Government Contract Fraud

False claims are made in connection with a wide variety of government contracts. The entire scope of fraud against the government cannot be easily summarized and this list is not complete. Though these categories of fraud are commonly litigated under the False Claims Act, many others exist.

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With the help of whistleblowers across the country, including some of our clients, the federal government has recovered billions of dollars in False Claims Act cases.

We have helped our whistleblower clients earn awards for reporting this fraud through extensive investigation and documentation, diligent preparation of winning whistleblower lawsuits, and our solid working relationship with government attorneys.

Types of Government Contract Fraud

The most common areas of government contract fraud are:

Defense Contractor Fraud

Though overtaken in recent years by healthcare, defense contractor fraud has traditionally been the primary target of False Claims Act litigation. Indeed, the FCA was passed in 1863 for the very purpose of preventing the fraud that had plagued the Union Army throughout the Civil War. With the largest armed forces of any nation in the world and a steadily growing private defense sector, the U.S. is susceptible to massive fraud by for-profit military contractors. Former Representative Alan Grayson (D-FL) has suggested that fraud accounted for at least 10% and as much as 50% of the total defense spending on the war in Iraq. With such enormous taxpayer losses to fraud, a qui tam whistleblower can potentially claim a huge reward for coming forward and uncovering defense contractor fraud.

Cross-charging occurs when a defense contractor shifts costs from one contract to another more lucrative one to maximize its profits. While some defense contracts have a fixed price, others provide for a fee as a percentage of the total costs (“cost-plus”). This gives companies an incentive to both artificially increase costs for cost-plus contracts and to shift costs associated with a fixed-price contract to a cost-plus contract account. While many costs will be tied to a specific project, other costs will relate to a number of different projects a contractor has taken on. Costs should be allocated to customers fairly, but often unscrupulous defense contractors will simply push general costs onto the party paying the higher cost-plus rate—typically the U.S. government—thereby shifting the costs of private contracts onto U.S. taxpayers.

The U.S. government imposes guidelines on all its defense contracts relating to how products must be manufactured, including specifications for the materials and constituent parts to be used and where those parts may or may not be manufactured. It is illegal for contractors to use materials and parts that do not meet the required specifications. The sale of substandard products to the U.S. military was the primary impetus for the passage of the False Claims Act in 1863 and remains a major concern today. Similarly, the services that are provided by defense contractors must also meet certain standards. Security and other services provided to the U.S. military by for-profit companies are implicitly certified as meeting the government’s requirements, and when they fail to meet those standards due to shoddy or inconsistent work, the False Claims Act provides a remedy so that the government can recoup its losses.

Like cross-charging, inflated billing is an unfortunate product of “cost-plus” contracts by which defense contractors receive a fee based on a set percentage of the total costs. This arrangement provides a great incentive to drive up the costs of a contract so that the percentage fee will also be larger. Such fraud is often accomplished by falsifying time sheets and purchase orders, claiming extra time spent on projects, and inflating materials costs. Such inflated costs are difficult for the U.S. government to scrutinize when the defense contractor’s product is unique. Even when costs rise noticeably over expectations, the government may not have the choice of finding an alternate supplier if only one company produces the needed products. The Truth in Negotiations Act requires most defense contractors to supply the government with detailed cost and pricing data before a contract is awarded. Knowingly falsifying such data is a violation of the False Claims Act, and whistleblowers are encouraged to bring private lawsuits against companies seeking to defraud the U.S. government.

Here are some examples of defense contractor fraud:

  • In 2010, Lockheed-Martin settled a lawsuit brought by a qui tam plaintiff in Atlanta for over $10 million. The company was accused of overbilling on its contracts with the U.S. Air Force and Navy for production of the C-27J transport aircraft.
  • In 2009, MPC Products Corp. settled a qui tam lawsuit alleging inflated billing for a total of $25 million. The whistleblower who brought the suit claimed that MPC executives ordered him to falsify costs and price justifications on government contracts related to the manufacture of parts to be used in military aircraft. The government agreed to pay $4.5 million to the relator who initially filed the lawsuit under the False Claims Act.
  • In 2009, the defense contractor Northrop Grumman settled a qui tam lawsuit for $325 million. The False Claims lawsuit alleged that TRW, a subsidiary of Northrop Grumman, knowingly sold the U.S. government defective parts to be used in spy satellites. The substandard parts resulted in spy satellites falling from orbit and made expensive repairs necessary. The relator who brought the qui tam lawsuit against Northrop Grumman was awarded $48.7 million, 15% of the total damages to be paid to the government.
  • In 2007, the security contractor Akal Security Inc. settled a qui tam lawsuit brought against the company alleging that the company provided civilian guards on U.S. military bases with substandard training. Specifically, the relators and government claimed that Akal did not provide adequate weapons training to guards it provided under its contract. Under the terms of the settlement, Akal paid the government $18 million in damages.
  • In 2003, TRW Inc. (a subsidiary of Northrop Grumman Corp.) settled a qui tam lawsuit against it for $111.2 million. The lawsuit was brought under the False Claims Act and alleged that TRW had illegally shifted expenses from its commercial operations onto its accounts with the U.S. government. The relator, who initially brought the qui tam lawsuit against TRW in 1994, was given an award of $27.2 million. His relator share was 24.5% of the total award, just under the maximum possible of 25% in lawsuits where the government has intervened.

