It’s hard to keep from shaking the head and saying, “Tsk, tsk,” when we keep reading stories about contractors who fail at government contracting. Or as their attorneys might argue, “who find themselves in a difference of opinion with the Department of Justice regarding the propriety of certain contract-related billings.” Let’s remember that all contractors are innocent until proven guilty in a court of law—or until they reach a negotiated settlement with the DOJ.

Our first story today concerns the company, U.S. Foodservice. The company is based in Rosemont, Illinois, and was formerly owned by Royal Ahold NV, a giant supermarket conglomerate based in Europe. In 2007, the company was sold to private equity firms Clayton Dubilier & Rice Inc. and Kohlberg Kravis Roberts & Co. for $7.1 billion.

According to this story at Bloomberg Businessweek, U.S. Foodservice agreed to pay the U.S. Government $30 million in order to “settle a fraud lawsuit claiming it used shell companies to overcharge the Defense Department and the Department of Veterans Affairs for products at military bases.”

The article reported that U.S. Foodservice was awarded multiple contracts from 2000 through 2005 to supply military installations. The article reported these were “cost-based contracts,” but also reported that “under the contracts, U.S. Foodservice was only allowed to charge the price it paid for acquiring each product the government ordered, plus a pre-determined ‘add-on fee.’” Given that cost-plus-percentage-of-cost contracts are illegal, it’s not exactly clear what the contractual billing arrangement was supposed to be.

Apparently, something very like the requirements of FAR 31.205-26(e) were in place. Readers may remember our previous story about Bell Textron, who in May, 2010, agreed to pay the U.S. Government $16.6 million for overcharging the government from improperly billing its affiliated entities.

According to the Bloomberg story (which quoted the DoJ press release)—

U.S. Foodservice created shell companies, which were known within the company as ‘third-party billing entities’ and later called ‘value-added service providers,’ or ‘VASPs.’ … At U.S. Foodservice’s direction, the VASPs were told to ‘resell’ the same goods to the company and the government was billed for the higher amount shown on VASP invoices… The shell companies passed back to U.S. Foodservice the difference between the actual cost of the food products and the inflated amount they charged the government...

The Bloomberg article noted that—

More than a dozen people were charged in a related criminal case brought by the U.S. Attorney’s office in Manhattan. They included U.S. Foodservice’s former finance chief, Michael Resnick, who pleaded guilty to conspiracy and was sentenced to six months of house arrest.

According to this article at the Wall Street Journal—

U.S. Foodservice was previously at the center of a fraud case that alleged the company overstated the amount it was receiving in supplier rebates, known as promotional allowances. The company allegedly overstated those rebates by hundreds of millions of dollars to meet income targets.

That same article noted that—

In 2004, Ahold settled U.S. Securities & Exchange Commission charges that accounting issues led it to overstate net sales by about $30 billion from fiscal 2000 through fiscal 2002, including artificially inflating payments to U.S. Foodservice by vendors. Ahold cooperated with the SEC and wasn't fined.

In 2005, Ahold agreed to pay $1.1 billion to shareholders to settle a separate civil lawsuit in the U.S. over its accounting.

In 2007, Ahold agreed to sell U.S. Foodservice to a group of private-equity investors.

We should note that the company has its own view of the situation. The Bloomberg article reported that—

U.S. Foodservice said in an e-mailed statement that it fully cooperated in the probe. ‘We deny any wrongdoing and stand behind our pricing policies and practices, which have always been consistent with the terms of our federal government contracts and industry standards,’ the company said. ‘We settled because we want to close this chapter in our past.’

In somewhat related news, a couple of former Department of Energy contractors are in the process of learning about the wheels of justice, first-hand. This DOJ announcement reported—

… a scientist and his wife, who both previously worked as contractors at the Los Alamos National Laboratory (LANL) in New Mexico, have been indicted on charges of communicating classified nuclear weapons data to a person they believed to be a Venezuelan government official and conspiring to participate in the development of an atomic weapon for Venezuela, among other violations.

The 22-count indictment … charges the defendants with conspiring to communicate and communicating ‘Restricted Data’ to an individual with the intent to injure the United States and secure an advantage to a foreign nation. They are also charged with conspiring to and attempting to participate in the development of an atomic weapon, as well as conspiring to convey and conveying classified ‘Restricted Data.’ The indictment further charges Mascheroni with concealing and retaining U.S. records with the intent to convert them to his own use and gain, as well as six counts of making false statements. Roxby Mascheroni is also charged with seven counts of making false statements.

Misbilling the U.S. Government is one thing. Corporations can settle with the U.S. Government; CFOs can receive six months of house arrest. But selling secrets can be an entirely different issue, as these two individuals are about to learn.

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