Photo by Joe Klein

General Atomics. In addition to its profitable ventures in federally sponsored nuclear and computer technology, the firm developed the Predator, an "unmanned aerial vehicle" that saw service over Bosnia as part of NATO forces.

Ever since James Neal Blue and his brother Linden Stanley Blue bought La Jolla-based General Atomics back in August of 1986, the high-tech U.S. government contractor -- into everything from nuclear fusion to supercomputers -- has operated as a family affair. James, 66, a Yale graduate and ex-Air Force pilot, is GA's president and chairman of the board, and Linden, 65, who once ran Beech Aircraft and is also a veteran of Yale and the Air Force, derived their wealth from "gas utility companies in Ohio, Utah, Colorado, and Wyoming, oil and gas production in Canada, and real estate in Colorado," according to a company news release.

James Neal Blue (left), a Yale graduate and ex-Air Force pilot, is General Atomic's president and chairman of the board,

Their mother, Virginia Neal Blue, one of Colorado's most prosperous women, "spent most of her life becoming an accomplished financier and realtor," according to the website of the Colorado State Archives. "In 1962, she was elected the first female Denver Realtor of the Year, and soon she became the first female president of the University of Colorado Associated Alumni.

Linden Stanley Blue was briefly held prisoner by Fidel Castro after flying his plane too close to Cuban air space in 1961.

"In 1967 Blue was elected to the post of Colorado State Treasurer, the first woman to hold the position. In this official capacity Blue improved banking and investment practices in the state, and when she left three years later, the state was left with an extra $8 million." She is memorialized by a stained-glass portrait in the Colorado capitol's state "Hall of Fame."

The brothers apparently inherited their mother's knack for making money. Following the purchase of General Atomics, for a reported $60 million from Chevron Oil, the Blue brothers set out to grow the company's federal contracting business. A company "advisory council," featuring such Defense Department luminaries as former Secretary of State Alexander Haig and ex-U.S. Joint Chief of Staffs chairman General John Vessey, was set up to trawl for taxpayer dollars. The brothers and their employees also became big contributors to both Republicans and Democrats, being especially kind to the local congressional delegation, which in turn pushed hard for GA research appropriations.

At the time of the Blue acquisition, technical problems and public resistance had sidelined the company's flagship "gas cooled" nuclear-reactor technology, but the firm was still turning out so-called TRIGA reactors, used to make radioisotopes; experimenting with nuclear fusion; doing research for Ronald Reagan's "Star Wars" missile defense plan; and negotiating nuclear-waste disposal deals with Russia, all thanks to federal largesse.

The brothers set out to broaden the firm's base, and as the years went by, the company received a raft of new federal contracts. In addition to its profitable ventures in federally sponsored nuclear and computer technology, the firm developed the Predator, an "unmanned aerial vehicle" that saw service over Bosnia as part of NATO forces. What had been a marginally profitable venture under its prior owners became a cash cow for the Blue family.

The Blues, who both own mansions in La Jolla, also began getting good write-ups in the Union-Tribune. U-T society columnist Burl Stiff has reported that family members attend parties held by U-T publisher David Copley, and the paper often cites a Blue brother's opinions on its editorial pages. "People can be against things without thinking too much until there is a problem," Linden was quoted as saying in a March U-T editorial backing nuclear power.

Last year, Linden, who was briefly held prisoner by Fidel Castro after flying his plane too close to Cuban air space in 1961, wrote a U-T op-ed piece opposing efforts to revive trade with the island nation. "The 'accommodators' tend to be a combination of well-intended appeasers, traditional apologists for U.S. policy toward Castro, and, more recently, business opportunists."

But now James Neal Blue and General Atomics face a challenge to their federally funded empire. The U.S. Attorney and Sam Kholi, a former GA employee, claim that the firm conspired with Blue's two sons, Linden P. Blue and Neal Karsts Blue, to defraud federal taxpayers of millions of dollars by rigging contracts, padding payroll costs, and presenting false claims for payment using a company owned by the sons. Like his father, Linden P. Blue lives in La Jolla; his brother Neal resides in Las Vegas.

"Contrary to...conflict-of-interest provisions [of federal law], General Atomics entered into what were effectively sole-source contracts with a company in which two General Atomics employees, Audrey Voyles and Sam Kholi, and two children of the controlling stockholder of General Atomics, Linden P. Blue and Neal Karsts Blue, had financial interests.

