The Lawsuits

The False Claims Act

False Claims Act statute (31 USCA Section 3729, et seq.) basically provides that if a private party discovers that the United States has been defrauded that private party can bring suit in the name of the United States against the perpetrators to recover treble the damages caused to the United States. Under the statute the suit is brought under seal to permit the Attorney General to diligently investigate the allegations heretofore unknown to the government and decide whether to intervene in the suit (which means the United States prosecutes the suit.) Alternatively, the United States can decline, in which case under the statute the private party (called a relator) who brought the suit can prosecute the suit on behalf of the United States.

The statute provides that if the United States prosecutes the relator can receive up to 25 % of the amount recovered as a reward for bringing the fraud to light and assisting the United States in recovering damages. If the United States declines and the relator successfully recovers damages for the government, the statute provides that the relator can receive up to 30 % of the amount recovered.

The statute originated in Lincoln's day and has a long history. In 1986 major amendments were made to the statute intending to strengthen it, encourage more citizen discovery and revelation of fraud against federal government. A major Supreme Court review of the statute occurred in 2000. The report by the New York Times as to that Supreme Court decision can be viewed. [TL 1] (False Claims Act suits are often referred to as qui tam suits which in Latin means "who pursues this action on our Lord the King's behalf as well as his own.") A False Claims Act suit is a civil suit but criminal prosecutions by the government can arise from attendant facts developed in investigation.

Taxpayers Against Fraud (TAF) maintains a website with information about the False Claims Act. http://www.taf.org.

The Procurement Fraud

The Navy awarded a $222,476,849 contract for two tankers (also called Oilers and designated TAOs) to Pennsylvania Shipbuilding Company (PSC) on 5/6/85. That award reserved to the Navy the option to award two additional TAOs to PSC. In 2/86 the Navy exercised its option to award a third TAO to PSC for $96,984,329. In 2/87 the Navy exercised its option to award a fourth TAO to PSC for $95,025,450. This contract was a fixed price incentive type contract with a target price of the aforementioned amounts and a 50/50 share line. In no event would the Navy pay more than 130 % of the target cost, termed the ceiling price.

To induce the award of the contract, Fidelity Bank (now Wachovia Bank through mergers) and PSC (successor to Sun Ship through a sham sale by Sun Company, since renamed Sunoco, Inc.) provided the Navy with a Trust Indenture to "ensure the performance of PSC." In essence the Trust Indenture took the place of a performance bond which was not a requirement of the Navy's contract solicitation. The Trust Indenture (TI) was kept secret but its existence was discovered by Atkinson and Schorsch. They found that it contained many aspects of fraud. They also discovered that incorporated in the TI were five Exhibits (mortgages and security agreements) that secured to Fidelity Bank the original Sun Ship assets (worth some $100 MM) purportedly sold to PSC and PSC affiliates in Sun's 2/8/82 sham sale. Under the TI Fidelity Bank took those securities as Trustee for the Navy and in the event of contract default agreed that Fidelity would sell the assets and deliver up to $20 million to the Navy in proceeds from the asset sales for PSC failure to perform. (In reality, beyond other aspects of contained fraud, the TI by its terms reduced the protection the Navy had without the TI.) The TI stipulated that immediately upon award of the contract the five security instruments would be recorded, making them effective to protect the Navy in the event of default. Atkinson and Schorsch discovered that, in addition to keeping the TI secret, the security instruments were never recorded.

In Aug/Sept '87 the Navy's SupShip charged with oversight of the contract at the shipyard concluded that PSC could not deliver any TAOs within the contract provision, time and price. He briefed VAdm. Rowden, Commander NAVSEA, stating his conclusion. On 11/5/87 he briefed Assistant Secretary Pyatt and Rowden's senior staff with the conclusion that PSC could not build and deliver any TAOs within the contract provision and strongly recommended the contract be terminated.

During this late 1987 period unbeknownst to the SupShip, PSC was threatening the Contracting Officer in Washington and the contracts staff with bankruptcy and cessation of business. In early March '88 the SupShip again briefed VAdm. Rowden telling him that contract costs were going up and progress was going down, that there was little chance the first ship would be delivered on time, and if delivered, it would be over-budget. At this time the SupShip, Captain Pete Schrodt, first learned from the NAVSEA procurement contracting office that negotiations between PSC and the Navy were going to remove two ships from the contract. (Two of the four ships awarded to PSC were transferred to Avondale for construction, TAO-194 and TAO-196, under Mod 5, a contract modification on 6/18/88.)

