Figure 1. SFSA Monthly Trends and AISI weekly production percent change from a year ago

Figure 2. Weekly prices for WTI oil and copper

Figure 3. U.S. as a percent of the World's GDP

Figure 4. Trade between U.S., Canada, Mexico and China

Figure 5. Merchandise Trade balance of imports and exports in 2017

Public Statement by Bradken, Inc.

Bradken, Inc. is an American manufacturer of steel products. Bradken operates a foundry in Tacoma, Washington that supplies high quality steel castings, including HY-80 and HY-100 steel castings, to prime contractors with the U.S. Navy. The high yield castings produced by Bradken under these subcontracts are critical components for the shipbuilders, and are required to meet rigorous testing specifications. Because of the importance of Bradken’s role in the defense of our country and the protection of our nation’s sailors, Bradken understands that it must hold itself to the highest standards of quality and integrity.

It was, therefore, highly dismaying to Bradken to learn in May 2017 that one of its trusted employees at the Tacoma foundry metallurgy lab had falsified test results for HY-80 and HY-100 steel. The employee certified the falsified test results to the customer, causing substandard castings to be installed on U.S Navy vessels. We now know that the employee engaged in this practice for over 30 years, resulting in the installation of hundreds of substandard castings on Navy vessels.

When Bradken management discovered the fraud, we immediately notified the customer, and ultimately the Navy, of the discovery. We are proud of that initial response. Unfortunately, following that initial disclosure, Bradken made a series of inaccurate statements, which were provided to the Navy, suggesting that there was a legitimate explanation for discrepancies in Bradken’s databases. These statements minimized the evidence that the employee had engaged in deliberate fraud, and downplayed the possibility that the fraud was as broad in scope as we now know it was. We understand, and deeply regret, that these statements caused the Navy to limit its investigation and delayed the Navy’s ultimate discovery that the employee had deliberately falsified hundreds of test results.

All of this resulted in significant legal consequences for Bradken. The United States Department of Justice (DOJ) is filing a criminal fraud charge against the company, though DOJ has agreed, pursuant to a deferred prosecution agreement, to dismiss that charge in three years if Bradken meets certain conditions. Bradken has also reached a civil settlement with the DOJ, under which Bradken will make a substantial payment to resolve liability under the False Claims Act. And, Bradken has entered into a compliance agreement with the Navy under which Bradken must meet strict standards to prevent further fraud at the company. Bradken is grateful that it will continue to serve as a subcontractor for the United States.

The following is an account of Bradken’s discovery of the fraud; what Bradken did right and wrong in response to that discovery; and what the corporation did in the aftermath of this turmoil to pay for its mistakes and to ensure that they are not repeated. Bradken hopes that this account will help others to learn from its experience.

Bradken’s Discovery of the Fraud

In 1977, Atlas (a predecessor of Bradken) hired a young metallurgist who went on to work at the company for nearly forty years, eventually becoming the Director of Metallurgy. That individual (who will be referred to as the “senior metallurgist”) was responsible for certifying the Tacoma foundry’s metallurgical test results. In early 2017, the senior metallurgist entered early retirement, working only part-time.

With that transition, a new Metallurgy Manager at Bradken (the “new metallurgist”), who had recently started with the company as a young metallurgist, began taking over the senior metallurgist’s role. In May 2017, while reviewing historical product data as part of an audit by the prime contractor, the new metallurgist discovered a discrepancy between test results recorded in the company’s internal systems and the results that were certified to the customer. Notably, the set of numbers certified to the customer met specification requirements, while the other set did not. Upon further inspection, the new metallurgist also deciphered that the change had been made by the senior metallurgist, who had altered the results on a test card to increase each test result by exactly twenty points.

