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Tennessee and New York-Based Defense Contractors Agree to Pay $8 Million to Settle False Claims Act Allegations

The US government – in its efforts to crack down on fraud – has even encountered companies and individuals whose activities potentially compromise US business interests as well as national security. Last month the Justice Department announced that Kilgore Flares Company and one of its subcontractors – ESM Group Inc., – had agreed to pay $8 million to resolve allegations that they violated the False Claims Act and that, in the case of ESM Group, knowingly evaded customs duties owed to the United States. Kilgore Flares manufactures and sells electronics and energetic products, such as flares, to the U.S. military. ESM Group manufactures magnesium powder supplied to the chemical, welding and pyrotechnics industries. ESM Group imported the magnesium power it used in flares from China (PRC) which it then sold to Kilgore Flares. “The Department of Justice is committed to ensuring that contractors do not cut corners in manufacturing critical items sold to the U.S. military,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “These settlements also show that the department will aggressively pursue those who avoid paying duties to gain an unfair business advantage over competitors who abide by the rules.”

The flares, as well as the magnesium powder, are used by the U.S. Military to protect military aircraft from enemy heat-seeking missiles. Kilgore’s contracts with the army prohibited the use of magnesium powder from foreign countries (except Canada) in order to maintain domestic manufacturing capability in the interest of national defense. The US alleged that from July 2003 through May 2005, ESM Group knowingly misrepresented the content of the magnesium powder it imported from the PRC to avoid anti-dumping duties owed to the US. These duties are put in place to prevent foreign companies from “dumping” products in the US market at a price below cost. At the time of the imports alleged in this case, the magnesium powder from the PRC was subject to a 305% anti-dumping duty.

The government also alleged that from March 2005 through August 2006, Kilgore used the illegally imported magnesium powder he got from the PRC and sold it to the U.S. Army thereby violating both the anti-dumping law and the engineering specifications required by the Army contracts. Kilgore and ESM agreed to pay $6 million and $2 million, respectively, to resolve the government’s allegations. “Our warfighters– along with everyone who relies upon them, including their families – need to know that the equipment they use is of the highest quality and dependability,” said U.S. Attorney William J. Hochul Jr. of the Western District of New York. Prior to the settlements against Kilgore and ESM, fiver former employees and an agent of both companies pleaded guilty to the magnesium importation scheme. The criminal defendants were ordered to pay more than $14 million in restitution.

“Such schemes, perpetrated by dishonest contractors and individuals, place the American Warfighter in danger, erode public confidence and undermine the mission of our military services,” said Special Agent in Charge Craig W. Rupert of the U.S. Department of Defense Inspector General, DCIS. The settlement with ESM resolved a lawsuit filed under the whistleblower provisions of the False Claims Act. The act permits parties to sue on behalf of the US those who falsely claim federal funds. The law also allows whistleblowers to share in any award recovered by any legal action. In this case, Reade Manufacturing – a maker of magnesium powder – received $400,000 from ESM.

The settlements with Kilgore and ESM were a result of a coordinated effort between the Civil Division’s Commercial Litigation Brach and several other agencies including Defense Contract Audit Agency, DCIS. If you are involved in a case involving governmental fraud and the Whistleblower Act, you should consult a whistleblower lawyer and whistleblower law firm to determine what options you have.