by John Bringardner
Lynn Tilton, her Patriarch Partners firm and its MD Helicopters portfolio company are awaiting an appeals court ruling on whether a whistleblower lawsuit can proceed against them. The ordeal, which led to the conviction of a US Army colonel, centers on a narrow legal dispute over whether MD violated the federal False Claims Act when it negotiated a series of helicopter sales with the US Army.
A three-judge panel of the 11th US Circuit Court of Appeals could still take months to rule after oral arguments were aired on 22 February. But during that 35-minute hearing, at least two of the three judges made comments critical of the alleged actions carried out by Tilton, Patriarch and MD, which one referred to as a “sordid mess.” Should the court end up reversing the lower court’s previous dismissal of the suit, it would merely allow litigation to move forward.
[CLICK HERE to listen to an audio recording of the oral arguments from 22 February.]
The qui tam complaint, originally filed in 2013 by two former MD employees, seeks civil damages and penalties for six alleged violations of the federal False Claims Act, which covers any type of fraud that results in financial losses to the government. The suit alleges Tilton intended to “groom” US Army Colonel Norbert Vergez as a future employee, and to influence him to act in MD’s favor as the Army program manager in charge of the contract by offering him a lucrative job well before his retirement, according to court filings.
US District Court Judge Abdul Kallon dismissed the complaint in Alabama back in March 2015, finding that the alleged bribes were not “material” to the Army’s decisions regarding its contracts with MD. Vergez was convicted for accepting bribes, but the government has not charged Tilton, Patriarch or MD of any wrongdoing in relation to their interactions.
As such, the appeal of Judge Kallon’s finding turns on the question of whether the fact that the Army continued to do business with MD after discovering evidence of bribery and conflicts of interest is sufficient to undermine the False Claims Act allegations. The plaintiffs argue that compliance with ethics requirements was an implicit factor in MD’s negotiations with the Army, and that its noncompliance meant the company submitted false claims.
The two whistleblower plaintiffs allege that Tilton cultivated a relationship with Colonel Vergez that went too far, including the use of what Tilton allegedly called “Army pricing” to inflate government bills.
At the time of the deals with MD, Vergez served as a manager overseeing procurement in the Army’s Non-Standard Rotary Wing Aircraft (NWRSA) program. He allegedly accepted various offers from Tilton at the same time he was facilitating MD’s submission of inflated pricing information in its bids on contracts for helicopters for four allied countries, Afghanistan, El Salvador, Saudi Arabia and Costa Rica.
The Alabama court found that Vergez had lied to Department of Defense (DoD) auditors about several government contracts he had negotiated with MD and Avia Baltika Aviation Ltd (AVB), a Lithuanian firm.
In April 2015, Vergez signed a plea deal admitting to making false statements to the DoD and on his government ethics forms, and taking actions that constituted a conflict of interest. Last year, a judge sentenced Vergez to five years’ probation – including eight months of home confinement – and a fine of USD 10,000.
MD was implicated in Count Two of Vergez’s plea, concerning felony conflict of interest. According to the timeline sketched out in court filings, Vergez began negotiating a possible job with Tilton in March of 2012. That May, the Army informed him that he could not receive compensation from MD for one year. In the midst of his employment talks with Tilton, he “took official acts” in matters in which MD had a financial interest.
“In order to obscure Vergez’ employment arrangement at MD, Tilton created the illusion on paper that Vergez was a Patriarch employee, with a Patriarch title, based out of Patriarch’s offices in New York City, with a New York telephone number and Patriarch email address. As part of the illusion, Patriarch paid Vergez’ salary and benefits,” according to the whistleblower suit.
The Department of Justice then launched an investigation into Vergez, Tilton and MD, court filings show.
During her presentation to the 11th Circuit, the judges questioned plaintiffs’ lawyer Lisa Rosano of Philip Paul Weidner & Associates about implications the Supreme Court’s recent Universal Health Services v. United States ex rea. Escobar ruling might have for the MD case, including the timing of the allegations. In Escobar, eight justices unanimously held that the implied false certification theory can be a basis for liability under the False Claims Act.
