By Brandon Moseley
Alabama Political Reporter
This is the final chapter in our four part series covering Alabama Aircraft Industries (AAI)/formerly PEMCO) landmark $100 million lawsuit against The Boeing Company. AAI alleges that Boeing used bid rigging, political lobbying, and the theft of trade secrets to drive an Alabama competitor, AAI, out of business.
In part 3, we discussed how Boeing allegedly gained access to PEMCO’s processes and proprietary intellectual property thru the two company’s joint efforts to bid as partners on the Air Force KC-135 PDM contract. Boeing then ended the partnership to pursue the contract on their own. On June 12, 2006 PEMCO filed a protest with the USAF asking that the Air Force amend the FY08 KC-135 PDM contract to allow new bidders. The USAF agreed, and PECMO was given a 60 day window to make its own proposal. The short window to submit a bid meant that PEMCO did not have time to seek out another industry partner to replace Boeing and were forced instead to go it alone on the bid. PEMCO/AAI then prepared its own bid on the ten year contract to do the programmed depot maintenance (PDM) on the KC-135 Stratotankers at its Birmingham facility. The fate of the company was hanging on winning the PDM contract to continue to do the work that PEMCO/AAI had performed since 1969.
Boeing had all of PEMCO’s proprietary pricing data and methodology from the preparation of the joint bid that the two companies had worked on together in early 2006. PEMCO however had never been given access to Boeing’s plans, data, and methodology. PEMCO/AAI alleges that this inside information gave Boeing an unfair advantage in the bid for the 2008 KC-135 PDM contract with the U.S. Air Force.
On September 18, 2006 both PEMCO and Boeing each submitted separate bids on the contract. On February 23, 2007, both companies submitted their Final Proposal Revisions (FPRs) for the contract. Boeing reduced its estimate of labor hours per aircraft substantially. The Boeing Company never submitted any technical justification for the last minute changes in the bid. PEMCO/AAI alleges that the changes were based on the use of PEMCO’s proprietary information, not on any new labor saving methodology.
The USAF procurement officer overseeing the bid process was Ronald Poussard. Mr. Poussard had overseen the KC-135 PDM work for many years and was very familiar with the work done by both Boeing and PEMCO. In May 2007, with award of the contract pending by the USAF Ronald Poussard was replaced without explanation. Charles Riechers was made the SSA responsible for making the contract award. Riechers had been an Air Force officer and had spent the last four years of his Air Force career assigned to “concept” projects at the Pentagon, but had never worked in procurement before and had little knowledge of or experience with tanker aircraft. From November 2006 to January 2007 he worked as an advisor for Commonwealth Research Institute (CRI) making $13,400 a month at the secret request of the Air Force. Instead of doing work for CRI (a defense contractor and Boeing client) Riechers was actually working for Sue C. Payton, assistant Air Force secretary for acquisition, on projects that had nothing to do with CRI. CRI was registered with the IRS as a nonprofit, but it was also one of the 200 largest Defense Contractors at the time. Joseph Ryan, Trustee for the Litigation Trust said, “He (Riechers) came to work as a procurement officer from his job in a think tank (CRI) that was heavily funded by Boeing. Then he came in as an inexperienced procurement officer.”
On September 7, 2007, the USAF accepted Boeing’s revised bid on the recommendation of USAF Principal Deputy Assistant for Acquisition Charles Riechers. The USAF found that PEMCO was as well qualified as Boeing, and had a better performance record than Boeing. Boeing however was awarded the contract because its total bid price was $15 million less than PEMCO/AAIs. The difference was just 1.3% over the long potential life of the contract. PEMCO had submitted a bid of $1.18 billion and Boeing had submitted a bid of $1.165 billion. PEMCO alleges that Boeing low balled the bid using proprietary information taken from PEMCO during the preparation of the 2006 joint bid. PEMCO also alleges that Boeing at the last minute in the bid process used its proprietary knowledge of PEMCO’s proprietary information about pricing and methodology to submit a bid that was very slightly lower than PEMCO’s.
On September 14th during the official debriefing by the Air Force to PEMCO as to why the contract was not awarded to them PEMCO inquired as the removal of Mr. Poussard as the SSA in charge of awarding the contract at the last minute and asked to know why the Air Force had not investigated PEMCO’s allegations that Boeing had converted and misused proprietary information belonging to PEMCO in the bid process.
