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Vindication at a high price

An interview with James Holzrichter, recipient of the ACFE's 2015 Sentinel Award



When James Holzrichter reported some management issues to his supervisor, he had no idea that he would later discover widespread alleged fraud at Northrop. He'd lose his job, health and 17½ years of his life. But he'd retain his integrity and his family's love.

Could there ever be better advice for a whistleblower? "When is it ever wrong to do the right thing?" Simple. Absolute. Definitive. Except when someone puts it into practice. Then it can get messy.

James Holzrichter had been trying to follow those words of counsel from his father throughout his life. He believed he was doing the right thing when as an eager young analyst and systems auditor in the 1980s for the American aerospace and defense technology company, Northrop (later Northrop Grumman), he brought some problems of materials acquisition and management to his supervisor.

Ultimately, he discovered anomalies that lead to alleged fraud of overcharging the government and selling it defective equipment, a qui tam suit against Northrop and — ultimately — a 17½ -year ordeal in which Holzrichter would lose his job and his health. The aerospace community would blackball him, and he would have to deliver the Chicago Tribune newspaper for a living. Holzrichter and his family would live in a homeless shelter and later subsidized housing. Attempts would be made against him, and his son and his daughter's lives.

But he persisted. And finally on March 1, 2005, Northrop Grumman settled with the U.S. government for $134 million, which included portions for Holzrichter and another whistleblower plus attorney fees and other costs. The longest False Claims Act qui tam case in U.S. history was over.

Holzrichter was vindicated, but at a terrible price.

A mistake and a cover-up

During that meeting with his supervisor, he reported that someone had accidently determined that a substantial quantity of electronic cables for the research and development of a Northrop project had been scrapped and wiped from inventory with tracking records reflecting that they were excess and no longer needed. However, they were, in fact, still needed and would have to be reordered from the vendor who'd be paid a second time for the same part. The new order hid the fact that the same cable was being ordered a second time by changing three numbers at the end of the parts designation.

Somebody intentionally hid the redundant billing to the government under the guise of new parts rather than acknowledge the error. Holzrichter was concerned not with the human error but that it had been covered up, and the parts were charged to the government a second time.

Also, on more than one occasion other ordered parts were wiped from the system and disposed of on delivery. If they'd been determined to be faulty on delivery, they should've been returned to the vendor for replacement or credit.

"What I most especially did not know at that time [of the meeting] and would not even begin to grasp until some time later (and only when it was too late) was that I had just crossed what was probably the single most significant invisible and irreversible line in this entire journey," Holzrichter wrote in his 2011 book, with Patrick A. Horton, Ph.D., "A Just Cause: A True Story of Courage, Hope, & the Integrity of the American Dream."

"At that moment, the nightmare that was to become my life and that of my longsuffering family had been set in stone," he wrote. "It was not that I had just officially pronounced finding problems with procedures and possibly a few rogue employees: I had discovered the first visible signs to institutionally intentional and pervasive practices that if fully known and verifiable by the right parties, could threaten the very existence of the company itself."

For his courage and tenacity, the ACFE honored Holzrichter with the 2015 Sentinel Award at the 26th Annual ACFE Global Fraud Conference in June.

Fraud Magazine spoke to Holzrichter from his home in McHenry, Illinois.

FM: In your book, you write that when you told your supervisor about more of your findings that the company was inflating its inventory he said this "was standard practice at a time of year when programs and projects had to meet milestones to keep billing the government, and having the noted flow of parts made it look like they were on track." What was your reaction to his answer?
       JH:
I was disappointed with him. I felt I couldn't trust him anymore. Even more so after returning from an attrition committee meeting when he said the loss at that time to the government for just a few parts was $200 million. And I asked "Why don't we just give the money back and admit there is a problem?" He said they couldn't because they had already spent the money. He also said that I was safe because I had reported the issues to him, and he had told his boss so we were protected from prosecution. But he didn't know that isn't the case; just because you tell someone and then you do nothing, that isn't a protection. If you know of an ongoing felony — and do nothing — you can be charged for it and go to jail.

FM: What happened when you told your boss' supervisor?
       JH: She told me to stop. So, my supervisor moved my desk to an isolated location and told me to keep looking into the issues and keep developing more comprehensive reports, which vice presidents of the corporation and program directors began to use.

FM: After your boss' supervisor told you to stop investigating, the head of internal investigations accused you of passing Northrop documents in boxes to someone at a gas station. How did you respond to this? What was the outcome of meeting with him?
       JH: I was stunned because this never happened. It wasn't till another time in the future that I was contacted by federal agents and started bringing documents outside of the company. I never took the originals out but copies because it can be found to be illegal to remove documents from the building even if you are giving them to federal agents. Several whistleblowers have paid the price for this by judges ordering all documents to be returned to the company and dismissing the suit.

