Hundreds of millions of dollars goes to COVID-19 contractors accused of prior fraud

A San Diego ventilator manufacturer agreed to pay more than $37 million in January to settle a civil lawsuit alleging it defrauded the federal government through illegal kickbacks to suppliers, admitting no guilt.

Two months later, the U.S. Department of Health and Human Services awarded the same company, ResMed Inc., $32 million for ventilators made in Australia to fight COVID-19. Despite that track record – and because of the urgent need for the machines – the manufacturer landed the contract with no competition.

Desperate for supplies and services to combat the pandemic, federal purchasers have rushed out more than $16 billion in coronavirus contracts ranging from masks and medical equipment to janitorial cleaning, video productions and even ferryboat services.

A USA TODAY investigation of 15 of the largest and hardest-hit states found hundreds of millions of dollars in sole-sourced, non-competitive awards went to vendors that have been accused of defrauding taxpayers through the False Claims Act, which allows whistleblowers to bring fraud lawsuits on behalf of the U.S. government.

For these firms, the accusations were no barrier to getting more lucrative federal contracting work. Nothing in federal law prohibits it as long as they are still considered “responsible” and aren’t suspended or debarred from doing business with the government. A company with a scar in its background can resolve the government’s past claims while still denying wrongdoing, which is what happened in the case of the San Diego company.

With 2.7 million confirmed cases and more than 125,000 dead in the U.S, the need for life-saving supplies might reasonably be seen as outweighing a vendor’s questionable record. And not every False Claims Act accusation is ultimately substantiated.

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“Most government experts agree that if you have to choose between not getting medical supplies and getting them, you get the medical supplies,” said Steven Schooner, who served as a career official in the Clinton administration procurement policy office. “You have to tolerate a higher error rate.”

But under President Trump, where federal contracting officials have seen their workload increase nearly fivefold, Schooner said taxpayers are “particularly vulnerable because this administration has diluted the oversight functions.”

USA TODAY combed through more than 1,600 COVID-19 contracts with no competitive bids awarded through May 18 to vendors from 15 states, including the largest and some of those that have experienced the worst coronavirus outbreaks: Alaska, California, Georgia, Florida, Louisiana, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Oklahoma, Rhode Island, Texas and Washington State.

Journalists used state business registries, federal vendor documents, social media and the companies’ websites to identify principal officers, then backgrounded them through court systems, Securities Exchange Commission filings, criminal databases and property records.

The analysis found vendors accused of prior False Claims Act violations received more than 6,100 total COVID-19 orders worth nearly $500 million through late May, including $219 million doled out by the government without any type of competition.

Among the pandemic contractors are companies that have been accused of abusing preferences given to businesses owned by disabled military service veterans, minorities and women. Some were sued for advertising products made in America that were said to come from countries like China and India, which would violate federal rules. Others allegedly said they were the manufacturer, when instead they were a reseller, jacking up prices to the government.

Beyond False Claims Act allegations, USA TODAY found vendors that have faced claims of racketeering, securities fraud, bribery, negligence, breach of fiduciary duty and prior contract violations.

“It’s very frustrating when you see potential violators, and these companies continue to rack up multi-millions in taxpayer money,” said Tenley Carp, a Washington, D.C. attorney who’s represented whistleblowers in procurement lawsuits. “We have limited resources to investigate and pursue fraud, and that is how a lot of these companies end up getting contract after contract.”

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A federal whistleblower complaint in 2013 alleged Afognak Native Corp. and its subsidiaries “made a mockery” of laws meant to remedy the treatment of native Alaskans by using “sham companies” to win contracts ranging from security to construction and technology. The civil suit settled after six years for an undisclosed sum and with Afognak denying wrongdoing.

This spring, Afognak received new COVID-19 awards to provide administrative and professional support for various federal departments.

The Securities Exchange Commission accused Stryker Corp. of bribing foreign officials to get business. The Michigan-based medical device company settled the complaint in 2018 for $7.8 million without admitting or denying the allegations.

Yet Stryker has continued to get government work related to the coronavirus, including more than $11 million to supply defibrillators, chest compression systems and hospital beds for the Department of Veterans Affairs and other agencies.

Golden State Medical Supply was accused in a 2017 civil lawsuit of fraud for repackaging a series of generic drugs improperly and selling them to the federal government. Three whistleblowers, all pharmacists, worked with the government to build a case alleging that the company lied to the VA about the source of drugs, which came from India – a country of origin not permitted under the federal Trade Agreement Act that promotes fair trade practices.

