In a recent case that underscores the government’s commitment to rooting out fraud in government contracting, Sikorsky Support Services Inc. (SSSI) and Derco Aerospace Inc. (Derco) have agreed to pay a significant settlement of $70 million to resolve allegations of violating the False Claims Act. This case, brought forth by whistleblower Mary Patzer and intervened in by the Department of Justice, highlights the power of the False Claims Act’s qui tam provisions to incentivize insiders to report fraud on government contracts. The whistleblower will receive $13,976,900 or 19.9% of the settlement as a reward.

The Allegations

According to the allegations, SSSI and Derco, both subsidiaries of the same parent company, conspired to overcharge the government via an improper cost-plus-percentage-of-cost (CPPC) subcontract. These two related companies allegedly schemed for Derco to sell parts to SSSI at the cost Derco paid to other suppliers plus a 32% markup. SSSI then submitted claims to the Navy for reimbursement, which included this markup. As the contractors did not disclose this improper arrangement to the Navy, they allegedly violated the False Claims Act and the terms of their prime contracts. Congress has outlawed CPPC contracts because they incentivize suppliers to increase costs, leading to higher expenses for the government.

The Settlement

The $70 million settlement is a stark reminder of the costly consequences of non-compliance with government contracting regulations. This case demonstrates the critical role of whistleblowers in uncovering fraud and the government’s commitment to holding contractors accountable. Whistleblowers who are industry insiders, such as employees of a government contractor, have knowledge of the inner workings of their company and are often the “canary in the coal mine” regarding fraudulent activity. The whistleblower in this case was a former employee of one of the contractors.

The government relies upon contractors to supply the military, among many other areas. Regarding the negative impact of fraud in government contracting, “Overinflation of parts and material costs for the repair and maintenance of aircraft affected naval air training and is a disservice to the American taxpayer,” said the Special Agent in Charge of the Naval Criminal Investigative Service (NCIS) Economic Crimes Field Office about the case.

Understanding False Claims Act Whistleblowing

The False Claims Act (FCA) is one of the most powerful tools the government uses to combat fraud. It allows private individuals, known as whistleblowers, to file suits on behalf of the government. These individuals can share in a portion of the recovery, incentivizing the exposure of fraudulent activities. The FCA also permits the government to intervene and take control of the litigation, as seen in this government contracting fraud whistleblower case.

The settlement between SSSI, Derco, and the U.S. government serves as a crucial lesson for government contractors. It highlights the need for strict compliance with federal laws and the importance of ethical conduct in business operations, because would-be whistleblowers who see something, will say something.