Last week, an Ohio firefighters’ pension fund filed a securities class-action lawsuit against TransDigm Group, an aircraft parts supplier in the news recently for allegedly ripping off one of its largest customers, the Department of Defense (DoD). The lawsuit, filed on behalf of investors who bought TransDigm stock between May 2016 and January 2017, accuses the company and its top executives of engaging in a “fraudulent and illegal scheme…to artificially inflate TransDigm’s growth and profitability by price gouging the U.S. Government.” The plaintiffs seek unspecified damages for the decline in the value of their shares caused by TransDigm’s alleged failure to disclose adverse facts about its operations and prospects.
TransDigm produces and distributes components used on nearly every military and commercial aircraft in service today. The company operates as a virtual monopoly in the industry. It has acquired dozens of US and European aerospace manufacturers and is the exclusive owner and sole supplier of much of its diverse product line.
TransDigm’s stock value declined nearly 10 percent in January this year after financial analysts exposed the company’s history of drastically raising the price of parts after buying up the part manufacturer. Investors took another hit in March when House Armed Services Committee member Representative Ro Khanna (D-CA) asked the DoD Inspector General (IG) to investigate TransDigm for possible anti-competitive and fraudulent conduct. In addition to his concerns about the pricing practices, Khanna also had concerns that TransDigm is actively deceiving the DoD by using an elaborate web of subsidiaries and exclusive distributors to falsely create the appearance of a competitive bidding process. Khanna noted that 12 subsidiaries failed to disclose TransDigm as their corporate parent in the federal contractor registration database, an omission that carries potential criminal, civil, and/or administrative penalties. According to Khanna, those omissions were later corrected.
Representative Tim Ryan (D-OH) and Senator Elizabeth Warren (D-MA) have also joined the call for an IG probe.
It is certainly long overdue. TransDigm briefly landed on the DoD IG’s radar in 2006 when the IG found the military overpaid by about $5.3 million for 77 TransDigm parts. Rather than blame TransDigm, however, the IG report focused on the government, faulting DoD for policies and practices that prevent it from effectively negotiating prices.
Since then, TransDigm has kept clear of the Pentagon watchdog’s scrutiny. This could soon change with the company’s sudden notoriety, the growing call in Congress for an investigation, and a new president who shows little patience for wasteful defense spending.
In the meantime, we will closely follow the shareholder lawsuit. When it comes to contractor accountability, we often forget that lawsuits can be just as effective as IG investigations. Collective efforts such as investor class-actions can be a powerful deterrent to contractor misconduct.