Appeal of RECOGNITION EQUIPMENT INCORPORATED

February 17, 1989

In the Matter of the Proposed Suspension of:

RECOGNITION EQUIPMENT INCORPORATED
2701 East Grauwyler Road

Irving, TX 75061-3414

P.S. Docket No. 32/62

APPEARANCE FOR POSTAL SERVICE:
Sandra C. McFeeley, Esq.
Procurement Division
Law Department
United States Postal Service
Washington, DC 20260-1122

APPEARANCES FOR RESPONDENT:
C. Stanley Dees, Esq.
Robert J. Sherry, Esq.
McKenna, Conner & Cuneo
1575 Eye Street, N.W.
Washington, DC 20005-1166

POSTAL SERVICE DECISION

Background

By Notice dated October 7, 1988, the Assistant Postmaster General John J. Davin (hereafter referred to as the APMG or Department Head) notified Respondent, Recognition Equipment Incorporated (REI), that it was suspended from contracting with the United States Postal Service (Postal Service) for a period of 120 days pursuant to Postal Service Procurement Manual (PM) §3.3.2. As stated in the Notice, REI’s suspension was based on its alleged participation in a conspiracy to defraud the Postal Service and related felonies. Specifically, the Notice referred to an October 6, 1988, seven-count grand jury indictment charging REI and two of its former officers with violations of 18 U.S.C. §§37l, 1341, 1343, 1707, and 22 D.C. Code §§3832(a), (c)(1) and 105.

By letter dated October 27, 1988, REI timely appealed the suspension to the Judicial Officer in accordance with 39 C.F.R. §957.27 on the grounds that it was a presently responsible contractor. Both before and after filing its appeal, REI held discussions with Postal Service officials and submitted various documents to the Department Head in an attempt to resolve the matter by agreement of the parties. REI filed a brief on November 14, 1988, in which it requested a hearing. A reply brief was submitted on behalf of the Postal Service on December 5, 1988. At a prehearing conference, the Judicial Officer ruled, over the objection of the Postal Service, that he would consider de novo the validity of the continuing suspension.

A hearing was held on December 21, 1988, at which REI presented the testimony of three witnesses. Both parties filed post-hearing briefs.

While the matter was awaiting decision, the Department Head notified REI on February 3, 1989, that the suspension had been renewed for an additional 120-day period. In the letter notifying the Judicial Officer of the renewal of the suspension, Postal Service counsel stated that the renewal appears to render the present appeal moot. REI took a contrary position in its letter dated February 7, 1989. For the reasons stated in REI’s letter, the pending appeal is not considered to be moot.

Procedural Matters

In its post-hearing brief the Postal Service continues to vigorously contest the Judicial Officer’s ruling that he has jurisdiction to make a de novo review of the propriety of the suspension of REI. According to the Postal Service, the PM limits the Judicial Officer’s jurisdiction to a review of the validity of the Department Head’s suspension decision. REI argues that the Judicial Officer is authorized to consider post-suspension events in determining whether the continued suspension is necessary to protect the interests of the Postal Service.

Contrary to the Postal Service’s argument, the PM and the Rules of Practice authorize a de novo review of the suspension decision. Section 3.3.2.j of the PM requires the Judicial Officer to base his decision on the papers submitted or "upon other appropriate opportunity to be heard" (emphasis supplied). The Rules of Practice applicable to suspension proceedings where a request for a hearing has been granted, state that the Judicial Officer has the discretion to consider "supplemental pleadings setting forth transactions, occurrences, or events which have transpired since the date of the pleading sought to be supplemented and which are relevant to any of the issues involved." 39 C.F.R. §§957.11(d), 957.15(d), 957.27(c) (1988).

Furthermore, since case law and the Rules of Practice both provide the suspended contractor with an opportunity to be heard and to present evidence, there is no valid reason, given the drastic nature of suspension, to disregard post-suspension information which both parties have had an opportunity to address at a hearing. See, e.g., Transco Sec., Inc. v. Freeman, 639 F.2d 318, 321 (6th Cir.), cert. denied, 454 U.S. 820 (1981); Myers & Myers, Inc. v. United States Postal Service, 527 F.2d 1252, 1259 (2d Cir. 1975); Horne Bros. v. Laird, 463 F.2d 1268, 1270-71(D.C. Cir. 1972); Austin Hatcher, Jr., P.S. Docket No. 12/177 (P.S.D. May 13, 1982), p. 5; 39 C.F.R. §957.27(c) (1988); Note, “Graylisting” of Federal Contractors: Transco Security, Inc. of Ohio v. Freeman and Procedural Due Process Under Suspension Procedures, 31 Cath. U.L. Rev. 731, 733-34 (1982). A failure to consider such information could result in the continued suspension of a presently responsible contractor and thus be penal in nature. See, e.g., Peter Kiewit Sons’ Co. v. United States Army Corps of Engineers, 534 F. Supp. 1139, 1154 (D.D.C. 1982), rev’d on other grounds, 714 F.2d 163 (D.C. Cir. 1983); Roemer v. Hoffman, 419 F. Supp. 130, 131 (D.D.C. 1976). Moreover, just as the responsibility of a prospective contractor is judged at the time of award and not at the time of submission of the bid or offer, Heli-Jet Corp. v. United States, 2 Cl. Ct. 613, 621 (1983), the present responsibility of a suspended contractor should be determined at the time of the hearing and not at the time of the suspension decision. Accordingly, the prehearing ruling that post-suspension information and events will be considered in determining whether the continued suspension of REI is necessary to protect the interests of the Postal Service is affirmed.

Findings of Fact

I. Introduction

1. REI is a publicly-traded corporation with approximately 2,700 employees (Transcript (Tr.) 17, 63).

2. REI is headquartered in Irving, Texas (Respondent (Resp.) Exhibit (Exh.) 1, p. 8). The company has several divisions located in the United States and abroad (Resp. Exh. 1-9; Tr. 58-62).

