Amended Law Provides Incentive for Whistle-Blowers

Two of the four cases against Teledyne Electronics of Newbury Park were filed by whistle-blowers under a controversial law that has become one of the federal government’s main tools to attack defense industry fraud.

The federal False Claims Act, an obscure law that dates to the Civil War, was virtually moribund until it was amended in 1986 to make it more attractive to whistle-blowers.

Under the law, private individuals become “private attorneys general” who can sue a company suspected of defrauding the government. The Justice Department investigates the allegations and then decides whether to join the suit.

The law holds those who knowingly defraud the government liable for treble damages of the amount of the fraud. It also provides for civil penalties of $5,000 to $10,000 for each false claim. Private individuals who initiate the lawsuit can receive between 15% and 30% of the total recovery.

The law has drawn criticism from both sides.

Defense contractors say that whistle-blowers are often greedy malcontents who file frivolous claims that force companies to spend big money to defend themselves.

Whistle-blowers say they are ostracized by their fellow employees, usually lose their jobs and are worn down by powerful corporate interests and a painfully slow legal system. Many of them find their lives in ruins.

The Justice Department prosecutes less than half the lawsuits because they lack merit or get snared by legal hurdles.

Yet the False Claims Act can bring substantial rewards.

In a 1992 lawsuit against Teledyne, former Teledyne executive Stephen C. Reddy collected $869,000 as part of the $5.56-million settlement.

The unnamed plaintiffs in cases filed the same year by Taxpayers Against Fraud received $170,000 as their share of the $950,000 settlement. And Taxpayers Against Fraud, a Washington, D.C., legal center that specializes in such whistle-blower suits, collected $100,000 to cover legal fees and other costs.

Overall, whistle-blower lawsuits under the False Claims Act have returned nearly $1 billion to the federal government since 1986.