Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Criminal Action Nos. 88-00515-02, 88-00515-03.
Becker and Hutchinson, Circuit Judges, and D. Brooks Smith, District Judge.*fn*
HUTCHINSON, Circuit Judge
Co-defendants Gerald A. Leo (Leo) and James Badolato (Badolato) appeal from judgments of conviction and sentence entered against them following a jury trial in the United States District Court for the Eastern District of Pennsylvania. For the reasons set forth below, we will affirm the judgments.
On November 29, 1988, a grand jury sitting in the United States District Court for the Eastern District of Pennsylvania handed up a 321-count indictment against Leo, Badolato and General Electric Corporation (General Electric), doing business as Management and Technical Services Company (MATSCO), on various charges related to alleged defense contract fraud and an alleged cover-up that followed. MATSCO was charged with five counts of mail fraud, see 18 U.S.C.A. § 1341 (West Supp. 1991), and 312 counts of violating the criminal False Claims Act, see 18 U.S.C.A. § 287 (West Supp. 1991). Leo was charged with five counts of mail fraud, one count of racketeering, see 18 U.S.C.A. § 1962 (West 1984 & Supp. 1991), and two counts of making false statements to government agencies, see 18 U.S.C.A. § 1001 (West 1976). Badolato was charged with five counts of mail fraud, one count of racketeering, one count of making a false statement to a government agency and one count of endeavoring to obstruct Defense Department proceedings, see 18 U.S.C.A. § 1505 (West 1984).*fn1
Jury selection began on October 30, 1989, and the trial commenced on November 14, 1989. Testimony at trial did not conclude until January 22, 1990. On February 2, 1990, the jury returned its verdict. It convicted MATSCO on four counts of mail fraud and 282 counts of violating the False Claims Act. It convicted Leo on four counts of mail fraud and one count of making a false statement; at the close of its case, the government had dismissed the other false statement charge against Leo. The jury also convicted Badolato on one false statement count and on the count that charged him with endeavoring to obstruct agency proceedings.
On July 26, 1990, the district court sentenced the three defendants. It accepted a joint recommendation from the government and MATSCO that MATSCO be sentenced to pay a $10,000,000.00 criminal fine. As part of the agreement, the government says that General Electric paid an additional $8,300,000.00 in civil damages and $11,700,000.00 to resolve other civil matters. General Electric also agreed not to appeal the district court's judgment of conviction and sentence. The district court sentenced Leo to ten months imprisonment on the mail fraud charges and ordered him to pay a $15,000.00 fine on the false statement conviction. The district court sentenced Badolato to five months imprisonment on the charge of endeavoring to obstruct agency proceedings and ordered him to pay a $10,000.00 fine on his false statement conviction.
As required when reviewing convictions, we recite the relevant facts in the light most favorable to the government. Cf. Glasser v. United States, 315 U.S. 60, 80, 86 L. Ed. 680, 62 S. Ct. 457 (1942). The testimony at trial focused on a contract between the United States Army and MATSCO for the production of mobile battlefield computer systems housed in trailer-like vans. The system was called the Decentralized Automated Service Support System, more commonly known as DAS-3B. The indictment charged that Leo, a long-time General Electric employee who was responsible for the management of the materials and purchasing department for MATSCO, and Badolato, who was MATSCO's subcontracts manager, executed a scheme to defraud the Army out of millions of dollars on the contract in order to advance their standing within the company. Further, the indictment alleged that, after the contract between the Army and MATSCO was signed in June of 1983, Leo and Badolato committed various acts to hide the fraud from the Defense Department.
In 1979, the Army awarded MATSCO a competitive contract to build mobile computer systems that could be housed in trailer-like vans and used for logistical support for Army units around the world. The Army sent a team of specialists to the MATSCO plant in 1982 to assist in the development of an updated version of the van.
