January 01, 2017 Public Contract Law Journal

Debarment & Discoverability of Internal Audit Reports: The 2016 Dentons "Gilbert A. Cuneo" Government Contracts Moot Court Competition

by Alexandra Barbee-Garrett, Kathryn Thornton, Thomas E. Daley, Zachary H. Schroeder, Matthew Michaels & Ioana Cristei

Alexandra Barbee-Garrett and Kathryn Thornton authored the competition problem. Thomas E. Daleyand Zachary H. Schroeder authored the best Overall Government Brief. Matthew Michaels and Ioana Cristei authored the best Overall Contractor Brief. 

At the time of the competition in March 2016, all six authors were J.D. candidates at The George Washington University Law School. Professor Steven L. Schooner served as the faculty 
adviser. The George Washington University Law School thanks its distinguished and 
outstanding volunteer judges for challenging the  competitors. 

I. Competition Problem1

United States District Court for the District of Columbia

Clean Water Initiative, Inc.

Plaintiff,
v.

Linda Vasquez, Secretary, Federal Agency for International Development

Defendant

January 11, 2016

Memorandum Opinion2

Barnes, Judge:

Clean Water Initiative, Inc. (“CWI”) brought suit to challenge its debarment by the Federal Agency for International Development (“FAID” or “the Agency”), claiming the debarment was wrongfully imposed. FAID asserts that the debarment is valid and that, among other things, an Audit Report and Interview Notes regarding CWI, which CWI asserts are privileged, should be disclosed to prove the debarment is proper.

The first claim (“Claim One”) concerns the validity of CWI’s debarment. CWI argues that the debarment was improper, indeed, invalid, because the Agency suspension and debarment official (“SDO”), Raymond (“Ray”) Tusk issued the debarment in a manner contrary to law and failed to afford appropriate due process in the debarment proceeding. FAID argues that the debarment is proper because CWI failed to meet its burden to prove its present responsibility by refusing to produce the Audit Report and interview notes from an internal investigation, which FAID’s SDO requested.

The second claim (“Claim Two”) concerns the privilege of CWI’s internal investigation. CWI asserts that the Audit Report and Interview Notes are protected by attorney-client privilege and the attorney work product doctrine, so it is not compelled to produce them for the debarment proceedings. Thus, FAID asks the Court to compel disclosure of CWI’s Audit Report and Interview Notes to further confirm the debarment was proper.

Pending before this Court are plaintiff ’s and defendant’s cross motions for summary judgment on the appropriateness of the debarment as well as FAID’s motion to compel production of the Audit Report and Interview Notes and CWI’s opposition to that motion.

A. Background

1. CWI

Claire Underwood established CWI, a family-owned, small business headquartered in Scalp Level, Pennsylvania, in 1996. CWI, known in the industry as a “bug and sludge” vendor, provides conventional water purification services. Though it also performs domestic work, CWI specializes in international crisis response. CWI provides temporary purification in developing countries distressed by floods and other natural disasters affecting the water supply, such as the 2010 earthquake in Haiti and 2012 floods in Nigeria. With nearly forty percent of CWI’s annual revenue generated by government contracts, Underwood, as chief executive officer (“CEO”), established a Washington, D.C., satellite office in 2004, which she manages to strengthen relationships with federal entities. From 1996 to 2013, CWI held thirty contracts for water purification with FAID, the Department of Defense (typically, but not exclusively, the Army Corps of Engineers), the Federal Emergency Management Agency, and the Department of State. Seventy percent of those contracts were administered by FAID.

In 2012, CWI held two contracts with FAID — a one-year cost reimbursement contract awarded in January 2012, with four option years, for water purification in Western Africa, and a one-year cost reimbursement contract awarded in April 2012, for water purification in Oaxaca, Mexico. Under both of these contracts, CWI was entitled to reimbursements for its allowable incurred costs.

2. Campaign Contributions

CWI has long maintained a close relationship with Pennsylvania Democratic Senator Peter Russo. Russo and Underwood have been friends since they were both political science majors at Pennsylvania State University. They often watch the Nittany Lions at Chinese Disco, a bar in Georgetown, Washington, D.C. Now that he holds elected office, Senator Russo frequently uses his influence as a member of the Senate Appropriations Committee’s State and Foreign Operations subcommittee to draft and pass legislation to expand FAID-managed water purification grant programs. CWI further maintains close ties with the state, recruiting top engineers, biologists, and newly minted MBAs from the University of Pennsylvania and Pennsylvania State University.

In the summer of 2012, Senator Russo faced a tight race for reelection as the junior senator from Pennsylvania. Doug Stampler, CWI’s Vice President for Government Affairs, became concerned that FAID would invest less in water purification projects, resulting in fewer contracts for CWI if Senator Russo lost the election. To ensure the success of Russo’s campaign, Stampler enlisted Rachel Posner, CWI’s Senior Event Coordinator. Together they underwrote and hosted a fundraiser for Senator Russo in August 2012. While invitations initially billed the event as a barbeque catered by Freddy’s BBQ, last minute connections brought Reading, Pennsylvania, native Taylor Swift to the fundraiser, where she performed her Billboard hit “We are Never Ever Getting Back Together.” The fundraiser received substantial coverage by Pennsylvania and D.C. media, noting the event was a remarkable publicity coup for the junior Senator’s campaign.

The fundraiser raised $165,000. Stampler and Posner then “bundled” and contributed the funds from the event and a matching donation directly from CWI, altogether $330,000, to PennPromise, a super PAC that supported candidates committed to expanding Pennsylvania’s role in international development. In the 2012 election, PennPromise publicly disclosed that the only candidate for Senate it supported was Senator Russo. In addition to CWI’s $330,000 bundled donation, CWI was the primary contributor to a PennPromise. Stampler and Posner considered supporting Senator Russo a “cost of doing business” and a “good investment in the future.”3 Accordingly, they instructed CWI’s accountants to include all of the costs associated with hosting the fundraiser and CWI’s direct donation to PennPromise in CWI’s general and administrative (“G&A”) overhead pool. Subsequently, costs included in that G&A pool were allocated to CWI’s two FAID contracts and thus were passed on, or charged, to FAID through invoices paid under those contracts.

In November 2012, following a routine audit, CWI’s accountants brought to the attention of CEO Underwood that Stampler and Posner had included the donation and the fundraiser in CWI’s operating costs, which in turn appeared to have been charged (as indirect costs) to the government. When confronted, both employees admitted their actions. At the time, CWI was in the process of recruiting a new general counsel, and the only attorney serving as corporate counsel was the company’s junior tax attorney, Christina Gallagher. Gallagher had no experience in government contracts. At Gallagher’s assurance that doing so would resolve the problem, Underwood promptly fired Stampler and Posner for what Underwood feared might amount to fraudulent billing practices. In an abundance of caution, having already received partial payment from FAID, CWI submitted revised invoices, without the charges associated with the political activities, and reduced an October 2012 FAID invoice with a credit to offset the improperly received funds.

On January 10, 2013, at the urging of newly hired Senior Vice President and General Counsel (“GC”) Catherine Durant, CWI voluntarily disclosed4 the improper charges and creative but improper accounting CWI used to remedy them to FAID Contracting Officer (“CO”) Janine Skorsky.

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