Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 1 of 42. No C (Judge Lettow) IN THE UNITED STATES COURT OF FEDERAL CLAIMS AEY, INC.

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1 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 1 of 42 No C (Judge Lettow) IN THE UNITED STATES COURT OF FEDERAL CLAIMS AEY, INC., Plaintiff, v. THE UNITED STATES, Defendant. DEFENDANT S RESPONSE TO PLAINTIFF S MOTION FOR SUMMARY JUDGMENT AND MOTION TO DISMISS COUNTERCLAIMS FOR LACK OF JURISDICTION STUART F. DELERY Assistant Attorney General ROBERT E. KIRSCHMAN, JR. Director KIRK T. MANHARDT Assistant Director A. BONDURANT ELEY Trial Attorney Commercial Litigation Branch Civil Division Department of Justice P.O. Box 480 Ben Franklin Station Washington, D.C Tele: (202) Fax: (202) July 23, 2014 Attorneys for Defendant

2 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 2 of 42 TABLE OF CONTENTS TABLE OF CONTENTS... i TABLE OF AUTHORITIES... ii STATEMENT OF THE ISSUES... 1 STATEMENT OF THE CASE... 1 I. Nature Of The Case... 1 II. Statement Of Facts... 2 A. Procedural Background... 2 B. Disputed Facts The Investigation Into AEY s Illegal Activities ASC s Suspension, Termination And Debarment Of AEY SUMMARY OF ARGUMENT ARGUMENT I. Applicable Legal Standard II. AEY s Motion For Summary Judgment Is Premised Upon A Misapprehension Of The Scienter Requirements Under Both The FCA And The Special Plea in Fraud A. AEY Misstates The Law Addressing Government Knowledge Of Fraud In The FCA Context B. AEY Misstates The Law Addressing Government Knowledge Of Fraud In The Context Of The Special Plea In Fraud III. IV. Genuine Issues Of Material Fact Preclude Summary Judgment In AEY s Favor AEY s Contention That This Court Lacks Jurisdiction To Entertain The Government s Fraud Counterclaims Has No Merit CONCLUSION i

3 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 3 of 42 TABLE OF AUTHORITIES CASES AEY, Inc. v. United States, 114 Fed. Cl. 619 (2014)... 5 AEY, Inc. v. United States, 99 Fed. Cl. 300 (2011)... 2, 3 Carrier Corp. v. United States, 328 F.2d 328 (Ct. Cl. 1964)... 23, 24, 25, 26 Daff v. United States, 78 F.3d 1566 (Fed. Cir. 1996)... 35, 36 Gen. Dynamics Corp. v. United States, --- U.S. ---, 131 S.Ct. 1900, 179 L.Ed.2d 957 (2011) Joseph Morton Co. v. United States, 757 F.2d 1273 (Fed. Cir. 1985) Little v. United States, 152 F. Supp. 84 (Ct. Cl. 1957)... passim Martin J. Simko Constr., Inc. v. United States, 852 F.2d 540 (1988)... 34, 36 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986) Medina Constr. Ltd. v. United States, 43 Fed. Cl. 537 (1999)... 35, 36 Resource Conservation Group, LLC v. United States, 597 F.3d 1238 (Fed. Cir. 2010) Shaw v. AAA Eng'g & Drafting, Inc., 213 F.3d 519 (10th Cir. 2000)... 19, 20 Trauma Services Group v. United States, 104 F.3d 1321 (Fed. Cir. 1997) ii

4 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 4 of 42 United States ex rel. A-Plus Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 428 (6th Cir. 2005) United States ex rel. Barrett v. Johnson Controls, Inc., No. 3:01-CV-1641, 2003 WL (N.D. Tex. Apr. 9, 2003) United States ex rel. Burlbaw v. Orenduff, 548 F.3d 931 (10th Cir. 2008) United States. ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321 (9th Cir. 1995) United States ex rel. Durcholz v. FKW Inc., 189 F.3d 542 (7th Cir. 1999) United States ex rel. Harrison v. Westinghouse SavannahRiver Co., 352 F.3d 908 (4th Cir. 2003) United States ex rel. Laird v. Lockheed Martin Engineering & Science Services Co., 491 F.3d 254 (5th Cir. 2007) United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991) United States v. Diebold, Inc., 369 U.S. 654 (1962) Veridyne Corp. v. United States, --- F.3d ---, 2014 WL (Fed. Cir. July 15, , 28, 34 STATUTES 18 U.S.C. 1001(a)(2) U.S.C U.S.C U.S.C. 1491(a)(1) U.S.C. 1491(a)(2) U.S.C U.S.C iii

5 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 5 of U.S.C passim 31 U.S.C REGULATIONS 48 C.F.R , 15, 31 MISCELLANEOUS Black s Law Dictionary (7th ed. 1999) iv

6 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 6 of 42 IN THE UNITED STATES COURT OF FEDERAL CLAIMS AEY, INC., ) ) Plaintiff, ) ) v. ) No C ) (Judge Lettow) THE UNITED STATES, ) ) Defendant. ) DEFENDANT S RESPONSE TO PLAINTIFF S MOTION FOR SUMMARY JUDGMENT AND MOTION TO DISMISS COUNTERCLAIMS FOR LACK OF JURISDICTION Pursuant to Rule 56 of the United States Court of Federal Claims (RCFC), defendant, the United States, hereby respectfully submits this response to plaintiff, AEY, Inc. s (AEY) motion for summary judgment, and its motion to dismiss the Government s fraud counterclaims for lack of jurisdiction. STATEMENT OF THE ISSUES 1. Whether genuine issues of material fact preclude relief on summary judgment in AEY s favor on the question of whether AEY forfeited its claims under 28 U.S.C Whether genuine issues of material fact preclude relief on summary judgment in AEY s favor on the question of whether the Government may pursue remedies against AEY under the False Claims Act (FCA), 31 U.S.C. 3729, et seq. counterclaims. 3. Whether this Court possesses jurisdiction over the Government s fraud I. Nature Of The Case STATEMENT OF THE CASE In this contract case, AEY contends that the United States Army, acting through the Army Sustainment Command (ASC) wrongfully withheld payment on two invoices submitted by

