P.S. Docket No. 6/6
November 22, 1977
In the Matter of the Proposed Debarment of
WESTERN CONTRACT FURNISHERS
4400 Broadway
Oakland, CA 94611
P.S. Docket No. 6/6
APPEARANCES:
Arthur C. Chambers, Esq.
Clyde & Chambers
1636 Bush Street
San Francisco, CA 94109
For Respondent
Norman D. Menegat, Esq.
Assistant Regional Counsel
Western Region, United States Postal Service
San Bruno, California 94099
for United States Postal Service
POSTAL SERVICE DECISION
Background
In a letter of notice dated May 6, 1977, the Assistant Postmaster General, Procurement and Supply Department, United States Postal Service, (USPS) advised Western Contract Furnishers, 4400 Broadway, Oakland, California 94611 (WCF or Respondent) that he proposed to debar it from contracting with the Postal Service for a three-year period commencing with June 1, 1977. In the notice it is stated, also, that:
“***The reason for this action is the action of your employee, Miles E. Sandstrom, during the time that you were contracting with the United States Postal Service to influence contracting personnel of the Postal Service by offering them things of value. This action seriously affects your responsibility as a Postal Service contractor.”
It was stated, further, that the authority for the proposed debarment was Section 1-604 of the Postal Contracting Manual, and the Respondent was told that it had 20 days from the date of the receipt of the notice within which to request a hearing. Respondent was advised that failure to request a hearing within the prescribed time would result in the proposed debarment’s becoming final.
In the request for a hearing, timely filed by Respondent, it was stated that Miles E. Sandstrom was not an officer of Respondent; that he exceeded his authority in acting as alleged in the notice; that Sandstrom never informed Respondent that he was acting as alleged in the notice; that it was against Respondent’s policy to act as Sandstrom was alleged to have acted; and that Respondent had no direct information that Sandstrom had acted as alleged in the notice.
The USPS, in replying to the request for a hearing, alleged, in substance, that Mr. Sandstrom, as an authorized salesman and representative of Respondent, illegally arranged for furniture and other gifts to be furnished to contracting officials of USPS; that the furniture so provided was accounted for in the records of WCF and it was charged to the USPS account with WCF; that the aforementioned activity by Sandstrom was accomplished within the course of his duties with WCF; that WCF knew or should have known of these illegal activities; and that with reasonable diligence and prudent accounting and auditing practices WCF could, and should, have discovered, and taken steps to stop, such activities. USPS further alleged that during its term the original contract between USPS and WCF was substantially increased by noncompetitive additions to the contract; that the described acts and omissions of WCF are of such serious and compelling nature affecting WCF’s responsibility as a government contractor that its debarment is warranted; and that the character of the events described is such as to require a debarment of not less than three years.
A hearing was held on June 27 and 28, 1977, and both parties have filed briefs presenting their arguments on the issues.
Postal Contracting Manual Provisions
Section 1-604.1 of the Postal Contracting Manual sets forth a number of specific “Causes and Conditions for Debarment”, and it includes the following:
“(4) Any other cause of such serious and compelling nature, affecting responsibility as a Government contractor, as may be determined by the Postal Service to warrant debarment.”
Section 1-604.2 of the Postal Contracting Manual provides, in part, as follows:
“***debarment by the Postal Service shall be for a reasonable, definite, stated period of time, commensurate with the seriousness of the offense or the failure or inadequacy of performance. As a general rule, a period of debarment shall not exceed 3 years.”
In §1-604.3(b) of the Postal Contracting Manual it is stated, in part, that:
“***The criminal, fraudulent, or seriously improper conduct of an individual may be imputed to the firm with which he is connected where such grave impropriety was accomplished within the course of his official duty or was effected by him with the knowledge or approval of that firm.***”
Findings of Fact
Western Contract Furnishers was founded in 1956 in San Francisco, California. It now has other offices in San Jose and Oakland, a sub-branch in Monterey, and an affiliated but separate corporation in Sacramento, Western Design Associates. (Tr. 123-4) In the Bay Area, WCF has about 88 employees producing about $12,000,000 of business per year at present, and there are 22-24 employees in Sacramento doing an annual volume of about $4,000,000.
