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On Monday, April 23, 2012, the Department of Justice announced its recent settlement with ATK Launch Systems Inc. that resolved allegations ATK sold dangerous and defective illumination flares to the Army and the Air Force from 2000 to 2006.  The defective illumination flares, LUU-2 and LUU-19, are used for nighttime combat, covert, search and rescue operations.  The flares burn in an excess of 3,000 degrees Fahrenheit for over five minutes.  Troops in Afghanistan and Iraq exclusively have used ATK illumination flares.

The government alleged that ATK’s flares could not withstand a ten foot drop without exploding or igniting as required by specifications.  The government alleged that ATK was aware that the flares did not meet such specifications when it submitted claims for payment to the Department of Defense.

ATK will pay the United States $21 million in cash and provide approximately $16 million for in-kind services repairing the 76,000 defective flares still in government inventory.

An ATK employee filed a qui tam action bringing this fraudulent behavior to the government’s attention.  David D. Barlow, U.S. Attorney for the District of Utah stated that “This settlement demonstrates our commitment to aggressively go after contractors who recklessly disregard and deliberately ignore critical safety defects in munitions used by America’s uniformed fighting men and women….”

On March 20, 2012, the Department of Justice announced the sentencing of another co-conspirator involved in a bribery and money laundering scheme arising out of activity on Camp Arifjan, a military base in Kuwait.   Terry Hall was sentenced to thirty-nine months in prison for his role in the scheme. Mr. Hall also agreed to testify against his 16 co-defendants.

Between the spring of 2004 through the fall of 2007, Mr. Hall operated and/or had interest in several companies, including Freedom Consulting and Catering Company and Total Government Allegiance that recieved more than $20 million in contracts and blanket purchase agreements.  A blanket purchase agreement allows the U.S. Department of Defense to order supplies on an as-needed basis at a pre-negotiated price.  Mr. Hall’s two companies contracted to deliver water and erect security fences for the U.S. military in Kuwait and Iraq.

In order to recieve these lucrative contracts, Mr. Hall paid his co-defendants who were U.S. Army contracting officials more than $3 million in unlawful payments and provided other valuable items and services.  He attempted to cover the true nature of the scheme by executing fake consulting agreements with his co-defendants, primarily former U.S. Army Major Eddie Pressley and his wife Eurica Pressley.  Fake invoices were also prepared to justify the bribes as payments for the non-existent consulting services.

Hall also secured payments from other contractors for the Pressleys.  These payments amounted to approximately $1.6 million of the total $3 million paid.  Hall and the Pressleys used the money to buy commercial real estate in Muscle Shoals, Atlanta.  Hall forfieted this real estate worth approximately $15, 757,000 as part of his sentencing.

Eddie Pressley was sentenced to 144 months in prison on January 5, 2012 and his wife Eurica Pressley was sentenced to 72 months in prison for her role in the scheme.

The Department of Justice announced on Wednesday, March 7, 2012, that Michael Rutecki of North Pole, Alaska pleaded guilty to one count of accepting illegal gratuities from a contractor during his deployment in Iraq in exchange for a contract under the Commanders Emergency Response Program. (CERP)

Mr. Rutecki was a pay agent responsible for paying contractors from the CERP funds for work done in accordance with civil development objectives established by United States Army commanders.  During and after the contract solicitation process, Mr. Rutecki admitted to accepting cash and other items of value from one particular contractor. The contract was awarded to the contractor.  It is a violation of federal law for pay agents to accept personal gifts or gratuities from the contractors that depend upon the pay agents for contracts.

Mr. Rutecki faces up to two years in prison and a fine of $250,000.  A sentencing date has not been set.

On January 3, 2012, the Department of Justice announced that Maersk Line Limited agreed to a $31.9 million settlement to resolve pending false claims allegations relating to its military contracts with the United States for transporting cargo in shipping containers to support troops in Afghanistan and Iraq.

The case brought by qui tam whistleblower Jerry H. Brown alleged that Maersk, a wholly owned subsidiary of Denmark-based A.P. Moller Maersk, knowingly overcharged the Department of Defense to transport thousands of containers from ports to inland destinations in Iraq and Afghanistan.  Maersk falsely inflated its invoices through several schemes.  These are a few examples of the allegedly fraudulent schemes:   Maersk allegedly billed in excess of its contractual rate to maintain refrigerated containers at a port in Karachi, Pakistan and U.S. military bases in Afghanistan.  It allegedly billed excessive late fees by failing to account for cargo transit times and grace periods as allowed by the contracts and billed for container GPS-tracking and security services that were not provided or only partially provided.

This is the second qui tam brought by Jerry H. Brown relating to fraud relating to military contracts.   In 2009, the government settled the allegations brought against shipping company APL Limited and its parent company for $26.3 million.