7 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 7 of 42 AEY for ammunition delivered to the Army for use by Afghan troops and police. The Government has counterclaimed that, under 28 U.S.C and the well-established rule in Little v. United States, AEY is liable for forfeiture of any payments on these invoices in light of AEY s guilty plea to conspiring to commit major fraud against the United States, conspiring to make false statements, and conspiring to commit wire fraud in connection with the company s scheme to defraud the Government by concealing the fact that ammunition delivered under the contract originated from a prohibited source. The Government has further counterclaimed for damages under the FCA, based upon multiple false statements of conformance issued by AEY that caused the Government to pay AEY $10,331, to which it was not entitled. II. Statement Of Facts A. Procedural Background On January 26, 2007, the United States Department of the Army (Army), acting through the Army Sustainment Command (ASC), awarded AEY a firm-fixed-price requirements contract, Contract Number W52P1J-07-D-0004 (the contract) to provide non-standard ammunition for the weapons used by the Afghan National Army and the Afghan National Police. AEY, Inc. v. United States, 99 Fed. Cl. 300, 302 (2011) (AEY I). The contract expressly incorporated 48 C.F.R , a provision of the Defense Federal Acquisition Regulation Supplement (DFARS), which provides that supplies delivered under the contract may not be acquired, directly or indirectly, from a Communist Chinese military company. Id. AEY delivered ammunition under the contract between May 2007 and March 28, Def. s Answer and Counterclaim 37 [hereinafter Counterclaim ]; Plaintiff and Counterclaim Defendant AEY s RCFC 7(a) Amended Counterclaim Reply to Defendant and Counterclaim 2

8 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 8 of 42 Plaintiff s Counterclaims 37 [hereinafter Counterclaim Resp. ]. On March 31, 2008, the ASC suspended all deliveries under the contract after ASC received conclusive proof that AEY had delivered ammunition of Communist Chinese origin in response to Delivery Order See App. 5 (Declaration of Kim Jones 19 [hereinafter Jones Decl. ), App. 13 (Declaration of Melanie Johnson 19 [hereinafter Johnson Decl. ]. 1 On May 23, 2008, the ASC terminated AEY for default. App. 6 (Jones Decl. 22), App. 14 (Johnson Decl. 22). On June 19, 2008, AEY and its officers were indicted in the United States District Court for the Southern District of Florida in connection with the company s delivery of the Communist Chinese-manufactured ammunition. AEY I, 99 Fed. Cl. at 302. The company ultimately pled guilty to conspiring to commit major fraud against the United States, conspiring to make false statements, and conspiring to commit wire fraud, in violation of 18 U.S.C. 1031, 18 U.S.C. 1001(a)(2), and 18 U.S.C. 1343, respectively. App. 28. As part of its guilty plea, AEY made a factual proffer in which it admitted that: (1) company principals were aware that certain ammunition that they intended to supply under the contract was Communist Chinese in origin; (2) company principals knew that the company could not supply Communist Chinese ammunition under the terms of the contract; (3) company principals chose to conceal the ammunition s Communist Chinese origin by having the ammunition removed from the wooden crates and metal tins that bore Chinese markings, disposing of papers containing Chinese markings, and repacking the ammunition in cardboard boxes; (4) the company falsely certified that the ammunition being furnished conformed in all respects with the contract requirements and that the manufacturer and point of origin was [a company] in Tirana, Albania; and (5) the company submitted invoices to the Government in connection with the Communist Chinese 1 App. is a reference to the documents filed along with this response. 3

9 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 9 of 42 ammunition that caused the Government to make $10,331, in payments to AEY. App AEY has sued the Government in this Court to obtain payments under Delivery Order 0003 and 0004 to the contract, which were not filled with Communist Chinese ammunition. The Government has counterclaimed that, under 28 U.S.C and the well-established rule in Little v. United States, because of AEY s admitted fraud in connection with Delivery Order 0002, it has forfeited its claims to payment of all delivery orders under the contract. The Government has also counterclaimed under the FCA, seeking a total recovery in the amount of $31,380,209.32, comprised of a civil FCA fine and treble damages for amounts paid to AEY in connection with Delivery Order AEY has now moved for summary judgment with respect to these counterclaims, urging that certain documents in its possession establish that the Government cannot pursue fraud counterclaims against the company. AEY also urges for the first time that this Court lacks jurisdiction to entertain the Government s fraud counterclaims at all, because the contracting officer s final decision referenced AEY s fraud as a reason not to pay the invoices as AEY demanded. B. Disputed Facts AEY s motion for summary judgment with respect to the waiver issue rests upon attorney argument concerning the interpretation of certain documents in its possession, rather than any actual facts that cannot be genuinely disputed regarding the Army Sustainment Command s knowledge of AEY s fraud and ostensible consent thereto. Pl. Mot. at 3. Moreover, the materials from which AEY makes its arguments are so obviously ambiguous on their face that this Court has already agreed with the Government in connection with prior summary judgment 4

