Georgia Tech Procurement Assistance Center

How contractor fraud is reported shouldn’t affect how it gets investigated

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While the vast majority of federal contractors are dedicated to their craft and their country, a very few wrongdoers occasionally cast a shadow on the industry as a whole. Unfortunately, the way that the government resolves fraud allegations is often dictated not by the egregiousness of the fraud but rather by how the government learns of suspected wrongdoing.

Given this inconsistency, we suggest a more uniform approach to addressing whistleblower allegations.

As many defense contractors have painfully learned over the years, the world of federal procurement regulations is complicated, evolving, and perilous. Even technical violations of procurement regulations can bring stiff consequences. And, more and more, employees at federal contractors are speaking up when they see wrongdoing. We applaud these employees for taking their job responsibilities seriously. And, when an employee sees wrongdoing, he or she should report it.

The traditional way to blow the whistle is to report internally up the chain and—if that does not work—the whistleblower could report suspected wrongdoing to federal contracting officers or to Defense Department hotline numbers.

Keep reading this article at: https://www.govexec.com/contracting/2018/10/how-contractor-fraud-reported-shouldnt-affect-how-it-gets-investigated/151771

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

Japanese manufacturer to pay $66 million settlement for supplying defective bullet proof vests

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Toyobo Co. Ltd. of Japan and its American subsidiary, Toyobo U.S.A. Inc., f/k/a Toyobo America Inc. (collectively, Toyobo), have agreed to pay $66 million to resolve claims under the False Claims Act that they sold defective Zylon fiber used in bullet proof vests that the United States purchased for federal, state, local, and tribal law enforcement agencies, the Justice Department has announced.

The settlement resolves allegations that between at least 2001 and 2005, Toyobo, the sole manufacturer of Zylon fiber, knew that Zylon degraded quickly in normal heat and humidity, and that this degradation rendered bullet proof vests containing Zylon unfit for use.  It was further alleged that Toyobo nonetheless actively marketed Zylon fiber for bullet proof vests, published misleading degradation data that understated the degradation problem, and when Second Chance Body Armor recalled some of its Zylon-containing vests in late 2003, started a public relations campaign designed to influence other body armor manufacturers to keep selling Zylon-containing vests.

According to the government, Toyobo’s actions delayed by several years efforts to determine the true extent of Zylon degradation.  Finally, in August 2005, the National Institute of Justice (NIJ) completed a study of Zylon-containing vests and found that more than 50 percent of used vests could not stop bullets that they had been certified to stop.  Thereafter, the NIJ decertified all Zylon-containing vests.

This settlement is part of a larger investigation undertaken by the Justice Department’s Civil Division of the body armor industry’s use of Zylon in body armor.  The Civil Division previously recovered more than $66 million from 16 entities involved in the manufacture, distribution or sale of Zylon vests, including body armor manufacturers, weavers, international trading companies, and five individuals.  The settlement announced on March 15th brings the Division’s overall recoveries to over $132 million.  The United States still has lawsuits pending against Richard Davis, the former chief executive of Second Chance, and Honeywell International Inc.

The latest settlement resolves allegations filed in two lawsuits, one brought by the United States and the other filed by Aaron Westrick, Ph.D., a law enforcement officer formerly employed by Second Chance who is now a Criminal Justice professor at Lake Superior University.  Dr. Westrick’s lawsuit was filed 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 2005 in Dr. Westrick’s case.  Dr. Westrick will receive $5,775,000.

This case was handled by the Justice Department’s Civil Division, along with 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; there has been no determination of liability.  The lawsuits resolved by the settlement are captioned United States ex rel. Westrick v. Second Chance Body Armor, et al., No. 04-0280 (PLF) (D.D.C.) and United States v. Toyobo Co. Ltd., et al., No. 07-1144 (PLF) (D.D.C.).