Over the course of two days – December 8th and 9th 2011, the Department of Justice announced the resolution of three fraud cases regarding military contracts.

In the first case, former Master Sergeant, United States Air Force, Patrick W. Boyd was sentenced for his role in an agreement with three military contractors in Afghanistan from September 2004 to January 2005.  Boyd served as a warranted contracting officer in Afghanistan and in exchange for the award of contracts for concrete bunkers and barriers and asphalt paving services to Naweed Bakhshi Company, Northern Reconstruction Organization and Top’s Construction, Mr. Boyd, along with his eighteen co-conspirators received $30,000 from each company. Mr. Boyd received a forty month prison term and ordered to pay $130,000 in restitution.

In the second case, Sergeant Sheryl Ayeni was sentenced to one year in prison, one year of supervised release and ordered to by $30,000 in restitution for her role in receiving $30, 000 in bribe money in exchange for paying a local Afghan military contractor in U.S. dollars, a violation of Department of Defense regulations.

The third case announced on December 9, 2011 involved Thomas Aram Manok  a former employee of the U.S. Army Corps of Engineers stationed in Baghdad, Iraq and now residing in Chantilly, Virginia.  Mr. Manok used his official position to accept cash bribes from Iraqi contractors in exchange for recommending that the U.S. Army Corp of Engineers award the Iraqi contractors certain contracts and for the approval of other payments to such contractors.  Mr. received a prison term of twenty months with three years of supervised release.

Zylon is a synthetic fiber developed by the Toyobo company in Japan.  Zylon fiber has high tensile strength, thermal stability and flame resistance when compared  to organic fibers.  High tensile strength is the maximum stress that a material can withstand while being stretched or pulled before the material begins to significantly contract, otherwise known as necking.  Because of these characteristics, Zylon provides ballistic protection at a low weight making it ideal for bullet-proof vests.

Toyobo sells Zylon as spools of continuous filament yarn.  Armor Holdings Products Division of Honeywell Corporation’s High Performance Fiber Group uses Zylon in a proprietary lamination process to create ZShield.  ZShield combines layers of Zylon fiber with special resin in between two layers of protective filament.  Weaving companies such as Second Chance Body Armor or First Choice Armor Inc. incorporated Honeywell’s ZShield into bullet proof vests that are sold to the United States government for use in the government’s law enforcement agencies as well as for the troops in all the military branches.

Currently, the United States has lawsuits against the group of above mentioned companies involving allegations of defective manufacturing and/or sale of defective Zylon bullet proof vests.  On October 30, 2011, the Department of Justice announced that the United States government is pursuing a False Claims suit against Lincoln Fabrics Ltd., a Canadian company and its American subsidiary, Lincoln Fabric Inc. aka Lincoln Textiles Inc.  for the weaving and sale of defective Zylon fabric used as key ballistic material in bullet-proof vests.

The government alleges that these two companies were aware that the Zylon degraded rapidly overtime especially in hot and humid conditions and the extent of the degradation was such that it rendered the vests unfit for use.  The government also alleges that despite this knowledge the two companies never informed the United States government of these facts and never stopped selling the Zylon for ballistic applications, thus placing U.S. law enforcement personnel including all branches of the military at risk.

The government already has settled cases involving the manufacture or sale of defective Zylon vests with other entities for more than 47 million.

Contracts with the military are as varied and complex as the armed services themselves.  The contracting process and performance thereof offers ample opportunity for individuals and companies to perpetrate fraud against the United States government.  Recently, a series of cases prosecuted through the Department of Justice (DOJ) illustrate the various schemes used to defraud the United States government in a myriad of military contracts.

The DOJ announced  this series of cases beginning in the middle of September, 2011.  Three cases resulted in settlements, one in a  criminal conviction and one is a recent indictment; but all include fraudulent activity relating to military contracts.

On September 16, 2011, the DOJ announced that a Saudi Arabia based company, Tamimi Global Company Ltd (Tamimi) agreed to pay 13 million dollars to the  United States government to resolve allegations regarding a series of kickbacks which Tamimi paid to Kellogg, Brown & Root Inc. (KBR) to obtain subcontracts awarded under KBR’s prime contract with the U.S. Army to provide logistical support to the military in conflicts abroad. One example of such kickbacks were monies paid to subcontract manager Steven Lowell Seamans in return for favorable treatment in the award and performance of providing dining services at Camp Arifjan in Kuwait between October 2002 and March 2006.  Other kickbacks were paid under five smaller subcontracts for dining services and other logistical support, such as shower/laundry units, in Iraq.

