TITLE: Sprint Communications Company LP; Global Crossing, B-288413.11; B-288413.12, October 8, 2002
BNUMBER: B-288413.11; B-288413.12
DATE: October 8, 2002
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Sprint Communications Company LP; Global Crossing, B-288413.11; B-288413.12,
October 8, 2002
Decision
Matter of: Sprint Communications Company LP; Global Crossing
Telecommunications, Inc.--Protests and Reconsideration
File: B-288413.11; B-288413.12
Date: October 8, 2002
David S. Cohen, Esq., and John J. O'Brien, Esq., Cohen Mohr, for Sprint
Communications Company LP, and John G. Horan, Esq., and Jason A. Carey,
Esq., McDermott, Will & Emery, for Global Crossing Telecommunications,
Inc., the protesters.
Carl L. Vacketta, Esq., Kevin P. Mullen, Esq., and David E. Fletcher,
Esq., Piper Rudnick, for MCI WorldCom Communications, Inc., an intervenor.
William L. Mayers, Esq., Department of Defense, for the agency.
Henry J. Gorczycki, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Protests alleging material misrepresentation of an offeror's financial
information submitted to the agency for the purposes of determining the
offeror's responsibility is dismissed where the totality of circumstances
make it inappropriate for the General Accounting Office to review this
matter.
DECISION
Sprint Communications Company LP and Global Crossing Telecommunications,
Inc. protest an award to MCI WorldCom Communications, Inc. under request
for proposals (RFP) No. DCA200-01-R-5008, issued by the Department of
Defense, Defense Information Technology Contracting Organization (DITCO),
for the Defense Research Engineering Network (DREN). Global Crossing
alternatively requests reconsideration of our decision, Global Crossing
Telecomms., Inc., B‑288413.6, B‑288413.10, June 18, 2002, 2002
CPD P: 102, in which we denied Global Crossing's earlier protest of the
award to MCI. The protesters allege that the agency relied upon a
material misrepresentation by the awardee in making award.
We dismiss the protests and the request for reconsideration.
The agency awarded a contract to MCI on April 4, 2002. In the months
prior to that award, the agency had twice selected Global Crossing's
proposal for award. The first selection resulted in a contract award that
was canceled following protests by competitors, including Sprint and MCI.
Upon reevaluation, the agency again selected Global Crossing for award
and, based on a pre-award survey, determined that the firm was
responsible. However, at the request of Global Crossing, the agency
delayed the award, and soon thereafter Global Crossing announced that it
was filing for reorganization under Chapter 11 of the Bankruptcy Act. The
agency updated its pre-award survey to consider Global Crossing's most
recent financial conditions, and subsequently determined that the firm was
nonresponsible.[1]
The agency also performed a pre-award survey on MCI, whose proposal was
considered next in line for award. MCI asked the agency to rely on the
financial position of the firm's parent corporation, WorldCom, Inc.
Following submission of a corporate guarantee by WorldCom, the agency
consented to MCI's request and conducted the pre-award survey, based on
WorldCom's financial statements for the previous 3 years. The pre-award
survey determined that WorldCom's financial data indicated that the firm
had satisfactory financial performance, generally favorable trends of key
financial indicators, and a very unlikely chance of bankruptcy, which did
not expose the Government to significant risks in issuing a contract to
MCI with WorldCom serving as guarantor. In determining MCI responsible,
the contracting officer determined, based on the information submitted by
WorldCom, that the firm had adequate capacity to meet financial
commitments, though it may be subject to adverse economic conditions.
The protests of Global Crossing, Sprint and another firm that followed the
award to MCI challenged in part the agency's responsibility
determination. After receiving a report from the agency addressing all of
the protest allegations, Sprint and the other firm withdrew their
protests. Global Crossing's protest was limited to challenging the
agency's responsibility determination concerning Global Crossing and
alleging that the agency treated the firms unequally in analyzing their
financial information in determining responsibility.
In denying Global Crossing's protest on June 18, we reviewed the agency's
pre-award surveys of both firms. The record reasonably supported the
agency's determination of nonresponsibility for Global Crossing. The
record also did not support a finding that the agency treated Global
Crossing and MCI unequally in reaching opposite conclusions about the
financial capabilities of each firm resulting in different responsibility
determinations.
On June 25, WorldCom publicly announced that it had made accounting
transactions that were not in accordance with generally accepted
accounting principles, which resulted in the firm overstating earnings
before interest, taxes, depreciation and amortization (EBITDA) by $3.055
billion for 2001 and $797 million for first quarter 2002. WorldCom Press
Release (June 25, 2002). On June 26, the Securities and Exchange
Commission (SEC) publicly announced that the *accounting improprieties*
confirmed by WorldCom's announcement were of *unprecedented magnitude,*
and filed a complaint against WorldCom alleging that WorldCom had
defrauded its investors. SEC Press Release (June 26, 2002); Complaint,
SEC v. WorldCom, Inc. (S.D.N.Y). The present protests, filed July 3 and
5, followed.
Sprint and Global Crossing essentially allege that the agency's
responsibility determination, based on a material misrepresentation of
WorldCom's financial information, was unreasonable, which rendered the
contract award void.[2] Global Crossing alternatively references the
alleged misrepresentation to request reconsideration of our prior decision
denying its allegation of unequal treatment in the agency's responsibility
determinations.[3]
The agency responds to the protests by arguing that the telecommunications
industry is in economic turmoil, that restatement of WorldCom's financial
statements does not compare unfavorably with other telecommunications
firms, that WorldCom's financial condition is typical of the industry, and
that a review of WorldCom's financial information would not necessarily
result in a nonresponsibility determination.