3. REI designs, manufactures, markets and services data capture and document management systems (Resp. Exh. 1, pp. 1, 6). Slightly less than 10 percent of REI’s overall business is derived from the federal sector (Tr. 18). The company has two principal federal sector operations (Tr. 20). One develops and sells data entry and optical character reader products to the Federal Reserve and the Postal Service (id.). This activity is based at REI corporate headquarters in Irving, Texas (Tr. 20-21). The second operation, Federal Systems Division (FSD), is a systems integrator located in McLean, Virginia (Resp. Exh. 1, p. 8; Tr. 21, 61). FSD markets different products and services than the Irving-based operation and has never marketed or produced mail sorting equipment (Tr. 20-21).

4. REI’s Board of Directors (Board) consists of four outside and two inside directors (Tr. 24-25; see Resp. Exh. 1-7). REI’s outside directors presently hold, or have held, executive or senior management positions at other companies (Resp. Exh. 1-7; Tr. 24-25). All REI directors hold other directorships in addition to their duties at REI (Resp. Exh. 1-7).

II. Events Underlying the Suspension

5. On October 6, 1988, an indictment was issued by a grand jury of the United States District Court for the District of Columbia against REI and two of its executives – Mr. William G. Moore, Jr., then Chairman of the Board, President and Chief Executive Officer (CEO), and Mr. Robert W. Reedy, then Vice President of Marketing (Postal Service (PS) Exh. 1).

6. In the seven-count indictment, the grand jury charged REI and Messrs. Moore and Reedy with conspiracy to defraud the Postal Service and to commit offenses against the United States in violation of 18 U.S.C. §371; mail and wire fraud in violation of 18 U.S.C. §§1341, 1343; theft of property used by the Postal Service in violation of 18 U.S.C. §1707; and receiving stolen property in violation of 22 D.C. Code §§3832(a), (c)(1) and 105 (id.).

7. The indictment specifically alleges that between approximately July 1984 and October 1, 1986, REI, Messrs. Moore and Reedy and other unindicted co-conspirators conspired to obtain an award for REI of a Postal Service contract for multi-line optical character reading (MLOCR) equipment through noncompetitive means (id. at 7, 11-12). In furtherance of this scheme, REI agreed at the insistence of Mr. Peter E. Voss, then Vice-Chairman of the Postal Service Board of Governors (BOG), to hire John R. Gnau, Jr. and Associates, Inc. and related firms, to promote REI’s MLOCR cause before the Postal Service (id. at 13, 28-29; see Resp. Exh. 3-6). Through these public relations firms, REI illegally paid a gratuity to Mr. Voss in return for Mr. Voss’s assistance in obtaining the MLOCR contract for REI (PS Exh. 1, p. 10-11, 13-15, 19, 24, 30-31, 34, 40-41, 43-44). REI used confidential information obtained through Mr. Voss from the BOG to place before the BOG and Postal Service management extensive materials favorable to REI’s position (id. at 13, 16-17, 32-33). These materials were represented to be the independent work and judgment of Governors Voss and Ruth Peters and the BOG’s Technology and Development Committee, but in fact were authored by defendants and an unindicted co-conspirator with the aid of the stolen confidential information (id. at 16-17, 33).

The indictment further alleges that when it appeared to the co-conspirators that then Postmaster General Paul N. Carlin was an obstacle to their efforts to obtain a sole-source award, they instituted a plan to remove him and to influence the selection of his successor (id. at 18-22, 39, 41-44). Moreover, through Mr. Voss, REI gained access to the BOG to influence the removal of Senior APMG James V. Jellison because he was thought to oppose REI’s plan to obtain a noncompetitive contract (id. at 15-16, 21, 22, 35, 43-44).

8. The indictment does not allege that any REI officials other than Messrs. Moore and Reedy participated in or had knowledge of the conspiracy to defraud the Postal Service (Tr. 11-12; see PS Exh. 1, pp. 22-24).

9. According to the indictment Messrs. Moore and Reedy concealed the conspiracy from REI’s Board and other REI representatives (PS Exh. 1, pp. 22-24).

10. In early 1986, the Postal Service and the grand jury investigated potential improprieties in the MLOCR procurement process (Resp. Exh. 1, p. 16). Following the initiation of these investigations, allegations concerning potential improprieties in the MLOCR procurement process were publicly disclosed (id.).

11. As a result of a subpoena issued by the grand jury in the spring of 1986 for various REI corporate documents and the criminal proceedings against Messrs. Voss and Gnau, see FOFs 14-15, REI retained Locke Purnell Rain Harrell as outside counsel to assist the company and the Board in monitoring the MLOCR investigation (Resp. Exh.. 1, p. 16; Tr. 74-76: see Resp. Exh. 3-11; PS Exh. 2, p. 2). In-house and outside counsel attended interviews conducted by the United States Attorney’s Office, reviewed tens of thousands of documents furnished by REI pursuant to subpoena, debriefed grand jury witnesses and conferred with counsel for other individuals involved in the investigation (Resp. Exh. 1, pp. 3, 16-17; Resp. Exh. 3-11; Resp. Exh. 4, pp. 1-2; Tr. 32-33).

12. In March 1986 the Board amended REI’s bylaws to permit the corporation to indemnify employees for legal expenses incurred in connection with civil, criminal, administrative or investigative proceedings arising in connection with their REI employment (PS Exh. 2-4, art. 9). Under the revised bylaws, REI employees are required to reimburse the corporation only if found guilty or civilly liable and REI directors have the discretion to determine that reimbursement of legal fees will not be required (id.).

13. In May 1986, the United States Attorney’s Office advised REI that it was neither a subject nor a target of the investigation (Resp. Exh. 3-11; Resp. Exh. 4, p. 1; Tr. 33, 63-64, 74).

14. On May 30, 1986, Mr. Voss pleaded guilty to receiving an illegal gratuity and embezzlement and on October 24, 1986, he was sentenced to a four-year prison term and fined $11,000 (Resp. Exh. 1, p. 16).

15. In November 1986, Mr. Gnau pleaded guilty to charges of conspiracy and paying an illegal gratuity to Mr. Voss and in December 1986 he was sentenced to three years in prison and fined $10,000 (id.).

16. In October 1987, REI and Messrs. Moore and Reedy received target letters from the United States Attorney’s Office, informing them they were likely to be indicted (id. at p. 3; Resp. Exh.. 4, p. 1; Tr. 80).

