Ex-U.S. Official Sues Hughes for Overcharges : Defense: The filing of a whistle-blower suit by a government overseer may be precedent setting. Most such suits are brought by current or former employees.

A former high-ranking government official overseeing contracts at Hughes Aircraft Co. has filed a whistle-blower lawsuit against the firm, alleging that the Hughes Ground Systems Group in Fullerton fraudulently overcharged the government by $70 million between 1983 and 1989.

The suit was brought by Patrick M. Kelley, former chief of the contracts division of the Defense Contract Administration Service, the Pentagon office that manages government contracts at the Hughes Fullerton operation.

Hughes termed Kelley’s allegations as “unfounded” and said he never characterized Hughes billings to the government as fraudulent until after he retired from government service and filed the lawsuit.

The filing of a whistle-blower suit against a defense firm by a government official responsible for overseeing contracts at that firm may be unprecedented and could mark a significant elevation in the legal risk facing defense firms. Until now, most such suits have been brought by current or former employees of defense firms.

“To my knowledge, he is the highest government employee to be relator,” said Dean Francis Pace, Kelley’s attorney. Relators are plaintiffs under the federal False Claims Act, which allows individuals to file suit on behalf of the government and share in any awards.

Pace said there is legal precedent allowing a government official to file such a lawsuit, even in cases where the issue is central to the official’s job responsibilities.

Kelley alleges in the suit that Hughes improperly used a labor pricing rate on its Fullerton contracts that had been specifically disapproved. Most defense firms have a variety of negotiated pricing rates under which they bill work to the Pentagon. Pace said the Hughes Fullerton unit had some 200 approved negotiated pricing rates.

But the Hughes group used a so-called labor attrition rate that was not approved, which added about $20 million annually that was already billed under a so-called realization rate, Pace said. The two rates were supposed to compensate Hughes for the labor involved in producing scrapped, lost or surplus goods, according to the suit.

A Hughes spokesman said other government officials had approved its labor attrition rate and that the company used it in those cases, but not in contracts over which Kelley had jurisdiction.

“As far as Hughes knows, Kelley never characterized the costs as false or fraudulent until after he retired from government service and filed the lawsuit, which could bring him significant personal financial reward.”

Pace said Kelley had disapproved the labor attrition rate during his tenure at the Defense Contract Administration Service and told Hughes that it could not use the rate on contracts. “But Kelley alleges that he did not know of any specific contracts on which Hughes was recovering this rate until May, 1989, after he had retired.” Pace declined to say how Kelley learned that Hughes had made the billings after he had retired.

The suit asks that Hughes pay damages and fines of $360 million, including treble damages. Under the False Claims Act, Kelley could be awarded up to 25% of any damages Hughes pays.

The suit was filed under seal in U.S. District Court in Los Angeles last August and was quietly unsealed Jan. 16. Pace made the suit available Tuesday.

The Justice Department, which can elect to intervene in the suit as a plaintiff under the False Claims Act, is still evaluating the case, Pace said. The department has until March 16 to intervene, decline or seek an extension of the deadline to intervene.