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Kilgore Flares Company and ESM Group Inc., a subcontractor, agreed to pay $8 million to settle False Claims Act allegations after selling faulty infrared countermeasure flares to the Army. Kilgore Flares produces and sells flares as well as other energetic electronic goods to the U.S. military and ESM Group makes and imports magnesium powder for a variety of industries.

According to the Department of Justice, the two organizations sold or conspired to sell defective devices, in violation of the False Claims Act. In addition, ESM has been accused of willfully avoiding customs duties. Under the terms of the contract the U.S. Army signed with Kilgore Flares, the flares supplied to the Army were to be made with domestically sourced magnesium powder or could be made with powder from Canada.

Instead, ESM Group is accused of supplying magnesium powder from the People’s Republic of China (PRC) for Kilgore Flares between July 2003 and May 2005. ESM is also accused of keeping the origin of the product hidden to avoid having to pay antidumping duties. Kilgore Flares used magnesium powder to make flares for the Army but the powder did not meet the government contract requirements for a domestic powder and did not meet engineering specifications.

The Army uses infrared countermeasure flares to thwart enemy heat-seeking missiles targeting U.S. military aircraft. According to the Department of Justice, faulty equipment provided to the military and equipment not in accordance with government contracts is a threat to the safety of military personnel.

The False Claims Act and Defense Contracting Fraud

The False Claims Act makes it illegal to substitute components in a government contract. Unauthorized substitutions may violate the contract and give rise to a False Claims Act violation.  Because of the nature of the substitutions made in the Kilgore Flares Company and ESM case, both companies have agreed to pay a total of $8 million to resolve allegations. In addition, five agents and previous employers of ESM will also pay over $14 million in restitution.

The False Claims Act helps create a level playing field for businesses by rooting those companies that get ahead by cutting corners with, or outright cheating, the government. Businesses can use the False Claims Act to report competitors' fraudulent schemes.  If those businesses are successful, they will not only have put a stop to the fraud, leveling the competitive playing field, but they also stand to recover a portion of the funds they were able to save the government as a reward for coming forward.

In the Kilgore Flares Company and ESM case, a domestic manufacturer of magnesium powder, Reade Manufacturing Company, discovered the fraud taking place, and because of the False Claims Act, was able to pursue a claim on behalf of the government. For providing evidence and suing on behalf of the government, Reade Manufacturing Company will receive $400,000 of the settlement.

If you have seen evidence of government contract fraud, violations of the Truth In Negotiations Act or other types of fraud, contact Goldberg Kohn today for a confidential consultation.