17. As a result of the target letter, REI engaged the law firm Davis Polk & Wardwell as its criminal counsel (Tr. 78-80; see PS Exh. 2, p. 2). The Board also informed Messrs. Moore and Reedy that their legal expenses would be covered pursuant to article 9 of the corporate bylaws and an October 8, 1987, Board resolution (Resp. Exh. 3-2; Resp. Exh. 3-11).

18. REI took no immediate action as a result of the target letters to separate Messrs. Moore and Reedy from active involvement in the management of the company.

19. In late 1987, the Board retained the law firm of Haynes and Boone to represent the outside directors and to advise whether the Board and the other law firms engaged by REI had exercised proper diligence throughout the investigation (Resp. Exh. 3-11; PS Exh. 2, p. 2; Tr. 82-84).

20. None of the law firms which assisted REI throughout the investigation were requested to make an independent inquiry into possible corporate wrongdoing or ethical violations (Tr. 84-85).

21. REI spent $1.5 million in conjunction with the MLOCR investigative process (Tr. 82).

22. In early 1988, Mr. Moore discussed with one of the then outside directors, Mr. Thomas L. Ringer, the possibility of Mr. Ringer succeeding him in the event of indictment (PS Exh. 2, p. 2; Tr. 62-63; see Tr. 23). At approximately the same time, on the advice of outside counsel, the Board asked Mr. Ringer if he would be available to replace Mr. Moore should Mr. Moore be indicted (PS Exh. 2, p. 2; Tr. 63).

23. On October 6, 1988, the grand jury handed down the indictment against REI and Messrs. Moore and Reedy for conspiracy to defraud the Postal Service and related felonies (PS Exh. 1). The charges in the indictment were based on allegations discussed in FOF 7.

III. REI’s Suspension

24. On October 7, 1988, REI and Messrs. Moore and Reedy were suspended for a period of 120 days based on the allegations in the indictment (Resp. Exh. 1-6).

IV. Changes in REI’s Board and Senior Management Subsequent to the Suspension

25. On October 20, 1988, the Board accepted the resignations of Messrs. Moore and Reedy from their positions with the company and placed them on temporary leaves of absence (Resp. Exh. 1, pp. .4-5, 21; Resp. Exh. 1-10, p. 1; Resp. Exh. 3-7; PS Exh. 2-1). Both former executives continue to hold stock in the company and receive full salary which for Mr. Moore included a 5 percent increase for FY 1989 (Tr. 39, 40-41, 43-44). Messrs. Moore and Reedy also continue to drive company cars, enjoy life insurance, health insurance, and other executive benefits, including continuing membership in a luncheon club (Tr. 39-40). Mr. Moore no longer entertains or represents the company ceremonially (Tr. 39). Neither Mr. Moore nor Mr. Reedy is now entitled to an incentive bonus, which apparently consisted of stock options and historically constituted one-quarter to one-half their total compensation (Tr. 29, 40-41). REI has provided both defendants with off-premises offices and secretarial assistance for the purpose of preparing their defense to criminal charges (Tr. 28-29, 41, 44).

26. On October 20, 1988, the Board appointed Mr. Ringer, a former outside director, as the new President, CEO and Chairman of the Board (Resp. Exh. 1-10, p. 1; Resp. Exh. 3-7; see Tr. 14, 23).

27. Mr. Ringer has 27 years of experience in the management of electronics and information processing companies (Resp. Exh. 1, p. 5; Resp. Exh. 1-10, p. 1; see Tr. 14-16). Mr. Ringer served as CEO of three companies before coming to REI (Tr. 36-37). One of these companies engaged in some public sector contracting (Tr. 37-38). Prior to assuming his new duties, Mr. Ringer served as outside director of REI for five years (Resp. Exh. 1, p. 5; Tr. 23-24).

28. Mr. Ringer has known Mr. Moore for thirteen years and has worked with him in three companies where Mr. Ringer was a consultant (Tr. 45). In early 1983, Mr. Ringer came to REI as an outside director at Mr. Moore’s invitation (id.). The men and their wives have socialized, shared meals and in conjunction with business functions have taken vacations together (Tr. 45-46). Mr. Ringer no longer shares meals with Mr. Moore (Tr. 46).

29. Mr. Ringer met Mr. Reedy subsequent to becoming a member of the Board, and the two men do not have a social relationship (Tr. 46-47).

30. Mr. Ringer believes Messrs. Moore and Reedy are innocent (Resp. Exh. 3-4, p. 1; Tr. 35; see Resp. Exh. 1-10, p. 1). If they are convicted, however, Mr. Ringer stated that their status as employees on administrative leave will be terminated and they will no longer be associated with REI (Tr. 35-36; see Resp. Exh. 4, pp. 2-3). The Board resolution evidencing Messrs. Moore’s and Reedy’s temporary change in status within the company does not indicate that their employment will be terminated in the event they are convicted (Resp. Exh. 3-7).

31. Upon assuming REI’s leadership, Mr. Ringer prepared several employee communications, including a videotape, to inform employees of his commitment to managing the company (Resp. Exh. 3-4; Resp. Exh. 3-10; Tr. 25-26). He also participated in planning meetings, visited offices abroad, made customer calls, reviewed ethics training materials and ethics policy changes, attended a meeting of the company’s Corporate Ethics Committee, and restructured several sales and development efforts (Tr. 26-27, 29-31, 68-69).

32. The transition from Mr. Moore’s leadership was virtually completed 12 days after Mr. Ringer took charge (Tr. 28; see Resp. Exh. 2-2, p. 1), with the exception of one minor customer call, Mr. Moore has had no involvement in the management of the company and has not visited REI’s offices since early November 1988 (Resp. Exh. 2-2; Tr. 28, 42-43). Although Mr. Moore may drive onto REI’s premises, he is not entitled to walk through REI offices and is unwelcome at REI’s eating or recreational facilities (Tr. 42).

33. Mr. Dwayne L. McAfee, the Senior Vice President for Operations of REI, has assumed Mr. Reedy’s position and duties (Resp. Exh. 1, pp. 5, 22; Resp. Exh. 1-10, p. 1).

34. Except for the temporary leaves of absence of the two individual defendants and their replacement with Messrs. Ringer and McAfee, the composition of REI senior management and the Board has not changed since the indictment (Compare Resp. Exh. 1-8 with Resp. Exh. 1-9; Tr. 25).