FM: What other problems did you find after that initial discovery?
       JH: In the fourth quarter of every year, a large influx of non-conforming material was hitting inventory and inflating inventory numbers. Non-conforming material is any material that doesn't meet the original specifications on the engineering drawings or fails in some fashion during production and testing. It then needs to be isolated from general inventory until engineering decides what to do with it and the customer signs off on the decision to use it as is, repair it, scrap it or return it to vendor for replacement or repair.

When I brought this to my supervisor's attention he told me it was standard operating procedure to have enough inventories in house to satisfy "government milestones" [predetermined benchmarks] for payout on contracts to show that Northrop could move ahead with production.

Northrop knew the material was defective and it had even returned it to the vendors for repair. But they contacted the vendors to send the material back even knowing they couldn't use it, but it would still show in inventory to satisfy the customer. And the only customer they had was the U. S. government.

We [Holzrichter and Rex Robinson, a Northrop engineer, who filed the qui tam suit with him] alleged an inflated "build of materials." A build of materials is the list on the computer of all of the parts in a "black box" that go into building it and phantom parts. A black box is the piece of electronic equipment that Northrop is building for the customer. As programs progress, and there are legitimate engineering changes, the black boxes undergo modifications as to what is actually in them. How can you charge for them if you don't know what's inside them?

The build of material needs to be maintained and made accurate as these changes take place. New parts get added and old parts get taken out. In some cases, Northrop wasn't doing this. Also, when parts were scrapped, Northrop needed to give money back to the customer for salvaged parts, and it wasn't always doing this. In December 1988, for the first time in the history of the company, the attrition numbers were negative, which caused the customer — the U.S. government — to not sign off on the end of year report because they were secretly slipping back into the books the credits they felt should be there without letting them know what they were doing. We alleged all of this.

Also, when they were doing an actual inventory on closed and completed programs Northrop found $9 million to $11 million of excess inventory, which they had separated out of the actual inventory to get rid of it. I was at the attrition committee meeting that had decided to go back to closed and negotiated contracts so the customer would never look at them again. Northrop would create what they said were phony purchase authorization numbers and transfer the excess onto those numbers on the computer and dispose of the parts so the customer would never find out about it. This is what could lead to what is known as a "forward or follow-on pricing scheme" — the history would show the consumption of the parts and when subsequent contracts are negotiated these parts would be built into the bid but Northrop would know it didn't need them. The standard automatic 10 percent increase in profit would also be automatically assessed to the new contract so you see an $11 million excess inventory adds up to a lot more than that.

FM: At that point, did you realize that the alleged frauds were systemic?
       JH: Yes, and I was getting the proof out to federal agents because I didn't want to take the fall for the corporation. I was also telling my supervisor as well as writing about it in different reports to upper management, but they never got in touch with me to correct the problem other than my boss' supervisor jumping down my throat for exposing some issues she was supposed to prevent from happening.

FM: In January of 1988, you received a call from Richard Zott, a federal agent with the U.S. Department of Defense Criminal Investigative Service. What did he want and how did you respond? Can you describe your relationship with Zott through the years?
       JH: Richard said he was aware that I knew of some problems that Northrop had, and he wanted to talk to me. He never told me until later that he had gotten my name from Rex Robinson, who would be my co-relator [co-whistleblower] in the later qui tam case. I told Richard I couldn't verify his credentials; so I would let Northrop know he had called me and they would verify his credentials and set up a meeting with him.

He told me the reality was that I would go into work the next day and tell them he had called me, and in five minutes they would have me in front of their corporate lawyers and scare the hell out of me, and I wouldn't talk to him. He then paused for a few seconds and said he would then come to see me with handcuffs and put me in prison, and I said right away, "What time can you be here tomorrow?"

Over the years our friendship continued to grow so that even now after he has retired from federal service we still talk and get together as we did last month in St. Louis where he now serves as the chief public safety officer for the city's public transportation.

He told me that during his work on the case at some point it changed for him. Because of the things that we had suffered as a family, he felt that if he and his fellow agents had failed it was not just that the country would have lost money but he felt would have failed us. It became personal for him to not let that happen. I came to cherish our relationship and felt closer than a brother to him.

FM: You spent many months surreptitiously collecting incriminating documents, taping them to your body and smuggling them out of the building. What kind of emotional and psychological toll was this taking on you?
       JH: I was so scared and the impact is still with me today. I couldn't tell my wife what I knew nor did she want to know. She believed our home phone was tapped — and [Agent] Richard Zott verified it was — and she felt if they knew that she knew nothing, they wouldn't have a reason to take her life. She really felt that I was probably going to be killed, so she took out several low-cost double indemnity insurance policies. She felt that if I was killed, it would be made to look like an accident, and if she didn't know anything they wouldn't hurt her and she would still be there for the children.

