We recently posted an article about fraud in the commercial and international marketplaces.  (We could keep on posting similar articles, such as this one, but we won’t.)  Other past articles have focused on corrupt activity by military or civilian government employees.  Our point—which we’ve made before—is that a myopic focus only on government contractors misses the bigger picture.  Fraud and corruption are endemic to the human condition, and they flourish where weak people and their temptations meet lax oversight and/or ineffective controls.  Enhance the control environment and you reduce the opportunity for miscreants to break the rules.

But today we are reporting on yet more government contractors who are in the news because of alleged wrongdoing.  Let’s start first with John Feeney, of Woodbridge, Virginia—who at age 28 has pretty much ruined the rest of his life.  According to the Department of Justice, Mr. Feeney pleaded guilty to one count of mail fraud on July 28, 2010.  Interestingly, Mr. Feeney thought he was defrauding only his employer, BAE Systems Training Services, Inc.  Unfortunately for him, BAE Systems was a government contractor whose expenses were reimbursed by Uncle Sam’s Defense Department—meaning Mr. Feeney was really defrauding the U.S. Government, who frowns on that sort of thing.

According to the DOJ press release, Mr. Feeney was a logistics engineer who “used his position to authorize the purchase of camera lenses and video equipment, intending to keep the equipment for his personal use but to bill BAE for the purchases.”  Mr. Feeney made 15 such “illicit purchases” between August 2005 and June 2006, which cumulatively were worth $476,424.  Let’s repeat that:  Mr. Feeney purchased nearly half a million dollars worth of camera lenses and video equipment in less than a year, and sent the bills to his employer, who was apparently pleased to pay them. 

What did he do with his ill-gotten treasure of photographic goodness?  The DOJ reported that “Feeney subsequently sold many of the purchases on an Internet auction site for profit.”  As we mentioned, Mr. Feeney’s employer had a contract at that time with the DOD, under which “BAE would purchase surveillance equipment and subsequently bill the U.S. government for those purchases.”  In fact, Mr. Feeney’s job was to purchase the equipment for the contract.  BAE Systems billed the DOD for $464,819 of the equipment he fraudulently acquired.  We don’t know how Mr. Feeney was caught, but caught he was.

According to the DOJ, “The mail fraud count carries a maximum penalty of 20 years in prison, a $250,000 fine or twice the gross gain or loss, whichever is greater, as well as three years of supervised release.“  That pretty much takes care of the rest of Mr. Feeney’s career.

Next, we report the settlement of a False Claims Act case against Quantum Dynamics, of Macon, Georgia.  On July 29, 2010, the DOJ announced that it had reached a settlement with the company, who allegedly received contracts from the U.S. Army by fraudulently claiming to be a HUBZone contractor.  As the DOJ noted—

Under the HUBZone program, companies that maintain their principal office in a designated HUBZone and employ 35 percent of their workforce from a HUBZone, among other requirements, can apply to the Small Business Administration (SBA) for certification as a HUBZone small business company. HUBZone companies can then use this certification when bidding on government contracts. In certain cases, government agencies will restrict competition for a contract to HUBZone-certified companies.

Because Quantum Dynamics did not qualify as a HUBZone company, its representations that it was one created a false statement (under the False Statements Act).  Because it billed the Government for the fraudulently obtained contracts, its invoices were considered to be “false claims” that subjected the company to considerable liability.  The reported settlement figure--$750,000—indicates to us that either the prosecutors felt there was some question as to the company’s intent to defraud, or else that the company was short on financial resources and there was little use asking for more.  (Actually it could be both, as the HUBZone rules are complex and difficult to understand.)  The DOJ press release did not report which company would be completing the work started by Quantum Dynamics.

Next, we report that on the same day (July 29, 2010) DOJ announced that it had intervened in a qui tam False Claims Act suit against Oracle Corporation (and its subsidiary Oracle America, Inc.) for allegedly failing to disclose its commercial sales practices to the General Services Administration (GSA)—which then would allegedly lead to the government paying higher prices than it otherwise would have.  The DOJ reported that Oracle billed GSA “hundreds of millions of dollars in sales” under the contract, so we’re not hopeful that Oracle can settle the suit for less than a million dollars, as Quantum Dynamics did. 

What did Oracle (allegedly) do wrong?  According to the DOJ—

Under the contract, GSA used Oracle’s disclosures about its commercial sales practices to negotiate the minimum discounts for government agencies who bought Oracle software. The contract required Oracle to update GSA when commercial discounts improved and extend the same improved discounts to government customers. The suit contends that Oracle misrepresented its true commercial sales practices, ultimately leading to government customers receiving deals far inferior to those Oracle gave commercial customers.

The DOJ noted that the suit was originally filed by Paul Frascella, who was the Senior Director of Contract Services at Oracle, and who might be expected to know Oracle’s sales practices.  The suit, United States ex rel. Frascella v. Oracle Corp. et al., No. 1:07cv:529 (E.D. Va.), may make Mr. Frascella a rich man, since as “relator” he will share in any damages awarded by the Court to the United States.

Finally, we wanted to relate this sad tale of corruption in the executive ranks of a defense contractor.  (Here’s the link, but you need to be a member to access the story.)  This is not so much a story of defrauding the U.S. Government, as it is a story about “sweeping accusations of fraud, insider trading, and company-financed personal extravagance.”  According to the New York Times story, David Brooks (former CEO and Chairman of the Board at DHB, now called Point Blank Solutions) received corporate reimbursement for “more than $6 million in personal expenses”—including luxury cars as well as “university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.” 

Hey, some of that stuff might be unallowable!

As the article noted, what makes this story interesting is the egregiousness of Mr. Brooks’ behavior and “how gross the abuses are.”  The article stated that—

Mr. Brooks has not disputed that many of his personal expenses were paid for by the company, but his lawyers have maintained that the practice was authorized.  His lawyers also defended the hiring of prostitutes for employees and board members, arguing in court papers that it represented a legitimate business expense ‘if Mr. Brooks thought such services could motivate his employees and make them more productive.’

There’s quite a bit more to the story, including allegations of forged compensation agreements, inventory manipulation, insider trading, and tax evasion.  If convicted, Mr. Brooks may be spending a long time behind bars.  Apparently, Mr. Brooks is aware of his precarious future, as the article reported that—

He may also face additional charges stemming from an episode last week when he was caught for a second time trying to smuggle into jail prescription anti-anxiety pills, which were similar to medication he was already taking at an unusually high dose. The pills had been hidden in pens that a supporter of Mr. Brooks’s had placed near the defendant’s seat in the courtroom.

So as we bring this article to its conclusion, we agree that we have presented litany of dissimilar stories that may not have much of a common theme—other that they all happened at government contractors.  On the other hand, government contractors are supposed to have developed robust internal controls to prevent such acts from occurring.  We hope readers will think carefully about how they might detect or prevent similar incidents at their companies.