V. REI’s Self-Governance Program

35. REI’s self-governance program was initiated in late 1987 and was accelerated in the fall of 1988 as a result of the indictment and suspension (Resp. Exh. 4, pp. 3-4; Resp. Exh. 10, p. 1; PS Exh. 2, pp. 5-6; Tr. 91). This program includes: (a) a revised Code of Business Ethics and Conduct and corporate policy revisions, (b) a Corporate Ethics committee, (c) a Corporate Ethics Officer, (d) an ethics hotline, (e) ethics awareness materials, (f) compliance reviews, (g) videotapes, (h) ethics education and training programs and (i) an ombudsman proposal (Resp. Exh. 4, pp. 3-4; Resp. Exh. 10; Tr. 91; see Resp. Exh. 1, pp. 18-34).

A. Revised Code of Business Ethics and Conduct and Corporate Policy Revisions

36. REI has had a code of ethics since at least 1982 (Resp. Exh. 2-1, p. 1; Tr. 92, 119). REI’s code of ethics has always been applicable to FSD (Tr. 147). Company policy dictates that every employee read the code of ethics upon joining the company (Code of Business Ethics and Conduct, art. 8.2, Resp. Exh. 3-9; Tr. 120-21).

37. In 1986, Mr. Moore issued a revision to the company’s code of ethics (Resp. Exh. 1, pp. 18-19; Resp. Exh. 3-9; Tr. 119). The Board did not participate in the issuance of this revision to corporate policy (Tr. 119).

38. On June 15, 1988, REI issued a revised code of ethics entitled the “Code of Business Ethics and Conduct” (Resp. Exh. 3-9). This revised code was drafted largely by outside counsel and was not approved by the Board (Tr. 94, 118; see Tr. 51-53). The revised code provides guidance and policy in areas such as: gifts and entertainment for public officials; bribery, gratuities and kickbacks; contingent fee arrangements; and improper contract bidding and negotiation practices (Code of Business Ethics and Conduct, Resp. Exh. 3-9). Unlike earlier versions of the code of ethics, the June 15, 1988, revisions make reference to penalties for violation (id. at art. 8.3). Although this revised code of ethics was sent to employees with a policies and procedures manual, it is unclear from the record whether all REI employees and directors received copies (Tr. 120).

39. On October 28, 1988, REI issued a new corporate policy governing the provision of meals, gifts and entertainment to public officials (Resp. Exh. 1, pp. 28-29; Resp. Exh. 1-19; Tr. 93).

40. On October 31, 1988, REI’s Board, along with Mr. Ringer, approved further revisions to the company’s code of ethics (Resp. Exh. 1-13; Tr. 93-94), previously, the code of ethics was approved solely by the CEO (Tr. 94). This most recently revised code of ethics provides for greater restrictions on the retention and use of public sector marketing consultants and adds more specific prohibitions concerning solicitation, receipt and use of source selection or competitors’ proprietary information (Resp. Exh. 1-13, arts. 6.1.4, 6.2.5; Tr. 93).

41. The October 31, 1988, version of the code of ethics also establishes the position of FSD Ethics Officer (Resp. Exh. 1-13, art. 4.3; Tr. 93). This officer is responsible for proposing modifications and updates to the code of ethics, with specific emphasis on public sector contracting; assisting in the development and implementation of REI’s ethics education and training programs and serving as a member of the Corporate Ethics Committee (Resp. Exh. 1-13, art. 4-3). On October 31, 1988, the Board designated Mr. David L. Heys, Director of Contracts, FSD, as the FSD Ethics Officer (Resp. Exh. 1, p. 24; see Resp. Exh. 1-3).

42. On October 31, 1988, the revised code of ethics was distributed to all domestic employees (Resp. Exh. 1-13; Tr. 93-94). In an accompanying memorandum, Mr. Ringer required each such employee to read the code by December 1, 1988, and execute a certificate that he or she was in compliance with its provisions (Resp. Exh. 1-13; Tr. 94-95, 148; see Tr. 48-49). By mid-December 1988, 80 percent of all REI employees and 100 percent of FSD employees had submitted certifications (Tr. 95, 148).

43. On October 31, 1988, REI issued a corporate policy which established stricter approval levels and more extensive documentation as a prerequisite to retaining public sector marketing consultants (Resp. Exh. 1, pp. 27-28; Resp. Exh. 1-18; Tr. 93). On November 18, 1988, REI implemented a total ban on the use of marketing consultants in federal procurements (Resp. Exh. 4, p. 3; Resp. Exh. 10, p. 3; PS Exh. 2-5; Tr. 34, 96, 139). FSD has always had a policy of not using marketing consultants (Tr. 139).

44. Corporate policy revisions are generally proposed by in-house counsel (Tr. 69). Mr. Ringer reviewed and approved recent corporate policy revisions (id.).

B. Corporate Ethics Committee

45. The June 15, 1988, version of the code of ethics establishes a Corporate Ethics Committee and a Corporate Ethics Officer (Code of Business Ethics and Conduct, Resp. Exh. 3-9, arts. 4.1, 4.2).

46. The Corporate Ethics Committee is responsible for periodic review of the code; development of programs and materials for REI’S ethics education and training program; investigation and resolution of potential violations of the code or applicable laws or regulations; and engagement of outside counsel to provide ethics counseling and investigative assistance (Resp. Exh. 1-13, art. 4.1; Resp. Exh. 3-9, art. 4.1).

47. On September 8, 1988, the Board appointed Mr. Thomas A. Loose, Senior Vice President, Secretary and General Counsel, Mr. George A. O’Brien, Vice President and Chief Financial Officer, and two outside directors, Ms. Lucy Billingsley and Mr. William Seay, to serve as members of the Corporate Ethics Committee (Resp. Exh. 10, pp. 1-2; Tr. 92-93). The Committee has held one meeting (Tr. 115). The activities of the Committee have been described to the Board, but the Board has not approved them (Tr. 114-15). Mr. Ringer was unable to identify actions taken by the Corporate Ethics Committee (Tr. 71).

C. Corporate Ethics Officer

48. The Corporate Ethics Officer is responsible for developing and maintaining ethics education and training programs for employees; coordinating and overseeing implementation of policies related to the subject matter of the code of ethics; ensuring that new employees receive a copy of the code and a briefing concerning ethics and standards of conduct; updating the code; and maintaining liaison with the Corporate Ethics Committee (Resp. Exh. 1-13, art. 4.2).