Agricultural Subsidies Fraud

The U.S. government pays $20 billion annually in agricultural subsidies to farmers. While the subsidies themselves are widely criticized as wasteful and unnecessary, they are additionally a large source of fraud. Lax oversight of agricultural subsidy awards has allowed many who do not qualify for awards to submit false claims to the USDA and illegally receive taxpayer dollars. Because of lax enforcement it is difficult to know the exact scope of agricultural subsidies fraud, but a representative of the Government Accountability Office has estimated that hundreds of millions of dollars are improperly or fraudulently claimed each year.

A typical strategy used to defraud the government is splitting a single farm operation into different parts and submitting subsidy claims for each part. In one case, a Mississippi cotton farmer created 78 different corporations—three of which were called “Megabucks Farms,” Easy Money Farms,” and “Get Rich Farms”—and bilked the government out of $11 million.

Here are some examples of agricultural subsidies fraud:

  • In April 2010, a New Mexico farmer was convicted of submitted false claims to the U.S. Department of Agriculture in connection with agricultural subsidies fraud. Bill Melot provided false documents to the USDA and fraudulently collected over $225,000 in agricultural subsidies. Melot was also convicted of tax fraud amounting to over $18 million in unpaid taxes over more than two decades. Melot faces a maximum sentence of up to 49 years in prison and total fines of $2.85 million.
  • In September 2010, a disbarred Tennessee attorney was convicted of fraud for making false claims to a federal biofuels subsidy program. H. Max Speight was a partner at Biodiesel of Mississippi, Inc., a company that produced biofuel derived from soybeans. Speight and his partner, William Tacker II, were accused of fraudulently obtaining $2.88 million from a USDA biofuel subsidy program, money they were not qualified to receive. Tacker’s case is pending and Speight will testify against him in exchange for a reduced sentence. Speight was sentenced to 26 months in prison and ordered to repay the fraudulently acquired funds.

Disaster Relief Fraud

In 2006, the Government Accountability Office estimated that the Federal Emergency Management Authority had lost at least $1 billion the previous year due to lax oversight and fraudulent claims in the wake of Hurricanes Katrina and Rita. FEMA is charged with coordinating disaster response and relief when the scope of a disaster overwhelms local resources. In the past decade, FEMA has responded to hurricanes, terrorist attacks, earthquakes, tsunamis, wildfires, snowstorms, and oil spills. When the government sets aside money for disaster victims, FEMA is responsible for allocating the funds to individuals and businesses with claims for damage they have suffered.

In the chaos following disasters, many false claims are submitted to the agency and a great number of undeserving individuals receive large payments. In recent years, the largest source of FEMA-related fraud has undoubtedly been the response to Hurricane Katrina. The Government Accountability Office has reported numerous cases of claims made to individuals listing post office boxes as their residences, claims for damage to houses that never existed, and claims filed under the names and social security numbers of prisoners. The number of false claims submitted to and paid by FEMA after Katrina is extremely large and nearly six years later investigations and prosecutions are ongoing.

Here are some examples of disaster relief fraud:

  • In November 2005, Ruth Leslie Goodman, a New Orleans romance novelist, plead guilty to defrauding FEMA and other relief programs of nearly half a million dollars. Goodman, who had twice previously been accused of insurance fraud, claimed to own ten properties that actually belonged to her father. She falsified receipts for work done on the properties before Katrina and submitted inflated rental records. Goodman was sentenced to 37 months in prison and fined $476,000.
  • In April 2009, the federal government reached a settlement with Lighthouse Disaster Relief, whose partners were accused of Katrina-related fraud under the False Claims Act. The Department of Justice accused Lighthouse’s partners Gary Heldreth and Kerry Farmer of making false statements to FEMA employees to receive $5.3 million for work they had not yet performed and then did not finish. The company, which had no related experience and was not even incorporated when it received its government contract, was to have constructed a base camp for Hurricane Katrina relief efforts within two days of the contract formation. The camp was not ready for anyone until over a month later and then it only supported 400 relief workers, rather than the 1000 needed. Heldreth, Farmer, and Lighthouse were ordered to pay a fine of $4 million in addition to the $1.3 million the government had already seized.

Environmental Fraud

The Environmental Protection Agency and the Superfund program identify hazardous waste sites throughout the U.S. and ensure that they are cleaned up according to federal regulatory standards. The budget allocated to Superfund and related environmental cleanup activities is approximately $1.5 billion annually. Much of the cleanup work mandated by the federal government is actually performed by private contractors who bid for individual cleanup contracts. Other contracts not specifically related to cleanup efforts nevertheless require strict environmental compliance with federal regulations. Violations of federal environmental laws can also result in actions under the False Claims Act for falsely certifying that a company is in compliance. As with healthcare and defense contractor fraud, the most common types of false claims associated with environmental cleanup and regulation are for substandard work, incomplete work, overcharging, and falsifying data.