On September 21, 2011, the DOJ announced two cases involving companies falsely certifying that they qualified as vendors for special set aside contracts.  In the first case, Lydia Demski agreed to pay $800,000 to resolve allegations she and her company caused false claims to be submitted to NASA’s Plumbrook facility in Sandusky Ohio.  The contract was for the re-furbishment of equipment at the Plumbrook facility.  NASA had set aside this particular contract to be performed by a Service Disabled Veteran Owned Small Business company.  Lydia Demski misrepresented that her company Deerpath International qualified as such a business.  Instead, once awarded the contract, Demski funnelled all the work to another company, Deerpath Corp.   A whistle blower brought this case under the False Claims Act.

The second case announced on September 21, 2011, settled allegations against Future Research Corporation located in Huntsville, Alabama.  Future Research Corp.  inappropriately obtained contracts with the Navy.  The particular contract at issue had been set aside for companies that qualified for the Small Business Administration Historically Underutilized Business Zone (HBZone). Although Future Research Corp. did not qualify for this program, the company and its president, Jesse Nunn falsely certified to the Navy that it indeed was qualified.  The contracts were thus fraudulently awarded to the company.  This case settled for $200,000.

The DOJ announced a criminal conviction against Neil Campbell on October 4, 2011.  Mr. Campbell, an Australian citizen, pled guilty to charges that he steered United States funded contracts to a subcontractor in Afghanistan.  He received $190,000 for steering $15 million in reconstruction contracts to particular companies in that country.

Finally, on October 12, 2011, the DOJ announced they recently indicted three individuals for their roles in bribery and fraud involving federal procurement contracts.  The fraudulent scheme involved the U.S. Air Force Foreign Materials Acquisition Support Office (FMASO) contracts.  The FMASO, on behalf of various military divisions, purchases foreign military material.  Only a limited number of vendors are eligible to bid on the sale of the foreign material to FMASO.

Sylvester and Maria Zugrav are principal owners of one such vendor, Atlas International Trading Corporation. (Atlas) The Zugravs allegedly gave Jose Mendez, a former program manager for FMASO over $1,240, 500 in payments in exchange for favorable treatment during the procurement process. The favorable treatment included giving the Zugravs competitors’ bid information to aid the Zugravs in winning the contracts.  The three are indicted on counts of procurement fraud, and bribery.

The vast amount of fraud against the United States military in the procurement of the necessities of the Civil War, such as ships, food, and supplies, provided the impetus for the enactment of the original FCA in 1863. The Government was concerned not only with the millions of dollars lost, but also with the safety of soldiers. In light of the massive fraud on the United States Military, Congress enacted the FCA to deter and punish wrongdoers and reimburse the Government for its losses.

Since its enactment, actions against defense contractors have dwindled, and healthcare fraud has become the leading source for qui tam actions. In contrast with healthcare recoveries, which totaled $1.7 billion in 2003, recoveries for defense procurement fraud totaled a mere $299 million. However, fraud in the defense arena is still a concern for the Government. In light of the Iraqi War, defense contractors surely will fall under the Government’s microscope.

False claim actions involving defense contracts usually fall into two categories: 1) those claiming that the defense contractor provided false information regarding product specifications, such as testing records, in violation of a statute, regulation or the contract terms and 2) those alleging that the defense contractor mischarged the Government for the cost of the supplies or services rendered.

In the first category, a defense contractor that has falsified its test records is analogous to the risk of Civil War soldiers being harmed by ammunition filled with sawdust rather than gunpowder. A faulty missile detonator will also lead to the loss of many lives, or a defective helicopter can lead to the loss of lives.

For example, a qui tam whistleblower and the Government alleged that a defendant company made false statements regarding the manufacture of helicopters sold to the United States Army. As part of the contracts negotiated between the company and the Army, the company was required to test and guarantee the quality of all the parts.

The suit was commenced after a helicopter crash over the Saudi Arabian desert during Operation Desert Shield. The failure of a defective flight-critical transmission gear caused the crash. The qui tam whistleblower and the Government claimed that the company made false statements regarding the quality of the parts used to manufacture the transmission gears. The court found that the entire helicopter was defective due to the defective gear, and the company’s claim for payment of the helicopter was false under the FCA. The court also held that the Government could recover the cost of the entire helicopter.

The second category of false claim actions brought against defense contractors involves the falsification of pricing information for equipment or labor. For example, a qui tam whistleblower claimed that the defendant company fraudulently overcharged the Government on contracts with the Department of Defense and National Aeronautics and Space Administration. The qui tam whistleblower was the director of financial control for the company’s space unit and reported directly to its general manager. The qui tam whistleblower accused the company of shifting expenses from commercial jobs to government contracts, and falsely classifying other expenses in an effort to avoid reimbursement caps placed on research and development costs of government contracts. The company settled the lawsuit for $111.2 million.

For more information and case citations, please see “Federal False Claims Act and Qui Tam Litigation,” published by Law Journal Press (2010).