Litton Settles Fraud Suit for $82 Million : Defense: Contractor agrees to resolve allegations of overcharging. Whistle-blower is not alive to see historic settlement.
In one of the largest whistle-blower settlements in history, Beverly Hills-based Litton Industries agreed Thursday to pay $82 million to resolve allegations it overcharged the government for computer work on defense contracts, vindicating a former employee who did not live to see his courage bear fruit.
More than six years ago, James Carton, a Litton data systems analyst, sued the defense conglomerate, alleging that the company used illegal accounting techniques to make the Pentagon pick up the tab for data-processing costs that should have been borne by commercial customers.
Carton sued under the Federal False Claims Act, which permits a private party to sue on behalf of the government and receive from 15% to 25% of the proceeds if the suit is successful.
With Thursday’s settlement, Carton’s widow, Anita--who runs a Simi Valley hair salon--could garner up to $20 million. Carton himself died of a heart attack in December during a Caribbean cruise celebrating the couple’s 25th wedding anniversary. He was 51.
“That is a really tragic aspect of this case,” said Howard Daniels, chief of the U.S. attorney’s civil fraud section in Los Angeles. “He was really a good guy.”
In a statement, Litton said it settled without any admission of wrongdoing or liability.
“A decision to settle is a difficult choice when you believe your position is correct,” Chairman Alton J. Brann said. “This decision was made in recognition of the potentially significant amount at risk.” The company said its potential liability for damages and penalties could have totaled as much as $650 million.
Anita Carton came to the federal courthouse in Downtown Los Angeles as attorneys put the final touches on the settlement Thursday. Through her lawyer, Janet Goldstein, she said only that she was pleased with the settlement.
The agreement ended “the most exhaustively litigated case I’ve been involved in during my 20 years as a lawyer,” Daniels said, noting that there were 76 volumes of legal pleadings, two large roomfuls of documents and two file cabinets of correspondence.
Daniels said he thought the settlement, the third-largest of its kind, was a particularly important one. “This was an extraordinarily subtle and sophisticated scheme,” he said. “We wanted to get the message out to the defense industry that we could tackle cases of this magnitude and stay with them to the bitter end.”
During the past four years the U.S. attorney’s civil fraud unit has recovered $150 million for taxpayers, Daniels said. “That dwarfs the recoveries of any other U.S. attorney’s office that I’m aware of,” he said.
Carton’s suit was originally filed under seal in April, 1988. Several government agencies then launched investigations, and in March, 1989, the Justice Department unsealed the case and announced it would take it over in conjunction with Carton’s lawyers.
The lawsuit alleged that Litton--apparently in an attempt to attract more commercial computer customers--did not charge commercial clients for using the company’s computer memory banks beyond a certain “cap” level. There were no such “caps” for government clients, the suit said, so the government ended up paying the excess overhead for commercial customers.
In a 1989 interview, Carton said he discovered the problem when he was asked as technical director of Litton’s Woodland Hills division to do a profitability study of the company’s computing business. He said he confronted his superiors with his findings that the government was being overcharged but got no response.
The case was ferociously fought. To defend itself, Litton employed three highly skilled law firms, headed by Los Angeles’ Munger, Tolles & Olson.
The lawyers challenged the constitutionality of the federal whistle-blower law under which the suit was filed. After that move failed, Litton raised numerous other defenses, including a challenge to the government’s contention that Litton’s accounting system was illegal.
In June, 1992, U.S. District Judge Mariana R. Pfaelzer rejected that bid, ruling that Litton’s cost accounting system was illegal under federal procurement laws. On Thursday, Litton maintained that its system lowered costs to all customers, including the government.
Earlier this year, the company contended that the case should have ended with Carton’s death. A Florida federal appeals court had rejected a similar contention in another whistle-blower suit, and the issue was pending here when settlement talks grew serious in April.
Chief U.S. District Judge W. Matthew Byrne played a key role in forging the settlement, Daniels said.
Litton said Thursday that it has agreed to pay the Cartons’ lawyers $4 million.
After consulting with that law firm--Phillips, Cohen & Goldstein of West Los Angeles--Daniels will make a recommendation to Justice Department officials on how much Anita Carton should collect. In a pleading filed earlier in the case, Daniels said Jim Carton would have been the key witness if the case had gone to trial.
A friend said the burden of being a whistle-blower had taken its toll on Carton.
Emil Stache, a whistle-blower in another case, said in a court declaration that Carton had told him he “suffered from a great deal of anxiety and nervousness and that the case was taking a ‘great emotional toll’ on him.”
