Top Navy Execs Tried To Bilk Retirement System

Defense Week | August 19, 2002 | John M. Donnelly

[Stand Watch Listen]

Three years ago, some of the Navy's top officials engineered a scheme designed to enable a couple of them to retire before their time and start collecting pensions, an internal Navy report says.

Of the five officials involved, only a couple were punished for the scam, and then only slightly. Two of them are still in high-ranking Navy positions. Two others hold high-paying jobs with major defense contractors.

The previously unpublicized 2000 Navy Inspector General (IG) report called the scam a case of senior Navy executives "taking care of their own." In the eyes of some of the handful of Navy personnel who know about the case, the top execs got off lighter than lower-ranking people would have for the same acts. That double standard happens too often in the military, they say.

According to the IG report on the "manipulation of the federal retirement system," one of the senior executives involved said to investigators: "I don't think ethics; it's not my job to determine the ethics." A second participant told a colleague who had expressed concern about morality: "This is how the big kids play."

According to the report, three top Navy civilians helped two others retire early.

The three who pulled the strings were Charles Nemfakos, the then-No. 3 official in the Navy, now an executive with Lockheed Martin; Robert Panek, still a top budget official; and Betty Welch, who even today runs the service's civilian-personnel system.

The people who stood to gain from the scam were Robert Nussbaum, former head of the Naval Center for Cost Analysis and now a principal with the Booz Allen Hamilton consultancy; and Sheryl McNair, formerly a budget official under Nemfakos. McNair's current whereabouts could not be ascertained at press time.

Nemfakos, Panek and Welch helped create unnecessary jobs for their two colleagues and then rapidly abolished the positions, the report said. The idea was to create the appearance of involuntary terminations—so-called "discontinued service retirements"—which enable people to reap benefits before they otherwise could.

The execs would have defrauded the government out of $1 million in annuities and benefits, the IG said. In Nussbaum's case, the trickery was caught before the money was processed. In McNair's case, an unknown amount of money was paid; but an Office of Personnel Management spokesman told Defense Week the government ultimately terminated McNair's pension—and it wants her to pay back the checks that were issued.

Lt. Cdr. Pauline Storum, a spokeswoman for the sea service, said then-Navy Under Secretary Jerry Hultin took no action in the cases of Nussbaum, McNair and Panek. Hultin did take "appropriate administrative action" in the cases of Nemfakos and Welch, she said. But privacy rules prevent the Navy from saying what the actions were, she said. The responses might have included counseling, putting a "non-punitive letter of admonition" in the person's file, or reducing bonuses, she added.

It turns out Nemfakos and Welch did not make bonuses for fiscal 2000, the time the scheme occurred (though Panek got a $24,480 bonus). But more awards were to come soon. For the fiscal 2001 period, all apparently was forgiven: Each of the three execs who facilitated the scheme—Nemfakos, Panek and Welch—netted a $25,000 bonus. The awards came on top of base salaries that, at that level, are at least $122,000.

Defense Week obtained the IG report and the bonus information via the Freedom of Information Act.

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Today, Panek is associate director of the Navy's Office of Budget and Fiscal Management. Welch is the deputy assistant secretary for Civilian Personnel and Equal Employment Opportunity.

It was Welch who told IG investigators: "I don't think ethics; it's not my job to determine the ethics."

To which the IG responded: "Particularly alarming is the fact that Ms. Welch, the most senior [personnel official] in the Department of the Navy, is not willing to concern herself with the ethical implications of a personnel action."

Neither Panek nor Welch would comment for this story.

Nussbaum, reached by phone, also declined to comment. A Booz Allen Hamilton spokesman said the firm was not aware of the IG investigation when it hired him.

Nemfakos retired last September as the Navy's deputy under secretary and comptroller. In those capacities, according to multiple sources, he exerted more day-to-day influence than anyone else in the Navy during the latter half of the 1990s.

Indeed, Welch told investigators: "It's Charlie Nemfakos who controls the Navy probably more than anybody else. ... When Charlie jumps in the middle of something, a splash goes out."

Today, Nemfakos is director of Internal Program Development with Lockheed Martin Naval Electronic & Surveillance Systems. Lockheed spokesman Thomas Jurkowsky said Nemfakos would not be available for comment. Jurkowsky also said the company did not know of the investigation when it hired Nemfakos just after he left the Navy, but that knowing about the probe wouldn't necessarily have mattered.

"That was an issue that the Navy handled," he said. "It's over and done with."

The Nussbaum case

According to the IG, three years ago, Nussbaum had a job waiting for him at Booz Allen that was to start Dec. 13, 1999. So he needed to get out of the government. But he wanted a pension. He was 55 years old and had served for 20 years. If he just quit, he would have had to wait until he turned 62 to start netting an annuity.

