DRC fights civil damages lawsuit

Dynamics Research Corp.

Location: Andover, Mass.

Chairman and CEO: James Regan,br>
2002 employees: 1,858

2002 revenue: $192.6 million

2002 net earnings: $6.3 million

www.drc.com

Ticker: DRCO

James Regan, DRC's chairman and CEO, said the "government is overreaching" in its effort to punish the company for the crimes of two former employees.

Henrik G. de Gyor

Systems integrator Dynamics Research Corp. faces civil fines of up to $30 million under a government lawsuit charging that the company failed to properly supervise two employees who defrauded the government on contracts at Hanscom Air Force Base in Massachusetts.

In a civil lawsuit filed Oct. 9 in the U.S. District Court in Boston, U.S. Attorney Michael Sullivan charged DRC with multiple counts alleging kickbacks and overcharges and failure to meet the terms of its contracts. The government is asking for penalties and triple damages, estimated to be more than $10 million.

The two employees, Victor Garber and Paul Arguin, were sent to prison for their roles in setting up sham companies and using their positions with DRC to steer business to those companies. According to the complaint, the two vice presidents skimmed more $10 million through a variety of schemes.

"The conduct by two high-level executives of Dynamics Research is something for which the corporation must be held responsible," Sullivan said in a statement announcing the lawsuit. The civil complaint "should make clear that companies will be held accountable for their employees who use government contract positions to corrupt government programs."

The activities took place under the Technical and Engineering Management Services contract, which ran from January 1996 to March 1999, and the Information Technology Services Program, which ran from July 1997 to January 2000.

Arguin initially was the program manager, and then was promoted to vice president. He reported to Garber, according to the complaint.

James Regan, DRC's chairman and chief executive officer, held a conference call the day before the charges were filed to say that DRC had cooperated fully with the investigation of Arguin and Garber, and fired them as soon as the deceit was discovered.

"As a result of our proactive ... support of the case, they were convicted, fined and imprisoned," he said. "In October 2002, the U.S. Attorney thanked us for our full and complete cooperation. DRC did not receive any financial" benefit from the crime.

The company tried to negotiate a financial settlement with the government, but the two sides were unable to reach an agreement, he said.

Regan said the government recouped most, if not more, of the $10 million through fines and income taxes paid by the defendants.

"Under these circumstances, we believe the government is overreaching and acting without any apparent concern" for the impact on innocent company employees, he said.

Regan said the company has successfully competed for business from the Air Force since the men's wrongdoing was discovered. He also cited Hanscom personnel for playing a role in the kickback scheme.

"This fraud was made possible by actions of certain government personnel and other companies not related to DRC," Regan said.

A company spokesman declined further comment, citing the pending court case. The U.S. Attorney's office also would not comment.

"I think it came as a surprise for those who had been following the company. They thought it had been put behind them," said Tom Meagher, vice president of equity research, BB&T Capital Markets, Richmond, Va. "This is not a criminal complaint, it's a civil complaint -- it's about money."

The actual cost of defending DRC against the charges is not likely to be large, Meagher said, because the matter has been going on for some time, and DRC already has incurred a lot of the legal expenses.

Meagher said the company's argument that it did not benefit from Arguin and Garber's actions, and that it actively cooperated with authorities in their prosecution, make for "a strong case."

But the financial community is split over the lawsuit's effect on DRC.

John Mahoney, senior vice president of equity research at Raymond James Financial Inc., St. Petersburg, Fla., said if DRC loses, the company could be liable for $30 million or more, a sizeable portion of its estimated $250 million in revenue for 2003.

In a research report issued the day the charges were filed, Mahoney wrote: "We are concerned that an unfavorable judgment would significantly burden an already weak balance sheet, as DRC does not have insurance for this type of settlement."

Nor is this the only legal cloud hanging over DRC. In October 2002, several companies that held a spot on the TEMS contract at Hanscom Air Force Base were served subpoenas by the antitrust division of the Justice Department for records covering the contract period. DRC was one of them.

In his conference call, Regan said he didn't know what effect the civil case would have on the antitrust investigation.

The announcement of the civil lawsuit hurt DRC in the financial marketplace. Stocks were trading Oct. 2 at a 12-month high of $19.40 per share; the price closed at $15.89 one week later, the day the lawsuit was filed. The price rebounded slightly, closing at $16.31 Oct. 20.

Staff Writer Patience Wait can be reached at pwait@postnewsweektech.com.

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