Here are some examples of environmental fraud:

  • In November 2006, Liberty Analytical Corporation, the parent company of the environmental testing company Compuchem Labs, reached a $200,000 settlement with the federal government in a False Claims Act case. Compuchem was accused of submitting false claims in connection with laboratory analysis of samples from Superfund hazardous waste sites. Compuchem was supposed to test for the presence of dangerous chemical compounds in the samples, but the company’s analysts did not calibrate their diagnostic equipment properly. As a result, the results submitted to the government were falsely certified as accurate and in compliance with federal standards. In addition, Compuchem issued hundreds of invoices for the substandard services, each of which was fraudulent and punishable under the False Claims Act. Three Compuchem analysts plead guilty to related criminal charges.
  • In April 2005, Science Applications International Corp. entered into an agreement with federal authorities to settle a lawsuit alleging that the company illegally inflated its expenses in contracts with the Air Force for environmental cleanup work. By inflating expenses, the company was able to make a profit of 30% on the $24 million contract, though it was legally limited to 10% profits. In 2002, Michael D. Woodlee, a former S.A.I.C. employee, brought a qui tam lawsuit against the company under the False Claims Act. Of the total $2.5 million settlement, Woodlee received a relator share of $500,000.

Research Grant Fraud

The U.S. government spends well over $100 billion annually on scientific research in the fields of defense, energy, medicine, agriculture, and basic sciences. Various federal agencies such as the National Institutes of Health and the National Science Foundation distribute a large portion of this money to universities and researchers throughout the U.S. to further promising research programs. In recent years, the False Claims Act has increasingly been used to pursue institutions and individuals who use government research funds inappropriately or falsify research to generate additional funding.

Here are some examples of research grant fraud:

  • In May 2000, Thomas Jefferson University reached a $2.6 million settlement with the U.S. government in two cases related to false claims made regarding HIV and leukemia research totaling $1.3 million. In the first case, researchers submitted fabricated data to government agencies to gain funding for research on the use of gene therapy to treat HIV. In the second case, the lead researcher of a leukemia study was out of the country during most of the period covered by the grant and the research grant was used to pay the salaries of researchers not connected to the project. University officials denied any wrongdoing had taken place and said that the settlement was agreed to in order to stem rising legal fees.
  • In November 1998, the University of Minnesota settled a False Claims Act lawsuit for $32 million. The whistleblower who brought the qui tam suit alleged that the university had made numerous fraudulent claims related to $19 million in federal grants for organ transplantation research over a nearly twenty-five year period. The university reported to the NIH that it had made no money from the organ transplant research when it had actually earned over $80 million from a drug developed in the course of the study. Additionally, the university falsified numerous bills submitted to the NIH relating to salaries and equipment used in the study.

Public Works and Construction Fraud

The federal government funds billions of dollars worth of construction projects each year ranging from office buildings to highways and bridges. The vast majority of federally funded construction work is done by private contractors who bid for contracts. Fraud may occur when contractors enter into illegal agreements with competitors so that they will not compete for a contract (often in exchange for subcontracting work), or it may occur through kickbacks to government officials. Types of fraud typical of healthcare and defense fraud are also common in the construction field: charging for services not performed, inflating prices, falsely certifying compliance with federal regulations, and performing substandard work.

Here are some examples of public works and construction fraud:

  • In December 2007, the Indiana contractor Gohmann Asphalt and Construction Inc. reached an $8.2 million settlement agreement with the federal government over charges of fraud in a highway construction contract. Under the terms of Gohmann’s contract with the federal and state governments, the company was to asphalt highways and roads in Kentucky and Indiana. A Gohmann employee brought a qui tam lawsuit against the company in 2003 accusing it of switching samples of substandard asphalt that it provided to government inspectors. Core samples that were too thin— because Gohmann had poured too little asphalt—were replaced with thicker samples. In addition to the settlement amount, Gohmann was required to repair damage to the roads for three years at no cost and to pay for inspection of future work.
  • In March 2007, two Michigan construction companies settled a False Claims Act lawsuit alleging fraud in federally funded construction projects. Ajax Paving Industries and Dan’s Excavating Inc. were accused of falsely claiming to meet federal requirements for Disadvantaged Business Enterprise support. Ajax and Dan’s claimed that more than 10% of the work on a project at Detroit Metropolitan Wayne County Airport would be completed by a DBE qualified company when in reality it performed only minor administrative work. According to the settlement, the two companies agreed to pay $11.75 million and ensured future compliance with federal DBE regulations.

The information provided above is a very general summary of the law of government contract fraud at the time this text was prepared. Because this analysis is subject to change depending upon recent cases and legal developments, you should not rely on this summary as legal advice. As with any important legal question, you should always consult a lawyer licensed to practice in your jurisdiction.

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