Incentives Sought : Blowing the Whistle for Hefty Profit

Sen. Jacob Howard (R-Mich.), his florid complexion set off by a thick thatch of black hair, rose in Senate chambers and spoke in his typically precise though ponderous manner. The senator was indignant.

“Persons have been employed to furnish shells for the use of the Army; and in several cases, it has turned out that these shells have been filled not with the proper explosive materials for use, but with sawdust!”

Howard also complained that “frauds of a very gross character have . . . been practiced in the purchase and furnishing of small arms for the use of the Army.”

People in the highest places shared the senator’s indignation. Even the President supported legislation to provide a handsome financial payoff for whistle-blowers--defense contractors’ employees who turn in bosses who cheat the government.

Today’s Law More Lenient

Abraham Lincoln was the President. Sen. Howard spoke on St. Valentine’s Day, 1863, at the height of the Civil War.

The biggest difference between companies that swindled the government in 1863 and those that do so in 1986 seems to be that today’s crooks get away with more.

Another difference is the federal False Claims Act, which is the legislation that Lincoln supported more than 120 years ago. Congressional revision has diluted the act to a degree just this side of annihilation.

A few politicians are working to invigorate the False Claims Act. If they are successful--and it appears they will be--they could create new multimillionaires: whistle-blowers who can combine patriotism, ethical conduct and fiscal success by turning in companies that bilk the government.

Under the amended act, a company that defrauds the government could be fined $10,000 per infraction and between two and three times the amount of the fraud, depending on the final configuration of the amendment. And a whistle-blower who turned in the company would get between 10% and 30% of what the government collects, while being protected against retribution from the company.

Can Keep Part of Award

The False Claims Act puts a whistle-blower in the highly unusual position of filing a lawsuit in the name of the U.S. government, essentially acting as the U.S. attorney general. The law also is unusual in that it allows a whistle-blower to keep a percentage of the amount awarded to the government.

The act covers the whole range of businesses contracting with the federal government: hospitals and doctors who overcharge Medicare, defense contractors who submit fraudulent bills, road builders who skimp on material, vendors who add soy beans to meat patties served in federally supported school lunch programs. The list is almost endless.

The amended act has passed both houses of Congress, although differences remain between the House and Senate versions. Sponsors of the amendment and other involved parties are working to reconcile those differences, in hopes of reaching agreement in time to send the amendment to President Reagan before Congress adjourns early next month.

In Lincoln’s day, the act mandated hefty fines for contractors who gulled Uncle Sam. And there were significant rewards for employees who turned in their cheating organizations.

Abuses Prompt Revisions

The False Claims Act was invoked occasionally before Congress revised it during World War II to counter citizens who tried to take advantage of the act by using it to collect on fraud they learned about after government officials knew the facts. In the process, the act was weakened.

Today, politicians in Washington trying to put some bite back into the law are advocating proposed legislation written in part by John Phillips of Los Angeles, a co-director of the Center for Law in the Public Interest, a not-for-profit firm specializing in cases like those that can be brought under the False Claims Act.

Legislators are worried about more than $404.25 socket wrenches, $900 ash trays and clamps that sold for $2,710 despite a $102 price tag 16 months before, all of which have been purchased by the Navy in the last five years.

Nobody knows precisely the extent of current fraud against the government. Estimates made by the General Accounting Office, the Department of Defense Inspector General’s office and the Department of Justice range between $1 billion and $100 billion annually.

Companies in Violation

This summer, Litton Industries agreed to plead guilty and pay $15 million in restitution and penalties after a federal grand jury charged a division of Litton with inflating prices on about 45 contracts for electronic equipment between 1975 and 1984. In addition to the financial penalty, Litton was temporarily barred by the U.S. Navy from receiving new Defense Department contracts. Such suspensions have also been handed out in recent months against General Dynamics Corp. and General Electric Co.

Federal investigators, not company whistle-blowers, uncovered Litton’s violations.

There are, however, workers who have tried, without recent success, to apply the False Claims Act.

One such man is John Michael Gravitt, a 46-year-old machinist from Pleasant Ridge, a suburb of Cincinnati, Ohio.