Following the controversial bid award to The Boeing Company, Charles Riechers became the subject of a General Accounting Office (GAO) investigation about his role in and his previous employment with CRI. CRI’s parent corporation Concurrent Technologies Corporation was a large Boeing client. On October 1, 2007, Riechers, told the Washington Post, that all he did at CRI was attend the Christmas Party where he met the corporate executives for the first time. “I really didn’t do anything for CRI,” Riechers said in the Post interview. “I got a paycheck from them.” On October 14, 2007 as the scandal was breaking in the press and with a GAO investigation focusing on his possible misconduct, Charles Riechers went in his garage, got in his car, turned his ignition, and committed suicide by carbon monoxide poisoning.
Ryan said, “As you know, he (Riechers) ultimately committed suicide leaving a note apologizing for creating another scandal. There was an investigation that was initiated in 2008 in respect to not only the suicide but also the alleged note. We have made every effort to find it, but the Washington Post reported on the content of the note at the time of the suicide. Nobody has any idea what the results of that investigation are. It could well be ongoing but we just don’t know. It is quite a conundrum, I can tell you that.” In the suicide note Charles Riechers addressed to his boss, USAF Acquisition Chief Sue Payton, he expressed remorse for having creating a new acquisition scandal. Ironically this acquisition scandal and the one centered around USAF procurement officer Darleen Druyun both involved The Boeing Company.
On December 7, 2007 the GAO agreed with PEMCO and issued a decision that the USAF had failed to perform an adequate price realism evaluation of the Boeing bid. The revised Boeing bid is a “cost plus” bid which in theory could actually end up being more than the PEMCO bid of $1.18 billion. On January 7, 2008 the USAF requested that the GAO reconsider its decision to sustain PEMCO’s protest of the contract award. On February 1, 2008 the GAO denied the USAF request. On March 3, 2008 the USAF notified PEMCO that they had again awarded the contract to The Boeing Company. The Boeing Company bid was $1,165,138,187 versus the PEMCO/AAI bid of $1,180,186,789.
On March 11-13 2008 PEMCO attended a Program Management Review (PMR) about the KC-135 PDM program. At that meeting, the USAF said that they were having problems doing their in-house PDM work. Whereas 44 planes a year had been going to Boeing and PEMCO for Programmed Depot Maintenance, the USAF had been also doing PDM work on a certain number of planes in house. Since the Air Force was having difficulty doing that work itself those planes likely would be sent to Boeing in the future. Thus the 2008 KC-135 PDM contract would likely be for more than the 24 planes a year that PEMCO had been led to believe. The reduction in the number of planes was the justification by Boeing for ending the MOA agreement in 2006.
In July 2007, Boeing agreed to repay more than $1 million it had overbilled the government from 1998 to 2003 to install new engines in KC-135 Stratotankers. On August 11, 2009, Boeing agreed to repay the government $2 million for false claims of KC-135 work that it had done from 2002 to 2006 at its San Antonio facility. On August 13, 2009 Boeing agreed to settle another federal lawsuit for $25 million, this time involving overcharges and defective work on the KC-10 aerial tankers. This work was also done at Boeing’s much criticized San Antonio facility, where all the KC-135 PDM work is now being performed.
In May 2006 the Department of Defense Inspector General found that disgraced USAF procurement officer Darleen Druyun had wrongly rushed the USAF to settle a $119 million Request for Equitable Adjustment (REA) in favor of Boeing for $35.8 million on the 1998 KC-135 PDM contract. Boeing’s poor work and questionable billing practices were why USAF procurement officer Ronald Poussard had recommended to the Air Force that they end the 1998 KC-135 PDM contract and rebid it in the first place with the 2008 KC-135 PDM contract, which is in force to this day. It is AAI’s assertion that The Boeing Company has a history of low balling bids to get defense contracts and then either coming back with an REA saying they need more money for the work or fraudulently adding costs to a cost plus work so that even when Boeing is the low bidder the actual price paid by the government is often more than what was supposedly bid.