The contract called on MATSCO to produce 233 of the DAS-3B vans over five years. The contract also gave the government the option to purchase twenty-five more in the sixth year. It was known as a "firm fixed price contract." As we will now explain, the "firm fixed price" is initially not so firm and fixed. The 1962 amendments to the Armed Services Procurement Act of 1947 (Act), Pub. L. No. 87-653, 76 Stat. 528 (1962) (codified in scattered sections of 10 U.S.C.A.),*fn2 and regulations promulgated under the Act applied to MATSCO's contract with the Army. Under the Act, a contractor must furnish the procuring agency a proposal that includes the contractor's best estimate of the costs the contractor expects to incur in making the product. See 10 U.S.C.A. § 2306(f)(1) (West 1983). Thus, the contractor must give its best estimate of anticipated material costs, labor, overhead, general and administrative expenses and then show its anticipated profit. The government and the contractor then negotiate over the amount of these projections as well as the appropriate percentage of total cost that should be added for profit in arriving at the final price. If the contractor's costs change before a final agreement is reached, the contractor must inform the Army. Once a final agreement is reached, the contractor must provide the Army with a Certificate of Current Cost, which certifies that all of the cost information provided to the Army as of the date of the final agreement is accurate, current and complete.
MATSCO's proposal on the DAS-3B contract was first submitted to the Army on January of 1983. MATSCO submitted a revised proposal in March of 1983. In accord with the instructions for the proposal, MATSCO promised the Army that it would update the prices upon which the proposal was based as negotiations with subcontractors continued.
The subcontract component of the proposal amounted to $156,715,300.00, based upon quotations received from subcontractors. The largest subcontract covered the Honeywell Information Systems computers to be placed into the vans. Aside from the computers, the March, 1983 proposal contained about $67,000,000.00 in estimated subcontract costs for thirty other subcontractors.
Leo's job at General Electric was purchasing for government contracts. He testified at trial that one of his strong points that helped him in that job was his vast knowledge of procurement and subcontract procedures and regulations, both government and commercial. See Joint Appendix (Jt. App.) at 837f. Among Leo's responsibilities was the preparation of updates on the proposal's cost estimates throughout the negotiation process. Leo testified that if the General Electric personnel principally responsible for negotiations with the Army over costs and prices needed any information about a subcontract's status, they would have to come to him.
Occasionally during the negotiations, Army negotiators asked General Electric negotiators whether there were any expected reductions in the subcontractor costs. The General Electric negotiators answered that with the exception of the Honeywell subcontract, there were no major reductions in subcontractor costs expected. This answer was based upon the information Leo relayed to General Electric negotiators.
On April 13, 1983, Leo himself briefed the Army negotiators. He told them that since the March, 1983 proposal certain subcontractor costs had gone up while others had gone down. On May 3 and 4, 1983, the Army and General Electric negotiated over the final estimate of subcontractor costs. During these final negotiations, Leo again represented that subcontractor costs apart from the Honeywell subcontract were basically unchanged from the March, 1983 estimate. Leo also proposed an additional $4,200,000.00 in subcontract costs he said were needed to cover what he called a "scope increase," which represented additional requirements not included in the March 1983 cost proposal.
Based on Leo's representation that subcontractor costs other than Honeywell's would remain about the same, the Army and General Electric agreed to a proposal under which MATSCO would reduce the $67,000,000.00 in proposed subcontract costs, which did not include Honeywell's cost, by six percent and would reduce the $4,200,000.00 scope increase by eight percent. Thus, the Army agreed to pay nearly $67,000,000.00 for the thirty subcontractors other than Honeywell. At the close of negotiations, Leo told the Army negotiators that the proposed reduction of expenses would be difficult to meet. On June 6, 1983, the date of the final price agreement, General Electric certified to the Army that as of June 2, 1983 all cost data were accurate, current and complete.