"General Atomics awarded the service agreement to Alliance after conducting a sham competitive-bidding process, which was manipulated in order to award the contract to Alliance," the government alleges. "General Atomics knowingly made or used, or caused to be made or used, false statements including but not limited to false certifications, memorandums, and representations in connection with the awards of purchase orders...in order to get false or fraudulent claims paid by the United States."

According to the government's complaint, filed this March 28, the junior Blue brothers set up Alliance Staffing Associates, Inc., a temporary-employment firm based in Mira Mesa, nine years ago. "In or about May 1992, Sorrento West Properties, which, like General Atomics, is a subsidiary of Tenaya Corporation, [owned by James Neal Blue], loaned Alliance $150,000 in start-up capital.

"On or about July 6, 1992, General Atomics and Alliance executed a 'Services Agreement,' whereby General Atomics agreed to provide 'general management services' to Alliance, and Alliance agreed to reimburse General Atomics the 'full costs incurred' by General Atomics. Through the Services Agreement, General Atomics maintained operational control of Alliance and recaptured portions of payments made to Alliance pursuant to its various contracts with Alliance."

Kholi triggered the federal action, using the False Claims Act, a Civil War-era statute that allows citizens to bring whistle-blower lawsuits on behalf of the United States against contractors alleged to have cheated the government. Under the law, the whistle-blower can collect, as a bounty, up to 30 percent of funds collected by the government as a result of the suit. The government can also choose to intervene in the lawsuit, as it has done in Kholi's case, which adds to the pressure against the alleged offender.

"Although the General Atomics defendants have more than 1000 employees, they have the need for additional staffing from time to time to work on specific contracts," according to the Kholi complaint. "The vast majority of these additional staffing needs are for engineers and scientists who have worked on specific contracts for the General Atomics defendants in the past. Other staffing needs are more general and administrative in nature."

"Until 1992, the General Atomics defendants would obtain this additional staffing via competitive bidding from staffing agencies," Kholi's complaint says. "At any given time, the General Atomics defendants would be receiving their additional staffing from 7 to 8 staffing vendors." But that, the complaint says, was before Alliance came along.

After the younger Blue brothers set up Alliance, Kholi's suit alleges, "The staffing was provided at exorbitant rates far above competitive market rates. Rather than provide staffing at its cost plus the standard 20 percent mark up, Alliance Staffing Associates, Inc., had a conspiratorially incestuous agreement with General Atomics defendants to charge its cost plus an outrageous mark up of up to 30 percent.

"These above-market costs were then passed on through to the government by the General Atomics defendants in their government contracts, to the government's damage. The government has been further damaged by this practice because the General Atomics defendants would then add their own profit percentage to these already inflated costs in their government contracts.

"These inflated costs were nothing more than a subterfuge to steal money from the United States and pass it on through to the sons of [James] Neal Blue," Kholi alleges.

For their part, federal prosecutors charge that the cost to taxpayers of this alleged hanky-panky, involving each of three major federally sponsored programs at General Atomics, was staggering. Under its Department of Energy contracts, the government says, the company submitted "at least 513 invoices for payment and received payments of at least $438,140,354 from the United States pursuant to those invoices" during the period from July 1, 1992, to the present. During the same period, Department of Defense contracts totaled "at least $119,000,000," and contracts from the federally sponsored National Science Foundation to operate the San Diego Supercomputer Center amounted to "at least $90,000,000."

The government says that once Alliance was established, the amount of business it did with General Atomics rapidly grew into eight figures. "On or about July 6, 1992, General Atomics awarded Alliance...a blanket purchase order for temporary labor in an amount not to exceed $5,400,000. On or about July 20, 1993, General Atomics modified [the purchase order] to increase the maximum payment to $17,400,000.

"Thereafter Alliance was effectively the sole-source supplier of temporary employment labor used by General Atomics on federal contracts and grants. On or about October 4, 1995, General Atomics again modified [the purchase order] to increase the maximum payment to $21,650,000."

But that, the government alleges, wasn't the worst of it. A year after the Blue brothers formed Alliance, it was decided that General Atomics would farm out its janitorial business to the company. "Prior to July 1993, janitorial and cleaning services at General Atomics' facilities in the San Diego area were performed by General Atomics' employees. On or about July 13, 1993, General Atomics awarded Alliance...a blanket purchase order for janitorial and cleaning services not to exceed $721,600. On or about March 18, 1994, General Atomics raised the ceiling to $747,600."

