Georgia Tech Procurement Assistance Center

Are more FCA cases against small businesses on the horizon?

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On August 20, 2019, the U.S. Department of Justice announced that it had reached a $20 million settlement with Luke Hillier (Hillier), the majority owner and former CEO of a Virginia-based defense contractor, ADS, Inc. (ADS), to resolve “allegations that he violated the False Claims Act (FCA) by fraudulently obtaining federal set-aside contracts reserved for small businesses that his company was ineligible to receive . . . .”  The resolution of the claims against Hillier follows ADS’s payment of a separate $16 million settlement on related claims, as well as an additional $225,000 paid by Charles Salle, the former general counsel of ADS, to resolve claims arising from his role in the alleged scheme.  Combined, the $36 million total settlement is believed to be the largest FCA recovery in history based on allegations of small business contracting fraud.  Given the size of the collective settlement and the nature of the allegations against Hillier and ADS, small businesses everywhere—particularly government contractors—should anticipate a potential increase in the frequency of small business fraud-related FCA cases.

The case from which these settlements arose was originally filed in November 2013 and alleged that ADS caused its affiliates to falsely represent themselves as, among other things, Service-Disabled Veteran-Owned Small Businesses (SDVOSBs).  It further alleged that these false representations allowed ADS, through its affiliates, to compete improperly for set-aside opportunities that were intended to be available only to SDVOSBs and for which ADS was not eligible.  As a result of this improper access, ADS profited at the expense of both the government and eligible SDVOSBs.  The claims against ADS were settled in August 2017; however, the claims against Hillier remained outstanding until last month.

Continue reading at: Piliero Mazza

Government contractor pleads guilty to fraud for paying drivers as independent contractors

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Paying workers as independent contractors instead of as employees may land a former executive in jail for criminal wire fraud.  On June 12, 2019, the former operations manager and vice president of a Florida-based mail transportation contractor pled guilty to two counts of wire fraud related to such treatment.  The Government’s case was based on pricing estimates for employee-related costs that the contractor later did not incur because it instead used independent contractors.

In the June 1, 2018 indictment of Alexei Rivero, the Government contended that Rivero purposely misclassified the drivers it hired as independent contractors.  According to the indictment, this allowed the contractor to “misappropriate” $1.5 million in USPS contract payments “designated” for fringe benefits and $1.2 million designated for payroll taxes.

Continue reading at:  Husch Blackwell’s The Contractor’s Perspective

Government settles alleged False Claims Act violations against Statesboro business

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The Sesolinc Group has agreed pay up to $2.4 million to settle allegations that they supplied defective products and submitted false claims to the Army, Department of Veterans Affairs and General Services Administration.

Based on the allegations of the unsealed complaint, Sesolinc is alleged to have violated the False Claims Act when it sold products to the United States that were not in compliance with required electrical and structural standards, said Bobby L. Christine, U.S. Attorney for the Southern District of Georgia.  After concerns were raised internally, Sesolinc, which manufactures its products in Statesboro, is alleged to have continued to deliver defective products to government customers.  As part of the settlement, Sesolinc has agreed to repair goods previously supplied to the United States and pay an additional penalty.

“If a contractor represents to the United States that it will provide products consistent with basic requirements of the government customers, this office will hold them to those promises,” said Christine.  “We will continue to vigorously pursue any contractors who try to cut corners at the taxpayers’ expense.”

“This settlement sends a clear message that defective products sold to our military will not be tolerated,” said Special Agent in Charge Cynthia A. Bruce, Defense Criminal Investigative Service (DCIS), Southeast Field Office.

Continue reading at:  Savannah Now

False Claims Act case based on DoD’s cybersecurity regulations survives motion to dismiss

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In the summer of 2015, we cautioned that the Department of Defense’s (DoD’s) new cybersecurity regulations could be used offensively to support False Claims Act (FCA) cases and bid protests.  Four years later, those premonitions have unfortunately come true.  Recently, a federal court refused to dismiss a relator’s implied certification FCA case in which he alleged that his employer “misrepresented … to the government the extent to which it had equipment required by the regulations, instituted required security controls, and possessed necessary firewalls” in violation of DoD’s cybersecurity regulations.  United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Inc., No. 2:15-cv-2245, 2019 WL 2024595, *3 (E.D. Cal. May 8, 2019).

By way of background, the False Claims Act imposes civil and potentially criminal liability on anyone who knowingly presents a false or fraudulent claim for payment to the federal Government, or knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim.  31 U.S.C. § 3729(a)(1)(A) & (B).  The FCA permits a private person, known as a relator, to bring a qui tam civil lawsuit in the name of Government against anyone who violates the Act.  Civil remedies can include up to three times the actual damages suffered by the Government as a result of the false claim along with a civil penalty between $5,000 and $10,000 for each violation.  The relator receives a share of any proceeds from the action—generally 15 to 25 percent if the Government intervenes, and 25 to 30 percent if it does not, plus attorneys’ fees and costs.  The FCA also has a lengthy statute of limitations of either six years from when the fraud is committed or three years after the Government knows or should know about the material facts giving rise to the claim, whichever is later, as long as the action is filed within ten years of the alleged fraud.  31 U.S.C. § 3731(b); Cochise Consultancy, Inc. v. United States ex rel. Hunt, 587 U.S. __ (May 13, 2019) (noting “if the Government discovers the fraud on the day it occurred, it would have 6 years to bring suit, but if a relator instead discovers the fraud on the day it occurred and the Government does not discover it, the relator could have as many as 10 years to bring suit”).

