Journalism
Washington's $8 Billion Shadow
The Flying Hummer
SAIC's ability to prosper is all the more remarkable given its record of lawsuits, charges brought by whistle-blowers, allegations of profiteering, fines assessed by federal judges, and repeated investigations and government audits. According to one former executive, in a sworn deposition in 1992, the practice of "mischarging" became "institutionalized within the company." (SAIC denies such allegations.)
The job of establishing the Iraqi Media Network's infrastructure—cables, transmitters, dishes—was rife with corruption and waste. In one instance, government auditors questioned an SAIC invoice for approximately $10 million. (SAIC says it is unaware of the auditors' report.) In March of 2004 the Pentagon's inspector general found widespread violations of normal contracting procedures: improper payments to subcontractors, unsubstantiated equipment purchases, unauthorized personnel on the payroll. One of the more blatant transgressions concerned SAIC's overall manager of the media effort in Iraq. The investigators discovered that he had bought a Hummer and a pickup truck in the United States and then chartered a DC-10 cargo jet to fly them to Iraq. When a Pentagon official refused to allow the charge, the inspector general reported, "SAIC then went around the authority of this acquisition specialist to a different office within the Under Secretary of Defense for Policy to gain approval and succeeded." SAIC's performance on the Iraqi Media Network contract is now, indirectly, at issue in a lawsuit brought by an employee who alleges that she was fired after she tried to draw the attention of SAIC executives to what she described in the suit as "unethical, illegal, and unsafe practices" by the company in Iraq. Because of the pending legal action, this employee declined to be interviewed, but considerable documentation is already part of the public record, including portions of her personnel file. SAIC's corporate priorities are suggested by one commendation the employee received, for her "excellent billing credentials."
This way of doing business has been an SAIC character trait for years. In 1991, SAIC was charged with falsifying data submitted to the E.P.A. on soil samples from Superfund toxic-waste sites. The law required the E.P.A. to identify toxic dumps and determine which ones posed the gravest risks. To perform the analysis, the E.P.A. contracted with independent labs, including SAIC's Environmental Chemistry Laboratory, in La Jolla. The lab was supposed to test soil and water samples within a certain number of days of their being received "to ensure the chemicals being tested for would not have dissipated in the interim." But technicians at SAIC's lab tested some samples after the deadline and then backdated the results. SAIC mounted a high-powered behind-the-scenes campaign to escape prosecution. A member of SAIC's board of directors, former secretary of defense Melvin R. Laird, wrote a personal letter to Attorney General Dick Thornburgh. "I can assure you there was no wrongdoing on the part of the corporation," Laird stated. Criminal prosecution of SAIC, he went on, would be "entirely inappropriate." Ultimately the company was accused by the government of making "false, fictitious and fraudulent statements," and pleaded guilty to 10 counts of making false statements or claims. SAIC paid $1.3 million in fines and restitution.
A few years later SAIC was in trouble again, this time over its efforts to design a flat-panel liquid-crystal-display screen to be used as a navigational device in the cockpits of air-force fighter jets. The initial contract had been awarded in 1987, but SAIC kept going back for more money. The government would shell out millions—even as SAIC assured the air force that steady progress was being made. And in fact air-force officials had no reason to believe otherwise: they had seen what they thought was a demonstration model when SAIC officials unveiled a slick-looking compact box with a backlit screen. SAIC officials traveled to military bases around the country to show off the prototype. A respected magazine, Engineering Design News, published a photograph of the display screen on its cover.
But the box was a fake. SAIC had been unable to develop the actual technology. The prototype—in effect, nothing more than a cheap video game—had been cobbled together with components taken from TV sets, computers, and everyday consumer appliances. When two SAIC employees complained to their superiors, both were fired. Two employees later filed whistle-blower lawsuits charging SAIC with defrauding the government. While denying any wrongdoing, in 1995 SAIC settled the suit with the government and paid a fine of $2.5 million.
The ill-fated cockpit-display project was hardly an isolated case. A recent case revealed one method SAIC employed to increase the profits on a contract. In San Antonio, the air force awarded SAIC a $24 million contract to clean up contaminated-waste sites at Kelly Air Force Base. Once the project was under way, the SAIC manager overseeing the job realized that the work would cost much less than the amount SAIC had negotiated. "It was massively overstaffed," Michael Woodlee, the former manager, said in an interview. "I didn't need that many [people]." Woodlee said he told one of his superiors that "there was no way under the moon we could spend all this money."
This is not what SAIC wanted to hear. Woodlee said that, because he couldn't spend everything in his budget, his SAIC superiors suggested that he "harvest money out of [his] project and send it up the corporate ladder." After he resisted, Woodlee contended, the project was taken away from him, and he was laid off.
In 2002, Woodlee filed a whistle-blower lawsuit charging SAIC with fraud under the federal False Claims Act. Working with air-force investigators, the U.S. attorney in San Antonio concluded that SAIC had in fact grossly understated profits on the contract: rather than the 8 to 10 percent profit the contract allowed, SAIC had, "unbeknownst to the Air Force," realized profits of three times that amount, and had submitted "false and fraudulent statements of its expected costs and profits."
