Drawing a Bead on Contractor Misconduct

As Americans were heading home for Thanksgiving last month, it was announced that defense contractor L-3 Communications will pay $25.6 million to settle a fraud lawsuit. The government accused L-3, L-3 subsidiary EOTech, and EOTech president Paul Mangano of knowingly selling defective gun sights to the military and federal law enforcement personnel.

As U.S. Attorney Preet Bharara put it, “With their own sights focused exclusively on corporate profits, the defendants let our soldiers fight with defective sights on their weapons.”

Two things about the case were encouraging. First, the government filed claims against a corporate executive, not just the company as a whole or a subsidiary. The Department of Justice recently adopted a new policy of focusing on individual corporate employees in misconduct cases. This case is an encouraging sign that the policy is taking root.

Second, both L-3 and Mangano admitted the wrongdoing. Specifically, they admitted they knew that the gun sights failed to perform as warranted in cold or humid conditions but did not inform the government for several years. The standard practice by the government—particularly in securities cases—is to settle corporate misconduct cases without requiring admissions of wrongdoing or liability.

But the case also left us somewhat concerned. A company and one of its top executives admit to not only stealing millions of dollars from taxpayers, but also putting the lives of servicemembers and law enforcement agents—not to mention innocent bystanders—in jeopardy. Yet the government didn’t file criminal charges. Nor were the defendants suspended or debarred from federal contracting.

Not that we were surprised. For many years, we have documented the government’s reluctance to suspend or debar large contractors. Using our revamped Federal Contractor Misconduct Database, we have also pointed out the relative scarcity of criminal cases brought against large contractors. Only about 7 percent of the more than 2,100 resolved instances in our database are criminal prosecutions. Only in about 2 percent was a contractor employee put behind bars.

L-3 has a fairly extensive misconduct history. The company has 15 instances of misconduct dating back to 2007—including 6 contract fraud cases—for which it has paid over $45 million in fines, penalties, and settlements. In addition, an L-3 unit was briefly suspended from federal contracting in 2010 for allegedly spying on a military computer network.

We’re glad the government was able to recover the money lost to L-3’s fraud, name and shame a specific corporate employee, and extract a formal admission of responsibility. However, we are worried about the long-term consequences. Without the added weight of criminal punishment and exclusion from federal contracting, will the government be able to change the culture at companies like L-3? Will it be enough to deter contractor misconduct?