Source: https://www.justice.gov/opa/pr/japanese-fiber-manufacturer-pay-66-million-alleged-false-claims-related-defective-bullet

 

Defense contractor to pay $16 million to settle false claims allegations over small business contracts

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Virginia-based contractor ADS Inc. and its subsidiaries have agreed to pay $16 million to settle allegations that they violated the False Claims Act by knowingly conspiring with and causing purported small businesses to submit false claims for payment in connection with fraudulently obtained small business contracts, the Department of Justice announced last week.

The settlement also resolves allegations that ADS engaged in improper bid rigging relating to certain of the fraudulently obtained contracts. The settlement with ADS ranks as one of the largest recoveries involving alleged fraud in connection with small business contracting eligibility.

In order to qualify as a small business, companies must meet defined eligibility criteria, including requirements concerning size, ownership, and operational control.  The settlement with ADS resolves allegations that ADS, together with several purported small businesses that it controlled, fraudulently induced the government to award certain small business set-aside contracts by misrepresenting eligibility requirements. The purported small businesses affiliated with ADS include Mythics Inc., London Bridge Trading Co. Ltd., as well as MJL Enterprises LLC, which falsely claimed to be an eligible service-disabled veteran-owned company, and SEK Solutions LLC and Karda Systems LLC, both of which falsely claimed to qualify as socially or economically disadvantaged businesses under the Small Business Administration’s 8(a) Business Development Program. ADS and its affiliates allegedly concealed the companies’ affiliations with ADS and knowingly made misrepresentations concerning the size of the businesses and their eligibility as service-disabled or 8(a) qualified businesses. Finally, the settlement resolves allegations that ADS engaged in illegal bid rigging schemes that inflated or distorted prices charged to the government under certain contracts.

The settlement with ADS resolves a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery. The civil lawsuit was filed in federal district court in the District of Columbia by Ameliorate Partners LLP. As part of today’s resolution, the whistleblower will receive approximately $2.9 million.

The settlement is the result of a coordinated effort among the Civil Division’s Commercial Litigation Branch, the U.S. Attorneys’ Offices for the District of Columbia and the Eastern District of Virginia, the Small Business Administration’s Office of Inspector General, and the General Services Administration’s Office of Inspector General.  The claims resolved by the settlement are allegations only, and there has been no determination of liability.

Source: https://www.justice.gov/opa/pr/defense-contractor-ads-inc-agrees-pay-16-million-settle-false-claims-act-allegations

Woman in DBE front scheme gets 12 months in federal prison

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The former owner of a suburban Chicago construction business convicted of acting as an illegal front so another company could secure a lucrative city airport contract was sentenced Thursday (Mar. 16, 2017) to 12 months in federal prison.

Lawyers for Elizabeth Perino had sought probation and home confinement, but U.S. District Judge Gary Feinerman said he opted for prison to send a message to “an industry that needs to clean up its act.”

Perino’s conviction is the latest turn in an eight-year saga sparked in 2008 when Perino’s former project manager filed a whistleblower lawsuit alleging misconduct in massive projects run by industry giant McHugh Construction, a century-old company that reported more than a half-billion dollars in revenue in 2015.

That sparked a joint investigation by federal prosecutors and Illinois Attorney General Lisa Madigan resulting in the criminal charges.

Perino’s company posed as a legitimate woman-owned business, allowing Chicago-based Diamond Coring Co. to meet its requirements for hiring disadvantaged businesses in order to win a multimillion-dollar runway repair contract at O’Hare International Airport. Perino did no work for the bills submitted by her company.

Keep reading this article at: http://www.chicagotribune.com/news/local/breaking/ct-phony-woman-business-owner-sentencing-met-20170316-story.html

Confidentiality agreements continue to pose potential compliance trap for contractors

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US DoD logoFederal contractors who require employees to sign confidentiality agreements—including those selling only commercial products or in small quantities—need to examine their agreements closely.

