December 12, 2019

Defense Contractor Misconduct and Government Procurement Fraud Take Center Stage in the Government’s Civil and Criminal Prosecutions

By Joel M. Androphy and Sarah Kim

The U.S. military and government face a centuries-old enemy that endangers the safety of American soldiers and continues to cost the government billions every year. In light of recent conflicts overseas, defense contractors have taken advantage of the large sums allocated for defensive purposes, with whistleblowers becoming the best audit mechanism for disclosing corruption.

The vast amounts of fraud against the United States military in the procurement of necessities like food, ships, and supplies during Civil War spurred the enactment of the original False Claims Act (FCA) in 1863. As a solution to the massive fraud on the United States Military, Congress enacted the FCA to deter and punish wrongdoers and reimburse the government for its losses. Today, FCA civil cases have led to more criminal prosecutions, jail time for individual offenders, and large fines for corporate entities with the potential for suspension of debarment.[1]

Since the FCA’s enactment, the number of suits against defense contractors has fluctuated. Healthcare fraud is the leading cause for most civil qui tam lawsuits, with a total of $2.5 billion in recoveries in 2018. Meanwhile, recoveries for defense procurement fraud merely totaled $107 million.[2] However, in the last 20 years, fraud in the defense arena has become a bigger concern for the government due to the recent overseas’ conflicts.

False claim actions involving defense contracts usually fall into two categories: 1) those claiming that the defense contractor provided nonconforming goods or false information regarding product specifications, such as testing records, in violation of a statute, regulation or contract terms, and 2) those alleging that the defense contractor mischarged the government for the cost of the supplies or services rendered.

In the first category, the risk posed by a defense contractor that has falsified its test records is analogous to the risk of Civil War soldiers being harmed by ammunition filled with sawdust rather than gunpowder. A faulty missile detonator or a defective helicopter will lead to the loss of many lives.

For example, after a helicopter crash over the Saudi Arabian desert during Operation Desert Shield, a qui tam whistleblower initially sued Boeing Co. for false statements regarding the manufacture of helicopters sold to the United States Army. [3] Under the terms of the contracts negotiated between Boeing Co. and the Army, the company was required to test and guarantee the quality of all the parts. The failure of a defective flight-critical transmission gear caused the crash. The qui tam whistleblower and the government claimed that the company made false statements regarding the quality of the parts used to manufacture the transmission gears. The court determined that the entire helicopter was defective because of the defective gear, and the company’s claim for payment of the helicopter was false under the FCA. The court also held that the government could recover the cost of the entire helicopter.

In a similar case, unmanned Navy target drones with defective parts were sold to the government by an advanced technology and aerospace corporation, Northrop Grumman Corporation.[4] The primary purpose of a drone was to provide a realistic aerial target that simulated enemy threats for missile training exercises. The government claimed that the drones failed to meet the reliability and quality requirements under the contract. The company settled the claim for $20 million.

The second category of false claim actions brought against defense contractors involves falsification of pricing information for equipment or labor. For example, progress payment fraud occurs when a contractor applies for payment in the course of a contract and fraudulently certifies that he has incurred costs that are eligible for reimbursement or fraudulently certifies that no encumbrances exist to payment.

A qui tam whistleblower claimed that the defendant company, TRW, Inc., fraudulently overcharged the government on contracts with the Department of Defense and National Aeronautics and Space Administration.[5] The qui tam whistleblower was the director of financial controls for the company’s space unit and reported directly to its general manager. The qui tam whistleblower accused the company of shifting commercial bid-proposal costs to the government for improper reimbursement, and falsely classifying other expenses in an effort to avoid reimbursement caps placed on research and development costs of government contracts. The company settled the lawsuit for $111.2 million.[6]

As of December 12, 2008, the Federal Acquisition Regulation (“FAR”) amendments require government contractors to self-disclose their employee’s violations as well as their own. Violations relating to fraud, conflicts of interest, bribery, gratuities, or the FCA must be disclosed. In order to take advantage of the FCA provision that rewards timely disclosure with double damages, rather than treble damages, disclosures should be made within thirty days. The disclosures must also follow the specific requirements set out by law such as FAR Section 52.203-13. Contractors must comply with these requirements, but they still retain the right to defend, investigate, and assert certain privileges like attorney-client privilege.

