A DynCorp subsidiary found guilty in two bid-rigging cases faces criminal fines that could exceed $7.5 million, $4 million more than the firm has reserved to cover its potential liabilities in the cases, according to recent Justice Department and company documents.
The McLean-based technical services firm has already suffered a financial hit from the bid-rigging charges, writing off $3.51 million in "extraordinary" costs during the first half of this year, purportedly to cover all costs associated with the cases. Those writeoffs, based on advice from its outside legal counsel, were enough to throw DynCorp into the red during the first quarter and to shrink the firm's net profits for the first nine months of the year by more than 40 percent.
But Justice Department officials contended yesterday that the DynCorp subsidiary, Dynalectric Co., could be liable for much more than that in criminal fines. In addition, officials have noted that the company faces possible civil suits over the bid-rigging from at least three parties, posing the threat of even higher legal penalties during a period in which DynCorp is attempting to complete a junk bond-financed leveraged buyout by its management.
"We still believe the $3.5 million is adequate to cover all the cases," Lee Parker, a spokesman for the company, said yesterday. "We have seen nothing yet to indicate we should change that."
A dispute over the potential fines has surfaced in recent days as a result of Dynalectric's plea of guilty last Friday to charges that it rigged bids to obtain a $15.7 million electric contract from a Kentucky rural cooperative five years ago.
The guilty plea, submitted in federal court in Louisville, follows Dynalectric's conviction earlier this year in a separate bid-rigging case in Atlanta.
Sentencing in the Louisville case is not scheduled until Jan. 8. But Dynalectric issued a press release yesterday suggesting the guilty plea would have no further financial impact on the company.
Parker said Dynalectric had set aside "sufficient" reserves of $1 million for the Louisville case, a "best estimate" figure based on advice from its outside legal counsel, Rodney O. Thorson of the firm of Skadden, Arps, Slate, Meagher & Flom.
In recent court papers, however, Justice Department officials have contended that Thorson misread the law and that Dynalectric's potential fines could "exceed $6 million" in the case.
The higher figure was based on an alternative sentencing provision in the Comprehensive Crime Control Act of 1984, which allows for fines of twice a company's gross profit on antitrust violations committed after the law became effective Jan. 1, 1985.
Dynalectric has been fined $1.5 million in the Atlanta case. The penalty has been stayed while the company appeals. Dynalectric has reserved $2.5 million for the Atlanta case.
While Dynalectric obtained the Kentucky contract in 1982, a Justice Department official noted yesterday that Dynalectric continued to receive payments on the contract until late in December 1985, thereby making the stiffer sentencing provisions applicable.
The indictment to which the firm pleaded guilty specifically charges that Dynalectric's bid-rigging conspiracy continued until "at least December 1985."
Justice has also submitted computer printouts received from the Big Rivers Electric Corp., the rural cooperative that awarded the contract, showing that Dynalectric earned a total profit of $3.1 million.
Parker sharply challenged that figure, however. "That's a 20 percent profit," he noted. "If you know anything about the contracting business, nobody makes 20 percent."
Thorson has argued in legal papers that Dynalectric's total fine for the Louisville case should be $1 million.
Asked yesterday about the discrepancy, Thorson refused to discuss it. "We've stated our position and I'm not about to comment on it," he said.