10 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 10 of 42 and other motions practice that there are outstanding issues of material fact that would make a decision on waiver premature. AEY, Inc. v. United States, 114 Fed. Cl. 619, 631 (2014). Rather than taking any discovery concerning these obvious proof deficiencies, or to even attempt to verify whether it has an accurate understanding of the events of this case, AEY has simply moved for summary judgment again on the so-called waiver issue, making the same baseless allegations regarding Government knowledge. We dispute the supposed facts offered by AEY in support of its waiver defense with four declarations authored by the individuals with actual personal knowledge of AEY s performance of this contract. Those individuals are: (1) Kim Jones, the contracting officer for the AEY contract; (2) Melanie Johnson, who served as Branch Chief for Propellants, Explosives and Ammunition in the Acquisition Center - Army Sustainment Command during the time of AEY s contract performance; (3) Col. Luigi Biever, the former Director of Regional Operations for the Army Materiel Command (AMC); and (4) Daniel Stackwick, former Deputy for Security Assistance for the United States Army Joint Munitions Command. We also provide excerpts from the sworn testimony from Michael Mentavlos and Albert Weisner, two special agents who testified at the trial of AEY principal Ralph Merrill regarding the investigation into AEY s activities. For the reasons set forth in detail below, had AEY elected to conduct even a minimal investigation of its own case, it would have learned that there is no basis for a finding of waiver against the Government, let alone any support for its current contentions on summary judgment. 1. The Investigation Into AEY s Illegal Activities In July 2005, almost two years before the award of the contract at issue in this litigation, the Directorate of Defense Controls, a division of the Department of State, sent a referral to 5

11 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 11 of 42 Immigration and Customs enforcement alleging that AEY was shipping United States Munition List (USML) items into Iraq under State Department contracts without the proper brokering approval, and potentially in violation of export control laws. App (Trial Testimony of Michael Mentavlos, November 30, 2010, at 6:1-7, 6:24-7:9 [hereinafter Mentavlos Testimony ]. The referral also alleged that AEY was procuring Chinese-made AK-47s, having them repackaged and re-marked to conceal their true origin and shipping them into Iraq under those same State Department contracts. App. 40 (Mentavlos Testimony at 7:10-13). By February 2007, the investigation into AEY s activities was being handled by Michael Mentavlos, an investigator with Defense Criminal Investigative Services, a part of the Department of Defense s Inspector General s Office. App. 36, (Mentavlos Testimony at 3:17-20, 6:24-7:2, 7:21-23). As of that time, DCIS was focused on the alleged brokering violations associated with AEY s State Department contracts in Iraq. App (Mentavlos Testimony at 7:21-8:2). The Army Sustainment Command (ASC) awarded AEY the entirely separate contract at issue in this litigation, an indefinite quantity, indefinite delivery contract for the delivery of nonstandard ammunition, i.e., not AK-47s, to Afghanistan, on January 26, AEY, Inc. v. United States, 99 Fed. Cl. 300, 302 (2011). The ASC placed Delivery Order 0001 with AEY on January 26, 2007, App. 108, and Delivery Order 0002 on March 13, App. 1 (Jones Decl. 4) App. 10 (Johnson Decl. 5). In April 2007, DCIS contacted the ASC Acquisition Center and requested a copy of AEY s contract without giving a reason for doing so. App. 2 (Jones Decl. 5), App. 10 (Johnson Decl. 6). Special Agent Mentavlos explained, however, that he requested a copy of 6

12 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 12 of 42 the ASC contract for the delivery of non-standard ammunition to Afghanistan in order to be thorough... [and] to see if, by chance, [AEY] had requested any brokering approval from the State Department on that contract. App. 41 (Mentavlos Testimony at 8:3-9). In other words, when Special Agent Mentavlos requested that the ASC provide him with a copy of AEY s contract to supply non-standard ammunition to Afghanistan, he was not doing so in an effort to investigate any delivery of Communist Chinese ammunition, but was furthering his pre-existing investigation into alleged arms brokering violations in connection with AEY s contracts with the State Department to deliver arms to Iraq. The ASC contract was not relevant to the other State contract allegations regarding Chinese AK-47s, as the ASC contract involved ammunition only. In any event, no deliveries had been made under the ASC contract with AEY as of the time that Special Agent Mentavlos requested a copy of the ASC contract. App. 41 (Mentavlos Testimony at 8:3-12); App. 2 (Jones Decl. 6); App. 10 (Jones Decl. 7). 2 AEY s first deliveries under the contract occurred in May 2007, and in June 2007, and DCIS requested copies of the signed receiving reports for ammunition delivered to date under the AEY contract, again without explanation. App. 2 (Jones Decl. 6-7), App. 10 (Johnson Decl. 7-8). Both Ms. Jones and Ms. Johnson have stated under oath that, based upon lengthy experience in government contracting and procurement, it is not unusual to receive requests for information from DCIS regarding contractors and contract documentation, and the fact that such a request has been made does not necessarily mean that a contractor has actually engaged in any wrongdoing. App. 2 (Jones Decl. 8), App. 10 (Johnson Decl. 9). Accordingly, neither Ms. Jones nor Ms. Johnson drew any conclusions at all from the fact that DCIS had requested 2 Although Delivery Order No required delivery by March 31, 2007, App. 109, AEY did not make delivery at that time. App (Testimony of AEY Vice President David Packouz, November 30, 2010, at 102:23-25, 106:19-22); App (Packouz Testimony, December 1, 2010, at 59:1-5, 107:25-109:1). 7