Another type of fraud arises when small businesses falsely represent that they qualify for preferential treatment in order to get government contracts. Preferential treatment is offered to small businesses owned and operated by veterans, women, socially or economically disadvantaged individuals, as well as small businesses in historically underutilized business zones. For FY 2015, the SBA reported that small and disadvantaged firms were awarded $90.7 billion government-wide in prime contracting assistance. However, OIG audits and investigations have identified numerous instances where firms that do not meet the criteria to be either “small” or “disadvantaged” have improperly obtained contracts under Small Business Administration contracting programs.[7]

In Missouri, a “rent-a-vet” scheme fraudulently obtained more than $13.8 million in federal contracts.[8] As part of the scheme, a veteran falsely certified that he was involved in the day-to-day operations of Patriot Company, Inc. when, in reality, another person managed the company. Meanwhile, the veteran was discovered working full-time at another job, 40 miles away. The scheme obtained 20 government contracts for which they received more than $13.8 million. As a result, legitimate veteran-owned-and-run businesses were not awarded these contracts. The penalty included 18 months in prison and a federal civil forfeiture of approximately $2.1 million.

Healthcare fraud claims have been brought against government contractors that provide services to agencies like the Department of Veterans Affairs.  For example, one whistleblower, a medical doctor, revealed a scheme by QTC Medical Services, Inc. that incentivized claims analysts and physicians to review as many files as possible even though it caused omissions of critical information.[9] Speed, rather than accuracy, was rewarded. This failure to perform properly under the contract led to cursory examinations of files for veteran-victims of Agent Orange, a highly toxic herbicide and defoliant used in the Vietnam War that is linked to cancer and Parkinson’s disease. The rapid review resulted in incorrect processing. The whistleblower claimed that the contractor also made other false certifications. On appeal, the Ninth Circuit court said that this is the type of case that “falls squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”

The FCA provides restitution to the government for losses sustained as a result of fraud, authorizing the award of actual damages and civil penalties to ensure that the government is made whole for losses caused by fraudulent acts.  By holding defense contractors to the standards required of them under the law, whistleblowers will be awarded a percentage of the recovery, as well as serving to help the government save funds and protect its military men and women. 

For more information regarding qui tam litigation, including possible financial rewards as a whistleblower, please contact Berg & Androphy here confidentially and we’ll get back to you quickly. See article foot notes below.

About the Authors

Joel M. Androphy has a nationwide practice representing plaintiffs in qui tam civil actions. He is the author of the Federal False Claims Act and Qui Tam Litigation by Law Journal Press. Besides recovering hundreds of millions of dollars for his clients and the government in qui tam cases, Joel has tried cases involving national and international corruption.  The Houston Press has named him Houston’s Best Civil Attorney for his work on qui tam cases.  Joel has established a pro bono program at his firm that provides zealous representation in criminal cases for young black men who live in Houston’s historical Fifth Ward community.  The firm was awarded the prestigious 2017 Harris County Bench Bar Pro Bono Award for its pro bono work.

Sarah Kim is a law clerk at Berg & Androphy.

Foot Notes

[1] For more information and case citations, please see Joel Androphy, Federal False Claims Act and Qui Tam Litigation §6.01-6.01(4), Law Journal Press (2010).

[2] Fraud Statistics – False Claims Act statistics including Healthcare Fraud and Abuse, Department of Justice (Sept. 30, 2018), https://www.justice.gov/doj/statistics-available-department-justice.

[3] U.S. ex rel. Roby v. Boeing Co., 302 F.3d 637, 640 (6th Cir. 2002).

[4] United States ex rel. Jordan v. Northrop Grumman Corp., 2003 WL 27366250, at *1 (C.D. Cal. Mar. 10, 2003).

[5] United States v. TRW, Inc., 2000 WL 33400196, at *1 (C.D. Cal. Dec. 12, 2000).

[6] Reddy, Northrup to Pay $111 Million to Settle Suit; Subsidiary TRW Allegedly Overcharged U.S. on 1990s Space Project Work, The Washington Post, at p. E5. (June 10, 2003).

[7] FY 2018 Congressional Budget Justification, U.S. Small Business Administration Office of Inspector General (2018), https://www.sba.gov/sites/default/files/2019-08/SBA_OIG_FY_2018_CBJ_5-17-17.pdf.

[8] Department of Justice (Sept. 30, 2018), https://www.justice.gov/doj/statistics-available-department-justice.

[9] United States ex rel. Vatan v. QTC Med. Servs., Inc., 721 F. App’x 662, 663 (9th Cir. 2018).