Whistleblower – Federal Government and Federal Government Contractor Fraud

July 22nd, 2010

A large percentage of the United State’s enormous annual spending goes to development and implementation of new weapons systems, facilities, equipment, supplies, and logistical and technical services through the procurement of government contracts.  Such government contracts frequently involve military defense contracts such as B-1 Bombers, military tanks and vehicles, military fire power and uniforms, and extends to areas such as computer technology and food services for our troops. Defense contractor fraud remains one of the most prominent areas of false claims litigation under the Federal False Claims Act. In April 2009 TRW Inc.’s efforts to stop a scientist from revealing his research findings about faulty electronic components the company sold to the government for military and intelligence-gathering satellites were the basis for a whistleblower lawsuit that Northrop Grumman Corp. settled for $325 million.  It was the largest settlement ever paid by a defense contractor in a whistleblower case and the second largest ever paid involving defense contractor fraud. 


The whistleblower was awarded $48.7 million for his work and the work of his attorneys on the case.  The Federal False Claims Act requires the government to award whistleblowers 15 to 25 percent of the amount the government recovers as a result of whistleblower cases.


A false certification of regulatory and statutory compliance, necessary to obtain a contract, can render false all claims for payment under that contract.  A contractor’s failure to meet contract performance requirements and failure to provide goods and services in conformance with federal statutes and regulations may be sufficient to violate the False Claims Act. 


Presentation of a claim to the Government for payment, when the failure to abide by contract requirements has not been disclosed to the Government, is deemed equivalent to false certification of compliance with such laws and regulations.  Therefore, if a claim for payment is submitted and the contract requirements have not been fulfilled in all respects, if federal funding is conditioned on compliance, gives rise to a False Claims Act case.  Claims may be false, even though goods or services otherwise fulfill contract specifications.


Defense contractor fraud remains one of the most prominent areas of false claims litigation.  Billions of dollars have been recovered from defense contractors, mainly as a result of whistleblowers.  Some common ways in which defense contractors have tried to defraud the government are as follows:


1.             Cross-charging.  This occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits. 

2.             Improper Product Substitution.  Contracts frequently request the contractor use a specific grade or quality of product or part.  There are often requirements that the products be new or made in the United States.  Defense contractors often attempt to save costs by substituting cheaper or substandard parts.

3.             Improper Cost Allocation.  Under this scheme the defense contractor will improperly allocate or shift cost from private businesses or foreign governments onto the cost-plus contracts they have with the United States government.

4.             Worthless or Substandard Products or Services.  In this case the defense contractor with knowledge or through reckless neglect, delivers products that do not perform as promised.

5.             Inflation or Costs and Charges.  In a cost-plus contract, the government pays the defense contractor a set price plus a percentage of the contractor’s costs for producing the product.  In this scheme the contractor improperly inflates their costs and charges to increase revenue the company earns from the U.S. government.

6.             Violations of the Truth-In-Negotiations Act.  Weapons systems and equipment can be extremely complex.  Much of the time, there is only one company in the world producing a particular weapon system or piece of equipment.  The government has no choice but to purchase the particular weapon system or piece of equipment from a single supplier.  Because other competitors are not bidding, the government has no way of knowing if it is paying a fair price.  The Truth-In-Negotiations Act is designed to prevent this problem by requiring defense contractors to disclose all relevant information about its costs to the government in such situations.  Defense contractors may sometimes attempt to inflate their costs and expenses because they have no competitor bidding for the contract.

The Whistleblower – Part IV – Qui Tam Claims

November 4th, 2009

As reported in a front page story of today’s Washington Times in September of 2009, internationally respected whistleblower, Bunnatine Greenhouse, has issued an appeal to the U.S. Senate to pass strong protections for all federal employees. Mrs. Greenhouse was the only major Bush Administration executive to challenge the Halliburton “no bid” Iraq reconstruction contracts.  Ms. Greenhouse wrote a letter to Congress.  “We urge every American to read Bunny’s letter and to TAKE ACTION!,” said Stephen M. Kohn, NWC Executive Director.  “This is not a Democrat or Republican issue.  This is not a partisan issue. This is an issue that goes to the heart of accountability and oversight.

It is estimated that almost 10% of the U.S. annual budget is paid to persons and/or companies defrauding the government.  Some overcharge the government for products sold directly to the government, while others engage in government contract fraud, defense contractor fraud, Medicare fraud, Medicaid fraud, or other public benefit fraud. Any situation in which the government has been defrauded should be closely examined.  To minimize fraud committed against the government, Congress passed the False Claims Act. 

