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.

Whistleblower: The False Claims Act and The Fraud Enforcement and Recovery Act of 2009 – Part I

September 28th, 2009

In 2003, John Kopchinski was earning $125,000 a year selling the drug Bextra for Pfizer.  He had a baby son, and his wife was pregnant with twins.  The Gulf War veteran says that, “In the Army, I was expected to protect people at all costs.”  At Pfizer, though, he was expected to sell Bextra, even though it raised the risk of heart attacks and strokes.  After Kopchinski expressed his concerns about Bextra’s safety, Pfizer fired him.  He eventually got a new job paying $40,000 a year.

Kopchinski hired attorney Erika Kelton of Phillips & Cohen.  In 2005, Pfizer withdrew Bextra from the market.  Now Pfizer is pleading guilty to felony charges of promoting Bextra for unapproved uses.  Pfizer will pay penalties of $2.3 billion, and Kopchinski will get a $51.5 million share for filing the “qui tam” lawsuit under the False Claims Act (FCA) that helped the government collect these penalties.  Kopchinski is one of five whistleblowers sharing in the settlement.  He says that he does not expect his life to change much now, according to a news account of this settlement available from Reuters.

Crutial court decisions such as the one in the Pfizer case have assisted whistleblowers in coming forward.  In 2008, there has been rapid legislative response in the enforcement arena.  On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA).  This act authorizes substantial new funding to the Department of Justice and other federal enforcement agencies for the investigation and prosecution of offenses.  FERA amends the False Claims Act (FCA) in a manner that may increase the exposure of every company that does business with the federal government and every person or entity that supplies goods or services that are reimbursed by federal government dollars.


The FCA provides for recovery of civil penalties and treble damages from any person who knowingly submits or causes the submission of false or fraudulent claims to the United States for money or property.  Under the most commonly-enforced provisions of the statute, a person is liable for “knowingly” (1) presenting or causing the presentment of a claim for payment or approval; (2) making a “false record or statement to get a false or fraudulent claim paid or approved by the Government;” or (3) conspiring to defraud the government “by getting a false or fraudulent claim allowed or paid.”  The FCA also penalizes so-called “reverse false claims, “ in which a person “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the Government.”  The FCA defines “knowingly” as having “actual knowledge” of falsity or acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information.  “No proof of specific intent to defraud is required.”  31 U.S.C. §3729(b).


The FCA’s qui tam provisions empower private individuals to file litigation in federal court on behalf of the government and to share in any subsequent recovery.  The FCA’s qui tam provisions provide enormous incentives for qui tam Realtors (whistleblowers) to expose fraud against the government, awarding 15-30% of settlement or judgment proceeds to Realtors, who may also be entitled to reasonable attorney fees’ and costs, which may be substantial.


FCA civil damages and penalties can be severe.  Defendants may be held liable for up to three times actual damages plus penalties between $5,500 and $11,000 per claim.  Depending on the method in which the “claims” are calculated, civil penalties may far exceed the actual damages the government sustained. 


FERA amends the definition of “claim” in a significant way.  The new definition of “claim” is:


(A)   any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that –(i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government –


(I)             provides or has provided any portion of the money or property requested or demanded; or

(II)            will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded. 


FCA liability may now be triggered by any false claim made to any recipient of federal money so long as the money is used to “advance a Government program or interest.” FCA realtors and the Department of Justice will now be able to push to give this provision the broadest possible interpretation.


The old FCA penalized a person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the Government.”  31 U.S.C §3729(a)(7). FERA now defines “obligation” to include the retention of any overpayment, which opens new avenues of exposure against federal contractors or grantees for knowingly retaining government “overpayments.” 


In the past, the FCA afforded protection to “any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee.”  31 U.S.C. § 3730(h).  FERA extends whistleblower protections beyond “employees” to a “contractor or agent” and no longer requires any prohibited retaliatory action be taken by an employer.  The FERA now reads “any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment.  31 U.S.C. § 3730(h).


An FCA action must be brought within six years of the date on which a violation was committed, or within three years of the date on which the government knew or should have known that a violation was committed, and in no event more than 10 years after the date on which the violation was committed.

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