Northrop Grumman Corp. [NOC] paid $325 million to settle a whistleblower case involving faulty military satellite parts involving TRW Inc. before Northrop bought that company in 2002, while at the same time Northrop settled an separate contract dispute by accepting a government payment of an equal $325 million.
Those two legal actions, which were coordinated, provided a net financial wash for Northrop, one of the largest defense contractors.
The first legal settlement involved actions of TRW, a company that Northrop later acquired. According to attorneys for the whistleblower in the case, this is what happened:
TRW attempted to stop a scientist from revealing his research findings about faulty electronic components TRW sold to the government for military and intelligence-gathering satellites were the basis for a whistleblower lawsuit.
The $325 million settlement is the largest one ever paid by a defense contractor in a “qui tam” (whistleblower) case and the second largest settlement ever paid involving defense contractor fraud, according to the lawfirm, Phillip & Cohen LLP.
The whistleblower, Robert Ferro, will be awarded $48.7 million for his work and the work of his attorneys on the case. The False Claims Act requires the government to reward whistleblowers 15 percent to 25 percent of the amount the government recovers as a result of a qui tam case.
Northrop said that while it believes it acted properly under its contracts and had substantive defenses to the claims, it also believes that settlement is in the best interest of all parties as it releases the company from the government’s claims, avoids litigation, and preserves a valued customer relationship.
The lawsuit — joined by the government — alleged that TRW sold to the government components known as “heterojunction bipolar transistors,” or “HBTs,” that TRW knew were likely to fail in government satellites.
The qui tam lawsuit says a government satellite “experienced critical failures” while in orbit in 2001, but at that time the government didn’t know that TRW had long been aware that failures of its components were likely.
Research conducted in 1995 clearly demonstrated the parts would fail if placed in satellites, but TRW didn’t inform the government of this before or after the problem occurred. Several government programs delayed launch of their satellites to determine the cause of the problems with the satellite in space. Those programs eventually replaced the HBTs in their satellites.
The whistleblower, Robert Ferro, is a scientific researcher who discovered in 1995 that the HBTs produced by TRW were likely to fail when operated under high electrical currents, such as when used in satellites. But TRW had insisted on a nondisclosure agreement before allowing Ferro to test its parts and refused to allow Ferro and his employer, Aerospace Corp., a private research company, to disclose the negative results to anyone.
The cover-up continued into 2002, when Ferro heard about the satellite’s problems. The Air Force asked Ferro’s employer, Aerospace, to provide an explanation of whether TRW should have known of the potential problem. Ferro attempted to include in that report the results of his 1995 research. But TRW sanitized the Aerospace report, making sure there was no mention of Ferro’s 1995 testing and editing out references to other warnings that TRW had received over the years.
“TRW deliberately suppressed Robert Ferro’s findings and sold the components to the government knowing that those parts were likely to fail,” said Eric R. Havian, a San Francisco attorney with Phillips & Cohen representing Ferro. “Even after a satellite in space experienced serious anomalies, TRW still refused to reveal the problems found earlier with the components and had the gall to charge the government millions to investigate what went wrong with the satellite.”
TRW also withheld from the government information about a massive recall of cell phone equipment because they contained similarly defective TRW HBTs just a month before the government began to experience its own HBT failures. Instead, TRW said the government problems were the result of a new defect that had never been seen before.
When the government directed TRW to issue an industry-wide alert (known as a GIDEP alert) about the HBT problem, TRW initially resisted, then issued an alert that made no mention of the failures. The alert merely stated, falsely, that some customers had improperly been using commercial-grade parts rather than flight-qualified parts.
Ferro then went directly to the government with his information and later filed a “qui tam” (whistleblower) lawsuit in federal district court in Los Angeles to make sure his disclosures were properly investigated. A company cannot shield itself from a whistleblower lawsuit brought under the False Claims Act by hiding behind nondisclosure agreements, according to Havian.
As part of the whistleblower case settlement, the government agreed to pay $325 million to settle the unrelated claim Northrop had made against the government.
Havian complimented the government for its work on the satellite case. Because of the classified nature of some of the evidence, the Justice Department constructed several high-tech, secure facilities, two on the East Coast and one on the West Coast, devoted solely to the case. Many of the issues could be discussed only in one of those facilities.
Havian said the Justice Department had many attorneys working long hours on the investigation, including some of the most senior members of the department.
“I have never heard of another case where such high-level government lawyers were directly involved in the details of an incredibly complex investigation,” Havian said. “They achieved a fantastic result.”
Ferro’s qui tam lawsuit was brought under the False Claims Act, which allows individuals to sue companies that defraud the government and to recover funds on the government’s behalf.
The case was titled United States ex rel. Ferro v. TRW Inc., Case No. 02-9934-PA (C.D. Calif.).
Separately, Northrop won an epic battle with the government that had dragged on for nearly a decade and a half.
In this controversy, Northrop in December 1996 filed suit against the government for recovery of uncompensated costs, investments and a reasonable profit related to the Tri- Service Standoff Attack Missile (TSSAM) program that the government cancelled for convenience in 1995. Under the terms of the agreement, the Department of Justice valued the Northrop TSSAM claims at $325 million.
Northrop said it is subject to various litigation and other contingencies, and management records and adjusts provisions and accruals for these contingencies from time to time as conditions require and in accordance with generally accepted accounting principles.
In the third quarter of 2006, the company recorded a legal provision for settlement and legal expenses related to the microelectronics claim.
But, of course, the company now is receiving from the government an amount equal to what it must pay the government.
Therefore, the financial impact of this agreement, including its related cost, on the previously recorded accrual for the microelectronics claim and any other adjustments for legal matters is expected to result in a net gain to be reported in the company’s second quarter 2009 results.
This agreement will not have a significant impact on the company’s cash from operations.