Gravitt, a former foreman at the General Electric Co.’s Evendale, Ohio, jet engine plant, now works at the Ford Motor Co. transmission plant in Batavia, Ohio. He used the act to accuse GE of cheating the Pentagon of about $7 million.

“I tried to correct the situation while I was at GE,” Gravitt said. “But my complaints fell on deaf ears. There was a complacent attitude. ‘We’ve been doing it this way for years,’ ‘Nothing’s going to happen.’ ‘We won’t get caught,’ were the answers I got.”

Those responses incensed and baffled Gravitt, said the heavyset ex-Marine sergeant who was awarded a Purple Heart in Vietnam. “In Vietnam we had trouble with the quality and quantity of weapons and supplies,” he recalled. “I think the American serviceman ought to get everything the American taxpayers are paying for instead of half of everything. I think you just don’t do things that hurt your country, and that’s the reason I filed suit against General Electric.”

In his lawsuit, Gravitt said that GE falsified time cards in order to charge for workers’ “idle time” at higher “straight time” rates. He also claimed that instead of absorbing cost overruns on jobs done under regular contracts, GE billed those overruns to “cost plus” federal contracts that required the government to pay for overruns.

Gravitt said he refused his superiors’ orders to falsify employees’ time cards.

15,000 Altered Cards

His attorney, James B. Helmer of Cincinnati, said other supervisors altered their employees’ time cards simply by writing over job designation numbers originally entered on the cards. A Defense Contract Audit Agency study indicated about 15,000 such altered time cards were turned in over a three-year period, Helmer said.

The lawyer argued that GE should be penalized about $44 million. “Under the False Claims Act the government is entitled to a $2,000 penalty for every infraction, and each of the 15,000 altered cards represents an infraction. That’s $30 million,” Helmer said. “Then the government is entitled to double damages for the actual $7 million, or another $14 million.”

Justice Department officials, however, disagreed with Helmer’s opinion that each falsified time card represents an infraction under the False Claims Act. Justice’s contention is that each billing voucher presented to the government, rather than each card, forms an infraction.

Using the same Defense Contract Audit Agency information available to Gravitt, the Justice Department found that of 303 GE billing vouchers, 117 included net overcharges to the government.

The agency also noted that of every five hours shifted on time cards, only one benefited GE, while two had no cost impact and two actually benefited the government, said Michael F. Hertz, director of the commercial litigation branch in the civil division of the Justice Department.

The Defense Contract Audit Agency “ultimately surmised that the scheme was an in-house one to make Gravitt’s unit appear more productive within GE,” Hertz said.

As to Gravitt’s allegation that GE cheated the government of $7 million, Hertz said: “I guess the simple answer is that there was no $7- million loss to the United States.” He added that the $7-million figure came from an early, “hypothetical study (by the Defense Contract Audit Agency) that could not be supported by either documentary facts or testimonial facts.”

Last December, the Department of Justice and General Electric agreed to settle for $234,000, which amounts to $2,000 for each of the 117 GE vouchers that overcharged the government.

Chief Judge Carl B. Rubin of the U.S. District Court in southern Ohio refused to accept the settlement, calling it unfair because it was too low in light of the amount of alleged fraud against the government. He designated U.S. Magistrate Robert Steinberg to conduct further hearings.

Under the False Claims Act, Gravitt could collect as much as $4.4 million if GE is fined $44 million, though Helmer observed that “it’s entirely up to Judge Rubin. It could be zero.”

Opposites Back Changes

Sen. Charles E. Grassley (R-Iowa), a conservative known for tenacious attacks against wasteful Pentagon spending, is sponsoring the Senate version of the False Claims Act amendment. Rep. Howard L. Berman (D-Panorama City), who is as well known for being a liberal Democrat as is Grassley for his conservative Republican voting record, is spearheading the House version of the amendment.

Berman said in an interview: “All the revelations of fraud against the government undermine the confidence of the public in the government’s ability to implement programs. My goal right now very clearly is to . . . get the amendment to strengthen the False Claims Act signed by the President before the end of the session, which would be in early October.”