Read more at:  Privacy and Data Security Insight

Defense contracting fraud remains ongoing issue

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In April Oben Cabalceta pleaded guilty to defrauding the U.S. Department of Defense (DoD) out of $1.8 million by providing the wrong or incorrect military equipment parts.  The New Jersey resident also admitted to illegally accessing sensitive, technical information despite not even being an American citizen.

Cabalceta, who is a native and citizen of the Republic of Costa Rica and was not lawfully in the United States, pleaded guilty to one count of wire fraud and one count of conspiracy for violating the Arms Control Act.

Continue reading at:  Clearance Jobs

Firm to pay $545,000 to settle claims it sold Chinese-made equipment to U.S. government

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A Sunnyvale-based network security company has agreed to pay more than a half million dollars to settle allegations it sold Chinese-made equipment to the U.S. government in violation of the False Claims Act, according to federal prosecutors.

According to a settlement agreement made public Friday, Fortinet Inc. acknowledged that between 2009 and 2016 one of its employees directed the relabeling of products to make them appear as though they were in compliance with the Trade Agreements Act.  The act prohibits government contractors from purchasing products that are not entirely from or “substantially transformed” in the United States or other designated countries.

Prosecutors said the new labels did not include the country of origin and featured phrases such as “designed in the United States or Canada” or “assembled in the United States.” A portion of the products were then resold through distributors and subsequent resellers to U.S. government end users.

“Contractors that supply the U.S. government with Chinese-made technology will be pursued and held accountable when violating the Trade Agreement Act,” said Bryan Denny, Defense Criminal Investigative Service special agent in charge, in a statement.

Continue reading at: East Bay Times

Aluminum supplier linked to NASA rocket explosions pays millions to settle criminal charges

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A Portland aluminum company that sold NASA defective aluminum, which allegedly caused two rockets to explode shortly after launch, has agreed to pay $46 million to settle criminal charges and civil claims.

Hydro Extrusion USA LLC, formerly known as Sapa Extrusions or Sapa Profiles, allegedly covered up substandard manufacturing by altering quality test results over two decades.

These were “tests that their customers, including the U.S. government, depended on to ensure the reliability of the aluminum they purchased,” said Assistant Attorney General Brian Benczkowski of the Department of Justice’s Criminal Division. “Corporate and personal greed perpetuated this fraud against the government and other private customers, and this resolution holds these companies accountable for the harm caused by their scheme.”

Continue reading at: The Oregonian/OregonLive

Division of N.C. company pays $3.5 million to settle False Claims Act allegations

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Indal Technologies, Inc. has agreed to pay $3.5 million to resolve allegations that it knowingly sold defective helicopter landing systems designed for U.S. Navy destroyers.  Indal, of Ontario, Canada, is a division within Curtiss-Wright Corporation of Charlotte, North Carolina.

Since the 1970s, Indal has produced the Recovery, Assist, Secure, and Traverse (RAST) system attached to U.S. Navy’s Arleigh-Burke class destroyers.  RAST systems allow helicopters to land on destroyers.

The RAST system includes a device that locks a hovering helicopter onto a trolley.  Once locked in place, the helicopter moves along a series of steel track plates into a shipboard hangar.  The trolley must remain securely connected to the track plates, because the helicopter may be required to land during rough seas and high winds.  The Navy’s contracts for RAST systems expressly required track plates made of HY100 steel due to the material’s increased strength, combat ruggedness, and protection from corrosion.

The settlement announced last week resolves allegations that Indal, without informing the Navy, knowingly substituted a different, less expensive type of steel in numerous RAST system track plates delivered to the Navy.

This settlement was the result of a coordinated effort among the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office for the District of New Jersey.  The investigation was conducted by the Naval Criminal Investigative Service and the Defense Contract Audit Agency.

The claims resolved by the settlement are allegations only; there has been no determination of liability.

Source: https://www.justice.gov/opa/pr/indal-technologies-agrees-pay-35-million-settle-false-claims-act-allegations

Fort Stewart contractor that posed as small business forfeits $7.8 million

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A company that rents tents and other outdoor structures for events agreed to pay the government $7.8 million to settle charges that it wrongly won Defense Department set-aside contracts reserved for small businesses.

Arena Americas, which does business from multiple locations as Arena Event Services, settled after a False Claims Act investigation conducted by the Army Criminal Investigation Command, the Defense Criminal Investigative Service and the inspector general of the Small Business Administration.