The Oakland office, which is the office that figures most prominently in connection with the events discussed in this proceeding, had a complement in 1972-1974 of 22 employees. The annual volume of business generated by the Oakland office in 1972-’74 was approximately $2,750,000, 30 per cent of which was produced by Miles E. Sandstrom, who had been employed by WCF for 10 or 11 years and who was one of 15 salespeople working out of that office at that time. (Tr. 124, 134-5, 142) Other people then in the Oakland office of WCF included an unnamed office manager; Bertram Deaner, who in 1973 replaced a Mr. Souza as office accountant[1] when the latter was promoted to the position of controller for the company with offices in San Francisco[2] (Tr. 125); and Virginia Turner, the bookkeeper. (Tr. 162) Mr. Ralph Hays was Manager of the Oakland Division, with a staff relationship to the corporate controller in San Francisco.
The occurrences which resulted in the proposed debarment of WCF are perhaps best described in a statement made on June 10, 1976, to Postal Inspectors by Miles E. Sandstrom. This statement, with a few explanatory interjections in brackets, is as follows:
“I, Miles E. Sandstrom, first being duly sworn, deposes and says (sic):
“I have been employed by Western Contract Furnishers as a salesman since about 1 September 1965. I met Bill Raborn during late 1971 when I was interested in bidding a postal contract. I was in continuous contact with Raborn and also worked fairly closely with Sam Cole, Larry Lippi and later Hugh Robinson. I met Cole through Raborn in early or mid 1972. Cole was usually present in meetings with Raborn.
“When I initially met Raborn there was a bid out for furnishing the Regional Inspectors Office. After this I talked to or sent a letter to Raborn regarding what Western Contract and myself could do regarding the design and supply on the Regional furnishing contract. Later we were successful bidder on the contract and had dealings with others besides Cole and Raborn, Properties Management [an organization within USPS] was continually requesting additional furniture on the contract and in my subsequent dealings with Cole and Raborn I did not want to ‘Rock the boat.’
“I was with Cole and Raborn on two or three occasions, probably all in Raborn’s office, when they would indicate that contractors who did not cooperate with them would not get anything in the future in the way of contracts with the Postal Service. I had taken action on several modification actions, i.e. orders had been placed for the merchandise prior to the [time the] authorized modification order was received and I relied on Raborn to authorize these modifications.
“Just before Cole moved his family to the San Francisco Area, from Southern California, I was with Raborn in his office when he (Raborn) said that Cole had to move and needed furniture. Raborn suggested I meet with Cole regarding Cole’s furniture requirements. Cole called me a few days later and I picked him up and visited his home which was on Gull Avenue. I came up with a package and dollar amount that Cole said sounded like a winner and to proceed. I did this and obtained furniture for delivery to Cole with such items invoiced to Cole. The items delivered to Cole’s home included a dining room set, a sofa and chairs, a table, and a bookcase unit which were all furnished within a couple of months. These items amounted to $4,850.00 which was billed by WCF to PDC[3] with related sub-invoices. Just prior to June 1973 I recall that in attempts to obtain payment from Cole and Raborn I had a meeting in Raborn’s office at which time they agreed that as I was entitled to fees of various sorts, on other jobs, that if anyone ever questioned them about the furniture items being charged to the Postal Service for design services, they would say it was ‘an error in judgment (sic).’
“(After a couple of months, during which time I mentioned payment to Cole once or twice, and even mentioned the exact amount to him, Cole mentioned something about a trust fund of some type which he had monies due from. The subject was then changed and nothing definite was mentioned again. After I called them again regarding payment Cole suggested I could take care of it by January 1973. I felt I was not going to be paid for this and sent a memo regarding it to Cole or Raborn. Later I met with Cole and Raborn in Raborn’s office and it was agreed that the furniture items would be paid for by the Postal Service and I was to receive a purchase order for supposed payment for design services, to cover payment on the furniture delivered to Cole’s home.)
“In late 1973 Cole called me and said that he wanted some additional furnishings and gave me a rundown as to what was needed. Cole said these items were needed to get the house furnished off and for me to take care of it. These items amounted to about $3,076.00 and were included in a PDC Billing of about $25,000 ($26,396.00) and resulted in a cutdown on my profit margin on the contract. These items were delivered to Cole within a couple of months. When the Postal Service paid the total amount of $25,000.00, $3,076.00 was paid on Coles amount with the remainder of about $22,000.00 credited to the Postal account.