SAIC's response was audacious. It told federal officials, in effect, that the government was right: the company does increase the profit margin beyond the terms of the contract. But there's a reason: risk is involved, and the additional profit is compensation for that risk. According to documents in the case, SAIC explained that it employs something called "Quantitative Risk Analysis" to identify potential business risks, and that it factors those costs into its contracts, although without ever mentioning the fact to customers. In a written response, the company stated that this kind of risk analysis is "commonly used throughout industry" and "such purely judgmental information was not required to be disclosed under [federal law] based on longstanding legal principles." But by failing to disclose that information to federal negotiators, the air force maintained, SAIC induced it "to agree to much higher prices than [the air force] would have agreed to had SAIC truthfully disclosed its cost and pricing data." After SAIC's "risk defense" surfaced, the air force issued a written alert to warn other agencies about SAIC's business methods, which it said SAIC "intends to continue using."
Although the amount of money in contention was relatively small, the principle involved was large, and it had potentially national implications. Was SAIC using the same formula in thousands upon thousands of other contracts it had with the government? We'll never know. For reasons that remain unclear, the Justice Department decided against expanding the probe beyond San Antonio. Is it possible that a call was made from one well-placed individual to another? In April of 2005, SAIC, while denying wrongdoing, settled the San Antonio lawsuit by paying a fine of $2.5 million.
More important, the company had forestalled a wider investigation. One of Woodlee's lawyers, Glenn Grossenbacher, who has represented other whistle-blowers against other companies, describes SAIC as unlike any other company he has ever confronted. "These guys handle things very differently than other people," he said. "They had better access to the Pentagon than the government's own attorneys. They are so well connected they were able to isolate this one case. This should have been a [national] case. The reason it wasn't was because of their political clout to shut it down and localize it."
Not every SAIC client is as forgiving as the United States government. When SAIC failed to deliver a highly touted security system for the 2004 Athens Olympics, the Greek government refused to make a final payment. SAIC had proposed the most extensive security shield in Olympic history: more than 100 command posts, vehicle-tracking devices and sensors everywhere, 1,600 video cameras, and a blimp loaded with "sensitive equipment" floating "silently overhead acting as an airborne surveillance center." As video feeds flowed to a central command post, SAIC's state-of-the-art software would link all these capabilities. The system was to remain in place as an anti-terrorism tool in Athens for years to come. But turmoil within SAIC plagued the effort from the start. Project managers came and went. On the eve of the games a source close to the Olympic planners stated that "the entire Committee without exception believe that the … system doesn't work."
The Olympics started up on schedule. SAIC's security system did not. A newspaper in Athens described the system as "operationally useless," and Greek officials improvised simply by adding more guards. Before the games began, SAIC and the Greek government had quietly come to an agreement that called for continued testing of the system and "final acceptance to occur no later than October 1, [2004]"—one month after the games ended. A payment of $23 million would follow. SAIC missed this deadline, too. After more wrangling the two sides, according to an Athens newspaper, reached an understanding that calls for SAIC to complete work by May 2008, almost four years after the Olympics. As of last fall, SAIC's losses on the project totaled a staggering $123 million, and the company acknowledges "our poor performance on the Greek Olympics contract." SAIC is trying to recoup some of its losses in an arbitration and so far has managed to keep the lid on potentially embarrassing revelations about the competence of a company whose operations are built on claims of technical expertise.
Radiation Sickness
Given that its founder came from a company called General Atomic it is hardly surprising that SAIC has been heavily involved in the nuclear business. One early project came in the 1970s and 80s, when SAIC received Pentagon contracts to reconstruct the amount of radiation absorbed by military personnel during atomic-bomb tests and other service-related exposures. The government's bookkeeping was so erratic from the early days of the Cold War that it was often difficult to tell how much radiation soldiers had received and whether it might have been responsible for their various cancers. When SAIC did the numbers, few veterans qualified for compensation. The Pentagon's nuclear testing was in effect off the hook, and ailing veterans were out of luck. After years of hearings, Congress in 1988 passed the Radiation-Exposed Veterans Compensation Act, which gave veterans the benefit of the doubt. It was presumed that their cancer was attributable to nuclear exposure without considering the radiation dose. By then many of the veterans were dead. A health physicist who testified later on behalf of the veterans spoke unkindly of the original SAIC work: "Atomic veterans have been deprived of benefits intended by Congress through [SAIC's] deceptive internal dose reconstructions and poor understanding of radioactive material distribution in the body." SAIC disagrees, saying that it "continues to work with the government to apply the best science to performing dose reconstruction for atomic veterans."
Periodically over the years, the Nuclear Regulatory Commission and the U.S. Department of Energy, prodded by executives in the nuclear industry, have sought to ease the rules against re-using "lightly" contaminated radioactive waste. The impetus has been the inexorably growing stockpile of nuclear debris—much of it lethal—that has been accumulating at weapons sites and power plants in America for decades. One way to draw down the stockpile would be to recycle large volumes of discarded nickel, aluminum, copper, steel, and other irradiated metals into usable products. If slightly radioactive metal were combined with other metals, the resulting material could be made into all kinds of consumer items—knives and forks, baby strollers, chairs, rings, eyeglass frames, bicycles, reclining rockers, earrings, frying pans. It also could be used in construction.