In fact, that was not the case. The government presented evidence at trial that Leo and Badolato had actually negotiated millions of dollars in subcontract savings between February of 1983 and June 2, 1983 without the Army's knowledge. As of April 13, when Leo met with the Army negotiators, MATSCO had reduced its subcontract costs by $6,610,967.00. Thus, the government contended at trial that the information Leo provided to the Army negotiators that day was false and fraudulent. By May 4, 1983, when the final subcontract negotiations were taking place between General Electric and the Army, MATSCO had achieved savings of $10,650,797.00 on the proposed subcontract costs. The cost reduction proposal that Leo said on May 4, 1983 would be so difficult to meet had already been exceeded by more than $6,000,000.00. On June 2, 1983, just before the contract was finalized, MATSCO had pretty well assured itself of over $12,800,000.00 in subcontract savings that had not been disclosed to the Army.
The government also introduced evidence that Leo and Badolato were responsible for inflating the March, 1983 revised proposal. Leo's superiors instructed him to bid only on the known requirements, yet Leo, on two occasions, and Badolato, on one occasion, told subcontractors to pad their quotes in anticipation of unknown contingencies. Leo and Badolato never disclosed the padding to the Army. Nor was the Army informed later when these subcontractors removed the contingency padding from their prices. The government also introduced evidence to show that it was Leo who ran up the March, 1983 proposal by including $696,000.00 in premium costs for expedited delivery, even though the Army negotiators thought that it was the subcontractors themselves that had insisted on this cost item. At trial, the two subcontractors that testified denied requiring the premium.
In late October of 1983, the Defense Contract Audit Agency began a standard post-award audit of the DAS-3B contract to see whether the cost and price data submitted to the Army had been accurate, complete and current as of June 2, 1983. Supervisory auditor Carl Stern (Stern) headed the audit.
Stern began to audit subcontractor costs in the summer of 1984. Working out of the MATSCO department that contained Leo and Badolato's offices, Stern began to review the purchasing files that Badolato had given him. In October of 1984, Stern noticed that many subcontracts had been placed before June 2, 1983 at prices less than those disclosed to the Army.
In November of 1984, Stern prepared a list of thirty subcontractors in which he included his conclusions about when particular purchase order prices had been firmly established. Stern gave the list to Leo and asked Leo to comment on the dates Stern had included. Before receiving Leo's comments on the list, Stern noticed that the purchasing files were in Leo's office. On December 14, 1984, a General Electric finance manager returned Leo's version of the subcontract dates on a copy of Stern's list to Stern. Leo had filled in all but a few of the dates. Leo's dates indicated that subcontract prices for a number of subcontractors were not established until after May 4, 1983. Leo had earlier told other General Electric employees that these very same subcontractors had their prices established before May 4.
After learning of Stern's initial findings on the timing of firm costs for subcontracts, General Electric finance executive Michael Kennedy (Kennedy) began a separate review of the purchasing files. While seeking information regarding the future year prices for a particular vendor, Kennedy checked the finance department's copy of a purchase order. He compared the purchase department's files with copies of the same information in the finance department's files. He found the purchasing department's order dates differed from the finance department's copy. This aroused his suspicion. Twice he asked Leo and Badolato about the discrepancies. Both times each expressed surprise.
On January 15, 1985, Badolato changed his story. He told Kennedy that in January of 1984 he altered eight purchase orders placed before June 2, 1983, to reflect dates after June 2, 1983. Badolato told Kennedy that Leo had no knowledge of this and that Stern's audit had nothing to do with the changes. Instead, Badolato claimed he altered the dates because of a late 1983 unrelated review of MATSCO's purchasing system by another Defense Department division. As it turned out, Badolato had altered about fourteen documents in January of 1984. These alterations caused other purchasing personnel to place incorrect dates on amendments made to those fourteen orders. All told, this resulted in about forty documents bearing false purchase dates.
Badolato's reason for altering the dates was disputed. Defense Department analysts who conducted the purchasing system review in 1983 testified that eight of the purchase orders Badolato altered in January 1984 were reviewed in the summer of 1983, at which time the Defense Department analysts told Badolato that they did not intend to look at these purchase orders again.