Throughout the contract the PSC presented an aura of financial distress and in its dealings with the Navy as publicly revealed threatened bankruptcy and financial distress. The most odd aspect of this behavior was the possession by PSC and its affiliates of some $100 MM in former Sun Ship assets which it had acquired in the sham sale and whose valuation on the PSC and affiliates' books were enormously undervalued. Many of these assets were surplus to the Navy contract needs and could have been sold or sold and leased back to relieve any real financial distress. This was not done for reasons that Atkinson and Schorsch believe have to do with covering up the sham sale, and in turn, the 1980 book cooking by Sun.

At any rate it now turns out that PSC and its affiliates were highly profitable. It also turns out that Fidelity Bank was not only Trustee for the Navy but lender to PSC and its affiliates. Questioning by Senator Roth of PSC Chairman Weller on this point can be viewed. [TL 2] For loans to PSC, Fidelity took its own security interest in the same properties ahead of the Navy for which it was serving as Trustee, but which security interests had improperly not been recorded. Beyond its position as Trustee and lender, discovery has now revealed that Fidelity also contractually became the Investment Banker for PSC.

The Damages

The government has expended in excess of half a billion dollars for two ships never completed and now rusting hulks in the laid up fleet, TAO-191 and TAO-192. The highest use of these hulks is scrap worth $2 million dollars. Under the treble damage provisions of the False Claims Act a claim of $1,609,913,487 is asserted in the lawsuit now being litigated and can be viewed. [TL 3]

The First Suit

Atkinson and Schorsch, as relators, outraged by the deceit and deception that underlies the fraud perpetrated upon the United States in the award, modifications, and default of a Navy contract to construct two ships filed their first suit under seal on 2/4/92. The Complaint was filed in Federal District Court in Philadelphia and was assigned to Judge Franklin S. Van Antwerpen. That suit is #92-723.

The 2/4/92 Complaint named the following as defendants.

Glenmede Trust Company Sun Company, Inc. Sun Ship, Inc. Paden, Inc. Pennsylvania-Texas, Inc. Capital Marine Corporation Pennsylvania Shipbuilding Conpany Pepper, Hamilton & Scheetz Coopers & Lybrand

Atkinson and Schorsch discovered that the security instruments of the secret Trust Indenture had not been recorded. On 2/4/93 Judge Van Antwerpen issued an Order which was not filed and therefore was unknown to the relators or to counsel whose representation they expected. A consequence of the response time to this unknown Order caused withdrawal by the relators' expected counsel.

On 3/4/93 Atkinson and Schorsch filed a First Amended Complaint asserting conspiracy and the additional allegation that the security instruments had not been recorded. Being without counsel they moved that all defendants other than PSC be dismissed without prejudice. Dismissal without prejudice permits the renaming of the defendants as facts warrant. Judge Van Antwerpen acceded to that Motion.

The suit remained under seal. On 8/27/93 the Justice Department (DOJ) declined to intervene. Judge Van Antwerpen then immediately dismissed the suit without prejudice, an improper judicial action because a) the statute requires concurrence by DOJ in the dismissal, and b) because the statute permits prosecution by the relators if DOJ declines. Appeals by the relators to DOJ to have the improper dismissal reversed were not effective. In the meantime the relators, consequent to a letter to Defense Secretary Aspin [TL 4] , had caused the initiation of an Audit by the Pentagon Inspector General (DOD-IG). That year-long Audit final report issued 3/24/94 can be downloaded from the DOD-IG web site as Report No. 94-069. The DOD-IG team was thwarted in its audit by the Navy which withheld literally thousands of documents. Moreover, certain damning information known by the DOD-IG team was withheld from the final report. This prompted Atkinson and Schorsch to write to Defense Secretary Perry on 5/20/94. [TL 5] Ultimately this unanswered letter caused 1995 hearings before the Senate's Permanent Subcommittee on Investigations.

The docket for first suit 92-723 can be downloaded using PACER from the web site for the Federal District Court for the Eastern District of Pennsylvania at http://www.paed.uscourts.gov.

