Category Archives: Defense Contractor Fraud

Defense Contractor to Pay $389 Million in Fines, Damages and Penalties Over Major Fraud

Supreme Group B.V. and several subsidiaries pleaded guilty to major fraud charges on Monday in connection with a contract to provide food and water to U.S. military forces in Afghanistan. The defense contractor will pay $288.36 million in fines and penalties stemming from the criminal case, and will pay $101 million to resolve civil allegations made in a whistleblower lawsuit.

download (1)In 2005, Supreme Foodservice AG (now called Supreme Foodservice GmbH, a Supreme Group subsidiary) entered into a contract to provide troops in Afghanistan with food and water. According to the Justice Department, the company devised and executed a scheme that forced the U.S. to overcharge for the goods provided, specifically Local Market Ready goods (referred to as LMR). Supreme used a United Arab Emirates company called Jamal Ahli Foods Co. (“JAFCO”) that it controlled as a middleman to artificially mark up prices on locally-produced products sold to military forces.

Incriminating emails between Supreme executives show that the company was aware they were marking up prices on goods at margins of around 60 percent. One particular email from a Supreme executive says the company shouldn’t raise prices any more than they already have because they didn’t want to raise suspicions with their government customer.

In 2007, a Supreme entered into a “separation agreement” with a Supreme executive, who was paid 400,000 Euros to keep quiet on the fraud scheme. A former Supreme employee brought the scheme to a stop in 2009 by notifying the government about JAFCO and the inflated prices on goods in Afghanistan.

The civil case against Supreme was predicated on whistleblower claims made by a Supreme executive, who accused the company of violating the False Claims Act when it knowingly overcharged the government for goods. The whistleblower also claimed that Supreme received rebates from suppliers that it failed to pass on to the government.

Government Intervenes in Defense Company Whistleblower Lawsuit

sikorsky_0The Justice Department announced today that it has intervened in a whistleblower lawsuit accusing Sikorsky Aircraft Corporation and subsidiaries Sikorsky Support Services Inc. and Derco Aerospace Inc. of overcharging the U.S. Navy on aircraft maintenance costs by using an illegal subcontract.

The lawsuit claims that Sikorsky approved an illegal subcontract called a “cost-plus-a-percentage” contract in which compensation is based on the cost of performing a service plus a percentage. These contracts are prohibited because the cost associated with the contract is unknown in advance and contractors don’t have any incentive to control costs. According to the Milwaukee Journal-Sentinel, the cost-plus-a-percentage contract caused the Navy to pay nearly $50 million in false billings for parts and materials used to maintain Navy aircraft.

The complaint was initially filed by whistleblower Mary J. Patzer, a former employee with Derco. Patzer started with the company as a financial analyst in 2002. By the time her tenure at the company ended in 2010, she was the point of contact for Derco’s defense contract audits. In her lawsuit, Patzer says she was fired shortly after reporting the alleged markups to a supervisor. The company’s reasoning for firing her: a “reduction in force.” She felt that filing her whistleblower complaint and holding her former employer accountable was simply the right thing to do.

If her case is successful, Patzer will be entitled to a whistleblower reward between 15 and 25 percent of any money the government recovers.

DRS Technical Services to Pay $13.7 Million to Resolve Fraud Allegations

DRS Technical Services Inc. (DRS) will pay the government $13.7 million to settle fraud allegations, the Justice Department announced today. DRS, a Virginia-based subsidiary of DRS Defense Solutions LLC, provides a variety of wireless network solutions, security systems and telecommunication services for both the government and the private sector.

dept_justiceThe Defense Department awarded time and materials contracts to DRS between 2003 and 2012 to provide services and supplies to the U.S. Army’s Communication and Electronics Command (CECOM) in Iraq and Afghanistan. DRS allegedly submitted bills to CECOM for work that was supposed to be performed by individuals with qualifications described under the terms of the contract. According to the Justice Department, the services were performed by individuals who did not possess the necessary qualifications, causing the government to overpay for the services.