After Badolato had made his initial acknowledgement to Kennedy, it was discovered that Badolato had also altered two copies of purchase orders bearing the signature of subcontractor representatives. Badolato had also asked three vendors to provide MATSCO with false certificates of current costs. Leo joined Badolato in one of these requests.
The district court exercised jurisdiction over the charges against Leo and Badolato pursuant to 18 U.S.C.A. § 3231 (West 1985). We have jurisdiction over these appeals pursuant to 28 U.S.C.A. § 1291 (West Supp. 1991).
Leo raises five issues on appeal. First, he contends that the government failed to produce sufficient evidence to support his conviction for having made a false statement. Second, he argues that the district court abused its discretion and erred as a matter of law in permitting General Electric finance executive Kennedy to testify about his audit of the DAS-3B contract. Third, he asserts that the district court violated his constitutional right to mount a complete defense when it limited his ability to deny the motive for wrongdoing that the government alleged. Fourth, Leo contends that the district court abused its discretion in excluding testimony from another General Electric auditor that he believed Leo over another witness. Leo's final argument is that the district court abused its discretion in allowing expert testimony concerning industry customs and practices in the field of defense contracting. If we rule in favor of Leo on any of his evidentiary arguments, he asks that we grant him a new trial.
Badolato raises two arguments in his appeal. First, he contends that the count charging him with obstructing proceedings before the Defense Department failed to charge a criminal offense. In his other argument, Badolato claims that the district court erred in refusing to give the jury his proposed instruction to consider his later correction of his false statements in deciding whether he made the false statements intentionally. This correction occurred, Badolato argues, when he admitted having made purchase order alterations to Kennedy. MATSCO officials then informed the Army of the alterations.
On Leo's sufficiency issue, we view the evidence in the light most favorable to the government as the winner of the jury verdict. So considering the record, we then determine whether there was sufficient evidence for a rational jury to find beyond a reasonable doubt that Leo was guilty of having made a false statement. See United States v. Gonzalez, 918 F.2d 1129, 1132 (3d Cir. 1990), cert. denied, 112 L. Ed. 2d 1097, 111 S. Ct. 1015 (1991).
Leo's remaining four issues all relate to rulings on the admission of evidence. We review them for abuse of discretion, rejecting Leo's argument that we should exercise plenary review over the district court's relevancy rulings in accord with a statement in In re Japanese Elec. Prods. Antitrust Litig., 723 F.2d 238, 269 (3d Cir. 1983), rev'd on other grounds sub nom. Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). In Pfeiffer v. Marion Center Area School Dist., 917 F.2d 779, 781 (3d Cir. 1990), we determined that the statement in Japanese Elec. Prods. that relevancy rulings would receive plenary review conflicted with an earlier holding of our Court and thus would be deemed to be without effect. See also United States v. Eufrasio, 935 F.2d 553, 571 (3d Cir. 1991). Therefore, we will use the abuse of discretion standard in our review of all of the evidentiary rulings at issue here.
We exercise plenary review over whether the count of the indictment that charged Badolato with obstructing Defense Department proceedings charged an offense under the law. See United States v. Markus, 721 F.2d 442, 443 (3d Cir. 1983). Finally, with regard to the district court's decision to refuse Badolato's proposed instruction about his correction of earlier untruths, we review the decision under an abuse of discretion standard. In the course of making that determination, we will look to see whether the proffered instruction was legally correct, whether it was not substantially covered by other instructions and whether its omission prejudiced him. See United States v. Smith, 789 F.2d 196, 204 (3d Cir.), cert. denied, 479 U.S. 1017, 93 L. Ed. 2d 720, 107 S. Ct. 668 (1986).
Leo first argues that the evidence, even when taken in the light most favorable to the government, does not meet the substantial evidence test necessary to uphold the jury's determination that he was guilty of the charge that he made a false statement in a false writing or that he concealed material facts by trick, scheme or device, in violation of 18 U.S.C.A. § 1001 (West 1976). Section 1001 provides:
Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent ...