Defense Contracting

Contractor Claims for Legal Costs Associated with Stockholder Lawsuits Gao ID: NSIAD-95-166 July 17, 1995

In response to a Congressional request, GAO asked the Defense Contract Audit Agency (DCAA) for its views on the allowability of reimbursing legal costs resulting from stockholder derivative lawsuits associated with defense contractor wrongdoing. DCAA responded that the Federal Acquisition Regulation (FAR) contains no cost principle dealing specifically with the allowability of legal fees associated with defending against stockholder derivative lawsuits. However, DCAA's research concluded that such costs are unallowable under the FAR cost principle on reasonableness of costs when the lawsuit is based on contractor wrongdoing. As a result, DCAA issued guidance on April 13, 1991, that no specifically deals with these costs. From October 1988 through December 1994, there were 72 cases involving procurement fraud associated with firms on the Defense Department's Top 100 Contractor list. However, it is not apparent that claiming reimbursement for stockholder derivative legal costs is a common practice.

GAO found that DCAA: (1) performs contract audit functions for the Department of Defense (DOD) and audits costs and makes recommendations regarding the allowability of costs claimed by contractors; (2) issued audit guidance that addresses the allowability of legal fees incurred when defending against stockholder derivative lawsuits; (3) concluded that legal fees are unallowable when the lawsuit is based on contractor wrongdoing. In addition, GAO found that: (1) there were 72 cases of procurement fraud associated with DOD contractors from October 1988 through December 1994; (2) criminal fines, awards, and restitution amounts totalled $1.03 billion; and (3) only 13 of the 72 cases involved stockholder lawsuits.

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