Criminal Investigation of Orbital Sciences Dropped

No Charges in Criminal Inquiry into Orbital

By Kendra Marr

Tuesday, May 27, 2008

Orbital Sciences said yesterday that federal prosecutors would not pursue criminal charges over allegations that the company defrauded the U.S. government of millions of dollars through improper billing and accounting.

The U.S. Attorney's Office for the District of Arizona told the Dulles rocket and satellite manufacturer that the government had ended its criminal investigation, according to an Orbital filing yesterday with the Securities and Exchange Commission. Still to be resolved is a civil lawsuit over the allegations in the U.S. District Court for the District of Arizona.

Sandy Raynor, spokeswoman for the U.S. attorney in Phoenix, declined to comment. Orbital spokesman Barron Beneski said he could not provide further information because of the pending civil suit.

The government's investigation began after former Orbital employee W. Austin Sallade filed a civil lawsuit in February 2005 under a whistle-blower provision of the False Claims Act, which allows an individual to bring suit in the name of the U.S. government and share a cut of any settlement.

Sallade was the senior director of finance for Orbital's Launch Systems Group, a unit working with missile defense launch systems in Chandler, Ariz., according to the complaint. He had a variety of responsibilities related to the Launch Systems Group's cost accounting and financial reporting.

Sallade, who filed his complaint under seal, alleged that through its "pervasively applied defective pricing and other accounting schemes, and by its submission of false invoices" Orbital misclassified and overbilled its costs. The complaint links the alleged fraud to Orbital's "negotiation and performance of contracts and subcontracts" with NASA, the armed forces, the U.S. Missile Defense Agency, Raytheon, Lockheed Martin and Boeing.

Sallade said in the complaint that he alerted his superiors and colleagues but that the alleged fraud did not stop. As a result, he said, the company stripped him of his responsibilities and demoted him.

The complaint states that Orbital is liable for triple the amount of the alleged damages to the U.S. government, plus civil penalties of $5,000 to $10,000 for each false claim and punitive damages.

Three months after Sallade filed his lawsuit, federal agents showed up with search warrants at Orbital's Dulles headquarters and at its design and manufacturing facility in Chandler, a Phoenix suburb. At the time, Orbital said it was unclear about the purpose of the raids, only that the investigation was focused on contracting procedures related to certain U.S. government launch vehicle programs.

Last year, the Justice Department notified Orbital that it was named as the defendant in the lawsuit, according to SEC filings. A federal court judge unsealed the case in the third quarter of 2007, and the complaint was formally served on the company.

Orbital has since denied all allegations of fraud and reasons for Sallade's demotion.

In its quarterly SEC filings, Orbital has repeatedly said that it is "vigorously defending" itself against the lawsuit. The company said it has "devoted significant time and resources to investigate the issues raised by the complaint." And, while it can't predict the outcome, Orbital "believes it has strong substantive defenses to all of the claims."

To date, according to the SEC filing yesterday, the civil division of the Justice Department had not intervened in the civil lawsuit.

Tagged: business, Orbital Sciences

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