Seven Defendants Plead Guilty to Millions of Dollars of Fraudulent Sales to Defense Department

[nitpicker]

https://www.justice.gov/usao-sdca/pr/seven-defendants-plead-guilty-millions-dollars-fraudulent-sales-defense-department

Department of Justice
U.S. Attorney’s Office
Southern District of California

FOR IMMEDIATE RELEASE
Tuesday, February 28, 2017

Seven Defendants Plead Guilty to Millions of Dollars of Fraudulent Sales to Defense Department

Jeffrey Harrington and Michael Mayer, the owners of several defense contracting firms, pleaded guilty before U.S. Magistrate Judge Karen Crawford this morning to conspiring to commit wire fraud and file false claims, and to making false statements on their federal income tax returns. The defendants admitted obtaining money from the United States by making false representations and false claims to the Department of Defense (“DoD”) for payment on items defendants knew had not been sold to the Navy, but which had been substituted with other, unauthorized products. Three of the companies owned by Harrington and Mayer, including San Diego-based Veteran Logistics, Inc. (“VLI”), as well as two employees, also pleaded guilty to conspiracy for their role in the offense.

The three defense contractors – VLI, Industrial Xchange, Inc., and Boston Laser Technology, Inc. – regularly sold supplies to the DoD, the Department of Navy, the General Services Administration and other federal departments and agencies. Each company had multiple contracts with DoD’s Defense Logistics Agency (“DLA”) to sell products to the federal government through “EMALL,” a web-based electronic commerce site that allows authorized users to search, compare and purchase commonly used products. Each contract allowed the company to sell up to $5 million in pre-approved goods at set, maximum prices. As detailed in court filings, however, the defendants fraudulently manipulated the EMALL system to substitute unapproved, overpriced items for the materials purportedly sold to the government.

In one example, the defendants agreed on EMALL to supply Maritime Expeditionary Security Group Two at Norfolk Naval Shipyard with over 10,000 “Post-It” writing paper pads, but then replaced these approved items with 50 electronic transceivers they were not authorized to sell. By fraudulently substituting these products, the defendants were able to circumvent procurement controls and charge the military a 134% mark-up on the transceivers. The defendants repeatedly employed this fraudulent technique dozens of times, on a host of products, across a wide array of components in the military.

The scheme also allowed the defendants to conceal the sale of consumer electronics and other items that could be used to corrupt military officials. For example, in one contract VLI agreed to supply the USS Ronald Reagan aircraft carrier with industrial, motorized plumber snakes. VLI then fraudulently substituted that order with 100 29” Toshiba TVs, 60 32” Toshiba TVs and 160 TV tilt mounts. VLI purchased these items for only $39,558, but billed the government $66,807.
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The defendants were hugely successful in their fraud, and received approximately $45 million for EMALL sales related to over 12,000 transactions between approximately March 1, 2008 and January 31, 2015. On a small sample of 60 of those transactions between August 2009 and October 2013, totaling approximately $2,868,590 in sales, the loss to the Navy was approximately $1,417,395, indicating a fraud loss of approximately 50%.
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