“In December 1974 Cole moved to another new home and contacted me regarding draperies. I gave Cole the name of a person who could furnish the drapes, Pete Sommers of Décor Draperies who called Cole, took measures, gave him a quote but was never called back by Cole and I never heard any more about it.
“About two years ago around June 1974 Raborn called and told me he had bought a new house and wanted me to give him an estimate on some new furnishings. After a week or ten days I visited Raborn’s home on Annapolis Street and gave him an estimate of about $7,500 covering the furnishings Raborn wanted. I prepared an invoice of over $7,500 as and (sic) estimate and furnished it to Raborn. Raborn said that looked fine to him and toled (sic) me to go ahead. The furnishings were delivered to Raborn in a couple of months and during this time I was in Raborn’s office and he told me ‘I could take care of this.’ I was shocked but did not make an issue out of it and absorbed the total amount in excess of $7,500 as a job cost which reduced our profit margin.
“To the best of my recollection, without having related documents, I believe that part of these items were included on Master tag #7113 for $2,181 on a separate billing and were paid for by applying manufacturers design fees and spec fees. Purchase Order #2738 for $2,069.05 about 3/11/74 reflects items received by Cole which was offset in the same manner, i.e., by applying manufacturers design and spec fees.
“About December 11, 1972 Cole called me and said that Raborn’s son was having a birthday and asked me to arrange for delivery of a ten speed bicycle to be delivered to Raborn’s son living in Sacramento. I obtained this from Baker & Hamilton at a cost of $75.90 and made no attempts to collect that amount from either Cole or Raborn.
“Raborn also called once regarding a dining room table for delivery to Raborn at a cost of several hundred dollars. The item was delivered but no payment was ever received on it. I do not recall how this was handled on the books. I also recall furnishing Cole or Raborn with a case of Old Crow which was charged as a job cost.
“Several times when I was in the company of Cole or Raborn they indicated they knew how to ‘take care of contractors’ who did not cooperate with them and that such contractors would not be able to do subsequent business with the Postal Service. However, they never mentioned any contractor by name. This was told to me as well as [my] receiving impressions along these lines while overhearing telephone conversations made in my presence.
“During all these transactions with Cole or Raborn I do not believe either of them ever made any payment on anything obtained from me.
* * *” Ex. F-14[4]
Messrs. Cole and Raborn have been indicted, tried and convicted of criminal offenses connected with the events related above. (Exs. 82 and 83)[4] It is suggested in the record, but it was not documented or otherwise supported, that Mr. Sandstrom was also convicted of a criminal offense for his role in the same events. (Tr. 7)
It is established, therefore, that Miles E. Sandstrom during the years 1972 and 1974, inclusive, while he was an employee of WCF, did furnish gifts of merchandise to Samuel H. Cole and William F. Raborn III, while they were employed by USPS and while the WCF was a contractor with USPS.
It is conceded by USPS that it has not developed direct evidence that any officer of WCF was aware of Sandstrom’s activities, and there is no charge or suggestion that any officer of the company participated in such activities. (Tr. 5, 6) The proposal to debar WCF is based upon three theories:
1. The doctrine of respondeat superior, under which the master is held to be responsible for the acts of its servant;
2. The constructive knowledge of WCF of the activities of its salesman by virtue of the pervasiveness of the corporate records relating to the transactions recounted in Sandstrom’s statement; and
3. Appellant’s negligence in allowing the situation to exist whereby the wrongdoing of Sandstrom could occur and remain undetected.
During the 1972-1974 period, but not simultaneously, there were four contract documents in force between WCF and USPS. Each of the contracts and the modifications thereto required the generation of a sizeable amount of paperwork. One of the forms used by WCF is illustrated by Ex. 85, an eight-fold, multi-colored document with a record of the customer’s order on the left-hand side, and a purchase order on the right-hand side used to order from vendors items not in Appellant’s warehouse. The customer’s order and the purchase order bear the same number. In the upper left-hand corner of Ex. 85 are spaces for the name and address of the customer and a space in which to indicate the place to which delivery is to be made. Near the left-center of the page is a blank for the name of the salesman by whom the transaction is generated. Naturally, Mr. Sandstrom’s name appears in the majority of the forms used in transactions related to this case.
