The elements of a criminal false claims act case are substantially similar to the elements of a civil false claims act case: generally the knowing submission of a materially false or fraudulent claim for money or property to the government. So, what prompts the Federal Government to pursue a criminal false claims act case in addition to a civil one? Although the Department of Justice has wide discretion regarding whether to bring a criminal case, some guidance for mitigating that risk is provided by the recent Louis Berger Group (“LBG”) case in the United States District Court for the District of New Jersey (Mag. No. 10-3198), in which the company engaged in a pattern of overbilling overhead costs over an 8 year period. Specifically, the company repeatedly inflated the overhead rate it charged to the government by classifying non-federal overhead as federal overhead. The pervasive and long-standing nature of the conduct and the intent of the individuals, particularly management, involved in improperly increasing the overhead rate to benefit the company likely elevated the conduct to a criminal offense.
LBG paid a criminal fine of $18.7 million (in addition to a $50.6 million civil settlement) and entered into a two-year deferred prosecution agreement in which it agreed to a series of compliance-related reforms and the retention of a monitor to evaluate the company’s compliance with the agreement. Two former senior LBG employees pled guilty to conspiracy to commit criminal false claims act offenses, and are awaiting sentencing. A third defendant, the former LBG President and CEO and Board Member of LBG’s holding company, has been charged with criminal false claims act and conspiracy and is scheduled for trial in November 2012. The individual defendants face potentially significant incarceration and fines.
What can be done to reduce criminal exposure? “Bad apple” employees are sometimes difficult to detect, especially at the management level. Nevertheless, the compliance-related reforms performed by LBG as a result of the case and agreed to as future undertakings are a roadmap for other companies who do business with the federal government. The reforms include, among other things: (1) conducting a comprehensive review of the implementation and effectiveness of the company’s internal controls and related compliance functions related to cost accounting and procurement; (2) reviewing the conduct and effectiveness of the company’s senior management in its internal controls; (3) establishing new ethics training programs, including a specialized training program for all staff; (4) implementing programs to prevent the recurrence of the conduct; (5) establishing a new position of Compliance and Ethics Officer; (6) expanding the obligations of the company’s audit committee; (7) enhancing the role of the Compliance Officer and the Chief Financial Officer, particularly regarding investigative authority and reporting requirements, and (8) developing additional policies and standard operating procedures regarding, among other things, compliance and ethics.
The company also agreed to enhance, support and maintain its existing training and education programs, to “advance and underscore LBG’s commitment to exemplary corporate citizenship, to best practices of effective corporate governance and the highest principles of integrity and professionalism, and to fostering a culture of openness, accountability and compliance with federal laws and regulations throughout LBG.” These should be the goals of every government contractor. The common sense and relatively inexpensive initiatives noted above can assist in reducing the potential for corporate and individual criminal exposure, and may save the company from having to write a large check and enter into an onerous deferred prosecution agreement with the government.
Brian Stolarz is the attorney responsible for the content of this article.