A Newark, Del., software firm that makes light-based fast-computing systems and a video-enhancement platform used by the U.S. military for war intelligence and weapons testing, has agreed to pay $2.75 million to resolve civil allegations of federal contracting fraud.
The 11-member firm, E.M. Photonics Inc., and Eric Kelmelis, the company’s chief executive, had each been accused of “falsified labor costs and duplicative work in order to maximize charges," under special programs run by the Small Business Administration for U.S. contractors with under 500 employees, according to a statement by David C. Weiss, U.S. Attorney for Delaware.
The company — cofounded by Kelmelis in 2001 while working on his master’s degree in electrical engineering at the University of Delaware — has filled 100 contracts with the U.S. Navy and Air Force, the Defense Advanced Research Projects Agency, NASA, the Department of Energy, and other agencies.
Photonics officials said they settled accusations with the agencies and prosecutors in late December, after a four-year investigation of “billing and timekeeping issues” from 2009 to 2014. However, the deal was announced only this week by federal prosecutors in Wilmington after the end of the partial shutdown of the federal government.
The government got the “quality” research and work it paid for, and the company and Kelmelis both “deny that they made any misrepresentations,” according to defense lawyer Nathan J. Andrisani of Morgan, Lewis & Bockius LLP, Philadelphia. And, the agencies have given the company 20 more contracts since the period covered by the investigation ended.
Andrisani said the company and Kelmelis were “disappointed” that they had to settle but thought that “putting the matter behind them was the best option” as they go back to work on “new and better technology.”
Kelmelis agreed to pay half the settlement immediately, while E.M. Photonics will pay the other half over the next three years. The settlement includes $1.18 million in restitution, and does not cover any tax or criminal liability. The settlement agreement says both sides agreed to the payments “to avoid the delay, uncertainty, inconvenience and expense of protracted litigation.”
During the five years covered by the investigation, the company and its boss “engaged in two principal schemes to defraud" federal procurement programs meant to help small businesses, prosecutors alleged in Weiss’ statement on the settlement.
First, Kelmelis and his company told employees to “falsely complete time sheets for direct labor that the employees did not perform and submit false invoices and public vouchers to the funding agencies for direct labor that was not performed on these contracts and grants.” Also, prosecutors say the company “sought and received” government funding “for essentially equivalent work already performed and funded by another government agency,” but “falsely certified” that the work wasn’t duplicative.
“The government alleged that both of these schemes were designed to maximize charges to each contract or grant,” the statement added.
The civil allegations resolved in the settlement are the latest in a series that government procurement investigators have made in recent years against firms participating in the federal Small Business Administration’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer programs. These programs are “the nation’s largest source of early-stage/high-risk funding for start-ups and small businesses," according to the E.M. Photonics settlement.
Some other cases included criminal charges and resulted in prison sentences. No criminal charges have been filed in the Delaware case. Asked whether the government is done with the company, Weiss' spokeswoman, Kimberlynn Reeves, said the office had “nothing to share.”
The settlement followed a joint investigation by Jamie M. McCall and Jennifer Hall, of Weiss’ office; the federal Defense Criminal Investigative Service; and NASA, Army, Navy, Air Force and Energy Department investigators, “to ensure the integrity of the U.S. Department of Defense’s procurement system," including research and development, said Leigh-Alistair Barzey, special agent-in-charge of the service’s Northeast field office.
In 2017, the federal Government Accountability Office urged Congress to tighten requirements for small businesses that participate in the small-business contractor programs.
GAO noted that federal agencies have awarded $2 billion a year through SBIR and tech transfer for the last 25 years, and that from 2010 to 2016, prosecutors used information collected by federal inspectors general to win 14 guilty verdicts or criminal pleas for violating program guidelines, collected $31 million in restitution, and suspended 40 people from federal contracting, with other cases in the works.
In one such case, a Lehigh University professor was convicted in 2016 on criminal charges and sentenced to prison for defrauding NASA and other agencies in connection with a $700,000 grant that was partly backed by the SBA SBIR program.
In that case, Lehigh University engineering professor Yujie Ding was sentenced to a year and a day in federal prison for lying to win the contract. Ding told the government he would use public funds to pay scientists to do the research in his company lab. Instead, the court found that Ding had a grad student do the work in a Lehigh lab, illegally boosting Ding’s firm’s profits.
“We are a Band-Aid. The agencies needs to firm up these programs,” Jim Ives, assistant inspector general for investigations at NASA, told me after Ding’s conviction was appealed (the Third Circuit appeals court upheld Ding’s sentence).