Slightly to the right of the center of the top of the sheet are two black-lined boxes, one larger box which is subdivided into 4 smaller spaces, and one smaller box under the larger one. In the top space of the upper box the customer’s purchase order number is to be placed and in the smaller box there is to be shown the number assigned by WCF to the customer. Future orders by the same customer under the same contract will have different WCF purchase order numbers, but they may have the same customer’s purchase order number and they will bear the same WCF – assigned customer number. By this means, billings may be made to the proper customer under the appropriate contract account. (Tr. 160)
The WCF salesman taking an order writes up the order on Ex. 85 and keeps the pink copy. The original goes into a file for later delivery to the customer and, the yellow, or office, copy is placed in the same file. The second copy, also on white paper, is used as WCF’s purchase order going to the vendor or supplier.
When the supplier furnishes the ordered item to WCF and invoices for it, the supplier’s invoice is checked by the person on the contract desk against the yellow sheet, and if they are found to agree, the invoice is sent to the person responsible for accounts payable, who also checks the supplier’s invoice for accuracy. In 1972-’74 it was the joint function of the salesman and the office to see to it that the proper numbers were assigned to purchases and that the charges were charged to the right job. (Tr. 158-160)
The yellow copy of the sales document was checked at the end of each month to determine the amount of commissions due to Sandstrom and to the other salesmen. This review was conducted by either the office manager or the bookkeeper at the Oakland office, and the review served the additional purpose of forming the basis of a monthly total report. (Tr. 161-163)
Documents evidencing contracts entered into with various customers were filed in a desk maintained by the bookkeeper and there was usually a copy in the salesman’s file. If, as appeared to be the case here, Western Design Associates and WCF entered into separate contracts with the same party, the separate contract documents probably would have been put in the same customer’s file. (Tr. 163) These contract documents were not reviewed on any regular schedule. When new contracts came in, the Oakland Division Manager, Mr. Hays, would see some of them and those that he did not see would be seen by the salesman and by the bookkeeper. (Tr. 164)
Frequently, after 1973, when an item was received from a supplier it was delivered by a delivery company owned and operated by an employee of WCF. Looking at Ex. 19, for example, it is seen that the delivery company reported the delivery of a list of items to Linda Cole, Foster City, California. The delivery company has billed WCF $20.00 for making the delivery, and receipt of the merchandise has been acknowledged by Mrs. Cole by her signature on the “receiving copy” of the WCF sales document. (Ex. 19, 3rd p.) The practice was that the salesman would initial the delivery company bill which would then be processed against the appropriate purchase order. The T & D Express Statement, on the right-hand margin references “PO #OA75498/99”, above which reference is a mark identified as Sandstrom’s initials. (Tr. 0485 )[5]/
In the normal course of WCF’s business, after delivery has been made the customer is billed and an entry is made on the monthly Accounts Receivable Trial Balance Sheet. (Ex. 79) When payment is received the payment is recorded in the Cash Receipts Journal which reflects the amount and date of receipt of each payment. (Ex. 74)
The record includes an invoice bearing number OA-84704 in the amount of $4,850 as the bill for providing “material and personnel to accomplish analysis and investigation associated with lobby and office layout to develop decorative, functional and creative concepts” (Ex. 1). The invoice lists a series of other purchase order numbers used in orders for different items from different suppliers, which items were delivered to (and some were receipted for by) Mr. or Mrs. Sam Cole (Ex. 19, 20, 22, 24, 25 and 28, e.g.), showing Mr. Sandstorm as the salesman and as the person approving the bill for delivery services. Exhibit 79 shows an account receivable on P.O. #84704 (a customer, or master, number assigned by WCF to USPS) in the amount of $4,850.00 and Exhibit 74 shows that the USPS, on August 31, 1972, paid $4,850.00 to WCF in connection with P.O. #84704.
