Feds target Lockheed Martin ‘scheme’ to boost profits from Hanford contract

A team of attorneys representing Lockheed Martin Corp. asked a federal judge in Spokane this week to dismiss civil allegations that company officials misled the U.S. Department of Energy into a contract at the Hanford Nuclear Reservation that improperly netted the private contractor tens of millions of dollars in taxpayer-funded profit.

The allegations, which stem from a three-year U.S. Department of Justice investigation, also claim Lockheed Martin provided “kickbacks” to those executives who carried out the scheme by giving them vast sums of cash and stock options in reward for pushing through the contract that netted the profit that one company official wrote was $100 million over the 10-year life of the contract.

“We are not talking about profit,” Assistant U.S. Attorney Dan Fruchter said in court. “We are talking about objective and specific lies they told the government to get taxpayer dollars that they were not entitled.”

But attorneys for the defense contractor argued in court that Lockheed Martin did nothing wrong; that government officials signed off on the contracts more than 10 years ago; and that the prosecutors presented no evidence that the extra payments to the executives were anything other than normal payments to employees.

“This case is the textbook example of Department of Justice overreach,” said Andrew Tulumello, who was one of a team of attorneys representing Lockheed Martin and its affiliates.

He accused federal prosecutors of trying to prove “fraud by hindsight … on contractual agreements that the Department of Energy knew about and approved,” said Tulumello, of Washington, D.C. “Dismissal is warranted.”

The liability implications of the case are staggering.

Federal prosecutors are seeking to have U.S. District Court Judge Rosanna Malouf Peterson award the government three times the amount of improperly obtained profits, which could total in the hundreds of millions of dollars, and twice the amount of every so-called kickback, along with costs and other penalties.

Peterson listened to hours of testimony Tuesday and said she will issue a written ruling in the case filed in February. However, she gave no time frame for her decision. If the judge rules against the dismissal motion, the case will proceed, possibly to trial.

The legal fight, which alleges violations of the False Claim Act and Anti-Kickback Act, unjust enrichment and breach of contract, stems from the massive Department of Energy contract awarded to handle virtually all of the day-to-day operations at Hanford that do not include plutonium cleanup.

“By receiving inflated, unreasonable, and unallowable payments and profits from the United States Department of Energy, by making and using false records and statements, by soliciting, accepting, offering, and paying kickbacks, and engaging in conflicts of interest, and through its wrongful, improper, and corrupt conduct, defendants (Lockheed Martin Corp.), (Lockheed Martin Services Inc.), and (Jorge ‘Frank’) Armijo have been unjustly enriched and are liable to repay such amounts to the United States,” Fruchter wrote.

In 2007, Lockheed Martin teamed up with Wackenhut Services Inc. and Jacobs Engineering Group to form Mission Support Alliance LLC to bid for the multibillion-dollar, 10-year Mission Support Contract at Hanford. The 586-square-mile reservation near Richland, Washington, produced much of the plutonium for the U.S. nuclear arsenal until it was shuttered in 1987.

During negotiations for the contract, government officials informed Lockheed Martin officials they would not be allowed to pay a subcontractor owned by the parent company, because that would improperly allow the the company to reap double profits.

Lockheed Martin installed a company vice president, Armijo, to serve as president of newly formed Mission Support Alliance. He then began to work on negotiating with the government to allow a company-owned subcontractor, Lockheed Martin Services Inc., to handle a portion of the overall contract despite repeated warnings prohibiting double profits, according to court records.

Federal prosecutors allege Armijo used inflated rates and understated the potential profit in convincing government regulators to allow MSA to award a $275.6 million subcontract to Lockheed Martin Services Inc., a wholly-owned subsidiary of Lockheed Martin.

As part of the permitting process, Department of Energy officials had the Defense Contract Audit Agency perform an audit on Lockheed Martin’s proposal. The audit agency found about $59.5 million in profit in Lockheed Martin’s proposal that would not be allowed under the terms of the contract.

However, Armijo “fraudulently disputed DCAA’s calculation of $59.5 million in profit, even though (Lockheed Martin Services Inc’s) own internal estimates of its profit over 10 years were nearly identical to DCAA’s calculation,” Fruchter wrote.

A year after winning the contract despite objections from a competitor about the potential for double billing, Armijo changed the structure of the contract with the Lockheed Martin subsidiary and resubmitted it for $279.6 million over five years instead of the original 10 years.

“This proposal nearly doubled the anticipated revenue for LMSI (the subsidiary) and the cost to DOE,” Fruchter wrote. The proposal “grossly and improperly inflated the prices to be charged to” the government agency.

Government officials repeatedly told Lockheed Martin it was not allowed to earn a profit from the subcontract with Lockheed Martin Services Inc., Fruchter wrote.

“The very same day that DOE explicitly communicated to defendants, including Armijo, that it would not permit any additional profit to LMSI on the subcontract, LMC internally projected between 10.4 percent and 11.3 percent profit on the subcontract (approximately $30 million in profit over the first 5 years), with 10.4 percent profit ($29 million) described as the ‘worst case,’ ” Fruchter wrote.

After a series of negotiations, Department of Energy officials eventually agreed to the contractual arrangement in 2011 but stated “no affiliate fee would be allowed,” Fruchter wrote. However, Armijo began charging the contract with inflated costs and fees anyway, he wrote.

Judge Peterson asked Fruchter if DOE officials asked for information about the payments to determine if they were legitimate.

Fruchter cautioned the judge not to blame the victim. “The idea that we would dismiss the case because DOE could have known about the fraud does not pass muster.”

The same year Armijo successfully lobbied the government to sign off on the arrangement, Lockheed Martin paid him $193,422, including more than $33,000 in cash, in money that was over and above his $267,000 annual salary, Fruchter wrote.

Armijo’s own company description of his accomplishments for that year stated that Armijo’s negotiated contract “will deliver in excess of $100 million in EBIT (profit) thru the 10-year life of the program,” court records state.

Overall from 2009 to 2015, Lockheed Martin paid Armijo more than $2 million, of which $461,000 was in cash and the remainder in company stock “in return for improperly using his MSA position to provide” Lockheed Martin and its subsidiary “favorable treatment,” Fruchter wrote.

Lockheed Martin attorney Michael Bronson argued in court that the government provided no evidence to show the payments to Armijo were anything other than a normal employee compensation.

“Employee’s payment of salary or stock options … is not a kickback,” Bronson said. “A company cannot bribe its own employees. The lack of information about how these payments were improper requires dismissal.”

Attorney Lucas Walker, who represents Armijo, argued the government’s allegations of kickbacks could affect anyone who does business with the government.

“The government theory (on kickbacks) is so expansive that any employee of a government contractor could face criminal liability for receiving a bonus,” Walker said.

Department of Justice attorney Donald Williamson pointed out to Judge Peterson that the lawyers were talking about “public money.” He referred back to the company line about how Armijo secured $100 million profit to Lockheed Martin.

“There could be no more clear kickback than that statement,” Williamson said. “As the president of (Mission Support Alliance) he should be ashamed. He is not honoring his obligation to the government agency.”

Lockheed gave Armijo more than $2 million in bonuses “for the improper purpose of rewarding these employees for their actions,” Williamson said. “It matters not that they had some affiliation. They were separate legal entities.”