Performance-Based Earned Value


 F-35 Whistleblower (False Claims Act) Case


Key Documents

Document 1: RELATOR’S FIRST AMENDED COMPLAINT (FAC)
US DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION
USA ex rel. Paul J. Solomon, Plaintiffs,
LOCKHEED MARTIN CORP. and NORTHROP GRUMMAN SYSTEMS CORP., Defendants.
CIVIL ACTION NO. 3:12-CV-4495-D, FALSE CLAIMS ACT COMPLAINT Document 34   Filed 03/20/15 
 
Excerpts:

1. This is a case of fraud by two major defense contractors, who wrongfully obtained lucrative defense contracts and contract payments by submitting grossly understated cost estimates and using improper accounting to conceal their cost overruns, resulting in a loss to the United States government in the hundreds of millions of dollars.  Defendants Lockheed Martin Corp. (LMC) and NorthropGrumman Systems Corp. (NGC), the prime contractor and a leading subcontractor on the F-35 Joint Strike Fighter program, conspired to defraud the government in at least three ways.

2. First, Defendants obtained a contract modification and increased funding for the F-35 program in 2005 by knowingly submitting grossly understated cost estimates, misleading the government into believing the F-35 program was more affordable than it actually was. LMC knowingly understated costs across the whole F-35 program by as much as $2.1 billion, which included a $233 million understatement on NGC’s portion of the program. One part of Defendants’ scheme to understate their costs is documented in a May 9, 2005 “Memorandum of Agreement” between LMC and NGC, which the Relator, Paul Solomon, discovered in the course of his duties as a compliance auditor at NGC.  Based on these misleading cost estimates—which Defendants made at a time when they knew the government was keenly focused on the affordability of the F-35 program—Defendants fraudulently induced the government to approve a contract modification that authorized billions of dollars in additional funding for the F-35 Program.  Because the contract modification was obtained by fraud, Defendants’ subsequent claims for payment under that contract constitute actionable false claims.  And because of this fraud, the United States was deprived of the benefit of its bargain to the tune of hundreds of millions of dollars.

Second, after securing the contract modification, Defendants incurred substantial and foreseeable cost overruns.  LMC and NGC concealed these overruns by improperly diverting funds from “Management Reserve (MR),” a budget reserve that is set aside for unanticipated future needs and is specifically prohibited from being used to cover cost overruns.  Defendants’ improper depletion of MR funds endangered the financial viability of the F-35 program, forcing the government to make steep cuts in testing and development resources with expensive and detrimental long-term consequences.

Third, by covering up their cost overruns, presenting a misleadingly rosy picture of their performance on measures of cost control, and setting performance goals which they knew all along they would not be able to meet, LMC and NGC were able to secure larger profits in the form of higher performance-based Award Fees than were warranted based on their actual contract performance.

121. On June 25, 2007, LMC Program Manager Dan Crowley, LMC General Manager Tom Burbage, and NGC Program Manager Janis Pamiljans announced in a letter to all employees on the F-35 program that the JSFPO had awarded an “exceptional” rating across all categories, and that LMC and NGC would receive more than 95% of the available Award Fee amount.  According to the letter, JSFPO had noted LMC and NGC’s “excellent progress” on “continuously improving cost performance.”  On information and belief, however, Crowley, Burbage, and Pamiljans knew that the “exceptional” rating was based on falsified cost performance reporting and that the Award Fee was undeserved.
    (See Document 2: Letter to Employees)


Document 3: “Layman’s” Explanation of the F-35 allegations to Sen. McCain, GAO and DoD IG

Document 4: NORTHROP GRUMMAN SYSTEMS CORP.’S REPLY IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Document 105   Filed 03/21/16

Excerpts:

