National Security and International Affairs Division

United States

GAO

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-258172

July 17, 1995

The Honorable John D. Dingell

Ranking Minority Member

Committee on Commerce

House of Representatives

Dear Mr. Dingell:

This report responds to your inquiry concerning the allowability of legal

costs resulting from stockholder derivative lawsuits associated with

defense contractor wrongdoing. As your letter indicates, the wrongdoing

involves fraudulent activities engaged in by the defense contractor named

in the stockholder lawsuit. Specifically, you requested current information

on the (1) defense procurement fraud cases, as previously reported on by

us;1 (2) Defense Contract Audit Agency's (DCAA) policy on the allowability

of legal fees associated with stockholder derivative lawsuits; and

(3) number of stockholder lawsuits associated with defense contractor

wrongdoing. You also asked whether reimbursement for these costs has

been a common practice.

The Major Fraud Act of 1988 (P.L. 100-700) and the Federal Acquisition

Background

Regulation (FAR) addresses the allowability of defense contractors' legal

fees and other proceeding costs related to litigation with the federal

government. However, neither the act nor the FAR expressly addresses the

allowability of legal costs associated with stockholder derivative lawsuits

based on prior corporate wrongdoing.

performs contract audit functions for the Department of Defense

DCAA

(DOD) and provides accounting and financial advisory services to DOD

components responsible for procurement and contract administration. In

addition, DCAA audits costs and makes recommendations regarding the

allowability of costs claimed or proposed by contractors. We asked DCAA

for its views on the legal costs you questioned.

responded that, according to its research, the FAR contains no cost

DCAA

Results in Brief

principle dealing specifically with the allowability of legal fees associated

Defense Procurement Fraud: Information on Plea Agreements and Settlements (GAO/GGD-92-135FS,

Sept. 17, 1992). This fact sheet contained information on cases the Department of Justice brought

against the companies that received large DOD contracts in 1991 that resulted in criminal convictions

or civil settlements or judgments.

Page 1

GAO/NSIAD-95-166 Defense Contracting