Getting the original act signed into law apparently was not much of a problem. Less than three weeks after Sen. Howard made his 1863 Valentine’s Day speech about sawdust-filled cannon shells, the 37th Congress approved “An Act to prevent and punish Frauds upon the Government of the United States.” It is today known as the False Claims Act.

It required persons convicted of cheating the federal government to pay a $2,000 civil penalty and double damages plus court costs. In addition, the convicted cheaters could be liable for criminal penalties of imprisonment from one to five years or up to $5,000 in fines.

For their trouble, whistle-blowers who reported fraud leading to conviction got half the damages, half the civil penalty and all their court costs.

Not Often Used

Despite such attractive payoffs, company employees seldom took advantage of the False Claims Act before World War II, said Lisa Hovelson, a legislative aide to the Senate Judiciary Committee, who has done extensive research on the act.

In 1943, the False Claims Act got a shot of publicity with unfortunate results. The Supreme Court ruled that a whistle-blower could sue under the act even if his or her information all came directly from government sources; in other words the federal government could end up buying information it already had.

A flurry of “parasitic” suits followed the ruling, suits based on newspaper stories, court indictments and other information already in government hands.

The fact that the government already knew about crimes alleged in the parasitic suits, coupled with the defense industry’s lobbying efforts, caused Congress to react quickly by amending the False Claims Act to forbid action on information the government already processed and to reduce financial rewards drastically. Instead of receiving half the damages assessed a company, the whistle-blower could get a maximum of 25% of damages awarded if the government did not take part in the suit, and a maximum of only 10% if there was government intervention.

The change was even more ominous than it appeared to be. The amended act stated that actions would be dismissed if they were “based on evidence or information the Government had when the action was brought,” which seems logical until one learns that at least one suit was dismissed because a whistle-blower told federal officials about the case before filing the complaint with the court.

“The current False Claims Act can sometimes be self-defeating,” Sen. Grassley said. “For example, a whistle-blower who telephoned the Defense Department hot line (800-424-9098) to report evidence of fraud would not be able to later bring a false claims suit, because the government already has the information. It wouldn’t matter that the hot line report was lying dormant in the back of someone’s file cabinet.”

Other problems with the False Claims Act as it stands today were cited by James Morrison, vice president for public policy of Business Executives for National Security, a Washington-based business trade association that lobbies for “a strong, effective and affordable national defense.”

Morrison observed that, although the act designates awards to the whistle-blower of up to 25% of the assessed damages, a judge has full discretion to assign any amount between the maximum and nothing at all, which could leave the whistle-blower financially high and dry.

Assures Follow-up

“Also,” continued Morrison, “there is no mechanism to force the Justice Department to act once it gets into a case, so we have had situations where someone came forth with evidence of fraud and the Justice Department never followed up that evidence, usually for benign reasons such as its very large case load or someone leaving the department.”

The proposed amendment corrects those problems. One of its most important sections provides strong “whistle-blower protection.” It guarantees employees who use the act protection from being fired, demoted, suspended or harassed. Any employee fired because of using the act is assured of reinstatement, back pay with interest and compensation for damages, including court and attorneys’ fees. On top of that, under the amendment a discharged whistle-blower could be awarded an amount equal to double his or her back pay, plus punitive damages.

Another important change is that the amendment would guarantee a whistle-blower between 10% and 25% of the amount recovered by the government from a cheating company if the Justice Department were to litigate the suit, and between 20% and 30% if the citizen were to litigate alone.

Further revisions in the act would increase forfeitures from $2,000 to $10,000 per false claim, increase fines from twice the amount of fraud to three times its total and guarantee that whistle-blowers be kept abreast of a suit’s progress when the government litigates and be able to object in court to settlements he or she felt to be unfair.

Cases in Wings

There are cases waiting in the wings for the expected passage of the False Claims Act amendment. The Center for Law in the Public Interest “is just waiting for the amendment to become law before filing two well-documented cases of fraud against the Pentagon,” said the firm’s co-director, Phillips.

“The amendment will make the incentives so attractive and the protection against retaliatory actions so absolute that there will be no reason for a whistle-blower not to bring such action.

“I believe there are literally thousands of potential cases out there that could result in billions of dollars pouring into the U.S. Treasury and provide hefty returns for whistle-blowers who come forward with pertinent information.”