For the last two years, the government has sought to prohibit confidentiality agreements that restrict employees’ ability to report fraud, waste, or abuse to “designated investigative or law enforcement representative[s]” for federal agencies authorized to receive that information.”

Most recently, the Department of Defense issued a new class deviation on November 14, 2016 prohibiting DoD from using funds from recent appropriations to contract with companies using overbroad confidentiality agreements. While these restrictions may not be new, the deviation’s broad application and significant consequences mean that contractors should give close scrutiny to ensure any agreements with employees comply with the prohibition.

Specifics of the Latest Class Deviation

DoD’s recent class deviation prohibits DoD agencies from using any money appropriated by the Continuing Appropriations Act of 2017 (or other FY 2017 dollars authorized by future continuing resolutions) to contract with an entity whose confidentiality agreement prevents employees from reporting fraud, waste, or abuse.

Keep reading this article at: https://www.insidegovernmentcontracts.com/2016/11/confidentiality-agreements-continue-pose-potential-compliance-trap-contractors/

Supreme Court hears argument over False Claims Act’s seal requirement

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Supreme CourtWeek before last, the United States Supreme Court heard argument in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby over the False Claim Act’s (FCA) “seal requirement.”  The controversy highlights an important statutory tool for government contractors who face allegations of making false claims for payment.  It also provides important lessons for those seeking to bring such allegations.

Under the FCA, a qui tam complaint must be filed under seal and remain under that seal for sixty days.  31 U.S.C. § 3730(b)(2).  During those sixty days, the Government can intervene in the case or request an extension of time.  Meanwhile, the plaintiff may not disclose the existence of the suit to the public.

Keep reading this article at: https://www.insidegovernmentcontracts.com/2016/11/supreme-court-hears-argument-false-claims-acts-seal-requirement/

 

 

Companies to pay $5.8 million for misrepresenting small business status and failure to pay GSA fees

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Justice Dept. seal - CopyThe U.S. Department of Justice (DOJ) has announced that a group of California-based companies — En Pointe Gov., Inc., En Pointe Technologies, Inc., En Pointe Technologies Sales, Inc., Dominguez East Holdings, LLC and Din Global Corporation — have resolved allegations of violations of the False Claims Act by agreeing to pay the government $5.8 million.

The government alleged that En Pointe Gov., Inc. falsely certified that it was a small business in order to obtain contracts set aside for small businesses.  The government also found that the company under-reported sales under a General Services Administration (GSA) contract in order to avoid the payment of fees.

En Pointe Gov., Inc. is now known as Modern Gov IT, Inc.; En Pointe Technologies Sales, Inc. is now known as Collab9, Inc.; and En Pointe Technologies, Inc. is now known as Dinco, Inc.

“These companies defrauded the government in two ways, each of which cost taxpayers,” said U.S. Attorney Eileen M. Decker for DOJ’s Central District of California. “Small businesses, in some cases, are eligible to receive a preference when government contracts are issued. Large companies that fraudulently solicit and obtain contracts under small business set-aside programs, like the companies in this case, not only abuse the system but also harm legitimate small businesses by taking those contracts away from them.”

In this case, the government alleged that, between 2011 and 2014, the defendants were liable for false representations that En Pointe Gov., Inc. met Small Business Administration (SBA) requirements to obtain work that was only available to small businesses.  In particular, the government alleged that En Pointe Gov, Inc.’s affiliation with the other defendants rendered it a non-small business and, thus, ineligible for the small business set-aside contracts it obtained.

The government also alleged that defendants caused En Pointe Gov., Inc. to file false quarterly reports with the GSA between 2008 and 2015, under-reporting sales made under a GSA schedule contract that allowed other federal agencies to purchase from En Pointe.  Under the terms of the contract, En Pointe was supposed to return to GSA a percentage of its sales receipts.  This is known as an Industrial Funding Fee.