Golden State has denied the claims and the federal government declined to intervene. However, the pending lawsuit did not stop the VA from giving the California firm another $168,000 in April to provide hydroxychloroquine – the antimalarial drug now deemed ineffective by the Food and Drug Administration in the fight against COVID-19.

Golden State did not respond to a request for comment, while representatives for Stryker and Afognak said they take government compliance seriously.

Christina Noel, a spokeswoman for the VA, said all of the contractors in question “have met the relevant criteria to become vendors for the federal government under federal law.” A representative for the U.S. Office of Management and Budget said each agency is working to weed out irresponsible vendors and that past accusations of wrongdoing are not enough to prohibit a contract.

The government relies on whistleblowers, often inside the contracting system, to ferret out waste. U.S. Sen. Chuck Grassley (R-Iowa) said that’s a big part of the problem.

Grassley predicted that COVID-19 contracts will cost taxpayers far more money in the long-run because fraud is not being weeded out of the system upfront. The rush for supplies could fan another wave of whistleblower and fraudulent purchasing cases years from now.

Last year alone, Justice Department prosecutors say they recovered about $3 billion from fraud cases, likely just a small fraction of the money flowing to contractors who have been accused of breaking the rules.

“The system is not working like it should. Companies can often defraud the government, get caught, pay a settlement, and still make a profit,” said James Tate, a Cincinnati attorney who specializes in False Claims Act cases. “There is little incentive to follow the law when you can make more money breaking it.”

Contracts spike but staffing and oversight do not

In normal times, government contracting officials follow rigorous rules designed to ensure open competition for federal dollars. To deem a vendor “responsible,” officials are charged with determining whether the companies can produce, judging their performance on past contracts and searching for other red flags.

But emergencies or times of war short-circuit those standards in order to speed shipments.

Federal exemptions allow government agencies to use “single-source” contracts for goods or services to circumvent the time needed for a competitive process, which is in and of itself a significant check and balance. About a third of the COVID-19 orders reviewed by USA TODAY were awarded without competition.

A San Diego ventilator manufacturer agreed to pay more than $37 million in January to settle a civil lawsuit alleging it defrauded the federal government through illegal kickbacks to suppliers, admitting no guilt. Two months later, the U.S. Department of Health and Human Services awarded the same company, ResMed Inc., $32 million for ventilators made in Australia to fight COVID-19.

Congress reduced the number of contracts that receive additional vetting by shifting the benchmark at which transactions require not just competition but more notification and increased oversight by individual agencies. In March, the threshold for “micro purchases” was raised from $10,000 to $20,000 for domestic purchases and the “simplified acquisition threshold” from $250,000 to $750,000.

Since Trump took office, there also have been fewer eyes on these contracts – even before the coronavirus crisis hit.

Under President Obama, contracting officers handled an average of about 374 contracts a year. A rapid rise of new contracts under the Trump administration without any significant staff increases left each responsible for 1,765 contracts by 2019, nearly five times the workload, according to research from Ben Brunjes, an assistant professor at the Evans School of Public Policy and Governance at the University of Washington.

And, unlike hurricanes and other disasters, which typically devastate one or more regions, COVID-19 spread everywhere, leaving government purchasers scrambling.

Providers from all over the world sought many of the same products. Traditional suppliers quickly were tapped out and bidding wars created a cottage industry of third-party brokers holding out for the highest price. Purchasers from Florida to California found themselves scrambling to fulfill orders for N95 masks, hand sanitizer and other personal protective equipment.

“It’s not so much that (government purchasers are) cutting corners, but you’re not going to go through the normal process you would under non-pandemic times,” said Trevor Brown, professor and dean of the John Glenn College of Public Affairs at Ohio State University, where he teaches classes on managing public organizations.

“When you’re in a period of crisis, and you’re facing a limited supply,” Brown added, “the risks of making a bad deal are high.”

For ResMed, the San Diego ventilator provider that settled for $37 million with the government this year, the False Claims Act served as the oversight. The law dates back to President Lincoln and the Civil War. It promises whistleblowers who come forward with cases of fraud on the government’s behalf a share of any money recouped, usually through a settlement in the context of a civil lawsuit.