13 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 13 of 42 information regarding AEY. App. 2 (Jones Decl. 8), App. 10 (Johnson Decl. 9). Indeed, given that DCIS was not investigating any wrongdoing by AEY in connection with the ASC contract, such conclusions would have been entirely unwarranted. Between June 21, 2007 and November 8, 2007, AEY made shipments of ammunition pursuant to Delivery Order App. 2 (Jones Decl. 9). App (Johnson Decl. 10). On June 21, 2007 and August 6, 2007, respectively, the ASC issued Delivery Orders 0003 and 0004, providing for additional deliveries of ammunition under AEY s contract. App. 2 (Jones Decl. 10); App. 11 (Johnson Decl. 11). The deliveries under Delivery Order 0003 were to be completed no later than November 30, 2007, and the deliveries under Delivery Order 0004 were to be completed by February 29, App. 2 (Jones Decl. 10); App. 11 (Johnson Decl. 11). At the time that they issued Delivery Order 0003 and 0004 to AEY, neither Ms. Jones, Ms. Johnson, nor the ASC staff knew or suspected that AEY might be delivering ammunition of Communist Chinese origin in connection with Delivery Order 0002, or providing the Army with false information concerning the origin of any delivered ammunition. App. 2-3 (Jones Decl. 11), App. 11 (Johnson Decl. 12). On August 23, 2007, DCIS conducted a search of AEY s headquarters, looking for digital and documentary evidence related to export and brokering violations with AEY s contracts in Iraq. App , 46 (Mentavlos Testimony at 8:25-9:6; 63:15-17). The search warrant affidavit obtained prior to that time did not include any mention of AEY s contract for the delivery of ammunition to Afghanistan because, at the time that the warrant was obtained, AEY had not delivered any items under that contract. App. 41 (Mentavlos Testimony at 8:16-20). Moreover, Special Agent Mentavlos testified that he did not ask AEY s president, Ephraim Diveroli, any 8

14 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 14 of 42 questions about the delivery of Communist Chinese ammunition to Afghanistan [b]ecause, at that time, I had no idea that there were allegations that AEY had been delivering Chinese ammunition under the Afghan contract. App. 42 (Mentavlos Testimony at 9:8-20) (emphasis supplied). Subsequent to DCIS s search of AEY s headquarters, Special Agent Mentavlos was contacted by two former AEY employees, David Packouz and Alex Podrizki, who communicated information that changed the focus of DCIS s investigation from alleged export laws violations to allegations that AEY was delivering ammunition under the ASC contract that was manufactured by a Communist Chinese military company. App (Mentavlos Testimony at 9:21-10:11). Special Agent Mentavlos interviewed Mr. Packouz and/or Mr. Podrizki on August 30, September 7, and October 9, See App (Mentavlos Testimony at 63:15-21, 65:24-66:18). In September 2007, Special Agent Mentavlos contacted Ms. Jones and Ms. Johnson, and told them that AEY was suspected of satisfying its requirements under the ASC contract with ammunition that originated from a Communist Chinese military company. App. 3 (Jones Decl. 12), App. 11 (Johnson Decl. 13). Based upon their experience with DCIS investigations of contractors, both Ms. Jones and Ms. Johnson understood at the time of their interactions with Special Agent Mentavlos that the mere fact that DCIS is investigating a contractor does not necessarily mean that the investigation is complete, or conclusive the contractor has done anything wrong. App. 3 (Jones Decl. 13), App (Johnson Decl. 13). Indeed, both witnesses understood that DCIS was continuing to investigate the issue. App. 3 (Jones Decl. 13), App. 12 (Johnson Decl. 13). Moreover, both witnesses would explain that it is not 9

15 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 15 of 42 unusual in their experience for such investigations to result in no charges being pursued or in a need for any contracting actions to be taken against the contractor. App. 3 (Jones Decl. 13), App. 12 (Johnson Decl. 13). Accordingly, Ms. Jones and Ms. Johnson did not, and, indeed, could not, conclude from the fact that DCIS was investigating AEY on suspicion that the company was delivering Communist Chinese ammunition that AEY had actually done so, and, by extension, was falsely certifying to the Government that the ammunition came from elsewhere. App. 3 (Jones Decl. 13), App. 12 (Johnson Decl. 13). During the ASC s communications with Special Agent Mentavlos in September 2007, Special Agent Mentavlos requested on behalf of DCIS that the ASC put all delivered ammunition on hold in a secure location under U.S. Control and not to release it to the Afghan National Army, because the ammunition was part of DCIS s investigation and might become evidence in the future. App. 3 (Jones Decl. 14), App. 12 (Johnson Decl. 15). In addition, Special Agent Mentavlos recommended that the ASC have inspectors on the ground examine AEY s deliveries to ensure that it had not been obtained from a prohibited source. App. 3-4 (Jones Decl. 14), App. 12 (Johnson Decl. 15). ASC, however, had limited ability to investigate on its own whether AEY was, in fact, delivering Communist Chinese ammunition in violation of contract requirements. App. 4-5 (Jones Decl. 15), App. 12 (Johnson Decl. 16). Whereas the ASC staff operated out of Rock Island, Illinois, all deliveries under AEY s contract were made to Afghanistan, where they were received by a military officer assigned to Combined Security Transition Command in Afghanistan (CSTC-A). App. 4 (Jones Decl. 15), App. 12 (Johnson Decl. 16). These individuals would lack the training and expertise to determine the ammunition s point of origin 10

16 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 16 of 42 from a visual inspection. App. 4 (Jones Decl. 15), App. 12 (Johnson Decl. 16). Moreover, the ASC did not have inspectors on the ground in Afghanistan. App. 4 (Jones Decl. 15), App. 12 (Johnson Decl. 16). Indeed, that is why the ASC relies upon contractors to certify honestly that the supplies or services being delivered are in accordance with all respects of the contract requirements, and to provide the ASC with correct information as to the manufacturer and point of origin of delivered products. App. 4 (Jones Decl. 15), App (Johnson Decl. 16). In November 2007, Ms. Jones and Ms. Johnson were informed that Special Agent Mentavlos had traveled to Albania and physically seen AEY repackaging Communist Chinese ammunition for shipment under our contract. App. 4 (Jones Decl. 15), App. 13 (Johnson Decl. 17); see also App (Mentavlos Testimony at 16:15-43:2). They were also informed at that time that pictures were taken, and that ammunition and components were seized. App. 4 (Jones Decl. 15), App. 13 (Johnson Decl. 17). As of November 2007, the ASC had not terminated AEY s contract, because the ASC did not have any conclusive proof that AEY had, in fact, delivered Communist Chinese ammunition. App. 4 (Jones Decl. 17), App. 13 (Johnson Decl. 18). Indeed, Ms. Jones and Ms. Johnson concluded, with the advice of counsel, that the ASC could not suspend or terminate the contract based upon the mere fact of an investigation into the contractor, and a secondhand, oral representation concerning AEY s actions. App. 4 (Jones Decl. 17), App. 13 (Johnson Decl. 18). Although Special Agent Mentavlos had seen some evidence of AEY s repackaging operations in Albania, the existence of those repackaging operations did not conclusively establish that AEY had ultimately delivered the repackaged ammunition to Afghanistan in 11