49. The Board appointed Mr. O’Brien as Corporate Ethics Officer in September 1988 (Resp. Eth. 10, pp. 1-2; Tr. 90-91, 115). Mr. O’Brien’s primary activity as Corporate Ethics Officer has been the making of the videotape discussing the allegations of the indictment (Tr. 115; see FOF 58).

50. Mr. O’Brien came to REI at Mr. Moore’s invitation in 1982 (Tr. 116-17), within a few weeks of his arrival at REI, Mr. O’Brien was appointed to the position of Vice President and Chief Financial Officer (Resp. Exh. 1-14; Tr. 116-17). Mr. O’Brien has known Mr. Moore since 1979 and worked for him for two and one-half years at another company (Tr. 116-17).

D. Ethics Hotline

51. On November 1, 1988, REI implemented a hotline for reporting suspected violations of the code of ethics or applicable procurement-related laws and regulations (Resp. Exh. 1, pp. 25-26; Resp. Exh.. 10, p. 3; Tr. 96-98). The hotline is answered on a confidential basis by the Corporate Ethics Officer, and permits each employee to anonymously ask for assistance on compliance with matters involving ethical issues (Tr. 96-97). The Corporate Ethics Officer, in turn, refers any suspected improprieties to the General Counsel or outside counsel for review, as appropriate (Tr. 97-98).

52. The company has publicized the hotline through a memorandum from Mr. Ringer to employees (Resp. Ex. 1-13; Tr. 98), posters (Resp. Exh. 1-16; Tr. 98), the corporate newsletter (Resp. Exh. 2-1, p. 2; Tr. 98), and a videotape by Mr. O’Brien (Resp. Exh. 11; Tr. 98-99).

E. Ethics Awareness Materials

53. In November 1988, REI distributed corporate posters concerning integrity in government contracting at all of its domestic offices (Resp. Exh. 1, p. 33; Resp. Exh.. 1-16; Resp. Exh. 10, p. 3; Tr. 98, 149). The poster, signed by Mr. Ringer, discusses a number of special government contracting requirements and reminds employees of the availability of the Corporate Ethics Committee and the ethics hotline (Resp. Exh. 1-16).

54. The October/November 1988 issue of REI’s newsletter, The Letter of Recognition, informs employees of the appointment of Messrs. Ringer and McAfee, reminds employees of their ethical obligations and publicizes the hotline, the role of the Corporate Ethics Committee, and the most recent revisions to the code of ethics (Resp. Exh. 1, pp. 33-34; Resp. Exh. 2-1; Resp. Exh. 10, p. 2; Tr. 98).

F. Compliance Reviews

55. In December 1988, the Washington, DC, law firm of McKenna, Conner & Cuneo conducted compliance reviews at REI’s corporate headquarters and at FSD (Resp, Exh. 10, p. 5, Tr. 108-09; see Resp. Exh. 1-20; Resp. Exh. 1-21). At FSD, the McKenna firm was assisted by the Washington, DC, law firm of Hogan & Hartson and the public accounting firm of Price Waterhouse (Tr. 158-59).

56. These reviews involved interviews with company officials and examination of company policies and procedures (Resp. Exh.. 1-20; Resp. Exh. 1-21; Tr. 109). The review objective was to determine whether company policies and procedures relating to government contracting comply with relevant statutes and regulations (Resp. Exh. 1, p. 29; Resp. Exh. 1-20; Resp. Exh. 1-21).

57. These reviews were to be completed on December 23, 1988, when outside counsel and Price Waterhouse were to deliver their final reports to REI and FSD (Resp. Exh. 10, p. 5; Tr. 113). The compliance review program was reviewed by the Corporate Ethics Committee but not by the Board (Tr. 111).

G. Videotapes

58. Messrs. Ringer and O’Brien both made videotapes to discuss the allegations in the indictment with REI employees and to remind them of the company’s commitment to ethical conduct (Resp. Exh. 3-10; Resp. Exh. 11; PS Exh. 2-6; Tr. 26, 99-100). Mr. O’Brien explained in his videotape that the company believes that it and its former officers are innocent (Resp. Exh. 11; PS Exh. 2-6, pp. 1-2; Tr. 99-100). Mr. O’Brien stressed, however, that if any REI employee participated in or condoned the conspiracy alleged in the indictment, he or she would be in violation of company policy and would be punished accordingly (Resp. Exh. 11; PS Exh. 2-6, p. 3; Tr. 99-100, 150-51). The O’Brien videotape also discusses the existence of the ethics hotline (PS Exh. 2-6, p. 3; Tr. 100).

59. All FSD employees viewed Mr. O’Brien’s videotape on December 2, 1988 (Tr. 150-51). This videotape was to be distributed to all other REI employees on December 23, 1988 (see Resp. Exh. 10, p.6).

60. Inside and outside counsel collaborated to write the script for the O’Brien videotape (Tr. 117). Mr. Ringer read and approved this script (Tr. 71).

H. Ethics Education and Training Programs

1. Corporate Headquarters

61. On December 13, 1988, an ethics education and training seminar was offered to 20 to 30 of the 700 employees at corporate headquarters specifically involved in contracting (Resp. Exh. 10, p. 5; Tr. 102-05; see Resp. Exh. 1-22). Employees selected for this training program had direct responsibility for Irving’s public-sector contracting, or were managers of employees with commercial contracting responsibilities (Tr. 105). REI had assured the Postal Service in November 1988 that all domestic employees would participate in an ethics education and training program (Resp. Exh. 1, p. 32; see Resp. Exh. 4, p. 4).

62. The December 13, 1988, ethics education and training session was conducted by Mr. Wil H. Adams, Jr., of McKenna, Conner & Cuneo and included review and discussion of topics such as code of ethics and compliance issues; gifts, gratuities, bribery and kickbacks; allowable costs and cost principles; retention and use of consultants; and a variety of other topics (Resp. Exh. 1-22; Resp. Exh. 10, p. 5; Tr. 102, 106, 123).