Lest any of this sound improbable, in the 1980s radioactive table legs began turning up in the United States everywhere from restaurants to nursing homes. A radioactive gold ring cost a Pennsylvania man his arm. The public outcry was so great that in 1992 Congress set out to ban this form of recycling. The N.R.C., D.O.E., and nuclear industry saw the ban coming and were not happy about it, but they also saw a way out: maybe it would be possible to develop broad guidelines that would allow the contaminated waste to be recycled based on what were deemed "safe" exposure levels. Never mind that there is no such thing as a safe dose of radiation. Two months before the ban was signed into law, the N.R.C. gave the multi-million-dollar job of formulating the guidelines to an outside contractor. The contractor was SAIC.
As the years slipped by, across town, another federal agency, the Department of Energy, was handing out a $238 million contract to B.N.F.L. Inc., at that time the U.S. subsidiary of British Nuclear Fuels, "to clean up and reindustrialize three massive uranium enrichment facilities" at Oak Ridge National Laboratory, in Tennessee. The agreement called for B.N.F.L. to recycle "hundreds of thousands of tons of metals." British Nuclear Fuels had a questionable track record in the nuclear industry. For decades it had dumped plutonium and other radioactive waste into the Irish Sea and the North Atlantic. Its workers had falsified critical quality-control data. When the D.O.E. announced the contract, SAIC was identified as a major subcontractor in the recycling of radioactive scrap metal.
Because the N.R.C. and the D.O.E. for some reason weren't talking to each other, the elegance of this arrangement escaped everyone's attention. To connect the dots: SAIC was writing the regulations for one government agency, the N.R.C., which would set the permissible limits of radioactive contamination for recycling, even as it partnered with another company, under contract to a different federal agency, the D.O.E., to recycle the radioactive metal for which it was drafting the regulations.
The synergy of this arrangement was discovered accidentally by a Washington lawyer, Daniel Guttman, whose longtime passion has been conflicts of interest that inevitably—purposefully—arise from government outsourcing. Guttman called attention in public hearings to what was happening, thoroughly embarrassing officials at the N.R.C. and the D.O.E. and stirring the ire of public-interest groups. The N.R.C. killed its contract with SAIC. The recycling project was put on hold. And the N.R.C. filed suit against SAIC, alleging "false and/or fraudulent representations to the effect that [SAIC] was providing services to the NRC which were free from bias." SAIC has denied the conflict-of-interest claims, and the suit is still pending.
But SAIC is by no means out of the nuclear business. It may be under a cloud at the N.R.C., but it's still a partner, with the construction giant Bechtel, in the largest nuclear project of all—the $3.1 billion effort to build a repository for America's high-level radioactive waste. The firm Bechtel SAIC is constructing the repository deep under Yucca Mountain, Nevada, where the buried waste will remain lethal for at least 10,000 years. It could provide a revenue stream for SAIC as far into the future as one can imagine.
The Permanent Government
Bob Beyster turned 79 in 2003. He was in his 34th year with the company. A writer for The San Diego Union-Tribune, granted a rare interview around this time, observed that Beyster was a "little more stooped now," but still vigorous. He continued to run three or four miles almost every day. Over the years numerous executives rumored to be his successor had come and gone as it became apparent that Beyster had no intention of relinquishing power. But the sheer size of the company and its aggressive, internally competitive style were catching up to Beyster. Even Pentagon officials had begun to complain that SAIC's overlapping divisions were creating confusion. When the Pentagon talks, contractors listen. In 2003, the SAIC board forced him out. By 2004, SAIC had a new chairman, Kenneth Dahlberg, a top executive at General Dynamics with long experience in the defense industry.
In October of 2006, SAIC carried out a long-anticipated I.P.O., selling 86 million shares at $15 a share in its debut on the New York Stock Exchange, raising $1.2 billion. Reflecting investor bullishness, shares rose to $21 in a matter of days. Its prospects have never looked brighter.
Unlike traditional wars, which eventually come to an end, the Global War on Terror as defined by the Bush administration can have no end: it is a permanent war—the perfect war for a company that has become an essential component of the permanent government. Political change causes scarcely a ripple. As one former SAIC manager observed in a recent blog posting: "My observation is that the impact of national elections on the business climate for SAIC has been minimal. The emphasis on where federal spending occurs usually shifts, but total federal spending never decreases. SAIC has always continued to grow despite changes in the political leadership in Washington."
And the revolving door never stops spinning. One of the biggest contracts ever for SAIC is in the works right now. It's for a Pentagon program called Future Combat Systems, which is described as "a complex plan to turn the U.S. Army into a lighter, more lethal, more mobile force" and also as "the most difficult integration program ever undertaken by the U.S. Department of Defense." The contract runs into the billions of dollars. The man who helped craft this program at the Pentagon was Lieutenant General Daniel R. Zanini. Zanini recently retired from the army, and he now has a new job. Can you guess where it might be?