But if he could say his job was "discontinued," then he would meet the age and time-of-service requirements to start collecting benefits immediately. That's because if a federal civil servant is 50 years old with 20 years of service (or any age with 25 years of service), then the person may net an immediate annuity when the job is discontinued through no fault of the employer.

To solve the problem, Nussbaum was hired as a "special assistant" to a task force studying the Defense Health Program. Unfortunately, the IG said, the project was "virtually completed" before Nussbaum's job was even created. What's more, the IG said, Nemfakos put together a job description for Nussbaum's new post by "cutting and pasting" words from an awards citation for work already completed by other people on the same task force.

"This wasn't even a carefully crafted sham," the investigators wrote.

Nemfakos signed an order to "disestablish" the special assistant's job on Dec. 11, 1999—two days before Nussbaum was to start work at Booz Allen. All told, Nussbaum spent six work days in his temporary job.

Nemfakos' plan was foiled, however. The IG put a hold on Nussbaum's retirement papers. So he just quit that December without a pension, the report said.

An anonymous Navy official told the IG: "It looks like we're doing something for Nussbaum that we wouldn't do for anybody else."

Another anonymous Navy official said that, when he told Nussbaum that what was happening was unethical, Nussbaum said: "This is how the big kids play."

The McNair affair

For her part, McNair was only 45 years old in 1999 but had been in the government for 24 years and nine months. Consequently, she was just three months short of the 25 years of service needed to be able to net benefits if her job was ended.

Sure enough, three months to the day after she started her Potemkin job, it was terminated.

Her retirement, unlike Nussbaum's, had already been processed and some of the money had started to flow her way. The government undid her retirement papers and now wants its money back.

"Ms. McNair's pension has been terminated and any monies she had been paid from the beginning of the claim until that termination are owed the U.S. government," said Michael Orenstein, a spokesman for the federal Office of Personnel Management (OPM), adding that McNair "illegally" received the benefits in the first place.

Both Nussbaum and McNair's "discontinued service retirements" were carried out with the complicity and sometimes active involvement of Nemfakos, Panek and Welch, the report said.

"Without Mr. Nemfakos' acquiescence, Ms. McNair's illegitimate [retirement] could not have been accomplished," the report said.

Welch "continually provided erroneous advice concerning the legality of the personnel actions involved," the IG found.

Tying the law `into a knot'

Welch's interviews with the investigators provide a glimpse into a peculiar moral sensibility.

Welch justified the scheme by saying, "I know they do it in OSD [the Office of the Secretary of Defense] all the time."

However, the IG found no such examples, and Welch could cite none.

Welch also said: "If there are ways we can support managers, my job is to say, `Yes'—if we take the law and tie it into a knot or a pretzel and don't break it."

An OPM official interviewed by the investigators said the scheme may have amounted to "conspiracy to defraud the government" and that OPM would " `bring pressure to bear' upon the Navy to sanction the culpable individuals."

That pressure did not yield much, it seems. The Navy may have withheld performance bonuses from Welch and Nemfakos, though that is not certain. Panek was exonerated, though the IG had found that he "shared accountability" for what happened.

The Navy also took no action against either Nussbaum or McNair. Navy spokeswoman Storum said that McNair's "special assistant" job was valuable to the Navy: "Mr. Hultin determined that no action was warranted in the McNair case, since Ms. McNair provided a clear benefit to the government in the newly established position. He did forward a copy of the IG report to the Office of Personnel Management for an appropriate determination with respect to Ms. McNair's retirement eligibility."

Storum added: "As a result of this investigation, Mr. Hultin issued a memorandum to all Navy personnel management specialists and managers outlining the expected standards for determining eligibility for discontinued service retirements."

The five officials' attempt to bilk the retirement system was not the first instance where a Navy executive found to have committed offenses was barely wrist-slapped for behavior that might have warranted a tougher response if a petty officer had done it.

A few years ago, Richard Shaffer, the Navy's top auditor, was written up numerous times for making racist comments, creating a climate of "intimidation" in the workplace and other offenses. Not only was he kept on board, he was lavished with thousands in performance bonuses—even after investigators documented his offenses.

[ex-snook]

Any Naval Academy involement?

[ampat]

Headlines like this really make my blood boil. It should read "Top Navy Department Civil Servants tried to....". Countless headlines have implied military wrongdoing when it is usually the civil servants (often from the senior executive service). This is usually the case when security leaks occur. In this case, those involved must have got their positions the easy way (the quickest way to get rid of an incompetent or otherwise undesirable civil servant is to promote them).
Hiding the punishment behind the privacy act is worse than the Senate sealing the record on Toricelli. At least we learned that he received a slap on the wrist.

[Wurlitzer]

"But privacy rules prevent the Navy from saying what the actions were, she said."

You know you have been slipped the weenie when this statement is made. Strange, we know 90% of the story but "privacy rules" prevent us from knowing the outcome.