17 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 17 of 42 connection with the ASC contract. In October 2007, Special Agent Mentavlos requested the assistance of the United States Army Criminal Investigations Command, Major Procurement Fraud Unit, to collect ammunition that AEY had delivered under the ACS contract to the 22 Bunkers ammunition depot outside of Kabul, Afghanistan. See App (Mentavlos Testimony at 56:21-57:5); App. 78, (Trial Testimony of Albert Weisner, December 2, 2010, at 3:8-19, 5:16-6:7 [hereinafter Weisner Testimony ]). That investigation was handled by Albert Weisner, who was assigned as special agent in charge of the major procurement fraud unit and who was one of only two individuals responsible for such work for the entire country of Afghanistan. App. 80 (Weisner Testimony at 5:3-13). Special Agent Weisner began work in December 2007, and the AEY investigation was identified to him by his predecessor as an ongoing investigation that had not been completed due to logistical and manpower issues. App (Weisner Testimony at 4:25-5:2, 5:16-6:13). Special Agent Weisner attempted to coordinate travel to Kabul and then onward to the 22 Bunkers facility in the month of December, but travel was disapproved based on the threat environment and other considerations. App. 82 (Weisner Testimony at 7:8-16). As a result, the trip to 22 Bunkers took place in January App. 82 (Weisner Testimony at 7:17-23). At that time Special Agent Weisner took random samples of AEY s delivered ammunition at the 22 Bunkers facility, App. 13 (Weisner Testimony at 13:3-24), but saw no data cards identifying the serial or lot numbers on the ammunition, and no discernible Chinese markings on the paper in which the ammunition was wrapped. App (Weisner Testimony at 13:25-14:19). Thus, Special Agent Weisner could not tell by his on-site inspection whether the ammunition that AEY had delivered was manufactured in China. App. 84 (Weisner 12

18 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 18 of 42 Testimony at 14:20-22). The samples that Special Agent Weisner collected were eventually shipped to the United States, App. 85 (Weisner Testimony at 17:3-11), however, and sent to a firearms laboratory for processing. App. 73 (Mentavlos Testimony at 57:12-14). 2. ASC s Suspension, Termination And Debarment Of AEY It was not until March 25, 2008 that Ms. Jones and Ms. Johnson received conclusive proof that AEY had delivered Communist Chinese ammunition under the ASC contract. App. 5 (Jones Decl. 19), App. 13 (Johnson Decl. 19). The proof came in the form of a Department of Army Memorandum for the Army Suspension and Debarment Official, dated 21 March 2008, Suspension of Efraim Diveroli and AEY, Inc; and the Department of Army, Procurement Fraud Branch Letter to Efraim Diveroli, Notice of Suspension, dated March 25, App. 5 (Jones Decl. 19), App. 13 (Johnson Decl. 19). The Memorandum related that, on January 5, 2008, [b]ased on information showing that AEY may have been purchasing ammunition from a source other than that listed on the [certificate of conformance], and, acting at the request of the ASC and others, the Army the Afghanistan Fraud Detachment, Major Procurement Fraud United, 701st Military Police Group, Army Criminal Investigation Command (CID), photographed and inspected AEY-supplied ammunition in Afghanistan using an unclassified Defense Intelligence Agency Publication, entitled Small Caliber Ammunition Identification Guide, Volume 1, Small Arms Cartridges up to 15mm. App. 89 (emphasis supplied). The inspection revealed 14 containers delivered in connection with Delivery Order 0002 that, despite accompanying certificates of conformance indicating that the ammunitions place of origin was Hungary, the ammunition in question, in fact, originated in the People s Republic of China. App. 89. Accordingly, the United States 13

19 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 19 of 42 Army Legal Services Agency recommended to the Army Suspension and Debarment Official that AEY be suspended until the resolution of any pending investigation or ensuing legal proceedings[.] App. 91. On March 25, 2008, the Department of Army, Procurement Fraud Branch suspended AEY from future contracting for providing false statements on its November 25, 2007 certificate of conformance, which had stated that the ammunition was produced in Hungary, when in fact it was from China. App. 6 (Jones Decl. 20), App (Johnson Decl. 20), App. 93. On March 31, 2008, the ASC suspended all deliveries under the contract, App. 5 (Jones Decl. 19), App. 14 (Johnson Decl. 19), App. 96, and on April 16, 2008, directed that AEY show cause why it should not be terminated for default for delivering ammunition in violation of DFARS App. 6 (Jones Decl. 21), App. 14 (Johnson Decl. 21), App. 97. On May 23, 2008, Ms. Jones issued the final decision of the Contracting Officer regarding Termination for Default of the contract with AEY. App. 6 (Jones Decl. 22), App. 14 (Johnson Decl. 22), App. 98. In connection with these events, both Ms. Jones and Ms. Johnson declare that: (1) any contention by AEY that the ASC encouraged and demanded AEY to continue performance under Delivery Order 0002, 0003, and 0004 regardless of knowledge that the company was delivering ammunition from a Communist Chinese source is factually inaccurate, App. 6-7 (Jones Decl. 23), App (Johnson Decl. 23); and that (2) any contention by AEY that the ASC knew that AEY was delivering Communist Chinese ammunition, but made a decision to overlook that fact because the ammunition in question was critically needed in Afghanistan is also factually inaccurate, App.7-8 (Jones Decl. 24), App. 15 (Johnson Decl. 14