According to an annual report issued by the Department of Justice, approximately $1.2 billion was recovered in whistle blower claims and lawsuits filed by private citizens through their lawyers in the fiscal year October 1, 2000 to September 20, 2001, with more than $210 million of those funds being awarded to whistleblowers themselves.  The amount is continuing to grow.  It is estimated that $3.1 billions was collected from businesses defrauding the government in the year 2005.

The False Claims Act was Amended and strengthened in 1986.  The amendments broaden the definition of fraud to include submitting claims with deliberate ignorance or reckless disregard for the truth of statements made in the claim for U.S. Government spending or funds upon which the fraud claim is based.  The burden of proof that must be met by the qui tam attorney is a preponderance of the evidence, that is that the evidence presented is more likely true than not.  The 1986 amendments included provisions to protect the federal whistleblower from retaliatory action by their employer.

A person who has knowledge of fraud against the government may retain a lawyer and file a court case under seal against the company or person committing the fraud.  Following the filing of a lawsuit, the United States attorney has sixty days to investigate the allegations.  The U.S. Government intervenes in approximately 25% to 33% of all whistleblower cases.  If the U.S. attorney finds that fraud was committed, then the U.S. Government takes control of the case and either enters into a settlement or pursues the lawsuit itself. 

If the government fails to intervene, the private citizen may pursue the action independently.  If the lawyers are successful in proving fraud against the government, substantial penalties can be assessed, which can be up to 3 times the amount the defrauder stole from the government (the tax payers).  Out of damages imposed the whistleblower may receive between 10% and 30% of the recovery, in some cases recovery could be millions of dollars. 

The Whistleblower – Pharmaceutical Fraud

October 19th, 2009

In September of 2007, Bristol-Myers Squibb Company and its wholly owned subsidiary, Apothecon, Inc. agreed to pay over $515 million to resolve a broad array of civil allegations involving their drug marketing and pricing practices.  In December 2007 the Corporate Crime Reporter reported Merick to pay $670 million to settle federal and state charges that it violated the False Claims Act by engaging in nominal pricing fraud.  In 1986, more than $20 billion was paid out in fraud lawsuits brought by whistleblowers.


Pharmaceutical fraud cases represent the largest percentage of False Claims Act recoveries by the United, and qui tam relator whistleblower lawsuits.  The False Claims Act Is a federal whistleblower law which has its roots in the civil war era and allows private citizens to file actions against federal contractors and corporations who conduct fraud against the government and the public.  It is the United States’ most powerful tool for rooting out fraudulent government contracts.  With the advent of the Medicare prescription plan, even more federal tax dollars will flow into the pockets of large ruling companies illegally and in violation of current law.  In an industry with great power and profitability, there are lots of pressures upon companies to ignore federal laws designed to prevent fraud and curb costs.


Pharmaceutical fraud can take a variety of forms and involve complex issues.  The following are some example:


  • Charging the government for drugs not used and returned to pharmacy providers;
  • Marketing, promoting, and selling drugs for use other than those approved by the FDA;
  • Paying kickbacks and inducements to physicians, hospitals and pharmacists to prescribe or otherwise favor a drug;
  • Engaging in off-label marketing; and
  • Providing false data to the FDA or withholding negative data from FDA about the efficacy of a pharmaceutical drug or medical device in clinical research trials to get approval to sell and market the pharmaceutical drug or medical device.

Currently, the United States Government, along with the governments of 15 states and the District of Columbia, have joined with two whistleblowers who allege that drug manufacturer Wyeth defrauded U.S. taxpayers out of hundreds of millions of dollars.  According to the Wall Street Journal, Wyeth is accused of overcharging Medicare and Medicaid programs nationwide for purchases of it’s acid-reflux drug Protonix.  Under federal law, drug companies are required to offer prescriptions to federal aid programs at the lowest possible price.  The Wyeth suit alleges that Wyeth was offering Protonix at a 90% discount to a private hospital, while charging the federal government much higher rates.


Other drug companies that have settled qui tam lawsuits include Pfizer, TAP Pharmaceuticals, Bayer, and Schering-Plough Corp.  A federal official recently said the government has approximately 150 pharmaceutical fraud cases pending involving over 500 different drugs.


Pharmacy benefits management companies have also come under increasing scrutiny as a result of the False Claims Act.  In one of the most prominent whistleblower cases reported, Phillips & Cohen represented two whistleblowers whose qui tam lawsuits resulted in a settlement of $875 million to settle the lawsuits and related criminal charges.


If you believe you have discovered fraud, you should try to assess the magnitude of the fraud and gather whatever documentary or electronic evidence is lawfully available.  Be sure you do not violate the law or the terms of your employment agreement.  Write down the details of any meetings or events where fraud was discussed, who was present and what documents may exist that memorialize the event.  This documentation should be given to your attorney.


Keep in mind, you cannot recover in a qui tam action if another whistleblower has already filed an action based on the same documentation and information.

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