Energy Dept. Urged to Halt Lab Contracts With UC : Ethics: Inspector says regents failed to disclose insider trading probe. University system could lose billions.

The inspector general of the U.S. Department of Energy has recommended that the agency consider barring the University of California from doing business with the federal government, a step that could jeopardize billions of dollars in contracts held by the university system as well as its management of the nation’s top weapons laboratories.

The unprecedented proposal follows the inspector general’s conclusion that for 11 months UC and its regents withheld information from the Department of Energy about an insider trading investigation involving a senior official of Lawrence Livermore National Laboratory. UC operates the lab for the Energy Department.

The inspector general said UC’s ability to manage the facilities was questioned because of its failure to disclose the Securities and Exchange Commission’s inquiry at a time when the university was negotiating a multimillion-dollar contract with the Energy Department to continue operating Livermore and two other laboratories.

“That failure may reflect a lack of business integrity or business honesty which could seriously and directly affect the ability of the University of California to manage and operate a Department of Energy facility,” John C. Layton, the inspector general, wrote in a Jan. 5 letter to Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee and of its oversight subcommittee. A copy of the letter was obtained by The Times.

The controversy over the insider trading case is the latest in a series of disputes between federal officials and UC over its operation of the Energy Department’s two leading nuclear weapons labs, Livermore and Los Alamos National Laboratory, and the smaller Lawrence Berkeley National Laboratory.

In recent years, Dingell and others have criticized security and management procedures at Livermore. Negotiations to renew UC’s contract began in 1991 and were bogged down in a dispute over responsibility for potential toxic-waste cleanups at the labs.

Layton said he asked the Energy Department to consider halting future government-wide contracts with UC, an action known as debarment. If the recommendation is upheld, UC’s five-year contract to operate the prestigious labs, as well as billions of dollars in other federal contracts, could be jeopardized, according to federal officials.

However, such a drastic action has never been taken by the federal government against a major contractor and the debarment law provides less severe alternatives. Energy Department officials would not speculate on what action, if any, might be taken against UC.

Dingell suggested that barring all federal contracts with UC would be an extreme sanction.

“It is good to know that the department appears to be getting serious about cracking down on contractor abuse, but the real question here involves a contract that seems to have been negotiated in bad faith and not whether they should be debarred in the future,” he said Thursday.

Dingell did not say what steps he thought the Energy Department should take, but congressional sources predicted that he will ask the department to reopen negotiations with UC in hopes of increasing management safeguards.

Layton declined comment through a spokesman. Philip D. Keif, an Energy Department spokesman, said Layton’s recommendation is under consideration in the procurement office and a preliminary decision is expected in a month or two.

James E. Holst, general counsel to the UC regents, who are named in the debarment request, said he and other officials learned of the insider trading investigation last January. He said they did not inform the Energy Department and he declined to give a reason for not passing on the information.

Janet Young, a lead UC negotiator on the lab contracts, insisted Thursday that she and other UC officials directly involved in the contract talks did not know of the stock trading allegations until the SEC disclosed its probe last month. “As soon as we found out there was a violation, we acted immediately,” Young said.

Holst, who is attending the regents’ monthly meeting at UCLA, said it would be inappropriate to comment on the inspector general’s recommendation or any steps UC might take to oppose debarment.

John R. Belluardo, acting director of communications for the Department of Energy in Oakland, said the department did not learn of the insider trading inquiry until last month when settlement of the case became public.

The case involved stock purchases by William C. DeGarmo while he was Livermore’s general counsel. The SEC said that DeGarmo made $27,322 by trading shares of Cray Computer in December, 1991, just before it was disclosed that Livermore had scrapped plans to buy Cray’s newest supercomputer.

The disclosure sent Cray’s stock down, allowing DeGarmo to collect profits because he had sold the stock short, predicting that its price would decline.

The SEC in Denver, near Cray’s headquarters, opened an investigation in January, 1992. UC officials quickly learned of the investigation, but David Schwoegler, a spokesman for Livermore, said they decided it would be inappropriate to reveal the information because of the sensitivity of the investigation.

“People were aware of it and were subpoenaed, but they were not able to reveal it because of the nature of the inquiry,” Schwoegler said. “The information was disclosed as soon as it reached the point where it could be disclosed.”

However, Robert H. Davenport, regional administrator of the SEC in Denver, said Livermore officials questioned in the investigation were told that federal law permitted them to disclose the existence of the investigation to proper federal and state agencies. He said the Energy Department could have been told.

The Energy Department did not learn of the matter until Dec. 1, when DeGarmo entered into a civil settlement with the SEC. He agreed to return his $27,322 in profits and pay a fine of $27,000 without admitting wrongdoing. Holst said DeGarmo was fired last month but is appealing the dismissal.

The settlement was made public two weeks after UC signed a new, five-year contract with the Energy Department to operate the labs. The contract provides UC with management fees of $14 million a year and reimbursements of $11 million a year.

Dingell asked the Energy Department in December about when its officials had learned of the insider trading inquiry and what action they were taking in response to the disclosure.

The inspector general told Dingell that UC had failed to notify the department during the investigation and said he would seek the university’s debarment. The formal request seeks debarment of the UC regents but a department official said the action would apply to the entire UC system.

Times education writer Larry Gordon in Los Angeles and researcher Ann Rovin in Denver contributed to this story.