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Really Expensive Food You Didn’t Know You Bought

By Robert M. Thomas, Jr.

How much can you spend on overpriced bananas?

 

Quite a bit, it turns out. Late last week the government announced a $344-million-dollar settlement in a case filed thirteen years ago under the False Claims Act (“FCA”) by a whistleblower alleging that Kuwaiti food contractor Agility was over-charging the military for fresh fruits and vegetables delivered to U.S. troops during the Iraq war. $344 million. I don’t know about you, but that seems like quite a food bill to me.

 

The case was brought under the FCA, as are many of the cases we bring at the Whistleblower Law Collaborative in Boston. One of the many interesting aspects of False Claims cases is their scale. Small discrepancies, or seemingly insignificant mark-ups, can in the context of large contracts, yield huge dollars in illegal profits. Yes, even for fruit and vegetables. In the Agility case, the $344 million was $95 million in damages, plus another $249 million in claims submitted that the company agreed to withdraw as inappropriately charged.

 

In a normal transaction, a 5% mistake, say an extra $2.50 on a $50 dinner bill, is negligible. Depending on one’s attentiveness or neurosis about money, one might choose to ignore it rather than going back to the restaurant to complain or ask for the money back.

 

However, when you add a bunch of zeroes to the number, things start to look different. A 5% fraud rate on a $100 million contract is $5 million in single damages (but could be trebled to $15 million under the FCA). A 5% fraud rate on a $1 billion contract is $50 million, before possibly being trebled. The Iraq War cost several trillion dollars all told. You start to see the nature of the problem.

 

Similarly, during the “Big Dig” highway project here in Boston a few years ago, where the feds agreed to underwrite the sinking of an interstate highway below the city’s streets, the price tag evolved from one billion to two, and then seven, ten, eventually fourteen. How does that happen? The steady drip, drip, drip of contract amendments, change orders, and the like, and next thing you know the taxpayers are paying fourteen times what was agreed to. Whistleblowers eventually came forward (towards the end of the project) to explain the mischief in the project’s finances, which had ballooned out of control.

 

Another source of FCA fraud cases on an enormous scale is the government health insurance programs, such as Medicaid and Medicare. These are a huge problem for much the same reason (a 90% compliance rate in a trillion-dollar health care economy translates into a $100 billion per year problem). Health care fraud cases constitute the majority of our FCA cases at the Whistleblower Law Collaborative. Why are these so prevalent? Because federal reimbursement systems are largely based on a type of honor code: the systems allow the contractor to submit claims electronically, and coding manipulations can be hard to detect in the absence of a witness coming forward to help the government see what it cannot see on its own. The government typically pays the claims and chases the bad ones after the money’s been paid out, the so-called “pay-n-chase” model. For people and entities willing to engage in gamesmanship, it’s a lucrative game to manipulate these vulnerable honor systems. Whistleblowers have become the government’s primary weapon for making the lucrative game more risky — and for recovering the money wrongfully obtained.

 

False Claims Act cases can arise in any number of situations in which the government spends money. The Pentagon’s massive expenditures are certainly fertile ground. As documented in L.A. Times reporter Chris Miller’s 2007 book, Blood Money: Wasted Billions, Lost Lives, and Corporate Greed in Iraq, huge sums of money were lost and fraudulently spent in the Iraq War, as the price of that conflict (originally touted as a self-funding enterprise costing the taxpayers nothing) ballooned into the trillions of dollars and turning a national surplus into a national deficit. As whistleblower lawyers, the frustrating aspect of that situation was knowing that fraud existed but that it would be incredibly hard to get to the facts in sufficient detail to bring legal action. Very little paper existed for the contracts and sub-contracts; witnesses were in Iraq and throughout the Middle East. Traveling to those areas for fact-finding was almost impossible and would involve prohibitively expensive security details and the like. Because of this, the Iraq conflict became known among whistleblower lawyers as a “Free Fraud Zone.”