Examples of the same kind of transaction could be traced in respect to Wm. F. Raborn III as has been shown concerning Samuel H. Cole, but no such showing is necessary for the present purpose, which is to show the number and location of entries to be made in one multi-item transaction. It is strange that this volume of paperwork did not reveal Sandstrom’s unlawful activities earlier to WCF, but it was suggested that, in some way, Sandstrom secreted the documents and thus concealed his operations. (Tr. 153)
Discussion
A case having precedential value in the situation here presented is Gleason v. Seaboard Air Line Railway Company, 278 U.S. 349 (1929). One McDonnell was an employee located at the Savannah, Georgia, terminal of the railway company’s line extending between Savannah and Charleston, S.C. McDonnell’s duty, among others, was to give notice to those engaged in the cotton trade, as was the case with Gleason, of the arrival of cotton at Savannah under “order notify” bills of lading. McDonnell went to Charleston, forged an “order notify” bill of lading indicating that a shipment of cotton had arrived at Savannah, and gave that notice to Gleason. Later, on the same day, a bank presented the properly endorsed bill of lading to Gleason with a draft on Gleason for $10,000, which Gleason paid in reliance upon the notice given him by McDonnell and the apparent regularity of the documents. After the presentation of the draft and before payment, McDonnell, in response to an inquiry, told Gleason that the cotton described in the bill of lading had arrived.
In deciding that Gleason was entitled to recover against the railway company on account of the acts of its agent, McDonnell, the Court said, inter alia:
“***Undoubtedly formal logic may find something to criticize in a rule which fastens on the principal liability for the acts of his agent, done without the principal’s knowledge or consent and to which his own negligence has not contributed. But few doctrines of the law are more firmly established or more in harmony with accepted notions of social policy than that of the liability of the principal without fault of his own.” (id. P. 356)
In the instant case, Sandstrom had been an employee of WCF since about 1965. He remained in the employ of WCF until December 1975. (Tr. 124) In the intervening years, Sandstrom became a trusted and competent salesman, with the result that, insofar as the dealings with USPS were concerned, he enjoyed a freedom that no one, before or since, has been permitted, and he was given complete authority to handle that job. (Tr. 129) In carrying out his duties in connection with the USPS contract, Sandstrom provided Cole and Raborn with items of home furniture and furnishings for which, as shown by the records of WCF, USPS subsequently was billed and for which USPS paid.
During the period 1972-1974, the accounting and auditing of the work in progress out of the Oakland office were, understandably enough, difficult to keep in balance. Mr. Hays, the Division Manager, insisted upon monthly balances and efforts were made to identify the problems and the reasons for the difficulties. On the other hand, if the accounts did not balance, arbitrary adjustments were made to bring them into balance. (Tr. 160, 161) When this spurious balance was achieved the record suggests that the matter was dismissed until the next time the accounts would not balance and the same remedy would be applied. WCF has an annual audit by outside certified public accountants, but there is no indication as to what action, if any, was taken when this audit resulted in an imbalance in the accounts. (Tr. 135) In an effort to correct the problem, WCF began in 1974 to install a new, computerized system of accounting. This installation work was done under the supervision of the corporate controller and the work was so demanding and time-consuming that the corporate controller could not give his usual attention to the overview of the accounts of the various offices. The installation of the computerized accounting system was completed in 1975 and it is the statement, yet untested, of Mr. Stevenson, President of WCF, that transactions of the Sandstrom-Cole-Raborn type could not occur again. (Tr. 125-129)
In July of 1975, Bertram Deaner, then the accountant at the Oakland office, advised Mr. Hays that representatives of USPS wanted to look at some company records concerning WCF’s transactions with USPS. In the course of the investigation by Postal Inspectors there was a problem in locating certain key documents. In these instances in which papers were not among the company’s records, Mr. Sandstrom was able to produce them. When the nature of the events under investigation became known to Mr. Hays he immediately communicated with Mr. Stevenson, who directed that an in-house investigation be conducted. These two investigations led to the finding that, as has been seen, Mr. Sandstrom had provided gifts to two USPS employees whose functions were in the purchasing area. (Tr. 151-154)
In the business in which WCF is engaged, it is not uncommon in instances in which a designer specifies the use of a particular manufacturer’s product, such as a carpet, for the manufacturer to pay a fee, called a “spec fee”, to the designer. It was from such fees that part of the payments were made for the furniture provided to Cole and Raborn. Some of these spec fees to WCF resulted from orders under WCF’s contract with USPS. This is one form of direct benefit flowing to WCF under its USPS contract arising out of Sandstrom’s dealings with Cole and Raborn.