The circumstances of that contract were, say federal attorneys, more than a bit suspicious. "Alliance had never provided janitorial or cleaning services. Alliance's executives and managers had no experience in furnishing janitorial or cleaning services, and Alliance did not employ any janitors nor own any janitorial equipment or supplies.

"General Atomics did not solicit bids or proposals from existing janitorial services companies and did not conduct a price analysis to determine whether the rates it agreed to pay Alliance were comparable to prices charged by existing janitorial services for comparable services."

When, three years later, General Atomics did set up a formal bidding process, it was, the government alleges, "a sham."

"On October 30, 1996, General Atomics formed a 'Janitorial Selections Review Committee,'" purportedly to competitively bid janitorial services. Alliance and three other companies submitted proposals in response to a request for proposals issued by the committee. On June 13, 1997, General Atomics awarded the janitorial services contract to Alliance.

According to the complaint, "Alliance's bid price was the highest of the four bidders." Not only that, but "a 'janitorial bid evaluation' prepared by the committee in March 1997 ranked the bidders on qualitative factors in addition to price. Alliance ranked last on the committee's janitorial bid evaluation."

Although it had lost that competition, the complaint alleges, "Alliance, unlike the other bidders, was given an opportunity to submit a second bid with a reduced price.

"The committee eliminated two of the bidders who were ranked as superior to Alliance in the bid evaluation and whose bid price was lower than Alliance's on the grounds that they offered insufficient employee benefits. The committee then selected Alliance, even though its price, even after the rebid, was 12 percent above the bid of the remaining bidder, Merchant's Maintenance.

"A 'Price Reasonableness Memo' prepared by the committee on June 13, 1997, which purported to document the basis for the award asserted that Alliance was selected because it was the 'superior source' to Merchant's Maintenance in the employee-benefit area. However, the bid evaluation prepared by the committee in March 1997 had rated Merchant's superior to Alliance on the employee-benefits criterion, as well as superior overall.

"In sum," the complaint concludes, "General Atomics awarded the janitorial services contract to Alliance although its bid was the highest submitted, although it ranked last on the overall evaluation, and although it was ranked inferior to a lower bidder on the specific factor the committee claimed in the Price Reasonableness Memo was critical to the award."

Both Kholi and the government are seeking so-called treble damages, or three times the amount of money General Atomics allegedly misappropriated, to be awarded at trial. That could run into millions of dollars.

Last fall, according to documents on file with the federal Securities and Exchange Commission, the younger Blue brothers sold their interest in Alliance to Oceanic Exploration Company, a public company controlled by their father, for $581,000. "Revenue generated by the employment agency averaged $302,000 per month since the acquisition," the filing says, "however, margins remain small mainly due to the highly competitive nature of the industry in San Diego. Alliance spent $92,000 from July through November 2000 on an intensive advertising and marketing campaign that has provided good name recognition." The filing makes no mention of the pending federal lawsuits against the company and the Blue brothers.

Oceanic and its subsidiaries, according to the filing, "have historically been engaged in the business of acquiring oil and gas concessions covering large blocks of acreage in all areas of the world." The company's oil interests are off the coast of Greece, the filing says, as well as the North Aegean Sea, in the East China Sea, and in the Timor Gap, a strait that lies between East Timor and Australia. Last year the firm won an $8,614,789 court settlement from a partner in the Greek oil concessions. It used a portion of that money to pay for the Alliance acquisition, as well as to pay off a $1.2 million note to companies controlled by James Neal Blue. The company was also involved in drilling an exploratory oil well in Finney County, Kansas. The filing says the well turned out to be a dry hole. In all, the company says, its oil and gas interests are worth $39 million.

As for its newly acquired subsidiary, Alliance Staffing, Oceanic says that earlier this year it gave "notice of termination" to Audrey Voyles, Alliance's president, who was named as a defendant in the Kholi case. According to the terms of her three-year employment contract of March 31, 2000, the filing says, "Ms. Voyles is to be paid a base salary of $160,000 per year to perform the duties and responsibilities of president of the Alliance Division. In the event employment is terminated before the contract expires, the employee is entitled to sixty (60) days written notice and six (6) months severance pay, unless terminated for cause. Ms. Voyles was given notice of termination on March 26, 2001. Accordingly, the Company intends to honor the terms of her employment contract."

Attorneys for the defendants in the case have filed documents denying the charges. Earlier attempts at a settlement of the matter ended in failure, and a trial date has been set for next summer.