Vendors can be liable for up to three times the damages, plus about $23,000 in penalties for every claim. The whistleblowers, typically former employees or competitors with intimate knowledge of the deals, are entitled to as much as 30%.

In the government lawsuits filed since 2015 in four federal courts in California, Iowa, South Carolina and New York against ResMed, whistleblowers and federal investigators claimed the company defrauded government customers like Medicare and Medicaid by offering services such as free installation, access to call-centers that promoted resupplies and free at-home testing devices to physicians. Those services were enticing because they could lock in a customer stream for years, the government contended.

When a patient receives a prescription for a device to treat a health care condition, the patient deserves to know that the device was selected based on quality of care considerations and not on unlawful payments from equipment manufacturers.

“When a patient receives a prescription for a device to treat a health care condition, the patient deserves to know that the device was selected based on quality of care considerations and not on unlawful payments from equipment manufacturers,” said Jody Hunt, civil chief at the Department of Justice, which handles False Claims Act cases on behalf of the government, in his announcement of ResMed’s settlement in January.

ResMed denied all wrongdoing, and told USA TODAY it settled to “avoid the expense, inconvenience and distraction” of the case.

“There is no connection between what was being looked into as part of that investigation and the government contract we have to provide ventilators,” said ResMed spokesman Jayme Rubenstein, referring to the March contract for $32 million.

Rubenstein said the company is on pace to meet its July 13 deadline for delivery of all 2,550 ventilators.

Some experts say despite the global panic, purchasers should not overlook a False Claims Act settlement.

“It’s a rush. It’s an emergency. They want to move fast … but this would be pretty easy for these folks to find that out,” said Steve Kelman, a Harvard University professor who served as the top procurement official during the Clinton Administration. “The False Claims Act is… a real no-no.”

Accusations and penalties no barrier to government money

Many False Claims Act cases are settled despite a denial of wrongdoing, as was the case with ResMed.

In the 15 states analyzed by USA TODAY, reporters identified 18 vendors who have been formally accused of violating the False Claims Act. Together they received more than 6,100 total COVID-19 awards, worth up to $474 million.

While that represents just a small fraction of the more than $11 billion spent during that time frame, companies with prior settlements can circle back into the system after claims of fraud to pick up more government money. Half of the 18 vendors identified by USA TODAY faced prior allegations of wrongdoing.

In 2013, the SEC accused Stryker Corp. of violating the Foreign Corrupt Practices Act by bribing foreign governments to benefit its business interests.

The Michigan-based medical company made millions in unlawful payments to doctors, hospitals and foreign officials through offshore subsidiaries in return for contracts to provide medical equipment, the lawsuit alleged. Stryker settled with the SEC for more than $13 million.

In 2018, the medical device maker agreed to settle new claims of foreign bribery and pay the SEC a $7.8 million penalty.

Stryker did not admit or deny the government’s claims in either case.

Years earlier, Stryker also had faced allegations of submitting false and fraudulent invoices to the VA. The 2008 whistleblower suit, filed by a former national account manager at Stryker, alleged the company conspired with Grand Rapids-based Alliant Enterprises to mark up the prices on medical equipment.

The two companies misrepresented that Alliant manufactured the products when it was actually a third-party reseller, according to the federal complaint. They did this, it said, to dodge a requirement that the company turn over commercial sales to the government for auditing, the lawsuit alleges, allowing it to artificially inflate the prices.

The companies settled their cases with the government for over $1 million combined. In recent months, both have COVID-19 contracts with the VA. Stryker Corp. is a major player in federal procurement, earning nearly $66 million in government obligations in fiscal year 2019. It received more than $11 million through late May from the VA for 48 orders related to the coronavirus.

The veterans agency also awarded Alliant Enterprises more than $1.5 million in COVID-19 contracts to provide coronavirus-related products including surgical tables, a bar code scanner and medical camera monitor systems.

Attorneys and former government officials say that in the absence of tougher measures including seeking criminal rather than civil penalties – a tougher burden of proof that is rarely pursued – little will deter them from seeking, and scoring, new awards despite past accusations.

In a COVID-19 world, when the government is spending billions and billions of dollars to assist businesses, we need far better vetting of companies that seek public funds.

“In a COVID-19 world, when the government is spending billions and billions of dollars to assist businesses, we need far better vetting of companies that seek public funds,” said Michael Hirst, who supervised False Claims Act cases in the U.S. Department of Justice and went on to represent the whistleblower in the suit against Stryker and Alliant.

