Deadtree Edition reported: FSS Contractor Defrauded USPS, Whistleblower Says – A whistleblower is claiming that his former employer, Northrop Grumman, defrauded the U.S. Postal Service by providing it false information about the Flats Sequencing System. The ex-employee “alleges that the company violated the False Claims Act in a number of ways with respect to the FSS contract [and] alleges damage to the USPS in an amount of at least approximately $179 million annually,”
The ex-employee and whistleblower, Beau Michaud worked on the FSS machines project for Northrop Grumman from January 2007 through February 2011, first as a subcontractor and then as an employee. According to the civil suit Michaud claims that he witnessed Northrop Grumman’s’ fraud “on the USPS and tried to stop it but was met only with resistance and retaliation.”
As noted by Deadtree Edition, Northrop Grumman addressed the complaint in its quarterly filing to SEC:
On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. On August 26, 2013, the relator filed a corrected First Amended Complaint. The relator alleges that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleges damage to the USPS in an amount of at least approximately $179 million annually, and seeks an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator also alleges he or she was improperly discharged in retaliation. Although the ultimate outcome of these matters, including any possible loss, cannot be predicted or estimated at this time, the company intends vigorously to pursue and defend these matters.
In 2012 Northrop Grumman sued USPS seeking “approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. ” USPS filed a counterclaim “denying most of the company’s claims, and counterclaims, seeking approximately $410 million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected.”
USPS Awarded Northrop Grumman a New Contract Despite Lawsuit -HERNDON, Va., Nov. 29, 2012 — The U.S. Postal Service has awarded Northrop Grumman Corporation a three-year contract to operate its central repair facility in Topeka, Kan. Northrop Grumman has operated the facility continuously since 1978.
The following are excerpts (paragraphs may be out of sequence) from Beau Michaud’s Complaint:
In February 2007, technology company Northrop Grumman entered into a contract (the “Contract”), called 3AAFLT-07-B-004, with the United States Postal Service (the “USPS”), an agency of the government of the United States. Pursuant to the Contract, Northrop Grumman agreed to design, build and deliver 100 Flats Sequencing System (“FSS”) machines to the USPS, and the USPS agreed to pay Northrop Grumman a series of milestone payments totaling, at most, $874 million. Northrop Grumman then entered into a subcontract (the “Subcontract”) with machine company MDCI to design, build and deliver a subsystem for each of the 100 FSS machines known as the Integrated Tray Converter (“ITC”).
By automating the sorting of flats, the USPS has predicted that the 100 FSS machines will save it approximately $600 million per year. This prediction assumes that the FSS machines meet the performance standards that are set forth inthe Contract – particularly those going to the speed, reliability, accuracy and efficiency of the machines. It was the promise of these cost-savings that caused the USPS to contract with Northrop Grumman.
If Northrop Grumman fails to deliver 100 FSS machines meeting those standards, then the USPS has the express right under the Contract to pay Northrop Grumman less than $874 million. So that the USPS could be sure that it would not pay the full amount of $874 million unless Northrop Grumman delivered 100 FSS machines meeting the performance and maintainability standards set forth in the Contract, Northrop Grumman was required by the Contract to periodically submit to the USPS certain reports with specified data on the speed,reliability, accuracy and efficiency of the FSS machines.
Defendants have submitted the false reports and certifications knowing that they are false, or with deliberate ignorance of their falsity, or with reckless disregard for the likelihood of their falsity. Defendants’ knowledge of the falsity of the reports and certifications is demonstrated by contemporaneous records that Defendants have in their possession but that they have deliberately concealed from the USPS, some of which are described below, including records showing that the FSS machines are slow, unreliable, inaccurate and inefficient, and that they do not meet the performance standards of the Contract or conform to the Contract’s
requirements.
the USPS is now left with defective, non-conforming, slow, unreliable, inaccurate and inefficient FSS machines that are not producing anywhere near the $600 million in annual cost savings that the FSS machines were supposed to produce. On the contrary, the USPS has to bear the expense of doing manually what the FSS machines should be doing automatically, and will have to pay to correct the defects and to make the machines conform to the performance and maintainability standards set forth in the Contract. Especially at a time when the USPS is suffering from billions of dollars in quarterly losses, the damage to the USPS and the public from Defendants’ fraud is acute.
NORTHROP GRUMMAN FALSELY CERTIFIED THAT THE FSS MACHINES ARE AVAILABLE 95% OF THE WORKDAY
AND THAT THE MEAN TIME BETWEEN FAILURES IS MORE THAN 108 HOURS
Examples of the costly issues that the USPS has had to address as a result of Defendants’ fraud include the following.
101. On March 31, 2011, the FSS machine located in Greensboro, NC was unavailable for one hour and 50 minutes because the EL1700 overheated.
102. On April 6, 2011, a worker was injured when a FSS machine in New Jersey unexpectedly restarted, likely as a result of the underpowered EL1700