Rosano asserted that allegations of Tilton’s bribery occurred after MD made its initial contract with the Army, but that MD had induced the government to award further contracts based on “false promises and half-truths and misrepresentations by omission.”
By the time Tilton’s lawyer, Chris Manning, a partner at Williams & Connolly, rose to speak, the judges were ready to pounce.
“There’s some bad stuff that went on here,” Judge Pryor said before Manning could get a word out.
“Whether the complaint fails as a legal matter – and I speak only for myself, not for my two colleagues – the one thing this complaint does not lack is factual specificity,” Judge Jordan chimed in. “There are dates, there are places, there are numbers, there are people. It’s all over the place.”
“And convictions,” Judge Pryor added.
“Putting aside the legal issue of materiality, which is a big issue… tell me where the complaint is not specific enough about what your clients are alleged to have done,” Judge Adalberto Jordan told Manning.
“There’s a very conclusory allegation in the complaint about bribery,” Manning replied.
“You can’t take that in isolation,” said Jordan. “The complaint says that while these negotiations were going on for at least some of the contracts, that your clients had basically agreed with Mr. Vergez … that he was going to come and be a part of MD, so he had a huge conflict of interest and that they had paid him sums of money. That’s not conclusory.”
“It is conclusory in that there is no quid pro quo alleged in saying we are going to give you this for your work in getting you this contract,” Manning said.
“What?,” Jordan exclaimed. “Why do you pay somebody on the inside of the government contracting system money and then hire that person at the end once you’ve been successful in some of the contracts at issue? […] The inference is that of course it was paid at the end because had it been paid earlier they might have figured out that there was something improper going on, so it’s a wink and a nod, and hey, when you formally retire, we’re gonna give you the money but of course the money is for everything you’ve done for us before. Isn’t that a fair inference from the complaint?”
“I think it may be a possible inference from the complaint, but it needs to be a plausible inference…” Manning said.
“That’s more than plausible,” said Judge Bill Pryor.
Later in the hearing, Manning took a different tack. “I think it is relevant to look at the actual time of payment,” he argued. “If the government did have a concern about bribery, one would have expected them not to do further business…”
“I can hypothesize a couple of reasons the government may have done it,” Jordan interjected.
The judges went further, questioning Manning on how his clients can maintain they did nothing wrong when Vergez was convicted based on his interactions with them.
“You don’t think there’s a basis for someone at the government to have charged somebody at MD with the payment of improper gratuities to a government official for the execution of official acts?” Jordan asked Manning.
“Absolutely not, and we saw that the government did investigate here and did not charge MD or any MD personnel of anything” he replied.
“Boy, let me just tell you your perspective and mine differ completely,” Jordan said.
“If those allegations are believed to be true, somebody at your clients’ company is in the legal cross hairs,” Jordan went on. “And if he or she is not a subject of a grand jury investigation, they might have been a target. The government might have chosen not to go down that route for a million and one reasons. If someone’s accepting a bribe or a gratuity, an improper payment is coming from somewhere.”
The pending appeals decision hangs over Tilton and her fund as they await a ruling in a separate proceeding alleging that she defrauded investors in her Zohar collateralized debt obligations (CDO).
The SEC has accused the self-styled “diva of distressed” of hiding financial troubles at her portfolio companies while collecting USD 200m in management fees. During a lengthy trial before an SEC Administrative judge last fall, Tilton testified regarding the turnaround efforts she led at three of those companies, including MD, where she serves as CEO. Tilton maintains that her investors knew from the outset that the businesses underlying her Zohar funds were deeply distressed, and were never going to make all of their interest payments. The Zohar deals were premised on the knowledge that she would have the discretion to alter the debt obligations at specific companies as she deemed appropriate, she argued.
The case under appeal is Philip Marsteller, et al v. Lynn Tilton, et al, number 16-11997, in the US Court of Appeals, Eleventh Circuit.