The settlement resolve allegations filed in a lawsuit by Minburn Technology Group, LLC (Minburn), a Virginia company that sells information technology products and services, and Anthony Colangelo, Minburn’s managing member.  The lawsuit was filed 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.  Minburn and Mr. Colangelo will receive approximately $1.4 million.

Source: https://www.justice.gov/opa/pr/information-technology-companies-pay-58-million-misrepresentations-relating-small-business

Defense contractors to pay $8 million to settle False Claims Act allegations involving defective equipment sold to Army

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False Claims ActThe Department of Justice (DOJ) announced last week that Kilgore Flares Company and one of its subcontractors, ESM Group Inc., have agreed to pay a total of $8 million to resolve allegations that they violated the False Claims Act by selling or conspiring to sell defective infrared countermeasure flares to the U.S. Army and, in the case of ESM, knowingly evading customs duties owed to the United States.

  • Tennessee-based Kilgore Flares manufactures and sells electronics and energetic products, such as flares, to the U.S. military.
  • ESM Group, located in New York, manufactures magnesium powder supplied to the chemical, welding and pyrotechnics industries.  ESM imported magnesium powder used in the flares from the People’s Republic of China (PRC), which it sold to Kilgore Flares.

The U.S. military uses infrared countermeasure flares to divert enemy heat-seeking missiles away from U.S. military aircraft.  A primary component of these flares is ultrafine magnesium powder, which combined with other materials, provides ignition and enables the flares to burn at high temperatures and at rates that mimic an aircraft’s engine.  Kilgore’s contracts with the Army prohibited the use of magnesium powder from foreign countries (except Canada) in order to maintain domestic manufacturing capability in the interest of national defense.

Justice Dept. seal - CopyDOJ alleged that from July 2003 through May 2005, ESM knowingly misrepresented the content of ultrafine magnesium powder imported from the PRC in order to avoid paying antidumping duties owed to the United States.  Antidumping duties protect against foreign companies “dumping” products on the U.S. market at prices below cost.  The U.S. Department of Commerce assesses and U.S. Customs and Border Protection collects these duties to protect U.S. businesses and level the playing field for domestic products.  At the time of the imports alleged in this case, ultrafine magnesium powder from the PRC was subject to a 305 percent antidumping duty.

DOJ further alleged that from March 2005 through August 2006, Kilgore used the illegally imported Chinese magnesium powder purchased from ESM in the countermeasure flares it sold to the U.S. Army.  The Chinese magnesium powder allegedly violated both the requirement for domestically produced powder and engineering specifications required by the contracts.

Kilgore and ESM agreed to pay $6 million and $2 million, respectively, to resolve the government’s allegations.

Prior to the civil settlements with Kilgore and ESM, five former employees and agents of ESM pleaded guilty to criminal offenses related to the magnesium importation scheme, including ESM’s former president, Charles Wright.  The criminal defendants were ordered to pay more than $14 million in restitution.

DOJ’s settlement with ESM resolved a lawsuit filed under the whistleblower provisions of the False Claims Act.  The act permits private parties to sue on behalf of the United States those who falsely claim federal funds or, as in this case, those who avoid paying funds owed to the government.  The lawsuit was filed by Reade Manufacturing Company, a domestic manufacturer of magnesium powder.  The act also allows the whistleblower to receive a share of any funds recovered through the lawsuit.  Reade Manufacturing received $400,000 as part of the settlement with ESM.

The lawsuit against ESM is captioned United States ex rel. Reade Manufacturing Co. v. ESM Group, Inc., Civ. No. 10 – CV – 504-S (W.D.N.Y.).  The claims resolved by these settlements are allegations only; there has been no determination of liability except as admitted by the individual defendants in the criminal proceedings.

