U.S. Department of Justice

Federal Bureau of Investigation

 For Immediate Release    Washington, D.C.
 September 10, 1998    FBI National Press Office

Mr. Louis Freeh, Director, Federal Bureau of Investigation, jointly with the Departments of Defense and Transportation, announced today that a four-year national covert investigation into allegations of fraud, kickbacks, and false claims involving federal contracts with maritime companies for repairs of United States Navy ships has been concluded.

The Department of Defense (DOD) agencies working with the FBI investigating the case, code-named "OCTANOVA," are the Defense Criminal Investigation Service (DCIS) and the Naval Criminal Investigative Service (NCIS). The Office of Inspector General of the Department of Transportation (DOT) also is taking part in the investigation.

Director Freeh announced that on August 11, 1998, Special Agents from the FBI, DCIS, and NCIS executed a search warrant for evidence at Bayship Management (BSM), Inc., of Englewood Cliffs, New Jersey. Additionally, throughout the country, subpoenas were served, witnesses were interviewed, and subjects were approached. Because of the ongoing nature of the national investigation, no indictments are being returned or arrests are being made at this time. However, plea agreements are being negotiated with many subjects across the industry, and indictments are forthcoming.

BSM holds an approximately $200 million Military Sealift Command (MSC) privatized ship management contract. The MSC is responsible for Department of Defense (DOD) ocean transportation needs, and its mission is to sustain U.S. military forces through sea delivery of equipment and supplies. MSC provides direct support for Navy combatant ships by allowing them to remain at sea for extended periods.

Mr. Scott Jacobs, Acting Assistant Director for NCIS, stated that "If public exposure of the practice (fraud) can serve as a deterrent for others, the maritime industry should consider this a shot across the bow. We know how this and other schemes work and we'll be out to stop them."

The investigation was initiated when allegations of fraud in the maritime industry regarding repair contracts for work onboard Naval ships managed by BSM were reported to law enforcement agents in June, 1994.

In response to these allegations regarding the fraud, which largely involved repair contracts and bid rigging, the FBI, together with DCIS and NCIS opened an undercover business, which eventually expanded over the course of the investigation and, at one time, had undercover offices in New Orleans, Louisiana; Houston, Texas; Norfolk, Virginia; San Francisco, California; and Jacksonville, Florida.

The covert phase of this investigation was highly successful in that it identified scores of persons and corporations that were involved in kickback schemes to acquire lucrative repair contracts.

Under current DOD guidelines for obtaining sealift and ship repair services, MSC normally relies on the competitive bid process. Investigation established that this competitive bidding process for the maintenance and repair contracts awarded by BSM management was frequently defeated and that lucrative contracts were illegally awarded to companies who had made kickbacks to BSM employees.

Ms. Carol Levy, Deputy Director, DCIS, stated that, "This is another instance in which companies and individuals have placed greed before integrity in the Government procurement process." Ms. Levy encouraged anyone who has information that might be useful to this investigation to telephone the DOD Hotline at 800-424-9098. This Hotline is staffed Monday through Friday, from 8:00 AM to 4:30 PM (EST).

Director Freeh encouraged the public to alternately contact their local FBI office to report relevant information.

The DOT Maritime Administration (MARAD) maintains a merchant marine fleet capable of meeting the nation's shipping needs for domestic and foreign commerce, as well as national security needs. This investigation also addresses potential frauds associated with these MARAD vessels.

Mr. Todd J. Zinser, DOT Assistant Inspector General for Investigations, commented that, "We intend to continue our investigative efforts in support of the FBI and the Department of Defense to ensure that any such integrity issues concerning the Department of Transportation are identified and properly resolved."

This investigation initially focused on a government contract awarded to BSM to maintain and operate USNS vessels. Thereafter, the undercover investigation determined possible fraud associated with contracts awarded to sub-contractors during the course of servicing these eight Naval vessels. This fraud ultimately cost the United States Government a significant amount of taxpayer dollars. The final cost to the government cannot be calculated until this investigation is complete.

Besides the search warrant executed in New Jersey, Director Freeh said court-approved subpoenas for evidence were executed in five cities where federal grand juries have been convened: San Francisco, New Orleans, Norfolk, Houston, and Jacksonville, Florida.