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Financial Fraud Law

Company Admits Defrauding Defense Department of Millions

 San Diego-based Vector Planning & Services, Inc., has entered into a deferred prosecution agreement with federal prosecutors in which it admitted to criminally defrauding the Defense Department, and in which it agreed to pay restitution.

As part of the agreement, Vector admitted that its former chief executive officer and majority owner submitted five years’ worth of false cost claims to the Defense Department, resulting in losses to the Defense Department of over $3.6 million.

The case concerned Vector’s accounting practices in connection with certain cost-reimbursement contracts that it held with the Defense Department. Under a cost-reimbursement contract, a contractor is entitled to reimbursement for both its direct allowable costs, such as the cost of labor on that contract, and a prorated portion of its indirect allowable costs, such as the cost of rent for the contractor’s office space. Because indirect costs must be pro-rated across multiple contracts, they cannot be precisely determined until the end of the fiscal year. Accordingly, under a cost-reimbursement contract, a contractor initially submits claims for indirect costs based on “provisional” or estimated rates, and later submits its actual indirect costs to the government for review, reconciliation, and approval. This later submission, known as an “incurred cost submission” or “incurred cost proposal,” reflects what the contractor certifies were its actual allowable costs for the prior fiscal year.

In this case, Vector admitted that after claiming and being paid for direct costs in connection with other firm-fixed-price and time-and-materials contracts, Vector systematically reclassified these same costs in its accounting system to make it appear as if the costs were indirect costs that were incurred in connection with its cost-reimbursement contracts, thereby inflating its indirect cost rates. These inflated rates then were used by Vector to justify the rates claimed in its incurred cost proposals submitted to the Navy. The effect of these fraudulent submissions was, in essence, to pay Vector twice for the same expenses, amounting to “double dipping” or “double billing” at government expense.

Vector admitted to submitting these false incurred cost proposals for costs incurred in 2005 through 2009, with a total loss to the Defense Department of $3,672,756. As described in Vector’s agreement, Vector made these false submissions in 2010, 2011, and 2012.

When faced with a Defense Department audit in late 2011, Vector falsified its electronic accounting entries, and prepared and backdated fake invoices in order to support those falsified accounting entries. Vector admitted that the direction for the fraud came from its then-CEO, who is now deceased.

As part of the agreement, Vector agreed to make payments in the amount of $6.5 million, which includes restitution to the Defense Department for losses Vector caused. Vector also agreed to maintain a compliance and ethics program. In exchange, federal prosecutors agreed to postpone a prosecution for felony false claims against Vector for a period of three years; in the event Vector complies with all the terms of the agreement, the criminal case will be dismissed at the end of that period.

In addition to the criminal deferred prosecution agreement, Vector is entering into a civil settlement with the Civil Division of U.S. Attorney’s Office and the Justice Department’s Civil Division. In all, Vector agreed to pay $6.5 million to resolve its criminal and civil cases.

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