Source: https://www.justice.gov/opa/pr/tennessee-and-new-york-based-defense-contractors-agree-pay-8-million-settle-false-claims-act

Company pays $5 million for exploiting SDVOSB contracts

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Fraud Waste AbuseNew York-based Hayner Hoyt Corporation has agreed to pay $5 million, plus interest, to resolve allegations that its chairman and chief executive officer, Gary Thurston, its president, Jeremy Thurston, employees, Ralph Bennett and Steve Benedict and Hayner Hoyt affiliates LeMoyne Interiors and Doyner Inc., engaged in conduct designed to exploit contracting opportunities reserved for service-disabled veteran-owned small businesses (SDVOSBs).

The United States has long used government contracting to promote small businesses in general and specifically small businesses owned by veterans who have service-connected disabilities.  Congress has established a targeted procurement program for the U.S. Department of Veterans Affairs (VA), which requires the VA to set annual goals for contracting with SDVOSBs.  To be eligible for these contracts, an applicant must qualify as a “small business.”  In addition to being a small business, a service-disabled veteran must own and control the business and handle its strategic decisions and day-to-day management.

The settlement resolves allegations that the defendants orchestrated a scheme designed to take advantage of the SDVOSB program to secure government contracts for a now-defunct company, 229 Constructors LLC, that Gary and Jeremy Thurston created and controlled and subcontracts for Hayner Hoyt and its affiliates.  The Thurstons – neither of whom is a veteran – exerted significant influence over 229 Constructors’ decision-making during the bid, award and performance of these contracts in various ways, including by staffing the company entirely with then-current and former Hayner Hoyt employees and their spouses.  They also provided 229 Constructors with considerable resources, which provided it with a competitive advantage over legitimate SDVOSBs neither affiliated with nor controlled by a larger, non-veteran owned corporation.  Hayner Hoyt officials caused false certifications and statements to be made to the government representing that 229 Constructors met all requirements to be a SDVOSB when they knew, or should have known, that 229 Constructors did not meet such requirements.  By diverting contracts and benefits intended for service-disabled veterans to Hayner Hoyt and its affiliates, the defendants undercut Congress’s intent of encouraging contract awards to legitimate SDVOSBs.

The investigation revealed that Bennett – a service-disabled veteran who allegedly ran 229 Constructors, served as its president and oversaw its $14.4 million government-contracts portfolio – was not involved in making important business decisions for the company.  He was instead responsible for overseeing Hayner Hoyt’s tool inventory and plowing snow from Hayner Hoyt’s property.  Jeremy Thurston set up an email account in Bennett’s name in such a way that all emails received by the veteran were automatically forwarded to him.  After the government began to question 229 Constructors’ affiliation with Hayner Hoyt, Gary Thurston wrote others that he and Jeremy Thurston would likely terminate operations of 229 Constructors.  A few months later, service-disabled veteran Bennett and Benedict, who was simultaneously the “co-owner” of 229 Constructors and listed on Hayner Hoyt’s website as one of its five “key” officials, transferred a total of $52,000 to Gary Thurston’s personal bank account allegedly to show their appreciation for the assistance he had provided.

Defendants make various admissions in the settlement agreement, including that their conduct violated federal regulations designed to encourage contract awards to legitimate SDVOSBs.  They also admit that 229 Constructors provided more than $1.3 million in SDVOSB subcontracts to Hayner Hoyt, LeMoyne Interiors and Doyner and that those companies generated $296,819 in gross profits as a result.

“Those who do business with the federal government must do so honestly,” said U.S. Attorney Richard S. Hartunian for the Northern District of New York  “As today’s settlement demonstrates, this office will vigorously pursue those individuals and entities who game programs designed to help our nation’s veterans succeed in starting small businesses.”

The government’s investigation was triggered by a whistleblower lawsuit filed under the qui tam provisions of the False Claims Act, which allows private persons, known as “relators,” to file civil actions on behalf of the United States and share in any recovery.  The relator in this case will receive $875,000 of the settlement proceeds.  The case is docketed with the U.S. District Court for the Northern District of New York under number 14-cv-830.

Source: https://www.justice.gov/opa/pr/hayner-hoyt-corporation-pay-5-million-resolve-false-claims-act-liability

 

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