The line between criminality and regulatory non-compliance grows fainter every year. A reading of the indictment brought against ex-Louis Berger Group CEO Derish Wolff, for which he appeared in court recently, is full of details that provoke questions about Wolff's actions and whether a judge or jury will find him guilty. A dramatic case could be presented about war-profiteering. However, there are reasons to ask if this should have been a civil lawsuit instead of a criminal case.
On the surface, the charges are serious. They involve Berger's former chief financial officer, Salvatore Pepe, and its former general accounting manager, Precy Pellettieri, both of whom were named as co-conspirators and pleaded guilty last year. Wolff is said to have worked with them to misclassify indirect costs and misrepresent the Berger Group's true overhead in performing contracts for the U.S. Agency for International Development (USAID) and the Dept. of Defense over a 10-year period, including work in Iraq and Afghanistan.
Specifically, the indictment claims Berger Group intentionally miscalculated to 143.41% the rate applied to its indirect labor costs and categorized as costs associated with its federal contracts work done for other projects and office space not associated with the jobs.
The alleged improprieties were brought to the federal government's attention by Harold Salomon, a former senior financial analyst in Berger's Washington, D.C., office.
The case may not be so simple to prove. The Berger clients against which the alleged fraud was committed, USAID and the Dept. of Defense, take several years to conclude their contract audits to determine final payment. During the long audit period, USAID allowed Berger Group, and presumably other contractors, to “estimate a 'provisional rate' for certain fiscal years based on prior year's cost data,” according to the Justice Dept.'s indictment.
After Salomon's tip, the Justice Dept. needed six years to finish its own investigation before agreeing with Berger Group to a $69-million settlement of a civil suit.
In our opinion, a multiyear audit and payment process on a cost-plus contract is a kind of moral sand trap, especially when combined with a long working relationship between an agency and its contractor. Maybe Wolff was brazen about deceiving USAID. Subordinates, according the the U.S. attorney, challenged Wolff's methods, but they claim Wolff wouldn't back off. Altogether, the amount repaid by Berger Group that was considered overbilled was $10 million.
Wolff and his top financial managers at Berger also could have been tempted to treat the calculation of costs as one long negotiation. With what seems like a growing number of aggressive prosecutions and enforcement of regulations involving the industry, we're interested to see the government's complete briefcase of evidence and Wolff's defense.