20 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 20 of 42 24), because neither they nor the ASC staff had conclusive proof that AEY was delivering Communist Chinese ammunition until March 2008, the point at which the ASC promptly suspended all deliveries under the contract, and ultimately terminated AEY for default. App. 6-7 (Jones Decl ), App (Johnson Decl ). Prior to that time, the ASC did not have sufficient conclusive evidence of wrongdoing on AEY s part to justify taking any adverse contract action against the company or to alter the business relationship. App. 6 (Jones Decl. 23), App. 14 (Johnson Decl. 23). Both Ms. Jones and Ms. Johnson declare that if they had obtained the conclusive evidence that the ammunition was manufactured in factories in the People s Republic of China earlier, AEY would have been terminated earlier for failure to deliver items in conformance with the terms and conditions of the contract, because AEY failed to deliver in accordance with the provisions of DFARS , Prohibition on Acquisition of United States Munitions List Items from Communist Chinese Military Companies. App. 7 (Jones Decl. 24), App. 15 (Johnson Decl. 24). Neither Ms. Jones, Ms. Johnson nor ASC staff ever considered at any time the idea of overlooking or excusing any delivery of ammunition manufactured in Communist China by AEY for any reason, or considered excusing false statements by AEY concerning the point of origin of the ammunition being delivered under the contract, and the ASC never conveyed to any representative of AEY that such actions would be excused. App. 7 (Jones Decl. 25), App (Johnson Decl. 25). The evidence cited by AEY that is purportedly to the contrary consists of an chain dated February 22, 2008, which AEY has misinterpreted and taken out of context. The chain consists of an initial communication by Lt. Col. Moises Gutierrez of CSTC-A to Col. Luigi Biever of the Army Materiel Command, in which Lt. Col. Gutierrez writes as follows: CJ4 has not had sufficient time to analyze the impact of immediate 15

21 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 21 of 42 suspension of the 4 SAAM deliveries from AEY, Inc..... Additionally, the [Afghan National Security Forces] are moving into the Spring fighting season and most ammunition is critically needed. The [Afghan National Police] has zero 7.62 x 54 mm on hand and is urgently waiting on deliveries of this ammo. As such, we are requesting that [Defense Contract Management Agency] be engaged as soon as possible to ensure quality product/packaging, but that deliveries continue given the criticality of need. App.103. Col. Biever, upon receiving this , forwarded it to Mr. Stackwick, stating: As you can see from the below request, CSTC-A would like the deliveries of ammunition to continue and will accept the risk. Id. This has nothing to do with AEY s illegal delivery of Communist Chinese ammunition under the contract. App. 18 (Biever Decl. 9), App. 21 (Stackwick Decl. 9). Rather, in February 2008, CSTC-A began to report complaints regarding the poor quality of the packaging of AEY s ammunition. App. 4 (Jones Decl. 18). The packaging issue presented a significant problem because, if the packaging for ammunition is damaged, the quality of the ammunition may be decreased as a result of damage by the elements and corrosion. Id. The packaging complaints constituted a quality control and quality assurance issue (QC/QA) that was addressed separately during the same timeframe that AEY was being investigated for delivering ammunition from a prohibited source. Id. Indeed, on March 18, 2008, as a result of the complaints from CSTC-A, Ms. Jones issued a letter to AEY requiring that the company respond within 10 days with a proposed corrective action to address the poor quality of its packaging. App. 5 (Jones Decl. 18); App. 76. In February 2008, Col. Biever was serving as the Director for Regional Operations for the United States Army Materiel Command (AMC), and Mr. Stackwick was Deputy for Security Assistances for the United States Army Joint Munitions Command (JMC). In their respective 16

22 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 22 of 42 positions, both Col. Biever and Mr. Stackwick were charged with liaising with individuals in Afghanistan to ascertain the ANSF s ammunition and delivery scheduling needs, and to assist in developing contract requirements that could meet those needs. App. 17 (Biever Decl. 2-4), App. 20 (Stackwick Decl. 2-4). As set forth in the attached declarations, the February 2008 exchange between Col. Biever and Lt. Col. Gutierrez was a follow-up to a discussion that the two had had regarding problems with the packaging of AEY s ammunition that had been observed in the field, not a reference to AEY s illegal delivery of Communist Chinese ammunition. App (Biever Decl. 6-7). Indeed, that is why Lt. Gutierrez s makes a request that DCMA be engaged as soon as possible to ensure quality product/packaging, but that deliveries continue given the criticality of need. App. 103 (emphasis supplied). Moreover, as set forth in the attached sworn declaration by Col. Biever, when Col. Biever forwarded Mr. Gutierrez s to Mr. Stackwick, and informed Mr. Stackwick that CSTC-A would like the delivery of ammunition to continue and they will accept the risk, the only risk that [he] was referring to was the risk that faulty packaging would result in the delivery of poor quality or unusable ammunition to the ANSF. App. 18 (Biever Decl. 8). Col. Biever s account is confirmed by Mr. Stackwick. App. 21 (Stackwick Decl. 6-8). Indeed, as of February 2008, neither Col. Biever nor Mr. Stackwick was aware of any allegation that AEY might be filling its delivery requirements with ammunition that was Communist Chinese in origin, App. 18 (Biever Decl. 9), App. 21 (Stackwick Decl. 9), and both individuals have executed sworn declarations that any suggestion that [the] February refers to an acceptance of a risk that delivered ammunition might be Communist Chinese in origin is entirely incorrect. [We] were only discussing issues with the quality of AEY s delivered ammunition in light of observed 17

