Federal judge weighs allegations of Hanford kickbacks, fraud and inflated pricing

A federal lawsuit against Hanford contractor Mission Support Alliance and Lockheed Martin is a classic case of federal government overreach, defense attorneys argued Tuesday in federal court.

Department of Justice attorneys responded that the companies had been clearly told by the Department of Energy that Lockheed Martin, a former owner of Mission Support Alliance, could not double dip on profits.

Lockheed Martin ignored the instructions and instead committed fraud to receive profit from the federal government both as an owner of Mission Support Alliance and then by subcontracting some of the work out to a subsidiary it also owned, according to the lawsuit

Defendants have asked U.S. Judge Rosanna Malouf Peterson to dismiss the lawsuit, which was filed in February, rather than letting it go to trial.

Peterson listened to arguments in a Spokane courtroom for three and a half hours this week before saying she would file a written decision later on whether to dismiss the case.

At issue is the recently extended 10-year contract, valued at more than $3 billion, that Mission Support Alliance was awarded to provide sitewide services, including information technology, at the Hanford nuclear reservation.

Up to $2.5 billion of taxpayer money is spent annually at Hanford as work continues to clean up massive amounts of radioactive and hazardous chemical waste and contamination left from the past production of plutonium for the nation’s nuclear weapons program.

From 2010 to 2015 Mission Support Alliance had a $232 million subcontract with Lockheed Martin Services for information technology services.

Lockheed Martin’s ownership ended in January 2016 and Mission Support Alliance no longer subcontracts most of its information technology services.

Subcontract billed fixed prices

The Department of Justice alleges that Mission Support Alliance and Lockheed Martin lied to DOE and gave annual bonuses to executives that were essentially kickbacks for their efforts to increase profit for Lockheed Martin for the subcontracted information technology work.

Mission Support Alliance has a cost reimbursable contract that allows it to charge DOE for its costs of providing services at Hanford and can make profit annually by meeting goals and by a subjective evaluation done by DOE.

But the subcontract it awarded to Lockheed Martin Services Inc. (LMSI) had fixed prices for work the subcontractor would perform.

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LMSI was at risk of losing money if it spent too much to perform the work at agreed-upon prices and that was balanced by the opportunity of making a profit if it performed work efficiently, said Andrew Tulumello, attorney for Mission Support Alliance.

DOE approved the fixed price contract, said defense attorneys.

But Daniel Fruchter, assistant U.S. attorney, said that DOE agreed that Mission Support Alliance could give a subcontract to a subsidiary of one of its owners but made clear that there could be no profit earned on the subcontract in the interest of good stewardship of taxpayer dollars.

“The Department of Energy never deviated from the position that Lockheed Martin could profit once,” Fruchter said.

The Department of Justice maintains that the companies used false information about the pay rates to perform work in the subcontract to drive up the profits Lockheed Martin Services Inc. would earn.

Some of the rates were grossly inflated and Mission Support Alliance and Lockheed Martin knew it, Fruchter said.

The defendants deny that, saying there was full disclosure of rates and two years of negotiations on them.

The Department of Justice accused Frank Armijo and Rich Olsen of misusing their positions to help Lockheed Martin obtain inflated pricing for the subcontract work.

The management incentive pay they received from Lockheed Martin in addition to pay from Mission Support Alliance was a kickback, the Department of Justice has argued.

Olsen, a former chief financial officer for Mission Support Alliance on loan from Lockheed Martin, reached a settlement agreement with the Department of Justice.

He agreed to pay $124,440, admitting no wrongdoing but wanting to end a long-term federal investigation, his attorney said.

Were bonuses kickbacks?

Armijo, who was both a Lockheed Martin vice president and Mission Support Alliance president, was named as a defendant with the two companies in the lawsuit.

Paying an employee an annual bonus based on performance is not a kickback, said Armijo’s attorney Lucas Walker.

A kickback has to involve two parties who are not aligned, and an employer and employee are working together toward the same goal, said Lockheed attorney Michael Bronson.

Armijo’s 2011 self-review said the information technology subcontract he worked on would deliver more than $100 million in profits over a decade, the Department of Justice said.

But it was just one of about 100 accomplishments he listed that year for his review that helped earn him incentive pay, his attorneys said.

Armijo would receive $193,000 in incentive compensation for the year in addition to his Mission Support Alliance salary of $267,000, according to court documents.

Department of Justice attorneys argued that the responsibility of Mission Support Alliance and its leadership was to protect the Department of Energy, and Armijo instead received pay it called a kickback for the favorable treatment of a subcontractor at the expense of DOE.

A DOE Office of Inspector General audit report in 2016 found that Mission Support Alliance improperly awarded $63.5 million in taxpayer money as profit to LMSI.

The audit found DOE partially to blame, saying it had not ensured costs incurred in the subcontract were appropriate and transparent to the federal government.

Senior staff writer Annette Cary covers Hanford, energy, the environment, science and health for the Tri-City Herald. She’s been a news reporter for more than 30 years in the Pacific Northwest.