“That’s especially important for companies that have already shown a willingness to defraud the public,” he added.

A Stryker spokesperson, who did not want to be named, pointed to the vendor’s companywide anti-corruption compliance program and said it is “committed to conducting our business in an ethical manner and in compliance with all applicable laws and regulations.”

Bob Taylor, CEO and owner of Alliant Healthcare Products, denied the 2008 allegations, noting that paying a settlement does not equate to admitting wrongdoing.

“Alliant did not commit fraud,” Taylor said in a written statement, “and would not have settled the case if it meant agreeing that it committed fraud.”

When presented with details of the COVID-19 contracts, a representative for the VA said 21 of the agency’s 27 no-compete orders from Stryker, Alliant and others who previously faced similar federal fraud claims have been fulfilled so far. The remaining six are scheduled for delivery in the near future.

That includes $150,000 awarded to Florida-based Pelican Sales Inc., which sells tactical gear for use by the military and police during riots. The company was among three vendors that went on to get a combined $2.5 million in new federal COVID-19 contracts despite accusations last year that they had violated the False Claims Act by providing misleading country of origin information for office equipment from China.

The federal government decided not to intervene in the whistleblower lawsuit, which experts say happens for many reasons, not only where there is a question about who will prevail, but also where the estimated recovery amount is not worth the cost of a lengthy investigation and court battle.

Pelican Sales owner Joe Giannacco is fighting the lawsuit and denies he misled the government, while acknowledging country of origin issues among his competitors. He says he was able to meet his coronavirus obligations, with the exception of a mask order, which he said the government rejected because the masks were from China.

“All supplies are just hard to get,” Giannacco said. “One day, someone will tell you they can get something, and the next day, it’s gone.”

Second chance can lead to the ‘riskiest transactions’

Financial mistakes made in a rush for supplies and equipment can take years for the government to clawback – if it’s ever able to at all. Some companies still are fighting cases from decade-old contracts awarded during other emergencies.

AECOM, a California-based architecture and engineering firm received more than $300 million from the Federal Emergency Management Agency between 2005 and 2019 during the response to Hurricane Katrina.

This month, the Department of Justice joined a whistleblower suit alleging that AECOM used inflated estimates to repair damaged buildings through a federal program it was supposed to be overseeing. AECOM is fighting the suit.

A U.S. Army Corps of Engineers worker reviews plans for the third floor of the former Commercial Appeal building in Memphis, which is being renovated as an Alternate Care Facility to treat COVID-19 patients. The Army issued a $51.4 million contract to AECOM for the project in April.

In April, AECOM beat back an even bigger case alleging the company violated its $1.9 billion maintenance deal with the U.S. Army in Afghanistan. A New York federal judge dismissed the case because the Army kept paying AECOM after it knew the company was editing timesheets and signing them without permission.

Despite those disputes, the federal government continues to turn to AECOM, awarding the company more than $200 million in new contracts related to the coronavirus. The work ranged widely, from housekeeping to architecture and hospital construction, federal records show.

An AECOM representative told USA TODAY that “we strictly adhere to the federal government’s rigorous contracting process from solicitation through completion.” He declined to be named, citing company policy.

Contractors accepting public money should be expected to “turn square corners,” as Oliver Wendell Holmes wrote in a Supreme Court decision, said Paul Debolt, an attorney with Venable, a law firm that specializes in government and regulatory affairs.

“Just like Katrina and the Troubled Asset Relief Program, there’s a lot of money going into the government arena to get the mission accomplished,” Debolt said. “When the auditors arrive, you better be able to document and show your work.”

Debolt and his colleagues assembled a guide to help contractors prepare for allegations under the False Claims Act. It calls for documenting decisions and taking employee complaints seriously.

But until contractors are barred from government contracts for past bad business practices, government procurement experts say the potential for fraud will endure.

“We’re in a system where if you commit a fraudulent act and pay your dues, you’re given a second chance,” said Brown, the Ohio state professor. “These are the riskiest transactions.”

Josh Salman and Nick Penzenstadler are reporters on the USA TODAY investigations team. Josh can be reached at jsalman@gatehousemedia.com or @joshsalman, or (941) 361-4967. Nick can be reached npenz@usatoday.com or @npenzenstadler, or on Signal at (720) 507-5273.