Navy Weighs Action Against Shipyard Cited for Fraud

U.S. Navy officials said Friday they are considering whether to take action against one of the largest remaining private shipyard companies on the West Coast after a federal judge’s ruling last month that the firm committed mail fraud and acted with fraudulent intent on a Navy contract.

Southwest Marine, with yards in San Diego, San Pedro and San Francisco geared toward the repair of large ships, acted “with intent to deceive, manipulate and defraud” the Small Business Administration and the Navy in the fall of 1983 to win a contract worth up to $150 million, U. S. District Judge Stanley A. Weigel ruled.

The summary judgment was issued Aug. 8 as a precursor to a trial slated to start Wednesday before Weigel in San Francisco. At the trial, a jury will decide on a lawsuit brought by three shipyards against Southwest Marine, accusing it of using unfair tactics to win a five-year contract to perform maintenance on four Navy replenishment ships.

Southwest Marine gets about 80% of its business from the Navy and just last week received a $35-million contract to overhaul a cruiser, said Arthur E. Engel, president of the San Diego-based company.

Contractors found in civil cases to have defrauded the Navy can be barred from bidding on Navy jobs, usually for three years, said Gerry Depkin, legal counsel for the Navy’s Debarment Committee, which imposes the sanctions.

Ultimately, the Debarment Committee makes its decision on whether to shut out bidders after receiving recommendations from other branches of the Navy.

One of those, the Naval Sea Systems Command, the agency within the Navy responsible for ship repair, is aware of the judge’s ruling and is studying the matter, said spokeswoman Sue Fili. “We have not determined what action to take,” she said.

Depkin said, however, that, “We’ve become aware of this now, so it’s possible that the Debarment Committee itself might look at this.”

An attorney for Southwest Marine, M. Laurence Popofsky, said that “all the facts have been known by the Navy for years” and that the company tried to follow the letter of the law.

Only firms with 1,000 employees or less were allowed to bid on the Navy’s five-year contract to qualify as small businesses, as defined by the Small Business Administration. Southwest Marine, following an obsolete rule that had accidentally been republished along with the SBA’s new rules, tried to show that its work force was below 1,000 during certain weeklong reporting periods.

For example, at the end of 1982, Southwest fired 513 employees at its shipyards in an attempt to maintain its status as a small business and then rehired them--along with 46 others--a week later, Weigel found. He said the firm also made false statements on an SBA form designed to ensure that it met the employee requirements.

“The evidence now clearly establishes that (Southwest Marine) manipulated the quarterly method of counting employees between February, 1982, and December, 1983, by periodically firing and rehiring employees for the purpose of retaining their small business status,” the judge wrote.

Those acts constituted mail fraud, because the mails were used to convey the information, and intent to defraud under California law, Weigel said.

Engel said Southwest Marine has 1,200 employees in its San Diego yard and 500 to 600 employees at both its San Pedro and San Francisco yards.