 

The money flowed and flowed in Iraq, but the whistleblower cases did not come, at least not right away. Just like the Big Dig, towards the end of the conflict when things had quieted down somewhat, people began to surface to make claims against defense contractors like Blackwater and Halliburton for a variety of over-charging schemes. And thirteen years after it was first filed, the Agility case shows that the money stolen in that conflict is still being recovered.

 

Taxpayers bear the brunt of these schemes. Whether it’s a city tunnel that cost fourteen times what was originally projected, or up-coded medical bills, or the most expensive bananas in the history of the world, you and I are stuck with the bill.

 

About the author: Bob Thomas is a Boston-based attorney and a principal in the Whistleblower Law Collaborative, whose work is the representation of whistleblowers. In addition to his work on behalf of whistleblowers, Bob is a board member of the ACLU of Massachusetts and an adjunct professor of law at Boston University, where he teaches a course on Health Care Fraud and Abuse.

 

The Perils of Privilege: Lessons

Lessons  from a False Claims Act Trial.

 

The United States and Kellogg Brown & Root, Inc. (“KBR”), have been engaged in a long running case in which the government alleges that KBR subcontractor Eagle Global Logistics bribed KBR’s Robert Bennett for better subcontract terms under KBR’s massive Logistics Civil Augmentation Program III contract, which cost the government $38 billion on over 10 years.  While the illegality of kickbacks is often thought of in connection with government health care programs, there is a similar federal law banning kickbacks in government procurement program (such as defense contracting).  KBR employee Bennett has already pleaded guilty to violating this Anti-Kickback Act, 41 U.S.C. §§ 51-58, now codified at 41 U.S.C. §§ 8701-07, and the United States argues that the alleged violations should be imputed to KBR.

 

Like many companies faced with reports or allegations of misconduct in the company or by an employee, KBR conducted an internal investigation (which led to Bennett being fired).  Companies typically use lawyers to conduct such investigations and seek to cloak such investigations and the resulting reports with the cloth of privilege (including attorney work product and attorney-client). If successful, privilege then shields the report from future discovery by another party, such as the government, who might seek to use the report as evidence of liability, knowledge of the crime, cover up, etc. Indeed, as we have written before, some of the most incriminating evidence may be found in such materials.

 

KBR had apparently successfully protected its report from falling into the hands of government prosecutors for years.  Then late last week, near the close of the trial, the presiding federal judge handed the United States a major victory when she ordered KBR to hand over its internal investigation report on the alleged kickbacks on the grounds it had waived attorney-client privilege of the document.  The government had requested such relief after a KBR witness under questioning by KBR counsel invoked the report during testimony; they did so to try to defend the company by showing that it had fired the perpetrator. However, it is often said that the attorney-client privilege acts as a sword and a shield; in this case, by trying to use the report as a shield, KBR handed the government a sword to cut through the company’s defenses. The judge reportedly ruled that protection for the report had been waived nine years before when one KBR employee transmitted it to another. While this was different reasoning than that argued by the government, it led to the same result: a finding that KBR waived the privilege and the report has lost its protection and must be turned over to the government.

 

The trial has now concluded, with the parties’ post-trial briefings due by Aug. 14, 2015, at which point the judge will take the case under advisement and ultimately render a decision and a judgment. It will be interesting to see how damaging the internal investigation report turns out to be to the company.

 

The case is U.S. v. KBR Inc., case number 1:04-cv-00042, in U.S. District Court for the Eastern District of Texas.

Fraud in Small Business Innovation Research Yields Settlement

Recently the U.S. Attorney’s Office for the Western District of Washington announced a False Claims Act settlement stemming from fraud in the Small Business Innovation Research (“SBIR”) program. nLight Photonics, Inc. (nLight), a privately-held, Vancouver, Washington-based manufacturer of high performance diode and fiber lasers, agreed to pay $420,000 to resolve allegations that between 2004 and 2013, it received multiple government grants and contracts for which it did not legitimately qualify under the SBIR because of its ownership structure. For the purposes of the SBIR program, the term “small business” is defined as a for-profit business with fewer than 500 employees, owned by one or more individuals who are citizens of, or permanent resident aliens in, the United States of America.

