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US: Northrop Subsidiary Overcharged 1990's Space Project Work

by Anitha ReddyWashington Post
June 10th, 2003

Northrop Grumman Corp. agreed to pay $ 111.2 million to settle a civil lawsuit alleging that a subsidiary overcharged the government for work done on space projects during most of the 1990s.

The settlement resolves charges that TRW Inc., a Cleveland-based firm that Northrop acquired last year, shifted expenses from commercial jobs to government contracts and wrongly classified other expenses to evade federally imposed reimbursement caps on research and development costs.

Northrop, headquartered in Los Angeles, said it had factored the possible cost of a settlement into the purchase of TRW and still expects earnings per share of $ 3.80 to $ 4.20 this year. The aerospace contractor did not admit or deny any wrongdoing as part of the settlement.

The suit has been in the courts for nearly a decade. Richard Bagley, director of financial control of TRW's space unit, first accused the company of accounting improprieties in a federal suit in Los Angeles in 1994.

Bagley, who was responsible for enforcing government cost accounting rules, reported directly to Daniel S. Goldin, the general manager of TRW's space unit. The suit alleges that Goldin, who later became head of NASA, approved at least some of the company's deceptive accounting. Goldin has denied any wrongdoing and was not named as a defendant in the case.

Bagley filed his case under the federal False Claims Act, which allows whistle-blowers to sue government contractors on behalf of themselves and the government if they suspect misuse of federal dollars.

TRW declined to settle the case for roughly $ 30 million in 1998, said Eric Havian, Bagley's lawyer and a partner in Phillips & Cohen in San Francisco. Then, the government decided that a major part of the final settlement, involving excess charges at two satellite projects, was too weak to pursue. But over the next two years, Bagley's lawyers uncovered enough evidence to make the government's attorneys change their minds.

The government has agreed to pay Bagley $ 27.2 million, or 24.5 percent of the settlement, because of the unusual length and complexity of the case and the close cooperation between Bagley's private lawyers and the government's lawyers, said Susan Hershman, an attorney who worked on the case for the U.S. attorney's office in Los Angeles.

As an incentive to report fraud, the False Claims Act entitles whistle-blowers to between 15 and 25 percent of damages and penalties collected, but rewards so near the cap are unusual in large settlements, Havian said.

Northrop Grumman still faces three other lawsuits alleging violations of the False Claims Act. The plaintiffs, who in two cases include the federal government, accuse the company of knowingly selling defective military target drones and overbilling on government projects. The plaintiffs are demanding a total of $ 395 million in damages and penalties, which can be tripled under the law. The company denies these charges and intends to "vigorously" defend itself, according to its last annual report.



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