatives of your Department and to furnish any additional information we have in the matter. Sincerely yours,
Comptroller General of the United States. x