The agreement details how Arena Americas worked with Military Training Solutions LLC to obtain small business defense contracts that were represented as being performed by Military Training Solutions, but were actually performed by Arena Americas.

“As a result of this scheme, which was perpetuated at Fort Stewart, Ga., and at other military installations across the United States, millions of dollars in defense contracts wrongfully were awarded to Arena Americas instead of legitimate small businesses,” said Bobby Christine, U.S. Attorney for the Southern District of Georgia, in a statement. “The U.S. Attorney’s Office will not tolerate any attempts to illegally exploit the system for a company’s personal advantage” in obtaining the set-asides that Congress intended as a tool to help grow small businesses.

Keep reading this article at: https://m.govexec.com/contracting/2018/10/defense-contractor-who-posed-small-business-forfeits-78-million/151951

See statement by U.S. Attorney’s Office for the Southern District of Georgia at: https://www.justice.gov/usao-sdga/pr/defense-contractor-agrees-pay-united-states-78-million-settle-false-claims-act

Former company president settles False Claims Act case related to defective bullet proof vests

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Richard C. Davis, the founder and former president and CEO of Michigan-based Second Chance Body Armor, Inc., recently agreed to resolve claims under the False Claims Act in connection with his role in the sale of defective Zylon bullet-proof vests purchased by the United States for federal, state, local and tribal law enforcement agencies, the Justice Department has announced.

Mr. Davis will relinquish his interest in $1.2 million in assets previously frozen by the United States and will pay an additional $125,000 to the United States.  This settlement is based on Mr. Davis’ ability to pay.

Background

Second Chance sold body armor to state, local and tribal law enforcement agencies reimbursed by the Department of Justice’s Bulletproof Vest Partnership (BVP) program and to federal agencies under contracts with the General Services Administration. The United States alleged that Second Chance’s vests were defective due to the loss of their ballistic capability when exposed to heat and humidity. The United States also alleged that by 2001, Davis was aware that Second Chance’s Zylon body armor was degrading at what he described as a “disappointing” rate.

The United States further alleged that, rather than using a $6 million payment from Toyobo Co. Ltd., the manufacturer of Zylon fiber, to fix the degradation problem, Second Chance pocketed the money and Davis and other Second Chance owners began meeting with various investment bankers in an effort to sell Second Chance. These efforts to sell the company allegedly stopped after a Forest Hills, Pennsylvania police officer was shot through his Second Chance Zylon vest in June 2003. Second Chance filed for bankruptcy in 2004 and was liquidated.

Subsequent tests by the National Institute of Justice (NIJ) of Zylon-containing vests found that more than 50 percent of used vests could not stop bullets that they had been certified to stop. The performance of Second Chance Zylon vests were reported to be among the worst.  The NIJ removed all Zylon-containing vests from its list of compliant products, and Zylon is no longer used in ballistic vests.

Settlement

“The Department of Justice will pursue those who attempt to fraudulently profit at the expense of the United States, particularly when the stakes are life or death,” said Acting Associate Attorney General Jesse Panuccio.  “Bullet proof vests protect the brave men and women of our nation’s law enforcement community, and those who manufacture and sell these products have a solemn duty to ensure their safety and efficacy.”

The settlement resolves, in part, allegations filed in a lawsuit by Aaron Westrick, Ph.D., a former employee of Second Chance, under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery. The Act also allows the government to intervene and take over the action, as it did in this case as to the allegations against Davis. Dr. Westrick will receive $28,750 plus a share of whatever the government ultimately recovers from the previously frozen funds.

This settlement is part of a larger investigation of the body armor industry’s use of Zylon.  The United States has previously recovered over $132 million from 18 corporations and individuals who participated in the sale of Zylon body armor. The Civil Division has transferred over $22 million of these recovered funds to the BVP program to replace BVP funds which had been used to purchase Zylon vests. The funds transferred to the BVP program will be used to fund the purchase of additional ballistic-resistant vests for state, local and tribal law enforcement officers. The United States is continuing to pursue claims against Honeywell International Inc., which allegedly sold a laminated version of Zylon for use in police armor.

The investigation and litigation of this matter were handled by the Civil Division’s Commercial Litigation Branch; the General Services Administration, Office of the Inspector General; the Department of Commerce, Office of Inspector General; the Defense Criminal Investigative Service; the U.S. Army Criminal Investigative Command; the Department of the Treasury, Office of Inspector General for Tax Administration; the Air Force Office of Special Investigations; the Department of Energy, Office of the Inspector General; and the Defense Contracting Audit Agency.

The claims settled by this agreement are allegations only, and there has been no determination of liability.  The lawsuit partially resolved by the settlement is captioned United States ex rel. Westrick v. Second Chance Body Armor, et al., No. 04-0280 (PLF) (D.D.C.).

Source: https://www.justice.gov/opa/pr/former-second-chance-body-armor-president-settles-false-claims-act-case-related-defective

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