63. At this session, REI corporate headquarters employees viewed two videotapes entitled "Tough Decisions: Ethical Issues in Government Contracting" produced by the Ethics Resource Center, Inc. (ERC) (Resp. Exh. 9; Resp. Exh. 10, p. 5; Resp. Exh. 12; Tr.106-07). These videotapes contain a variety of scenarios that raise ethical issues in government contracting such as use of consultants, intelligence gathering, favoritism toward vendors, mischarging, and defective pricing (Resp. Exh. 9, p. 4). After the viewing of the videotapes, the attendees discussed the ethical issues arising from their review (see Resp. Exh. 12; Tr. 107, 124).

64. Although Mr. Ringer read the training materials for the December 13, 1988, ethics education and training session, neither Mr. Ringer nor Mr. O’Brien contributed to, participated in, or attended the REI ethics education and training session (Tr. 68, 122-23).

65. There has been no formal evaluation of REI’s ethics education and training program (Tr. 124-25).

2. FSD

66. In the fall of 1987, as a result of receiving notification that it might be indicted, REI corporate and FSD management began planning an education and training program for FSD on ethical issues in the field of government contracting (Resp. Exh. 10, p. 1; Tr. 162-63).

67. In January 1988, REI retained Mr. Robert Kinney of Hogan & Hartson to provide FSD with general government contracts counseling and ethical education and training (Resp. Exh. 10, p. 1; PS Exh. 2, p. 2; Tr. 145, 162).

68. During the spring and summer of 1988, Hogan & Hartson recommended for discussion with FSD employees a series of case studies involving ethics questions and prepared a handbook concerning the gratuities policies of each federal agency (Resp. Exh. 10, p. 1; Tr. 145-46). This handbook was distributed to all FSD employees and a number of Irving-based employees, and FSD employees received sensitivity training on gratuities issues (Resp. Exh. 10, p. 1; Tr. 127-28, 147).

69. On November 10, 1988, FSD commenced a series of ethics education and training sessions covering 14 different categories of legal and ethical issues pertinent to public-sector contracting (Resp. Exh. 10, p. 3; Tr. 149-51, 155-56; see Resp. Exh. 1-23). The majority of the sessions included a directors’ training session followed by a general training session for FSD employees (Tr. 150, 155-56, 167-68; see Resp. Exh. 10, pp. 4-6). At the directors’ session Mr. Kinney trained FSD executives and served as a discussion leader for the case studies that would be presented at the upcoming general training session (Tr. 167-68). FSD executives conducted the general training sessions and Mr. Kinney was present at all sessions to answer questions (Tr. 155-57, 168).

70. At the December 2, 1988, ethics education and training session, all FSD employees viewed and discussed the ERC videotapes in addition to the O’Brien videotape (Tr. 150-151; see Resp. Exh. 9, 12; FOF 58).

71. Between approximately November 7, 1988, and December 21, 1988, FSD officers and employees devoted 15 percent of their time to ethics-related issues (Tr. 156).

72. FSD will hold periodic refresher courses in ethics education as well as introductory courses for new hires (id.).

I. Appointment of a Corporate Ombudsman

73. In a November 11, 1988, letter to the Department Head, Mr. Ringer proposed to appoint a corporate ombudsman acceptable to the Postal Service and the Army to monitor its ethical conduct program (Resp. Exh. 4, pp. 3-4; PS Exh. 2, pp. 3-5).

74. Mr. O’Brien stated at the hearing that REI was prepared to establish the position of ombudsman within 30 days from the date of an agreement with the suspending agencies (Tr. 125; see PS Exh. 2, p. 3).

75. Mr. O’Brien does not believe it is necessary to appoint an ombudsman as part of REI’s self-governance program (Tr. 127). Mr. David A. Gipe, FSD, is in favor of appointing an ombudsman (Tr. 169).

VI. REI’s Federal Systems Division

76. FSD was established in 1985 (Resp. Exh. 1, p. 8; see Tr. 132-33). Mr. Gipe has served as the Vice President and General Manager of FSD since that time (Tr. 132; see Resp. Exh. 1-1). When Mr. Gipe arrived at REI the company’s public-contracting operations were very limited and it was a condition of his employment that he would build FSD from the ground up (Tr. 132-33).

77. FSD is a systems integrator (Tr. 21, 134). It responds to office automation or similar solicitations issued by federal agencies by proposing systems comprised of commercially available, off-the-shelf products (Tr. 134-35). FSD adds value to these products through its selection, maintenance, training and integration processes (id.). Unlike the operation at REI headquarters in Irving, FSD performs neither manufacturing nor research and development (Resp. Exh. 1, pp. 8-9; Tr. 135). Ninety-nine percent of FSD procurements involve no REI products (Tr. 135).

78. Mr. Gipe makes all day-to-day business decisions affecting FSD without input from Irving (Resp. Exh. 1, p. 10; Tr. 137). He is responsible for hiring and firing, contract acceptance, pricing, staffing, bid/no-bid decisions and decisions on whether to team with other companies in response to solicitations issued by federal agencies (id.). Mr. Gipe signs all contracts awarded to REI/FSD in response to proposals submitted by FSD (Tr. 138). Mr. Heys, Director of Contracts, administers all REI public-sector contracts, with the exception of contracts for mail sorting or currency processing equipment (id.).

79. All FSD employees report directly to Mr. Gipe (Resp. Exh. 1, p. 10). None of the FSD employees report to Irving counterparts with the exception of the controller who has a “dotted line” responsibility to Mr. O’Brien (Tr. 141). Mr. Gipe reports directly to Mr. Ringer (Resp. Exh. 1, p. 10; Tr. 139-40) and Mr. Ringer can veto FSD decisions (Tr. 60-61). Although prior to October 20, 1988, Mr. Gipe had reported first to Mr. Reedy and then to Mr. Moore, neither of these individuals ever overturned any business decisions made by Mr. Gipe (Tr. 140-41).

80. FSD has its own marketing, business development, technical operations, customer service, contracts, pricing, finance, administrative and controller functions (Resp. Exh. 1, p. 9).

81. FSD also has its own budget, but a central accounting department handles the functional accounting of FSD (Tr. 60). REI corporate headquarters performs several services for FSD on a routine basis, such as payroll processing, benefits administration and handling accounts receivable and payable (Tr. 139). In addition, corporate headquarters monitors FSD’s profitability on a periodic basis by reviewing summary information concerning orders, revenues, profits and expenses (Tr. 137-38).