THERE WAS PUBLIC DISCLOSURE THAT DEFENDANTS’ EAC3 PROJECTIONS WERE NOT BASED ON “MOST LIKELY” ESTIMATES.
Relator Cannot Defeat The Public Disclosure Of Defendants’ “Should-Cost” EAC3 Basis By Recounting Multiple Sources Of The “Most Likely” Requirement
The Link Between Defendants’ EVMS Practices, Including Their Misuse Of MR, And Their Entitlement To Award Fees Was Publicly Disclosed
the DCMA EVMS Compliance Report found the “same patterns of Management Reserve abuse, cost report falsification, and other EVMS violations throughout the JSF program that were very similar to the violations” Relator had previously reported to DCMA.  In other words, these violations were publicly disclosed in DCMA’s Report.  For example, DCMA found LMC had inappropriately stored management reserve in empty work packages, and had used the resulting underruns to offset supplier overruns.
In sum, NGC’s proffered public disclosures contain the allegations or transactions on which the fraudulent inducement claim is based
Under the SDD Contract Award Fee Schedule, EVMS Practices and Cost Performance Are Factors in Determining Award Fees   The JPO public information website contains a model SDD Contract that states, at Section H-3, the criteria for earning award fee

Document 5
DECLARATION OF PAUL J. SOLOMON IN SUPPORT OF RELATOR’S RESPONSE TO DEFENDANT LMC’S MOTION FOR SUMMARY JUDGMENT, signed Feb. 23, 2016 

Contents include:

  • Discussion of my surveillance duties and examples of non-compliance findings
  • Discussion of fraud reporting events:

           2007: NGC internal ethics investigation

           2008: Letter to Congressman Waxman

           2011: Letters to Sen. McCain, GAO Fraudnet, and Asst. Secretary  of Defense                Katrina McFarland

           2012: Turnover of case by GAO to DoD Inspector General  


Document 6
US COURT OF APPEALS FOR THE FIFTH CIRCUIT
USA ex rel. Paul J. Solomon, Plaintiff-Appellant, 
LOCKHEED MARTIN CORP. and NORTHROP GRUMMAN SYSTEMS CORP., Defendants-Appellees. NO. 17-10046, 12/19/17

Excerpts:
The public disclosures must therefore provide “‘specific details about the fraudulent scheme and the types of actors involved in it’ sufficient to ‘set the government on the trail of the fraud.’”


The question is whether the relator could have synthesized an inference of fraud from the public disclosures.


Public disclosures will be sufficient if they provide details “such that the defendant’s misconduct would have been readily identifiable” and “furnish evidence of the fraudulent scheme alleged.”


The DCMA report states that Lockheed “was using management reserve funds to alter its own and subcontractor performance levels and cost overruns.”  The report identified Lockheed’s purpose: “to prevent the cost performance index (CPI) from worsening.”


..we also conclude that the DCMA and GAO reports allege facts that make a potentially fraudulent scheme readily identifiable: LMC and its subcontractors were violating contracting regulations by using their management reserve budgets to compensate for over-budget expenditures that would have otherwise raised their cost performance indexes and estimates at completion reported to the government.


..the model Joint Strike Fighter System Design and Development contract, which Solomon concedes was publically available at the time he filed his complaint, explicitly cites cost performance index reporting as a criteria for the disbursement of award fees.


We are not concerned however, with the overall probability of someone inferring fraudulent activity from the public disclosures.  The focus is on whether they could have made the inference.


Document 7 

Example of EVMS Surveillance Finding of Misuse of Management Reserve(MR) to Offset Cost Overruns, EVMS Finding No. 07-15 issued 8/3/07

  • Demonstrates technique used by Northrop Grumman to transfer budget from MR without adding statement of work for the purpose of improving cost performance.
  • Shows improvement in Cost Performance Index (CPI) from May to June.

From RELATOR’S BRIEF IN RESPONSE TO NORTHROP GRUMMAN SYSTEMS CORP.’S MOTION FOR SUMMARY JUDGMENT, Case 3:12-cv-04495-D   Document 96   Filed 02/22/16    Page 30 of 115   PageID 2532 Exhibit 60