As our Office was developing these protests, information and events
related to WorldCom's prior and current financial condition continued to
change. On July 21, WorldCom and MCI filed for reorganization under
Chapter 11 of the Bankruptcy Act. WorldCom Press Release (July 21,
2002). On July 29, WorldCom announced that, based on the firm's
bankruptcy action and pending restatement of its financial statements,
NASDAQ had determined that WorldCom and MCI stock would be de‑listed
from the NASDAQ Stock Market. WorldCom Press Release (July 29, 2002). On
August 8, WorldCom announced additional overstatements of EBITDA for 1999,
2000, 2001, and the first quarter of 2002 totaling $3.3 billion, and of
other non‑EBITDA pre-tax income for the same periods totaling $500
million, bringing the total overstatement to over $7.6 billion. The
announcement also stated that, when the firm releases its revised
financial statements, WorldCom anticipates writing off all of its existing
goodwill and other intangible assets recorded as $50.6 billion.
WorldCom's August 8 announcement also stated that, until an audit of its
prior financial statements is completed, the total impact of improperly
reported income and the ultimate amount of the write-offs cannot be
known. WorldCom Press Release (Aug. 8, 2002).
Legal events also unfolded as a result of WorldCom's announced accounting
improprieties. As indicated, on June 26, the SEC filed a civil complaint
against WorldCom in federal district court alleging securities fraud.
Soon thereafter, several congressional inquiries were conducted and
WorldCom officers, both former and current, received subpoenas to
testify. In August, a federal grand jury indicted two former WorldCom
executives in part for false statements and conspiring with others, known
and unknown, to commit fraud.
Here, it is clear from WorldCom's public announcements that the agency
relied on grossly inaccurate financial information in making a
determination that WorldCom was a responsible contractor. However, as
discussed below, we conclude that the matter protested is inappropriate
for resolution by our Office.
We have recognized that an offeror's material misrepresentation could
provide a basis for disqualification of a proposal and cancellation of the
contract award based upon the proposal. A misrepresentation is material
where an agency has relied upon the misrepresentation and that
misrepresentation likely had a significant impact upon the evaluation.
AVIATE L.L.C., B-275058.6, B-275058.7, Apr. 14, 1997, 97-1 CPD P: 162 at
11. Here, the allegations of material misrepresentation do not arise from
representations made in MCI's proposal, but rather arise from information
submitted by WorldCom during the pre-award survey. As such, those
allegations more closely relate to a challenge to the agency's affirmative
determination of responsibility than they do to a protest alleging
misrepresentation of information in a proposal. See Universal Techs.
Inc.; Spacecraft, Inc., B-248808.2 et al., Sept. 28, 1992, 92-2 CPD P: 212
at 13-16 (GAO reviewed merits of alleged misrepresentation of
responsibility information included in a proposal, but declined to review
affirmative determination of responsibility). Under our current
regulations, we will not consider challenges to an affirmative
determination of responsibility absent a showing of possible bad faith on
the part of government officials or that definitive responsibility
criteria in the solicitation were not met, which showing has not been made
here. 4 C.F.R. S: 21.5(c) (2002).[4]
Indeed, far from possible acts of bad faith on the part of government
officials, it appears that the agency had no knowledge of the inaccuracies
in WorldCom's financial statements until after award, thus making this
matter more one of contract administration (a matter beyond our bid
protest authority, 4 C.F.R. S: 21.5(a)), rather than a protest of the
agency's award decision. While we recognize that the protests were timely
filed within 10 days of WorldCom's initial public disclosure, we
nevertheless have reservations in the unusual circumstances present here
about the appropriateness of our Office considering a protest filed well
after award and after contract performance has begun, particularly where,
as here, the agency has authority to address the alleged impropriety as
part of contract administration.[5]
Moreover, the facts surrounding the inaccurate financial information are
in flux and, due to the actions pending in other forums, some of those
facts are unavailable to our Office during the short time frame under
which these protests must be resolved. We hesitate to judge the degree of
relevance or importance of such facts--such as the nature of culpability
for acts causing the inaccuracies--before the other forums determine
them. Thus, although the precise matter being protested here (the award
of the DREN contract) is not the subject of litigation before a court of
competent jurisdiction (which if had been our Office would have promptly
dismissed the protest, see 4 C.F.R. S: 21.11(b)), we do not believe it is
appropriate for our Office to *get ahead* of this process in the context
of this protest.
In sum, the total weight of the concerns presented above causes us to
conclude that the matter is not appropriate for review by our Office.
The protests and request for reconsideration are dismissed.
Anthony H. Gamboa
General Counsel
------------------------
[1] Essentially, the updated pre-award survey of Global Crossing and the
nonresponsibility decision determined that poor financial performance,
unfavorable trends of key financial indicators, and legal consequences
associated with bankruptcy and possible liquidation exposed the Government
to significant, unacceptable risks in entering into any contracts with
Global Crossing.
[2] Sprint alternatively relies on the alleged misrepresentation to
protest the agency's evaluation of risk associated with MCI's technical
and management proposals. However, the alleged misrepresentation does not
concern the information included in, or the agency's evaluation of, MCI's
technical and management proposals; it relates solely to the agency's
responsibility determination.
[3] Since the request for reconsideration rests upon the alleged
misrepresentation, we find no distinction between the protest and the
request for reconsideration.
[4] We are currently revising our regulations and have issued a proposed
rule revising our standard for reviewing affirmative determinations of
responsibility. 67 Fed. Reg. 61542, 61544-45 (2002).
[5] In this regard, given the circumstances, DITCO may wish to consider
whether it needs to take further action to protect the government's
interests in connection with this procurement.