Stanford, Navy Reach Accord in Billing Dispute

In a major victory for Stanford University, the Navy agreed Tuesday to accept $1.2 million to close a rancorous and embarrassing episode that opened with the university facing a $250-million claim for overbilling and led to the resignation of former Stanford President Donald Kennedy.

The settlement came after years of dispute in which the Navy claimed that the university had overcharged the government for research overhead for 12 years, including billing for such items as the depreciation of a 72-foot yacht, a steady supply of fresh flowers for Kennedy’s residence and upkeep of the mausoleum where the founding Stanford family is buried.

Stanford said Tuesday that the school had been cleared of a substantial amount of the wrongdoing that had been leveled against it.

“I am just really very pleased,” said Stanford President Gerhard Casper, who characterized the agreement as the end to a long and difficult process in which millions of dollars were spent auditing the way the university billed the government.

Not so ebullient were federal officials and Paul Biddle, the former Office of Naval Research inspector who first called attention to the alleged overbilling by Stanford in 1990. The settlement was a new setback for Biddle, who filed suit against Stanford in 1991 under a federal law that allows whistle-blowers to sue on behalf of the government and receive a percentage of any award.

In 1993, the Justice Department opted not to join Biddle in the suit, leaving him alone in his claim that Stanford had overcharged by hundreds of millions of dollars.

“We’re not giving up,” Biddle said Tuesday. “We’re still trying to get the taxpayers’ money back into the Treasury.”

Biddle’s lawyer, Phillip Benson of Newport Beach, said the agreement was an attempt to throw a roadblock in the way of the lawsuit.

“It’s a scam,” he said. “It’s an attempt to end run the false-claims lawsuit in federal court.”

The settlement was announced jointly by Stanford and the Navy. Rear Adm. Marc Y.E. Pelaez said in Washington that an investigation found Stanford adhered to its government contracts and was not guilty of fraud or misrepresentation. Congressional staffers said, however, that Stanford would not now be able to get away with the same billings because of reforms instituted after the scandal broke out.

Pelaez went to Capitol Hill on Tuesday to brief the House Energy and Commerce Committee, which investigated and disclosed many of the alleged Stanford overcharges in lengthy hearings. Pelaez expressed regret over the Navy’s inability to get a full recovery, a committee investigator said.

Although the settlement requires Stanford to pay $1.2 million to the Pentagon, the government has recovered $24.4 million from Stanford over the last several years, according to the committee staff.

Stanford agreed as part of the deal Tuesday to drop a legal action seeking $21 million that it was underpaid by the Navy in 1991 and 1992 for military research. The underpayment resulted from a reduction ordered by the Navy after the scandal began.

The school also repaid the Pentagon $2.2 million in 1991 for the most embarrassing charges, including the yacht, remodeling the university president’s house and charges for elaborate parties. Kennedy resigned during the furor in 1991.

In a measure of how acrimonious the issue became, Stanford officials wrote on the back of the $2.2 million check “payment in full,” and outraged Navy officials refused to accept the payment. A substitute check was sent the following day, the House committee staff said.

“This proves the adage that the outrage is not what is illegal, but what is legal,” said Rep. John Dingell (D-Mich.), chairman of the committee, on Tuesday. “At the end of the day, tens of millions of unwarranted and undeserved tax dollars remain in the coffers of Stanford.”

But at Stanford, the settlement was treated purely as a vindication of its past practices. Kennedy, who still teaches at the university, said that the agreement is something he has been waiting for, but that he did not feel it was in any way a vindication.

“I have never felt in any need of vindication,” he said. “But I am glad to have my faith in the government’s processes restored.”

Casper, who succeeded Kennedy as president of the university, was highly critical of Biddle, whose suit against the school is still in litigation.

“The suit is without merit and we will vigorously defend ourselves against it,” he said. “Mr. Biddle has caused Stanford and higher education a lot of harm by vastly exaggerating claims.

“It is quite clear, and foolish to deny, that we were hurt by the headlines. It caused a lot of pain. It cast a shadow over an otherwise sunny campus,” Casper said. The Defense Contract Audit Agency originally identified $250 million in improper costs by Stanford billed to the Pentagon under its research contracts.

Of that amount, $166 million came under so-called memoranda of understanding, which the Navy general counsel determined were legally binding agreements and could not be abrogated unless fraud was proved. A lengthy investigation found no evidence of fraud.

Under reforms established by the Navy since the scandal surfaced, the $166 million in billings would not be allowed anymore. The money was used for such things as upkeep of roads, libraries and utilities at the campus, the committee said.

The $1.2 million repayment stipulated Tuesday was described by Stanford as a “final adjustment” of what the school owes the government.

Kennedy reported from Los Angeles, Vartabedian from Washington.