Similarly, between 2009 and 2011, DRS allegedly billed the U.S. Coast Guard’s Aviation Logistics Center for services rendered by individuals that did not have the necessary qualifications to perform the services, per the terms of the contract. This too caused the government to pay an inflated price for the services.

The claims resolved under the terms of today’s settlement announcement are based solely on allegations and carry no determination of guilt. This case demonstrates the need for defense contractor whistleblowers to come forward if they have knowledge of fraud. In this type of case, a whistleblower that helps expose fraud is entitled to up to 25 percent of any money successfully recovered by the government.

Shipping Carrier to Pay Nearly $10 Million to Settle Improper Billing Charges

Matson Navigation Company, Inc. has agreed to pay the U.S. $9.95 million to settle whistleblower allegations that the shipping company allegedly made false claims to the U.S. Department of Defense concerning pricing practices. The claims were initially made by whistleblower Mario Rizzo, an Illinois freight consultant who filed the lawsuit against Matson and Horizon Lines – another major cargo carrier – in 2010.

MatsonRizzo claimed that improper billing caused the Department of Defense to overpay about $2 million per year for shipping. According to Rizzo, Matson falsely billed the Department of Defense for fuel costs associated with ocean transport when rail transport was actually used for some portions of shipping journeys. ¬†Matson and Horizon denied the charges, saying they were only acting as subcontractors and were not subject to the government’s terms regarding carriage limiting or fuel subcharges for inland and overland transport.

Although the Department of Justice declined to intervene in Rizzo’s case, the whistleblower still prevailed by securing the $9.95 million settlement. Because the burden of litigation fell to Rizzo, he will be paid a larger whistleblower reward than he would have received if the government intervened in his case. According to Watchdog, Rizzo will receive a total of $3.45 million as his whistleblower reward, which includes court costs and fees he incurred during litigation.

This case highlights that whistleblower cases do not always require government intervention to be successful.  Although the prospects of winning a qui tam case can be reduced significantly without the resources of the federal government, there is still the possibility of a favorable outcome. In addition, if the government does not intervene in your case and you are still successful, the whistleblower is entitled to a larger percentage of any money returned to the government.

California Masonry Companies to Pay $1.9 Million to Settle False Claims Accusations

Five California masonry companies and two individuals have agreed to pay the government $1.9 million to settle accusations that they misrepresented their disadvantaged small business status in connection with military construction contracts in North Carolina and California. The defendants in the case are Frazier Masonry Corp., F-Y Inc., CTI Concrete & Masonry Inc., Masonry Technology Inc., Masonry Works Inc., Russell Frazier and Robert Yowell.

The allegations made against the defendants stem from contracts to construct facilities at Marine Corps bases at Camp Lejeune, North Carolina and Camp Pendleton, California. Under the rules of the Small Business Administration, these contracts required that some of the work be performed by disadvantaged small businesses. The requirement aims to benefit small companies owned by women, minorities and other disadvantaged groups.

According to the Justice Department, the defendants and their principles misrepresented themselves as small businesses to the prime contractors, which caused the prime contractors to falsely certify that they had complied with the small business provisions in the contract. Russell Frazier, one of the two individuals named in this case, previously pleaded guilty in related criminal proceedings to causing false statements.

“This settlement demonstrates our continuing vigilance to ensure that those doing business with the military do so legally and honestly and that taxpayer funds are not misused,” said Assistant Attorney General for the Justice Department’s Civil Division Stuart F. Delery. “Among the rules that military contractors and subcontractors must follow are those relating to the use and hiring of small businesses.”

The settlement resolves claims filed in two lawsuits by whistleblower Rickey Howard, who formerly worked for Frazier Masonry Corp. The False Claims Act allows private citizens to sue on the government’s behalf for any false claims, and share in a percentage of the funds recovered. In this case, Howard will receive $393,383, according to the Justice Department.

The claims resolved by the settlement are allegations only. No determination of liability has been made. The cases are United States ex rel. Howard v. Harper Construction Co., et al., Case No. 7:12-CV-215-D (E.D.N.C.) and United States ex. rel. Howard v. RQ Construction LLC, et al., Case No. 7:13-CV-48-D (E.D.N.C.).