23 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 23 of 42 deficiencies in the packaging for that ammunition, not the ammunition s place of origin. App. 18 (Biever Decl. 9), App. 21 (Stackwick Decl. 9). SUMMARY OF ARGUMENT AEY s motion for summary judgment should be denied because (1) it is based upon a misapprehension of the scienter requirements under both the Special Plea in Fraud and the FCA, and incorrectly assumes that the existence of some purported Government knowledge of its fraud automatically bars the Government from pursuing a forfeiture of AEY s claims or damages under the FCA; and because (2) the Government has demonstrated, with sworn declarations and trial testimony, that every alleged fact upon which AEY s motion depends is substantively controverted, such that genuine issues of material fact preclude judgment in AEY s favor. In addition, AEY s motion to dismiss the Government s fraud counterclaims should be denied for failure articulate any cognizable, legal basis why this Court lacks subject matter jurisdiction to entertain them despite the statutory authorization afforded to this Court under 28 U.S.C and 2508, to exercise jurisdiction over counterclaims brought by the Government in pending matters. ARGUMENT I. Applicable Legal Standard Summary judgment is appropriate if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. RCFC 56(c). The benefit of all factual inferences runs in favor of the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam). 18

24 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 24 of 42 II. AEY s Motion For Summary Judgment Is Premised Upon A Misapprehension Of The Scienter Requirements Under Both The FCA And The Special Plea in Fraud. AEY opens its motion for summary judgment with two complete misstatements of the law defining scienter under both the FCA and the Special Plea in Fraud, representing to this Court that [g]overnment knowledge of the facts prior to the presentment by a private-party actor of a false or fraudulent Claim negates the statutory requirement for knowing submission by that private-part actor of a false or fraudulent claim, both for purposes of a violation of the FCA, Pl. Mot. at 14, and for purposes of the Special Plea in Fraud. Id. at Such arguments constitute a misstatement of applicable law. A. AEY Misstates The Law Addressing Government Knowledge Of Fraud In The FCA Context. First, contrary to the assertion made in AEY s motion for summary judgment, it is well established that the FCA was amended in 1986 to make clear that Government knowledge of a contractor s wrongdoing is not an automatic defense to an FCA violation. See Shaw v. AAA Eng g & Drafting, Inc., 213 F.3d 519, (10th Cir. 2000) (stating that 1986 amendments to FCA make clear that Government knowledge of a contractor s wrongdoing is not an automatic defense); United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991) ( That the relevant government officials know of the falsity is not in itself a defense. ). Although Government knowledge is not in itself a defense, such knowledge may show that a defendant did not act with the requisite level of scienter, that the defendant did not knowingly submit false claims. See U.S. ex rel. Burlbaw v. Orenduff, 548 F.3d 931, (10th Cir. 2008); U.S. ex rel. A-Plus Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 428,

25 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 25 of 42 (6th Cir. 2005). Even in cases where the Government is aware of the falsity, however, the focus of the analysis remains on defendant s state of mind. That is, Government knowledge is relevant only insofar as the facts and circumstances demonstrate that it led to a reasonable belief on the part of the defendant that its statements were not false. Courts have generally held that the Government s knowledge of a defendant s actions will show that the defendant s false claims were not knowingly submitted only if (1) the defendant shared all information with the Government, and (2) the Government directed the defendant to act as it did. See U.S. ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321, 327 (9th Cir. 1995); U.S. ex rel. Durcholz v. FKW Inc., 189 F.3d 542, 545 (7th Cir. 1999) (Cudahy, J.); see also U.S ex rel. Laird v. Lockheed Martin Engineering & Science Services Co., 491 F.3d 254, (5th Cir. 2007); U.S. ex rel. Harrison v. Westinghouse SavannahRiver Co., 352 F.3d 908, 920 n.14 (4th Cir. 2003); Shaw v. AAA Eng g & Drafting, Inc., 213 F.3d 519, 534 (10th Cir. 2000). 3 Even a cursory examination of AEY s motion for summary judgment reveals that AEY has made absolutely no showing on the second prong of the applicable legal inquiry. See 3 Among the cases articulating the showing that a defendant must make to establish that its false claims were not submitted knowingly, the Seventh Circuit s Durcholz decision is instructive. To speed the process of contract completion, a facility official instructed the contractor to submit invoices for excavation work, even though the officer knew that the contractor actually had completed dredging work rather than excavation work. The Seventh Circuit refused to hold the defendant liable for defrauding the government by following the government's explicit directions. 189 F.3d at 545; see also U.S. ex rel. Barrett v. Johnson Controls, Inc., No. 3:01 CV 1641, 2003 WL , at *10 (N.D. Tex. Apr. 9, 2003) ( if the Durcholz principle applies in this Circuit, it does so only in the rare circumstance when the government effectively directs the defendant to make the statement alleged to be false. ). Along the same lines, in Butler the Ninth Circuit affirmed a directed verdict for the government contractor. 71 F.3d at 323. The plaintiff argued the defendant falsified test reports because different types of tests were performed from those identified in the reports. The evidence showed, however, that the tests were the subject of discussion between the defendant and the Army, and the Army knew of and had approved the testing method actually used. Id. at

