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Ex-CEO of Defense Department contractor charged with overbilling

Photo Credit: Cliffview Pilot

BEHIND THE STORY: The former president and CEO of international engineering consulting firm Louis Berger Group surrendered to the FBI in Newark early today to face a six-count grand jury indictment accusing him of over-billing the government millions of dollars in reconstruction contracts in Iraq and Afghanistan, federal authorities said.

Derish M. Wolff, 76, had an appearance scheduled this afternoon in U.S. District Court in Newark.

Soon after Wolff — the nephew of company founder Louis Berger — became chairman of Berger Group Holdings, Inc., in 2002, federal officials awarded a five-year $300 million contract to the group for rebuilding power plants, schools and irrigation systems in Afghanistan.

But the company, among other sleights of hand, shifted overhead costs from private clients to federal and state contracts, hoping they wouldn’t be noticed, federal authorities said.

Two former senior employees with the Morristown-based company pleaded guilty in federal court in Newark last year to their roles in the scheme.

Although he wasn’t originally identified by name, the indictment points to Wolff as the mastermind of the plot, which federal authorities said was carried out by the two: Salvatore Pepe, 58, of Tuckahoe, N.Y., LBG’s former Chief Financial Officer, and Precy Pellettieri, 54, of Rahway, the former controller.

Pepe and Pellettieri admitted targeting an overhead rate above 140 – meaning: for every dollar of labor devoted to a contract from the USAID, LBG would receive an additional $1.40 in overhead expenses and total profits allegedly incurred by LBG.

The duo reclassified employees’ work hours — including those in the accounting department — to make it look like they worked on exclusive federal projects they never really came near, U.S. Attorney Paul J. Fishman said.

The workers had no idea, he said.

“[D]uring decades at the helm of a company entrusted with the rebuilding of battle-scarred nations, Derish Wolff focused on profits over progress,” Fishman said, adding that the scheme set targets “that could be reached only through fraud.”

Wolff, of Miami, Fla., and Bernardsville, was president and CEO of LBG from 1982 to 2002 before becoming chairman of LBG’s parent company. He officially was indicted on one count of conspiring to defraud the USAID and five counts of making false claims in connection with those billings.

The firm itself last year agreed to pay the government nearly $70 million as part of a deal to try and stave off criminal charges, given that Wolff and the others had been removed. Pepe and Pellettieri had plenty of stories to tell in exchange for the government’s promise to seek leniency for them when they eventually are sentenced.

In one instance, the indictment alleges:

“At an LBG annual meeting in September 2001, [Pepe], who was then the controller and eventually became the chief financial officer – presented a USAID overhead rate that was significantly below Wolff’s target. In response, Wolff denounced Pepe, called him an ‘assassin’ of the overhead rate, and ordered him to target a rate above 140 percent, meaning that for every dollar of labor devoted to a USAID contract, LBG would receive an additional $1.40 in overhead expenses supposedly incurred by LBG.

“In addition to padding employees’ work hours with fake hours supposedly devoted to USAID work, Wolff instructed his subordinates to charge all commonly shared overhead expenses for LBG’s Washington office, such as rent, to an account created to capture USAID-related expenses, even though that office supported many projects unrelated to USAID or other federal government agencies,” the indictment charges.

According to federal authorities in Newark, USAID is “an independent federal government agency that advances U.S. foreign policy by supporting economic growth, agriculture, trade, global health, democracy, and humanitarian assistance in developing countries, including countries destabilized by violent conflict.”

The Louis Berger Group, Inc. (LBG) received more than $1.4 billion in contracts from the Defense Department and the USAID, records show. USAID asked the company two years ago that Wolff “not be involved with any government contracts while the investigation by the U.S. attorney proceeded,” and threatened to cancel any deals if the Berger Group didn’t comply.

This was “more than playing with the numbers to rip off the government,” Fishman told reporters last year. “Funds that could have raised hope from the rubble instead padded the bottom line.

“This criminal conduct sends the wrong message to the world about what we stand for as a nation,” Fishman said, adding that one of the messages of the participants’ prosecution is that “it is just as intolerable to steal our government’s money overseas as it is here at home.”

The Bergen Group, in addition to an $18.7 million criminal penalty, also was to pay the government $50.6 million to resolve allegations that LBG violated the False Claims Act by charging inflated overhead rates on government contract invoices. The deferred prosecution agreement was supposed to keep the firm in business.

The company also must make full restitution to USAID; adopt effective standards of conduct, internal controls systems, and ethics training programs for employees; and employ an independent monitor who will evaluate and oversee the company’s compliance with the DPA for a two-year period, Fishman said.

The settlement “took into consideration LBG’s cooperation with the investigation and the
fact that those responsible for the wrongdoing are no longer associated with the company,” the U.S. Attorney said in a statement.

Fishman emphasized the work on the civil end by special agents and auditors within the Office of Inspector General for USAID. Audit support was also provided by the Defense Contract Audit Agency. The settlement was negotiated by the Civil Division of the Department of Justice and the U.S. Attorney’s Office for the District of Maryland, he said.

Handling the criminal case for the government is Assistant U.S. Attorneys Scott B. McBride of the U.S. Attorney’s Office Health Care and Government Fraud Unit, and Joyce M. Malliet of the Office’s
National Security Unit.

In business more than 60 years, the Morristown-based Berger group — with 5,000 or so employees — does work in engineering and construction here and in roughly 80 other countries.

A former Berger employee got investigators checking the books even before the international development agency handed the company its first contracts, by filing a whistle-blower suit in federal court in Maryland.

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