The new metallurgist immediately elevated the issue within the company. The Tacoma facility’s management team met with the senior metallurgist immediately upon the person’s return to the office the next day. The senior metallurgist admitted to changing the test results so that the product would meet specification requirements. The senior metallurgist added that the other test results were “excellent” and asserted that, because of this, the original results “couldn’t be correct.” But, as the management team knew, there is never a valid reason to intentionally alter records or to certify test results known to be false. The senior metallurgist also made statements to the management team suggesting that this was not an isolated incident, that is, that the senior metallurgist had falsified other test results as well.

The impact of these startling admissions from a trusted employee would reverberate for years to come. Three years later, and after a process that encompassed a massive internal review, a full-blown Government investigation, and thousands of hours of time from employees and consultants, Bradken has come to understand that, between 1985 and 2017, the employee falsified hundreds of test results, resulting in the installation of substandard steel on numerous Navy submarines. Bradken has now reached a global resolution with the Government addressing Bradken’s civil, criminal, and administrative liability. Through this process, Bradken has learned some important lessons that it believes should be shared with the community.

Lesson #1: Implement Internal Controls Sufficient to Detect Fraud.

Bradken failed to detect the senior metallurgist’s falsified test results for years because it lacked sufficient internal controls, and instead relied too heavily on the integrity of a single employee. For example, test results were typically handwritten on notecards and later entered into multiple databases. The senior metallurgist generally maintained the accurate results in one database, and recorded fraudulent, passing, results in a second database, which the senior metallurgist used in Bradken’s certifications to the customer. If these activities had been subject to oversight, or if Bradken had engaged in periodic internal audits of the various recordkeeping systems, it would have discovered the fraud many years earlier.

In response to this incident, Bradken has implemented a host of internal controls. Bradken’s Board of Directors has created an Audit and Risk Committee that will be responsible for overviewing and auditing risk and compliance processes across the company. In addition, Bradken has hired, or will be hiring, multiple new employees who will have oversight of the testing process. For example, Bradken has hired a Quality Control Specialist, whose responsibility will be to verify that all heat treatment and testing is compliant with specifications. Bradken has also eliminated the practice of using handwritten notecards to record test results, and now employs a fully electronic system of recording results on a tablet. Bradken is also in the process of developing a custom Laboratory Information Management System, which will protect test results and prevent improper alterations by requiring a full audit trail and double approval before recorded data can be changed. Finally, employees have been retrained on all new and updated procedures, with emphasis on those related to compliance, reporting, and Bradken’s zero-tolerance fraud policy. If Bradken had implemented these policies from the outset, the senior metallurgist likely would not have been able to perpetrate this fraud.

Lesson #2: If Your Company Detects Fraud in Connection with Government Contracts, Disclose it Immediately—and Fully—to the Government

Upon hearing their senior metallurgist admit to altering test records for a military product, the management team took two swift actions. First, that same day, the senior metallurgist was terminated, locked out of the computer system, and removed from the workplace. Second, the management team immediately notified Bradken’s customer, which in turn conveyed the disclosure to the Government. Within days, Bradken also participated in a call with representatives of its shipbuilder customers and the Navy, in which it reiterated the admission made by its former employee, disclosed that it now knew details of other test results altered by this employee, and committed to a full audit of its test records to find any other discrepancies.

Bradken understands that its immediate and open disclosure of its former employee’s misconduct was an important factor in the Government’s assessment of the case, and resulted in a more favorable final resolution than Bradken otherwise would have been able to reach.

Lesson #3: Don’t Backtrack on Your Voluntary Disclosure

While Bradken acted appropriately in immediately disclosing its discovery, some of the steps it took next were regrettable. Shortly after terminating the senior metallurgist, and as part of its efforts to investigate the matter, the company asked the senior metallurgist to return to the foundry for a second interview. During that interview, the senior metallurgist recanted the prior statement that the test results were intentionally altered, and instead stated there must have been a “good reason” for making the changes. However, the senior metallurgist was unable to provide a credible explanation for this assertion, and Bradken management continued to believe the senior metallurgist had likely falsified test results.