Former AAI Chairman Harold T. Bowling said, “If you go back to the original contract award that we talked about earlier, they (Boeing) bid it in a way that they couldn’t perform, so when they began to have the extraordinary costs that they probably knew they were going to have made, they knew that they could go back to the government and ask for this request for equitable adjustment and recover their costs. That has been their pattern throughout all of their contracting history and I think it was their strategy, their tactic, knowing that Alabama Aircraft had a lower price potential based on having lower overhead and the business situation that we had in Birmingham. They couldn’t meet that, but they went ahead and did it anyhow, knowing what our prices were going to be, thinking that from the business view standpoint they would go back and try to recover it as they have in other cases.”
Trustee Joe Ryan said, “There is a pattern and practice here for Boeing asking for requests for equitable adjustments. They did it with Druyun. In about 2000 she awarded them about $35.8 million which the Defense Department found to later be excessive and undeserved, but so what. There is a pattern here of Boeing coming in on a contract, bidding X. For example, the contract they won by underbidding by 1.5 percent on a $1.3 billion contract and that was done with Mr. Riechers. And then coming in with requests for equitable adjustments which would essentially make up for the amounts they underbid or by the amounts by which they underbid us in order to get the contract.”
After losing the 2008, bid on the KC-135 Stratotanker PDM contract to Boeing, AAI agreed to continue to do some of the KC-135 PDM work for Boeing. Under the ongoing bridge contact AAI/formerly PEMCO agreed to do PDM work on up to ten KC-135s per year for Boeing. AAI agreed to do the work for Boeing at the price of $6 million per airplane. On March 17, 2008 Boeing wrote AAI saying that the USAF only had $26 million to spend on the PDM work and that AAI had just 24 hours to agree to the new pricing of $3.25 million per plane. AAI wrote back to Boeing reluctantly agreeing to the new pricing. AAI later learned that Boeing was actually charging the USAF $4,769,460 per plane. These facts were concealed by Boeing. During this six month bridge contract, AAI contends that Boeing continued to delay parts and materials to AAI costing the Alabama Company “delivery fee awards” under these contracts.
In 2008, AAI reported only $53.5 million in revenue and a loss of $5.8 million. In August 2010, the company reported a loss of just $21,000; but revenues had plummeted to just $11 million. The loss of the KC-135 business (over 90% of AAI’s total business) was devastating. Every KC-135 Stratotanker in the USAF fleet had been through Hayes/PEMCO/AAI’s hangers at least once. Without the KC-135 work, the company could not meet it long term pension obligations to its employees. On February 15, 2011 the company filed bankruptcy. A bond fund affiliated with Michael Tennenbaum’s Tennenbaum Capital Partners was also owed $2.5 billion by Alabama Aircraft at the time of the bankruptcy.
Kaiser Holding Company bought some AAI assets and contracts out of bankruptcy in September 2011. The court approved the Section 363 sale over the objections of The Boeing Company. AAI officials assert that if Boeing had been a better joint venture partner there would never have been a bankruptcy. A week later, AAI filed suit against Boeing. The AAI filing said that, “Boeing was throughout this relevant time period a lawbreaker and chiseler of the government and its business partner and engaged in patterns of misconduct.”
Today the massive Hayes/PEMCO hanger sits largely empty. Salesmen are struggling to find contracts for the company to do. At the time of our interview last month, Chairman Bowling said that there were one C130 transport and some helicopters receiving maintenance. Where once 1,600 skilled Alabama workers drew a union wage, there are now just 50. The company is looking for P3 Orions, C-130s, helicopters, and other military work that it can perform at Birmingham. Trustee Ryan said, “The principals of Kaiser have every intention of having Kaiser Aircraft operate in the future as a viable defense contractor in the Birmingham area. They want to add employees. They want to get planes in those hangers. They did not buy it out of the bankruptcy simply to have a series of causes of action against Boeing or whomever. They bought it to run a business and it so happened, that they had these claims as well but this is not a liquidation proceeding. Kaiser is in business to maintain aircraft.” AAI is asking the court for a $100 million in damages for Boeing’s pattern of misconduct against the small Alabama company. Boeing has asked that this case be dismissed. Judge David Proctor has set a hearing on whether or not to grant Boeing’s request to dismiss for May 23 in Jefferson County.
There are allegations in the article that are taken wholly from the complaint filed by AAI and do not necessarily reflect the opinions of the author or publisher.