Boeing’s drone unit to pay $25 million to settle fraud charge that was sparked by whistleblower complaint

SEATTLE – Boeing’s drone subsidiary, Insitu, will pay $25 million to settle a federal lawsuit accusing it of fraudulently overcharging the government on no-bid military contracts by billing for new parts but using recycled ones.

The whistleblower who brought the original case, D R O’Hara, who was fired by Boeing, will get $4.625 million as a share of that penalty for uncovering the fraud. Insitu will also have to pay O’Hara’s legal expenses.

The Department of Justice accused Insitu of “knowingly submitting materially false cost and pricing data” for contracts to supply surveillance drones to both the U.S. Special Operations Command, or SOCOM, and the Navy, according to a statement Tuesday.

Insitu does not admit any wrongdoing and said in a statement that “our disclosures to the government at the time satisfied all requirements.”

The Justice Department alleged that between 2009 and 2017, Insitu entered into five noncompetitively bid contracts with the Navy and two contracts with SOCOM for drones at deliberately inflated prices using cost and pricing data for new parts and materials, while planning all along to use recycled parts.

“Taxpayers deserve to get what they paid for,” said U.S. Attorney for Western Washington Brian Moran. “Cases such as this one should be seen as a warning to defense contractors that false claims have no place in military purchasing.”

Bryan Denny, special agent in charge of the Defense Department’s Criminal Investigative Service, Western Field Office, said the litigation is an “example of our agents and law enforcement partners working together to uncover fraudulent activity and protect taxpayers’ dollars entrusted to the DoD.”

The Justice Department took over investigation of the case after O’Hara filed an initial complaint in 2015 under the federal False Claims Act, which allows whistleblowers to initiate cases against parties that have defrauded the U.S. government.

Boeing acquired drone maker Insitu in 2008 but has allowed it to operate as an independent subsidiary to preserve its innovative and agile culture.

In 2011, Boeing Corporate sent O’Hara, then a 37-year veteran of the company, to Insitu in Bingen, Klickitat County, as director of estimating, pricing and procurement to help manage the complex compliance processes for government contracts.

According to the court filing, O’Hara was stymied as he tried to uncover pricing and other data needed to validate contracts, and when he pushed for answers his managers grew obstructive and hostile. In fall 2014, he filed a complaint to the Boeing Ethics hotline, expressing his concern about Insitu’s deficient accounting practices.

Though the complaint should have been a protected communication, Boeing Ethics sent an email to Insitu’s Human Resources department identifying him, he said.

“Within a few weeks, I was terminated,” O’Hara said Tuesday in a phone interview . “They made up some stuff, slanderous charges that had no basis in fact.”

He was told then that he could not reapply to work anywhere at Boeing. His career ended, he lost the extra years his Boeing pension would have accrued.

Boeing did not respond to a request to comment on the alleged failure of the ethics program, which it touts as a safe way for employees to anonymously report activities that are illegal or pose safety issues.

O’Hara said Insitu executives constantly asked him to sign off on cost and pricing data, but he refused because he wasn’t given validating data.

“The U.S. government was able to get it and that’s how they validated the fraud that was going on,” he said.

He recalled challenging an executive who asked him to change the pricing on a contract under the Defense Department’s Foreign Military Sales program to sell drones to the Netherlands, telling the executive to do so might be fraud.

“When I’m bidding on an FMS contract, I’m going through the U.S. Defense Department,” O’Hara said. “I have to comply with U.S. regulations. It’s a matter of trust between military allies.”

The court filing states that over the course of his time at Insitu, he refused to sign more than 100 cost certifications because of his concerns about their accuracy. Instead, senior executives including the chief financial officer signed the documents.

O’Hara said after the Justice Department took over the investigation in 2019, Boeing Corporate finally stepped in and “cleaned house,” leading to an extensive turnover of top Insitu executives over the past two years.

Boeing declined to comment on the executives’ departures or why they left.

O’Hara started at Boeing in 1973 in Wichita, Kansas, and worked his way up from the factory floor, earning two industrial engineering degrees and a business management degree after he moved to Seattle. Over his Boeing career, O’Hara said, he devised the procurement accounting processes now used internally across Boeing.

He said he learned only after initiating his legal action – known as a qui tam case – that it allows for the whistleblower to get a share of the proceeds if successful.

“That wasn’t my motivation,” O’Hara said. “It was personal ethics and integrity.”

O’Hara, 65, said it’s been a “rough five-and-a-half years,” during which he couldn’t talk about the case to allow the investigation to proceed. He said he feels vindicated by the outcome.

He and his wife now own and run a historic bed & breakfast near Bingen.