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10/18/94

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Stanford, government agree to settle dispute over research costs

STANFORD -- In an agreement announced today, the U.S. government said it has no claims against Stanford University for fraud, wrongdoing or misrepresentation in connection with the university's indirect cost reimbursement submissions.

The agreement between the university and the Office of Naval Research (ONR) settles all disputed matters related to the billing and payment of indirect costs of federally sponsored research at Stanford for the fiscal years 1981 through 1992.

In addition to finding that the government has no claim for wrongdoing, the settlement upholds the validity of "Memoranda of Understanding" previously reached between the government and the university. The status of the MoUs was at the core of the dispute.

"Throughout this controversy, we asserted that Stanford has done no wrong," said Stanford president Gerhard Casper. "This settlement confirms that belief.

"We conclude this settlement with a sense of relief. With it behind us, Stanford can devote its attention fully to its ongoing mission of teaching and research on the frontiers of knowledge. And that is exactly what we shall do."

Under terms of the settlement, the university will pay $1.2 million to the government in a final adjustment covering the 12 years and withdraw its own claims that the university had been underpaid during 1991 and 1992. Those claims had been filed before the Armed Services Board of Contract Appeals in Washington, D.C.

The agreement ends several years of controversy during which allegations were made that the university owed the government as much as hundreds of millions of dollars for incorrectly calculating the indirect costs of doing research. Over the course of these 12 years, Stanford conducted research under nearly 18,000 federally sponsored contracts and grants involving many millions of transactions and dollars.

Paul Biddle, the former Office of Naval Research representative on campus, initiated the allegations, claiming the MoUs were invalid. Later he filed a qui tam suit, from which he could personally gain. Last December, the U.S. Department of Justice decided not to join the action, but Biddle's suit is still pending. (Under a qui tam suit, a private plaintiff can collect part of the damages for fraud, if any is found.)

"This suit is without merit and we will vigorously defend ourselves against it," Casper said in a prepared statement. Casper's statement, which outlines the history of the case and explains its resolution, is attached.

The controversy began in 1990 with allegations of accounting errors and inappropriate charges, as well as allegations that the signed agreements between the government and Stanford were invalid.

The university earlier had admitted that it had made some accounting errors, such as the depreciation charged for a yacht that had been donated for the use of the Stanford student sailing program.

"Stanford suffered much embarrassment as a result," Casper acknowledged. "These charges were a relatively few items out of literally millions of transactions." Once uncovered, Stanford withdrew the charges, repaid the government by check in 1991 and apologized, Casper said.

These earlier much-publicized charges had been cleared up before yesterday's settlement. By contrast, the validity of the MoUs, central to Stanford's position, was still to be resolved.

The MoUs were formal written agreements between the government and Stanford covering such complex accounting issues as the allocation of utility costs, recovery for library expenses, accounting for administrative effort and property management. Even though the agreements had been negotiated and signed by government representatives, Biddle questioned their validity, which eventually prompted the Office of Naval Research in April 1991 to cancel them retroactively to Sept. 1, 1990.

Stanford objected to the government's unilateral cancellation of the agreements but decided, as part of the settlement, to drop further pursuit of money it claimed was owed in the interest of good relations between the parties, Casper said.

"The university-government partnership, after all, has largely been responsible for the conduct of America's basic science program and for America's continued scientific and technological leadership in the world," Casper said. "Rather than expending additional money, time and energy in litigation, we preferred to re-establish a healthy relationship with the government and to turn our undistracted attention back to our essential tasks - teaching and conducting research that benefits not only both parties to this settlement, but the public as well."

-kpo-

Statement on the Resolution of Outstanding Disputes Between

Stanford and the Government on Indirect Cost Issues

Gerhard Casper

President of Stanford University

October 18, 1994

Yesterday Stanford University and the United States government agreed to a settlement of all disputed matters related to the billing and payment of the indirect costs of federally sponsored research at Stanford for the years 1981 through 1992.

In settling this contractual dispute, the Office of Naval Research, the responsible government agency, acknowledges that it has no claim against Stanford for fraud or any wrongdoing or misrepresentation with respect to Stanford's indirect cost submissions during these years.

Over the course of these twelve years, Stanford conducted research under nearly 18,000 federally sponsored contracts and grants involving many millions of transactions and dollars. The settlement provides that Stanford will pay the government an additional $1.2 million dollars as an adjustment for all the years 1981 through 1992 and dismiss its appeals concerning 1991 and 1992. In coming to the settlement, ONR has acknowledged that the documents governing Stanford's accounting practices (known as Memoranda of Understanding, or MoUs) were valid and binding agreements between the government and Stanford.

As a normal business settlement, this is unremarkable. Adjustments when closing out the books for open years are normal and expected under the applicable government rules, and the amount of the adjustments for the years just settled is within the normal range.

Yet this case is not normal. No sponsored research dispute at Stanford - nor I believe at any university - has ever received as much attention and scrutiny as indirect costs at Stanford during the 1980s. Let me comment on that scrutiny and on the disposition of the major issues.