 

The SBIR program was established by Congress in 1982, and amended several times since. Currently eleven federal agencies participate in the program, awarding millions of dollars of grants and contracts each year. It is a highly competitive program that encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) that has the potential for commercialization. Id. Government funding is available because many early-stage innovation are still too high risk for private investors, including venture capital firms.

 
The fraud was discovered by an employee of the Department of Energy, one of the government agencies from whom SBIR funding was obtained. Apparently, the employee who was overseeing both an nLight SBIR grant as well as an SBIR grant awarded to a company that nLight had acquired, made an inquiry of nLight which brought its ineligibility to light. Indeed, nLight had successfully sought funding from the Army, Navy, Air Force, NASA and Department of Energy to further develop its laser technology, which has military and related applications of interest. Each of these agencies participated in the investigation, along with the Department of Justice, to reach the settlement. According to one news report, by 2011 the privately-held company nLight had secured $110 million in equity financing from Silicon Valley investors and was on a steady growth trajectory that led to speculation that it would initiate a public stock offering.

 
It is encouraging to see a False Claims Act case made “the old-fashioned way”—through discovery by agency contracting personnel and investigation by government law enforcement working together with DOJ. It reminds us all that without the benefit of a whistleblower, there are plenty of FCA cases the government can and should make.  To be sure, there are many cases of complicated fraud where a whistleblower is needed, and one wonders how much sooner the fraud here would have been uncovered if a whistleblower had come forward.  In addition, while so much of the attention of the FCA these days is on health care fraud cases, we would all do well to remember how many billions of dollars the federal government spends each year procuring other goods and services, from research as here, to military equipment for our soldiers.

Shippers Who Ripped Off Military Settle FCA Suit

It appears a settlement has been reached in the False Claims Act case  brought by two whistleblowers and the United States against two shipping companies, Covan World-Wide Moving Inc. and Coleman American Moving Services Inc. (the Covan Carrier Group), in federal district court in South Carolina. In an Order issued yesterday, the federal district court judge put the case on hold pending finalization of a settlement in principle.  See Covan-Order and Law360-article-Covan.

 

Covan Carrier Group had contracts with the U.S. Department of Defense (DOD) to assist in relocating military personnel by packing and shipping their belongings as they were deployed at home and abroad. The United States and the whistleblowers, two workers at a Coven Carrier Group warehouse in Augusta, Georgia, allege that since at least 2007, Covan padded their bills for relocating personnel by lying about shipment weights. The whistleblowers claim that managers falsified weight tickets, including by forging documents or “whiting” out portions of the documents.  A government audit revealed widespread misconduct, for example, in Pearl Harbor, Hawaii, military officials determined that Covan consistently claimed its shipments weigh about ten percent more than they actually do; the United States’ Complaint has many other examples of fraud and alleges that it happened at all twenty-four Covan locations in the United States. See Covan-Complaint.

 

The terms of the settlement are not yet announced, but DOD says the companies have billed $723 million to the government for the shipping and relocation services. Under the FCA, the companies could face up to three times the damage or loss to the government plus a civil penalty of between $5,500 to $11,000 per false claim (i.e. invoice).  We expect the size of the settlement will depend on how much weight inflation there was and at what locations (for example, if it was ten percent across the board, then the single damages could be about $72 million; if it was limited in scope as the companies contend, it would be less), how much of a multiplier is applied to the single damages or loss figure (i.e. is it doubled or trebled which will likely depend on how egregious the conduct is), and how many, if any, civil penalties are assessed. In addition to damages and penalties, the companies could face debarment or exclusion by DOD from future federal contracts.

 

The FCA, also known as “Lincoln’s Law,” was first passed during the Civil War to recover for shoddy military equipment being billed to the Union Army. It is frustrating that companies are still ripping off the military for profit, but it is rewarding that the qui tam provisions of the FCA are working. We commend the two whistleblowers here for coming forward. Without them “blowing the whistle” in 2013,  the fraud may never have been exposed.