For Immediate Release
August 19, 1999

Washington D.C.
FBI National Press Office

Highlights of the Case

The Federal Bureau of Investigation, jointly with the Defense Criminal Investigative Service (DCIS), Naval Criminal Investigative Service (NCIS), and the Office of Inspector General of the Department of Transportation (DOT), announced that the criminal charges filed last week by the United States Attorneys Offices in New Orleans, Louisiana; Boston, Massachusetts; Beaumont, Texas; Houston, Texas; and Jacksonville, Florida were the result of a long term joint undercover operation, code-named "OCTANOVA," to investigate fraud, kickbacks, and false claims involving federal contracts for repairs of United States Navy Ships (USNS) and the ready reserve fleet maintained by the United States Department of Transportation, Maritime Administration (MARAD).

Thomas J. Pickard, Assistant Director in charge of the Criminal Investigative Division, announced that a total of 21 individuals and two companies have been charged to date in connection with the investigation. The charges include allegations of major fraud against the government, submitting false claims to the government, and violations of the Anti Kickback Act of 1986.

"This operation was a coordinated nationwide attempt to root out bribery, kickbacks and fraud in the repair and maintenance of Navy supply ships in the maritime industry. It was an extraordinary four year cooperative effort," said Assistant Attorney General for the Criminal Division, James Robinson.

Four of the individuals charged last week were former officers and employees of Bayship Management Inc. (BSM) which is headquartered in Englewood Cliffs, New Jersey. Donald Lee Allender, Vice President; Cary Gordon Byron, Senior Port Engineer; and Port Engineers Eric Metzner Bardes and Robert Chandler Kessler were charged through bills of informations filed last week in several judicial districts. The charges included fraud and kickbacks resulting from fraudulent contracts for maintenance and repair work on USNS.

Two BSM employees, Robert J. Collins in Norfolk and Donald George McNabb in San Francisco were charged earlier in the investigation.

Mr. John F. Keenan, Director, DCIS, the investigative arm of the DOD Office of Inspector General stated that "This case is an egregious example of corruption within a Department of Defense program that has undermined the procurement process, cost the American taxpayers a significant amount of money, and eroded the trust and confidence of the public in the operation of the government. However, this joint undercover operation exemplifies the professionalism and cooperation of Federal law enforcement in uncovering and prosecuting corruption within governmental programs."

BSM is one of the largest private ship management companies in the United States and holds millions of dollars of contracts with the federal government. Mr. Pickard announced that the covert investigation began in late 1994 after allegations of fraud regarding repair contracts for work onboard eight USNS managed by BSM were brought to the attention of law enforcement officials. The focus of the investigation was the alleged fraud in a five year, $200 million contract held by BSM with the Military Sealift Command (MSC) for maintenance and repairs of eight USNS known as Fast Sealift Ships (FSS).

The MSC is responsible for all DOD ocean transportation needs with a mission to sustain United States forces through sea delivery of equipment and supplies. The FSS provide sea transportation to sustain military force, whenever needed, through the delivery of materials, petroleum products, and other supplies. The FSS carried approximately 12% of the tonnage to the Persian Gulf during the Gulf War.

In late 1994, an undercover marine contracting business was opened and staffed by undercover Agents of the FBI, DCIS, and NCIS to address the allegations of fraud. The undercover business, Coastal Marine Engineering Group (CMEG), expanded during the course of the investigation and eventually operated in Houston, Jacksonville, New Orleans, Norfolk, and San Francisco.

Mr. Pickard summarized some aspects of the case that indicated the scope of the investigation. CMEG, which at one time had more than 27 Agents in undercover roles, processed more than 400 contracts for repairs on USNS and other vessels. More than 3000 telephone and body recordings were made by the undercover Agents. Dozens of meetings between the undercover Agents and subjects were videotaped by Closed Circuit Television. Three court ordered wiretaps of business telephones and facsimile machines were utilized in the investigation that encompassed nine judicial districts and 10 states.

Mr. Ernest A. Simon, Assistant Director, NCIS, stated that "The success of this investigation represents the combined efforts of our four agencies and simply outstanding work by the agents in the field. Working together allowed us to rely on each organization's strengths and expedite the exposure of these criminal activities. I'd like to stress that these activities had no impact on the Navy's operational readiness."

The investigation discovered widespread fraud in the contract award and procurement process. BSM employees directed the UCAs to fraudulently inflate the dollar amounts of contracts to cover gratuities provided to them by CMEG. Totally fraudulent contracts were issued for work that was never performed in order for CMEG to recover money spent to entertain the BSM employees at dinners, golf outings, and trips. On some occasions, the fraudulent contracts were issued to reimburse the undercover business for cash given to the employees.

The investigation also uncovered the use of "complementary" bids in the awarding of repair contracts. This practice occurred when the Port Engineer instructed certain subcontractors to submit bids higher than a favored vendor so that it appeared that the competitive bid process was followed. On many occasions, CMEG was recorded as a bidder on a job when, in fact, no bid was ever submitted. In addition, favored subcontractors were sometimes informed of the amounts of competing bids so that they could submit lower bids to win the contract award.

Vessels maintained by MARAD were also victims of fraudulent activity. MARAD maintains a merchant marine fleet capable of meeting the nation's shipping needs for domestic and foreign commerce, as well as national security needs. William Francis Martin of Norfolk and Warren Hilton of Houston, employees of MARAD were charged earlier in the investigation. Martin, a former Naval officer, was the ship operations and maintenance officer for the agency's Norfolk-based South Atlantic region. Hilton was a marine surveyor who oversaw repair work on government vessels in the Beaumont, Texas area.

DOT Inspector General Kenneth M. Mead stated that "These prosecutions underscore the importance of vigilance in oversight of ship repair contracting in order to detect--and deter--corruption within the industry. Protecting the integrity of the Government contracting process is essential, helping assure a level playing field for the many industry parties who compete for contracts lawfully."

Mr. Pickard announced that the investigation is continuing and additional charges will be forthcoming.