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FEDERAL SECURITIES LAWS AND DEFENSE

CONTRACTING

THURSDAY, FEBRUARY 28, 1985

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:30 a.m., in room 2123, Rayburn House Office Building, Hon. John D. Dingell (chairman) presiding.

Mr. DINGELL. The subcommittee will come to order.

We thank all present for being here.

The Chair has, before we commence today, a brief opening statement which I will proceed to read.

Rules X and XI of the Rules of the House of Representatives assign to this subcommittee responsibility for the Federal securities laws and, therefore, for the Securities and Exchange Commission, and corporations regulated by that body. The committee and its oversight subcommittee are charged with reviewing on a continuing basis the administration of laws to ensure that they are adequate and adequately enforced.

A concern which has been growing in the committee has been the stability of our financial markets. And the Chair observes that depends upon the American investor believing in the fundamental values of companies whose securities are traded in those markets. Incomplete, inaccurate, misleading information, or information available only to insiders destroys the investor confidence and ultimately the effectiveness of the capital markets of this Nation. Investor confidence depends upon accurate and timely information, honest corporate management and a stock market that is fair and is not rigged.

The subject of today's hearing is the General Dynamics Corp., a company whose securities are listed and traded on the New York Stock Exchanges and various regional stock exchanges, and which is subject to the reporting requirements of the Securities and Exchange Commission. For some time, a number of allegations have been coming to the fore involving the company and Federal security laws, and these have been circulating rather widely.

About 1 year ago, this subcommittee began looking at these allegations. Since that time, the subcommittee has received documents, obtained tape recordings, interviewed witnesses, and reviewed investigations conducted by the SEC, the Department of Justice, and the Navy Department into various aspects of the company's activi

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ties. Government auditors from the General Accounting Office have been assigned to help the subcommittee.

Although the assertion has been made that our inquiry depends upon the allegations of a disgruntled excorporate officer and fugitive from justice, the fact is that the evidence now before the committee is objective. It is supported by documents and it is not dependent upon hearsay or allegations. It reflects the careful review of many thousands of records and the interviewing of many dozens of witnesses.

General Dynamics is the largest defense contractor in the United States; 94 cents out of every dollar it takes in comes from the Department of Defense. A significant number of its corporate executives and officials are former military or civilian employees of the Department of Defense. By virtue of its size, General Dynamics is the industry leader which stock market analysts use as a benchmark to evaluate the economic health of the industry and to compare it with smaller companies within the industry group.

In addition to the present investigation, the subcommittee has begun a legislative oversight inquiry into the accounting profession and the Securities and Exchange Commission and the relationship of those two bodies. As part of that inquiry, the subcommittee will review in greater detail the contracting and reporting practices of defense contractors and will include some of the information developed in the course of this investigation of General Dynamics.

Today the subcommittee is focusing on certain matters involving the Federal securities laws. These include stock manipulation, false books and records, the Foreign Corrupt Practices Act, and full and fair disclosure to stockholders and investors.

Stock manipulation, the deliberate issuance of false information to protect or to affect the price of stock, is a serious violation of the securities laws. Withholding critical, damaging information is another form of manipulation. The securities laws were specifically enacted to stop these, amongst other forms, of abuses.

Corporate management are the trustees of the assets of the stockholders, and as such have a fiduciary duty to inform the stockholders fully and correctly. The integrity of management is essential for investor confidence. Inflated compensation not reported, corporate boards with unindicted but admitted felons, false recordkeeping-these all are serious questions and raise further serious questions about how well the stockholders are being served.

The jurisdiction of the committee is clear. Our inquiry is directed at the effectiveness and the adequacy of the Federal securities laws. As our investigation has progressed, the subcommittee has alerted our sister committees as appropriate and various Government departments and agencies of matters that we have found to be within their responsibilities.

During the course of this inquiry, however, the committee cannot ignore the adjuration of President Eisenhower in his farewell address. He said this:

In the councils of Government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We will not let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable

citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

These goals of which President Eisenhower spoke cannot be achieved without the fair enforcement of all laws to which corporate America is subject. That is why we are here today.

The gentleman from Pennsylvania is recognized.

Mr. RITTER. Mr. Chairman, I would like to be recognized to make an opening statement.

Mr. DINGELL. The Chair will recognize the gentleman just as quickly as he can. The Chair asks-how many members have opening statements?

[Show of hands.]

Mr. DINGELL. The Chair will advise that opening statements be conducted in conformity with relevance to the business of the committee before us today, and recognition will be given for that purpose.

The gentleman from Minnesota, Mr. Sikorski, is recognized.
Mr. SIKORSKI. Thank you, Mr. Chairman.

As I was reading the voluminous documents of evidence in this matter, I was struck by the fact that businesses in my district in Minnesota do not lead the charmed life of General Dynamics and its select top executives.

Who else can record the largest loss in history, over $5 billion, for tax purposes, at the same time record a $2 billion profit for SEC purposes, and still pay no Federal income taxes since 1972?

Who else can buy in on a major defense contracts, do a miserable job of managing the construction of the weapons system, overrun fixed-price contracts by $1 billion, be willing to settle a claim against the Government for $150 million, and later receive close to $1 billion in taxpayers' money?

Who else could use nonconforming steel in a submarine, foul up the welding program, suffer a total collapse of its quality control program, make a preposterous claim against the Navy insurance process, and then obtain another Government bailout?