Decision

Notwithstanding the fact it was named as a defendant in the October 6, 1988, indictment, REI contends that it is a presently responsible contractor and that the Postal Service suspension should therefore be terminated. In the alternative, REI argues that the suspension should not apply to FSD since this division is an autonomous operation which did not participate in the events described in the indictment. The Postal Service argues that REI is not a presently responsible contractor and that the remedial measures it has taken to reaffirm government confidence in its integrity are superficial, insufficient and incomplete. Furthermore, it is the position of the Postal Service that the suspension should not be lifted with respect to FSD since this division is directly controlled by REI.

Under applicable law and regulations, the Postal Service may suspend an indicted contractor to protect its interest in doing business with trustworthy contractors. PM §3.3.2.i; see Peter Kiewit Sons’ Co. v. United States Army Corps of Engineers, 534 F. Supp. 1139, 1148 (D.D.C. 1982), rev’d on other grounds, 714 F.2d 163 (D.C. Cir. 1983); Stanko Packing Co. v. Bergland, 489 F. Supp. 947, 949 (D.D.C. 1980); Roemer v. Hoffman, 419 F. Supp. 130, 131-32 (D.D.C. 1976). A contractor may not be suspended “for punishment.” See Peter Kiewit Sons’ Co., 534 F. Supp. at 1154; Roemer, 419 F. Supp. at 131.

In assessing the business risk a particular contractor poses to the government, the Postal Service is required to make a two part determination. First, the Postal Service must determine whether the contractor has been indicted for one of the crimes listed as causes for suspension in PM §3.3.2.i.[1] Second, the Postal Service must next make a discretionary evaluation as to whether the subject contractor is presently responsible. See Roemer, 419 F. Supp. at 131-32. A contractor may only be suspended if the Postal Service has cause for suspension under PM §3.3.2.i and has made an affirmative determination that the contractor is not presently responsible. Id.

In making a present responsibility determination the government is required to assess the present and future business risk of a contractor based on moral integrity, honesty and ability to perform. Id.; 39 Comp. Gen. 468, 470 (1959); PM §3.3.2.i.1(c). Past wrongdoing can be the basis for a determination that a contractor is not presently responsible, so long as mitigating factors are given due consideration. Shane Meat Co. v. Department of Defense, 800 F.2d 334, 336-38 (3d Cir. 1986); Agan v. Pierce, 576 F. Supp. 257, 260-62 (N.D. Ga. 1983); Stanko Packing Co., 489 F. Supp. at 949; Roemer, 419 F. Supp. at 131-32; Nathan Dal Santo, P.S. Docket Nos. 15/130 and 16/33 at 3, 5-7 (P.S.D. June 10, 1983); see Paul E. Jaguish, Jr., P.S. Docket No. 19/124 at 25 (P.S.D. Apr. 12, 1985).

REI’s indictment in its corporate capacity for the serious offense of conspiring to defraud the Postal Service and related felonies manifests a lack of business integrity and constitutes grounds for suspension under PM §3.3.2.i. See La Bar Trans. Corp., P.S. Docket No. 10/58 at 4 (P.S.D. Jan. 30, 1981). Continued suspension of REI is therefore reasonable absent a showing by REI that it possesses the requisite present responsibility to participate in Postal Service programs.

REI argues that it has taken several steps to mitigate the force of the indictment as an indication of its present responsibility. Mitigating factors proposed by REI include its response to the MLOCR investigation and its implementation of management changes and a self-governance program. Each of these factors is addressed in turn.

REI’s Review of and Response to the MLOCR Investigation

REI argues in its prehearing brief that its response to the MLOCR investigation is reflective of its present responsibility. However, the record indicates otherwise. Board actions taken as a result of the investigation fail to overcome inferences of nonresponsibility created by the indictment in that they were aimed more at protecting the interests of the corporation and its employees than at discovering whether any illegal acts had been committed. Although the Board hired outside counsel in the spring of 1986, as a result of the public disclosure of the alleged conspiracy, and in October 1987, upon receipt of the target letter, the company failed to request an independent inquiry into possible criminal activity or ethical violations on the part of the corporation or its employees. In neither the spring of 1986 nor, more importantly, in October 1987 did the company implement substantial remedial measures in their federal-sector operations in Irving or suggest that Messrs. Moore and Reedy be isolated from active management of the corporation. These responses are not reflective of a concern for honesty and integrity which would indicate present responsibility.

Management Changes

REI alleges that it has reaffirmed its present responsibility by accepting the resignations of the two employees implicated in the alleged misconduct and replacing them with competent individuals unequivocally committed to ethical contracting. In making these personnel changes, REI has undisputably taken a step toward overcoming the inferences of nonresponsibility created by the indictment. See Shane Meat Co. v. Department of Defense, 800 F.2d at 338. This remedial measure, however, falls short of the types of substantial management changes that would establish that REI is a presently responsible contractor.[2] Instead of the Board recruiting an individual who had no prior affiliation with the company, Mr. Moore arranged for Mr. Ringer, a personal friend and business associate of thirteen years, to replace him in the event of his indictment. The Board made no effort to second-guess Mr. Moore’s personal choice. Other than the leaves of absence of Messrs. Moore and Reedy, there are virtually no changes in the makeup of either REI’s Board or senior management.

Furthermore, the efforts REI has taken to disassociate itself from Messrs. Moore and Reedy are incomplete. Both continue to receive their full salary, which for Mr. Moore included a 5 percent increase for FY 1989, in addition to certain executive perks. Both continue to hold stock and stock options in the company. Additionally, REI has not demonstrated a firm commitment to dismissing Messrs. Moore and Reedy if convicted. Although Messrs. Ringer and O’Brien both stated that Messrs. Moore’s and Reedy’s status as employees on administrative leave would be terminated if they are convicted, there is no mention of this in the documents evidencing the temporary change in the former executives’ status.