26 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 26 of 42 generally Pl. Mot. Thus, against the relevant legal background, even if the Court were to take AEY s allegations concerning Government knowledge in this case as true and at face value (which, would be error for all of the reasons discussed in our disputed facts section, see supra Part II.B., and also explored further below), AEY is not entitled to summary judgment in its favor in connection with any purported government knowledge in this case. B. AEY Misstates The Law Addressing Government Knowledge Of Fraud In The Context Of The Special Plea in Fraud. Government knowledge also does not have any bearing on the scienter required for a violation of the Special Plea in Fraud, 28 U.S.C. 2514, and, as we have previously pointed out in summary judgment briefing and in our motion for reconsideration, it is legal error to suggest that the Government may waive application of the Special Plea in Fraud. First, the Special Plea in Fraud unequivocally provides that [a] claim against the United States shall be forfeited to the United States by a person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof. 28 U.S.C (emphasis supplied). The statute further provides that [i]n such cases the United States Court of Federal Claims shall specifically find such fraud or attempt and render judgment of forfeiture. Id. (emphasis supplied). Not only does the statute s plain language indicate that its application is mandatory, but the well-established case law further underscores that the statute is to have harsh and deterrent results, providing that fraud in the performance of part of a contract requires the forfeiture of all claims arising out of the contract. See Little v. United States, 152 F. Supp. 84 (Ct. Cl. 1957). As such: (1) a person who defrauds or attempts to defraud the Government has the courthouse barred to him and loses his claims, and (2) the forfeiture is required. In other words, the statute looks to the actions of the corrupt 21

27 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 27 of 42 contractor and only the corrupt contractor to determine whether forfeiture is warranted. The notion that a contractor who has, in fact, intentionally defrauded the Government may escape the forfeiture requirement based upon some subsequent, external action on the Government s part is nowhere to be found within the plain language of the statute, and conflicts directly with the statute s fundamental purpose of deterring and punishing fraud. Moreover, even if Government knowledge were deemed to have some relevance to scienter for purposes of the Special Plea in Fraud (which it does not), AEY s claim that Government knowledge is an absolute defense is also contrary to existing case law in the FCA fraud context, discussed above, which establishes that it is only the contractor s scienter, not the Government s, that is relevant to a determination of the contractor s liability under the fraud statutes, and that the applicable inquiry is whether the Government consented, acquiesced, or agreed to the contractor s actions underlying the alleged false claim in a manner that negated any knowledge on the contractor s part. See supra Part II.A. The decision of the United States Court of Claims in Carrier Corp. v. United States, 328 F.2d 328 (Ct. Cl. 1964), does not support AEY s contentions to the contrary. Carrier does not stand for the proposition that Government action can waive forfeiture under the Special Plea in Fraud if it knowingly continues to benefit from a contract in the circumstance where the Government intends to cancel the contract and seek forfeiture of the contractor s claims. Indeed, Carrier did not involve a situation in which Government action waived the applicability of the Special Plea in Fraud, but, rather, a situation in which the Government attempted to effect a forfeiture in circumstances where the Special Plea was not applicable in the first instance. The plaintiff in Carrier was a munitions contractor who entered into an agreement with 22

28 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 28 of 42 the Government to resolve a stop work order that the Government issued after discovering a fraudulent scheme by the contractor s employees to bypass required quality control procedures. Id. at In exchange for being permitted to resume production, the contractor agreed to demonstrate that top management had not been involved in the fraud, to fire certain employees, and to pay the Government for any excess costs that it had incurred as a result of the contractor s actions. Id. at 335. For its part, the Government reserved the right to pursue fraud remedies against the contractor for its earlier fraud, to include forfeiture. See id. The contractor fulfilled its obligations under the parties agreement, id, and on December 1, 1953, received a statement by the Government that purported to authorize it to proceed with production. Id. at 333. In reliance upon that statement and the negotiations that had led up to it, the contractor re-staffed its plant and completed a test run of shells. Id. A mere three weeks later, on December 29, the Government cancelled the underlying contract in its entirety as the result of internal discussions of which the contractor had no knowledge and in which it had apparently continued to discuss ways and means of canceling the entire contract even though it had authorized the contractor to resume production. Id.at 334; id. at 336. Although the Government attempted to justify the termination of the contract based upon the contractor s earlier fraud, the contractor believed that, in actuality, the cancellation was for the convenience of the Government, and that the reason was not the alleged fraud, but was due to fact that the defendant no longer had need for the large number of shells provided for under the original contract. Id. at 335. It is well established that [a] termination for convenience ordinarily entitles a contractor to recover its incurred costs of performance, reasonable termination expenses, and a reasonable profit on the work performed (or an offset to account for 23

29 Case 1:10-cv CFL Document 80 Filed 07/23/14 Page 29 of 42 the contractor's expected losses had the contract been performed to completion). Gen. Dynamics Corp. v. United States, --- U.S. ---, 131 S.Ct. 1900, 1908, 179 L.Ed.2d 957 (2011). The Government attempted to defend itself by reference to the Special Plea in Fraud, citing the contractor s fraud on the original contract, and claiming that, under the teachings of Little, the Government was entitled to forfeit all claims arising under the contract, including any claims for costs incurred by the contractor under the parties supplemental agreement. Id. at & n.4. The Court did not agree, holding that the plaintiff is entitled to recover the cost and expenses of the operation from December 1, 1953 to December 29, 1953, including the cost of reassembling its working force and its standby expense, but that its recovery should be thus limited, i.e., the costs associated with a termination for convenience of the supplemental agreement. Id. at 337. Significantly, although the Court discussed the Government s actions in harsh terms and made clear that it considered it cruel, unjust and unfair for [the Government] to delay final action while the plaintiff was incurring worse than useless expense, id. at 337, the Carrier Court did not justify its limited damages award to the contractor upon a finding that the Government had waived the application of the Special Plea in Fraud based upon its conduct. To the contrary, in a portion of the Carrier opinion apparently overlooked by this Court in its January 30, 2014 opinion, the Court held that the defendant s reservation of its right [in its agreement with the contractor] to cancel the contract for fraud would affect any claims arising out of the normal operation of the contract. Id. at 336 (emphasis supplied). In other words, directly contrary to this Court s reading of Carrier, the Court of Claims explicitly recognized that the Government s right to forfeit claims made by the contractor under the original contract 24