Despite Bradken’s serious skepticism about the senior metallurgist’s justifications, and the lack of support for them, the company, after consulting with counsel and its customers, issued further letters to its customers endorsing the senior metallurgist’s denials. The letters repeated the senior metallurgist’s denial of wrongdoing, inaccurately characterized the rationale provided as “well-founded,” and vouched for the senior metallurgist’s character and integrity. Bradken knew this information would be conveyed to the Government. The letters gave the misleading impression that, based on Bradken’s further investigation, Bradken had concluded that the senior metallurgist had not acted fraudulently; that there were legitimate reasons for the discrepancies in Bradken’s databases; and that there was no evidence that the senior metallurgist had falsified other test results. Bradken made these statements notwithstanding the fact that the employee had previously admitted to the fraud; had made statements suggesting that senior metallurgist had falsified multiple test results; and had never been able to explain the discrepancies in Bradken’s records. Bradken’s letters had the effect of misleading the Navy into initially concluding that the evidence of falsification was not as significant as it actually was, thereby delaying the Navy’s discovery of the fraud’s true scope.

Bradken understands that the misleading statements it made in these letters were a significant negative consideration in the Government’s evaluation of Bradken’s conduct. The company has learned from this the importance of not only disclosing all potential fraud as soon as it is discovered, but also fully and fairly characterizing the evidence and the scope of the potential fraud and resisting any temptation to diminish the misconduct.

Lesson #4: True Cooperation Means Being Proactive

Following its initial disclosures, Bradken commenced a records review to ferret out other instances of potentially discrepant test results. Bradken undertook a review of test result records covering the prior ten-year period and reported all data discrepancies it discovered. While the investigation was undertaken in good faith, unfortunately, Bradken’s review did not identify, and so Bradken did not disclose, all of the falsifications. Those falsifications were discovered only when the Government reinitiated and expanded its own investigation, analyzing records going back to the 1980s.

The Government’s investigation detected many more instances of fraudulent alterations by the senior metallurgist that Bradken had previously failed to identify through its limited review. The government also discovered patterns in Bradken’s internal data, which Bradken had not previously disclosed, that demonstrated that the discrepancies were the result of deliberate fraud.

Over the last 18 months, Bradken has cooperated with the Government’s investigation, making employee witnesses available for interviews, producing hundreds of thousands of pages of documents, responding to all requests for information, and hosting site visits and equipment demonstrations for Government investigators. That cooperation was an important positive consideration in the Government’s evaluation of Bradken’s conduct.

But Bradken has learned that true cooperation means more than just responding to requests as they are received. It also means independently seeking evidence of wrongdoing within the company, rather than making the Government find it for you. In other words, true cooperation means not just being reactive, but being proactive. Bradken also learned that it is important to always deal with the Government investigators with complete candor. Bradken regrets that its cooperation efforts fell short in the initial stages of the investigation.

Lesson #5: You are Legally Responsible for the Actions of Your Employees

Both the Government's investigation and Bradken's internal review revealed no evidence that any member of Bradken's management was aware of or involved in the fraudulent conduct of its senior metallurgist at the time it occurred. As discussed above, Bradken recognizes that its own lack of internal controls allowed this fraud to go undetected. Bradken also recognizes and accepts that as a corporation it is criminally and civilly liable for the actions of its employees—even if the employee's conduct violates corporate policies.

This incident has been an abrupt wakeup call. While Bradken is proud of its initial response when it discovered the fraud (and of the employee who made the discovery), it regrets making subsequent statements that minimized the evidence of the breadth of the fraud. However, over the past 18 months Bradken has shared all information requested of it and assisted in determining the impact of the misconduct.

Bradken believes that its experience can serve as a learning experience for other companies. Although it greatly regrets this experience, it has done its best to learn from it. Bradken remains committed to continuing, and improving upon, its tradition of outstanding service to its customers.