Self-Governance Program

To support its contention it is presently responsible, REI relies most heavily on its self-governance program, which consists of policy changes, educational programs and other activities aimed at strengthening its commitment to ethical business conduct. Although this program is impressive in many ways, it has failed to assure that REI presents no future business risk. One of the greatest weaknesses of this program is that it lacks the enthusiasm, commitment and involvement of top REI officials. Mr. O’Brien, for example, has failed to attend, lead or substantially assist in the preparation of the ethics education and training seminars. In the three and one-half months between the creation of the Corporate Ethics Committee and the hearing, only one meeting of the Committee had been held, and Mr. O’Brien’s principal activity as Corporate Ethics Officer had been the preparation of a videotape.

Mr. Ringer has similarly failed to attend the ethics education and training seminars. Although he did attend the meeting of the Corporate Ethics Committee he was unable to identify any actions the Committee has taken.

REI’s Board has also failed to become sufficiently involved in designing and implementing REI’s self-governance program. The early self-governance measures were initiated by Mr. Moore or by outside counsel and the Board undertook little action in the area of ethics awareness prior to September 1988. Furthermore, the Board waited nearly three months to appoint a Corporate Ethics Officer and a Corporate Ethics Committee as mandated by the June 1988 code of ethics. Despite its recent efforts to become actively involved in the formulation of a corporate ethics policy, the Board has yet to reach a satisfactory level of participation.

REI’s self-governance program is also deficient in that REI waited until shortly before and after it had actually been indicted and suspended to implement the majority of the program and to accelerate the program. Furthermore, certain of REI’s proposed self-governance measures were never fully implemented. For example, REI assured the Postal Service that all domestic employees would participate in an ethics education and training program. As of the date of the hearing, only 20 to 30 of the 700 employees at the Irving corporate headquarters specifically involved in contracting had attended such a program. By mid-December 1988, only 80 percent of REI employees had certified their compliance with the code of ethics.

REI’s self-governance efforts are also misdirected. The company has concentrated its most extensive remedial efforts in FSD, rather than in the federal-sector operations in Irving which were most closely associated with the ethical problems alleged in the indictment.

Having weighed all the evidence in the record, it is determined that the mitigating factors presented by REI are insufficient to overcome the inference of nonresponsibility to be drawn from the serious offenses for which it was indicted. The continued suspension of REI is therefore reasonable and appropriate under the present responsibility standard.

Suspension of FSD

REI argues in the alternative that the suspension should be terminated insofar as it encompasses FSD. The PM does not include a provision for the scope of a suspension, therefore, REI wishes to analogize to the scope provision in the Federal Acquisition Regulations (FAR).[3] The provision of the FAR, however, clearly indicates that FSD should be included in the suspension. The FAR applies a suspension to all divisions of a contractor unless the suspension decision is specifically limited. FAR 9.407-1(c). Such a limitation does not appear in the decision which suspends REI. Furthermore, the legislative history of this provision of the FAR indicates an affirmative decision that a suspension should apply company-wide in that comments recommending the limitation of the effect of debarments and suspensions were rejected. OFPP Policy Letter No. 82-1, 47 Fed. Reg. 28,854, 28,855 (1982).

FSD has not been shown to be a separately incorporated entity. It is REI alone which is incorporated, and FSD is merely a division of the corporation. General principles of corporate law consider a corporation and its unincorporated divisions as a single entity for purposes of determining liability. In fact, the United States Supreme Court has stated that “there can be little doubt that the operations of a corporate enterprise organized into divisions must be judged as the conduct of a single actor.” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 770 (1984) (antitrust); see also Western Beef, Inc. v. Compton Inv. Co., 611 F.2d 587, 591 (5th Cir. 1980) (contract); Stotter & Co. v. Amstar Corp., 579 F.2d 13, 18 (3d Cir. 1978) (antitrust); NLRB v. Deena Artware, Inc., 361 U.S. 398, 402 (1960). This body of law lends further support to a holding that the suspension of REI applies to FSD in that they are legally one and the same.

Should the imagination be stretched so as to consider FSD a separate entity, FSD will still fall within the scope of the suspension if REI “either directly or indirectly controls or has the power to control” FSD. PM §3.3.2(b)(7); see Paul E. Jaguish, Jr., P. S. Docket No. 19/124 at pp. 28-29; FAR 9.407-1(c). Such control is demonstrated by the management of FSD.

Although REI contends that FSD is autonomous, pointing to the fact that FSD markets different products and services, the structure of REI and FSD indicates otherwise. Mr. Gipe, Vice President and General Manager of FSD, reports directly to Mr. Ringer, who may veto FSD decisions. Although no such decisions have been vetoed, it is the power to control which is determinative.

Finally, REI relies on Peter Kiewit Sons’ Co. v. United States Army Corps of Engineers, 534 F. Supp. 1139 (D.D.C. 1982) for the proposition that suspension of an organizational entity which has committed no wrong is improper. The Kiewit case is inapposite, however, since the entity in Kiewit contesting its suspension was separately incorporated. Id. at 1141. In the present case, FSD is not separately incorporated, and it is the actions of REI, of which FSD is part and parcel, which serve as the basis for suspension.

A review of the evidence in the record as applied to the relevant legal principles indicates that FSD is part of and controlled by REI. Having determined that the continued suspension of REI is reasonable, the suspension continues to apply to all divisions of said corporation including FSD.

Conclusion

In accordance with the foregoing, it is concluded that REI is not presently responsible and the continued suspension of REI, including FSD, is in the best interests of the Postal Service. Accordingly, REI’s appeal of the October 7, 1988, suspension decision is denied.

James A. Cohen

Judicial Officer

[1] Under PM §3.3.2.i, cause for suspension exists where a contractor has been indicted for "[c]ommission of fraud or a criminal offense incidental to obtaining, attempting to obtain, or performing a Government contract . . . or [c]ommission of embezzlement, theft, forgery, bribery, falsification or destruction of records, receipt of stolen property, or any other offense indicating a lack of business integrity or business honesty that seriously and directly affects present responsibility as a contractor."

[2] In determining that REI’s management changes are insufficient to establish present responsibility, it is not intended to imply that any of REI’s present officers or directors lack business honesty or integrity or that they participated in the events alleged in the indictment.

[3] The FAR is not applicable to the Postal Service. 39 U.S.C. §410 (1982); see also United States v. Electronic Data Sys. Fed. Corp. and Planning Research Corp., 857 F.2d 1444 (Fed. Cir. 1988)(discussing the applicability of procurement laws to the Postal Service.)