The level of scrutiny was intense and came from many sources. At one point, there were as many as 30 government auditors working on the Stanford books. Also, because of a qui tam suit filed by Mr. Paul Biddle, who had been the ONR representative at Stanford, the United States Department of Justice spent over two years investigating fraud allegations. During this period, Stanford spent over $25 million on outside accounting firms and consultants to provide independent verification of Stanford's work and to assist us in responding to the government.

The result of this scrutiny was that the Office of Naval Research - after extensive government review of Stanford's indirect cost matters, including allegations of overcharges - concluded that it has no claim against Stanford for fraud or any wrongdoing or misrepresentation regarding indirect cost submissions. Additionally, last December the United States Department of Justice declined to enter the private qui tam fraud suit brought by Mr. Biddle.

Yesterday's settlement completes the long process of audit and negotiation and resolves all outstanding matters between Stanford and the government related to the indirect costs of research for the 12-year period, 1981 through 1992. Two quite different issues were raised in the course of this controversy.

The first issue involved accounting errors and inappropriate charges. One such error was depreciation for a yacht that had been donated to the Stanford student sailing program. Such charges were the subject of intense press coverage, and Stanford suffered much embarrassment as a result. Stanford readily and voluntarily agreed to full correction at the outset of the controversy. These charges were a relatively few items out of literally millions of transactions. Once uncovered - and Stanford's own review discovered many of them - Stanford withdrew the charges, repaid the government by check in 1991 for unallowable items, and apologized.

By contrast, the second issue - that of the status of the Memoranda of Understanding (or MoUs) - is not well known, but it is of overarching importance and is at the very core of this resolution. The MoUs were a series of agreements between the government and Stanford, which set out in considerable detail just how the government's rules regarding indirect cost accounting should be implemented at Stanford. These agreements covered a number of very basic but complex accounting issues such as the allocation of utility costs, recovery for library expenses, accounting for administrative effort, and property management. These were not casual agreements; rather they were formal, written documents that were reviewed by government auditors and representatives, and negotiated before they were signed by both parties as binding agreements. In short, these MoUs formed the essential basis for accounting and business practices with respect to Stanford's indirect cost recovery for the decade of the 1980s.

When Mr. Biddle made his allegations in 1990, he challenged the validity of the MoUs. In the wake of those allegations, the Office of Naval Research in April of 1991 canceled the MoUs retroactively to the beginning of the fiscal year, September 1, 1990. The immediate effect of the cancellation was the disruption of existing business practices and a consequent lowering of Stanford's indirect cost recovery rate until new business practices could be implemented.

Stanford immediately objected to the unilateral cancellation of these mutually agreed upon and binding agreements, and to obtain relief and reaffirmation of the validity of the MoUs, Stanford filed a claim with the Armed Services Board of Contract Appeals contesting the cancellation of the MoUs.

In the discovery process preparatory to a hearing by the Board, documents related to the development of the MoUs were subpoenaed, and both government and Stanford officials were deposed under oath. The evidence gained during this process, in addition to material Stanford had previously submitted, clearly demonstrated the validity of the MoUs.

Allegations of massive overpayments to Stanford that received much press attention in 1990 and 1991 all assumed - incorrectly - that the MoUs were invalid. For Stanford, affirmation of the validity of the MoUs was essential in order to arrive at a normal business settlement. After consultations, I concluded that both parties - Stanford and the government - would be best served by a negotiated business settlement for all the years in question. With the MoUs affirmed, protracted litigation would have added nothing to the resolution of the fundamental issues.

The university-government partnership, after all, has largely been responsible for the conduct of America's basic science program and for America's continued scientific and technological leadership in the world. Rather than expending additional money, time, and energy in litigation, we preferred to re-establish a healthy relationship with the government and to turn our undistracted attention back to our essential tasks - teaching and conducting research that benefits not only both parties to this settlement, but the public as well.

While this settlement resolves all the outstanding indirect cost issues of the past with the United States government, I note that Mr. Biddle's private qui tam lawsuit - from which he would be personally enriched if he were to prevail - remains. This suit is without merit, and we will vigorously defend ourselves against it.

As we put this matter behind us, we realize that Stanford did harvest some benefit from this episode. We did obtain a thorough outside review of our internal controls, and we tightened them and improved our systems.

Yet there is also undeniable sadness in the hearts of those on the Stanford campus and elsewhere who admire and respect the university. There was much pain and distress as the public controversy developed. We regret the errors and inappropriate charges. But we also regret irresponsible accusations questioning the intentions and integrity of Stanford and university officials.

Throughout this controversy, we asserted that Stanford has done no wrong. This settlement confirms that belief.

We conclude this settlement with a sense of relief. With it behind us, Stanford can devote its attention fully to its ongoing mission of teaching and research on the frontiers of knowledge. And that is exactly what we shall do.

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