What small contractor could suffer the wrath of the Secretary of the Navy, go to the White House and meet with Mr. Meese, then have a pleasant meeting with the Secretary of the Navy that results in the Assistant Secretary running out to your corporate limousine like puppy dog to assure you that the Navy will take care of you? And where else can that Assistant Secretary get hired 18 months later as an executive vice president? Mr. Chairman, the questions continue.

What small contractor could knowingly violate a contract by providing illegal gratuities to a top Navy admiral, falsify the books of the corporation to hide those gifts, have the chairman of the board and the chief financial officer participate in the coverup, and then promote the bagman and receive 1 billion dollars' worth of Government contracts, just weeks after the facts are revealed?

What top official of a small contractor, like the companies in my district, has access to an extensive fleet of corporate jets, to get away to his family plantation and other pleasure spots-and keep in mind that this is charged to the Government-and at the same

time have records about the nature of those flights altered in order to hide the identity of the passengers?

How many other chief executives would nominate for a position on the board of directors a fellow who was under criminal investigation by a grand jury for admittedly having bribed a bunch of State legislators and falsified the corporate books in an embezzlement scheme to get his bribery money back?

Of course, it helps to be the son of the principal stockholder. Equally important, how did he obtain a top secret security clearance from the Department of Defense while under grand jury investigation for bribery?

What other corporation would have a top official distribute classified data, including colored photos of our Nation's most sensitive weapon system, to an individual outside the corporation and still allow that official to stay with the corporation?

It goes on and on. There is something very wrong with the way we procure weapons systems in this country, and particularly the way the Department of Defense oversees and enforces these contracts, especially with this, the largest defense contractor.

Americans are disgusted with the cheating, coverups, deceptions, and the squandering of taxpayer money by General Dynamics, with full knowledge and cooperation of Defense. They should be outraged as well at the security breaches that have gone hand-in-hand with this fraudulent management.

Thank you, Mr. Chairman.

Mr. DINGELL. The Chair thanks the gentleman.

Would other members of the subcommittee be desirous to make a statement?

The gentleman from Oregon.

Mr. WYDEN. Thank you, Mr. Chairman.

First of all, I want to commend you for scheduling this hearing, Mr. Chairman, because I think this is one of the most important hearings that the Congress will hold this year, and in particular I want to commend the staff for an absolutely superior job of taking a very complicated set of issues and assembling them so we can examine this matter in an orderly way.

My colleague, Mr. Sikorski, I think has outlined a number of issues, and all of them very well, and I have just a couple of quick comments.

It seems to me that the evidence that we have accumulated today indicates that the top management in General Dynamics fostered and encouraged an attitude that they were above the laws of the United States. They seem to feel that they are accountable to no one; not to taxpayers, not to shareholders, not to the Federal agencies from which they receive very lucrative contracts under very questionable circumstances.

What I have seen so far, Mr. Chairman and colleagues, is a textbook case of how to fleece the American taxpayer.

I have only one other comment, Mr. Chairman. I come from a small Western State, the State of Oregon, and we have very few defense contractors, no major military installations. We have our share of the defense budget, we contribute about $3 billion a year. The citizens in my State are very willing to do that because they know that we need a strong national defense in this country. But

what they are not willing to do is support a system that is corrupt and what we have seen indicates that we face a very serious case o corruption in our largest defense contractor in this Nation, and now we have to get to the bottom of it and turn it around.

Thank you, Mr. Chairman.

Mr. DINGELL. The Chair thanks the gentleman.
Any further opening statements?

The gentleman from Alabama seeks recognition.
Mr. SHELBY. Thank you, Mr. Chairman.

As I understand it-and I am quoting a 17th century English scholar-he said: "It is not fit that the public trust should be lodged in the hands of any until they are first proved and found fit for the business they are to be entrusted with.'

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Mr. Chairman, to a certain degree we are gathered here today in this committee to determine whether the company in question, General Dynamics, has indeed violated that trust, a trust which goes hand in hand with the nature of their work.

General Dynamics is not in the business of supplying cookies and milk for congressional cafeterias. It is entrusted with helping to maintain the most sacred duty of this Government, national defense.

Consequently, by violating the tenets of that trust, General Dynamics may be weakening the very bond which has so ably served this Nation for 200 years.

Democracy, said George Bernard Shaw, is a device which ensures that we will be governed no better than we deserve.

Mr. Chairman, our democracy is only as strong as the will of the people to abide by its values. Hopefully these hearings will show that when somebody violates the public trust and does what obviously has been done to the American taxpayer, that there's got to be a day of reckoning here in the Congress.

Mr. DINGELL. The chair thanks the gentleman.

The Chair will recognize now a member of the full committee, not a member of the subcommittee, for a brief opening statement relative to the business of the committee today.

Mr. RITTER. Mr. Chairman, I have a statement which I believe is very relevant to the business of the committee today simply because the American people deserve a fair distribution based on the membership in the House and the ratios on the full committee.

Mr. Chairman, 42 percent of the members of the House of Representatives are▬▬

Mr. DINGELL. The business of the subcommittee today is the question of the investigation that the staff has completed relative to compliance of General Dynamics with the securities laws. If the gentleman desires recognition for that purpose, he will be recognized. If the gentleman does not desire recognition for that purpose, he will not be permitted to speak.

Mr. RITTER. Mr. Chairman, point of order?

Mr. DINGELL. The gentleman is not a member of the subcommittee for purposes of making motions. He has been afforded, as a member of the full committee, the opportunity to make a brief statement relative to the business of the subcommittee today.

Mr. RITTER. Mr. Chairman, Mr. Bates is not a member of the subcommittee.

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