Although it can not be measured with precision, it is entirely possible that additional direct benefit to WCF took the form of continued orders from USPS because of the gifts provided to these postal procurement officials -- and it is certain that such was the hope of Sandstrom.
However surprised WCF’s officials may have been when Sandstrom’s activities came to light, the company and its officials reacted very passively and with what might reasonably be called over-restraint. Sandstrom was not terminated, but, to the contrary, he was permitted to continue with the company for another six months – until December 1975 – and even then he left the employ of WCF voluntarily. Insofar as the testimony of WCF’s witnesses suggests, Sandstrom might still be a salesman for that company notwithstanding his dealings with Cole and Raborn.
Conclusions
1. USPS concedes that there has been no showing of knowledge of or participation by WCF personnel other than Sandstrom in the events which gave rise to this proceeding.
2. The company (a) realized the existence of a problem in accounting for its work in progress; (b) tried within its capabilities to identify and locate the problem; and (c) finally installed a system which it believed, and still believes, will prevent the recurrence of any situation like the one herein discussed.
3. While the foregoing positive actions by WCF’s officers reflect an effort more effectively to police the activities of its salespeople, they are offset somewhat by the absence of other actions which would have been appropriate under the circumstances. For example, Mr. Sandstrom’s continued employment with the company for some six months after his activities came to light was rationalized on the basis of the good job he was doing on another contract. This fact seems to place less than sufficient emphasis on the seriousness of his actions in contributing to the corruption of a public official. Moreover, there is no showing that the management of WCF has made any real effort to impress upon all of its employees the importance of complete compliance with the high standards of conduct necessary in dealing with the government and the obligation to report any deviation there from.
4. As stated by the Supreme Court in the excerpt from the Gleason case, above, WCF can not, in the factual context here found, escape all responsibility for the acts committed by its agent. Accordingly, on the basis of the facts herein found, debarment of WCF is warranted. (See also Oddo v. Interstate Bakeries, Inc., C.A. 8, 1959, 271 F.2d 417)
5. In view of the conclusion in number 4, above, it is unnecessary to rule on the theory of USPS predicated on the proposition that the documents relating to the unlawful gifts so pervade the company’s records that WCF should be deemed to have known of the unlawful activities of its agent.
6. A point on which stress is placed in the provisions of the Postal Contracting Manual relating to debarment is the “interest of the government.” (PCM 1-600 (b), 1-604.1(c)(1)) In order that the government’s interest may be accorded the protection to which it is entitled, it is not inappropriate to consider what, if any, benefit in the form of a deterrent may be salvaged from an otherwise detrimental situation. Despite the lack of a showing of active involvement of WCF’s management in the unlawful events herein discussed, nevertheless based upon (1) due regard for the best interest of the government; (2) the gravity of the acts of WCF’s agent; and (3) the failure of WCF’s management to take immediate, positive and decisive steps to remove Sandstrom and to advise other WCF personnel in regard to the conduct required of them in their contractual relations with the government, it is concluded that Western Contract Furnishers should be, and it hereby is, debarred from contracting with the United States Postal Service for a period of twelve (12) months commencing June 1, 1977.
William A. Duvall
Acting Judicial Officer
[1] It is not clear from the record, but it is possible that the functions of office manager and office accountant were performed by the same person.
[2] In early-or mid- 1975, Mr. Souza was terminated and Mr. Ed. Stenger became company controller. (Tr. 128)
[3] “PDC” means Postal Data Center, the disbursing office of the Postal Service.]
[4] Exhibits exchanged prior to the hearing were designated “Formal Exhibits” and identified as Ex. F-1 through F-14. Exhibits received at the hearing are numbered 1-28, 32-36, 39, 41, 42, 45-72, 74-85.
[4] At the time of the hearing in this appeal, Mr. Raborn’s conviction was on appeal.