The Second Suit

Atkinson and Schorsch got the first 14 pages of the TI through an FOIA request, which at first denied them the additional 112 pages comprising the security instruments. Before those security instruments were furnished to them, which took a long time and appeals, they discovered that the security instruments were not recorded, as they had noted in the first suit 3/4/93 First Amended Complaint. The FOIA appeals also produced a letter from PSC counsel in opposition to release of the TI. The Navy released that letter with statements about the Sun sale redacted from its second page [TL 6] and later released the full letter. [TL 7]

When the security instruments were finally released to them, Atkinson and Schorsch immediately noticed an exemption to the real estate being secured to Fidelity as Trustee for the Navy. They also discovered two mortgages given to insurance companies five months after contract award to secure a prior debt to the insurance companies of $4.2 million. They had reported to the DOD-IG that it was the exempted real estate that had been used to secure the $4.2 million debt, which debt was not disclosed to the Navy. The DOD-IG Audit Report omitted from the Audit Report mention of that debt, the mortgages to the insurance companies and the exemption used to secure it.

On 12/5/94 Atkinson and Schorsch filed their second suit under seal. The Complaint was filed in Federal District Court in Philadelphia and was assigned to Judge William H. Yohn. That suit is #94-7316.

The 12/5/94 Complaint named Pennsylvania Shipbuilding Company and Fidelity Bank. It alleged conspiracy with others.

DOJ obtained seal extensions from the Court during their investigation until 6/6/97 when DOJ filed a notice to decline intervention. Atkinson and Schorsch had advised DOJ of their intention and did the day before file a First Amended Complaint. That First Amended Complaint added Sun Ship, Inc. as a named defendant stating, among other things, that, "The ownership of shipbuilding assets by PSC and its affiliates was questionable in that no monies had been paid by PSC and its affiliates to Sun for the assets." They asserted that, "This asset sale by Sun was in conflict with the Pennsylvania Fraudulent Conveyance Act which requires for a lawful sale that a fair consideration be paid." They made known to DOJ the existence of the not disclosed $4.2 million insurance debt and the mortgages made from property marked as exemption in a TI mortgage to Fidelity Bank. They further made known to DOJ that the acreage represented as an exemption was in fact a nullity, that is it was described as an unbounded area, in effect a line, and hence no area or exemption at all. It was properly describe as a bounded area when used to secure the real estate for the insurance companies (and three years later to Sun) but whenever the area, as an exemption, was used as security for Navy interest or Pennsylvania State interest it was described as a nullity.

The conflict between the DOJ declination and the relators filing of the First Amended Complaint was resolved when DOJ obtained further seal extensions from the Court only to file notice again to decline intervention on 9/19/97. Atkinson and Schorsch protested that DOJ had not conducted a diligent investigation of the First Amended Complaint and moved that unsealing be stayed until DOJ provided sufficient evidence to the Court that DOJ had conducted a diligent investigation. DOJ never provided that evidence but Atkinson and Schorsch undertook to retain counsel and prosecute the suit as permitted under the statute.

In mid October 1998 the suit was unsealed and served by counsel for Atkinson and Schorsch on PSC, Fidelity and Sun Ship. Relators' Counsel was permitted to file (on 1/4/99) a Second Amended Complaint, subject to concurrence by DOJ, who took no exception.

Four years of wrangling over jurisdictional bars (original source, statute of limitations, etc) ensued. On 8/24/00 Judge Yohn issued a Memorandum and Order dismissing Sun and Fidelity both without prejudice but permitted relators the issuance of a Third Amended Complaint. The Third Amended Complaint names PSC and Fidelity. Sun Ship was not renamed but dismissed without prejudice. Atkinson and Schorsch believe Sun can be renamed as the facts may warrant.

On 8/30/02 Judge Yohn issued a Memorandum and Order which does hold Fidelity in as a defendant, granted Atkinson discovery into the conspiracy to not record the TI security instruments, by whom and with what motive. (Acceding to his family's desires Schorsch had withdrawn as a relator.) That discovery is in process. The bank has been stalling and is now a subject of a Motion to Compel. The first page of that Motion can be viewed. [TL 8]

The docket for second suit 94-7316 can be downloaded using PACER from the web site for the Federal District Court for the Eastern District of Pennsylvania at http://www.paed.uscourts.gov.

The 8/24/00 Memorandum and Order can be viewed at http://www.paed.uscourts.gov/documents/opinions/00D0664P.pdf

The 8/30/02 Memorandum and Order can be viewed at http://www.paed.uscourts.gov/documents/opinions/02D0672P.pdf

Pages 18 to 26 of the October 2002 TAF Quarterly Review is devoted to the 8/30/02 decision and can be read at http://www.taf.org/publications/PDF/oct02qr.pdf. A newspaper account can be viewed. [TL 9].