FM: Can you briefly describe the contentious meeting you had with Colonel Lambert, the top-level, Department of Defense, in-house authority and his government monitors and financial auditors? How did that impromptu meeting occur?
       JH: In early 1989, Northrop was doing a massive layoff and [Agent] Richard Zott and I were concerned that the documents I had been keeping at my desk in the event of a raid — that he thought was going to happen — would be compromised and lost. So, he suggested I reach out to one of the in-house government employees at Northrop to secure those documents if I was laid off. I spoke with one of them and that person reported it up the food chain where it stopped at the desk of Colonel Lambert, the in-house government rep in charge of all the reps. He was a full-bird colonel. He came across as if he were god, and was to be treated as such. When I was brought to his office he was very put out that I had not come to him with my concerns rather than to Richard. He put me on the defensive. He brought me through an open door where there were virtually every government monitor and financial auditor assigned to the facility — about 25 Defense Contract Audit Agency auditors and Defense Contract Administration Services — staring at me.

They all started accusing me of not knowing what I was talking about and were very defensive about their jobs. It got ugly fast. I got angry and said they were too compartmentalized to know what Northrop was doing. I told them I saw everything that was happening while they were seeing, at the most, maybe a small bit of the picture at a time and only what Northrop wanted them to see because, after all, Northrop trained them in the use of the computer they needed to track inventory and contract issues. I told them I was not going to discuss it further with them and they had my permission to take it up with the federal agents that were conducting the investigation. I left after the colonel said that the person I contacted could secure the documents if I was laid off.

FM: It seems like it was the beginning of the end for you at Northrop when a U.S. attorney actually called you at your work desk. Eventually, the head of security called you into his office and said, "We know we have a spy in our midst, Jim, and his name is James Holzrichter." What was the fallout after that? Can you describe how you left the company?


       JH: I was under unrelenting harassment. The corporate attorney kept telling me what I could and could not do and the CEO always wanting to talk to me. I had to leave after an anxiety attack that mimicked a heart attack landed me in the hospital. My primary doctor put me on a medical leave of absence for situational anxiety. Northrop was only too glad to have me out of the building until I was constructively discharged.

FM: Why would it take 17½ years for this alleged fraud case to resolve?
       JH: Bringing suit under the provisions of the False Claims Act is somewhat different than other court issues. When a relator makes his or her allegations the case is filed under seal. Under the original law written by Abraham Lincoln the seal provision did not exist but was added in 1986 to allow the Department of Justice [DOJ] to verify the allegations of the claimant to see if first there are grounds for criminal indictments and two whether or not the DOJ wants to join in any civil litigation with the relator.

The seal is automatic and the first one is 60 days, with the DOJ given permission to seek to extend it for cause, which many courts say that them just asking for it is cause enough.

In my case, the assistant U.S. attorney general [AUSA] convened a grand jury to review evidence that was subpoenaed at the beginning of the case, and it ran for two years without indictments being handed down for criminal prosecution. Then the AUSA reconvened another grand jury for another year and a half to continue their investigation.

This grand jury expired with the meeting in my attorney's office between Gordon Jones, the director of commercial litigation, fraud, for the DOJ, who would determine if the government would join in on a qui tam suit, and Agent James Bradburn from the Air Force's Office of Special Investigations. It was now almost four years old by the time the DOJ declined to intervene in the case before we could even begin to start going to court to seek documents under the rules of federal civil procedure governing discovery.

After the DOJ formally declined, my attorneys realized the case was just too large for them to take on themselves and they sought help from six other law firms to spread the expense and risk so by the end I was represented by seven law firms.

Understand that Northrop fought us every step of the way. Every time we tried to get documents, we needed to go to court to force them to give them to us. When they turned them over, it was literally 3 million paper documents tossed into boxes for us to sort out and make sense of. This was all before the advent of computers. Every one of these back-and-forth efforts took months and months of briefing and counter briefs. Northrop took full advantage of the court system to beat us down and wear us out. In the end, they mainly gave us paper snowstorms and haystacks without the needles.

Every time we did find something of substance, they challenged it under attorney-client privilege alleging accidental production of either attorney work product or attorney client issues and it was back to court to once again argue before the judge.

This ultimately caught up with them and angered the senior judge to no end. It finally cost them when the judge refused to allow them to file a brief for summary judgment. Let me rephrase that; he said they could file it but he wouldn't read it until after the case ended and the jury decided.

FM: What finally turned the corner for the case?
       JH: The turning point in the case came 10 years after the government initially had declined to intervene in the case when not only the criminal side but the civil side of the Department of Justice joined us in earnest to hold Northrop accountable for its actions. After that, everything changed. The government brought in General Charles Henry, who was responsible for the logistics of Desert Storm. I feel it was his expert report on government contracting and the issues he found in the evidence we had obtained over the years that made Northrop lift its head and realize they were in some serious trouble.

Finally, on March 1, 2005, three months before a trial was scheduled to begin and after years of denying wrongdoing, Northrop Grumman agreed to pay $134 million to settle allegations without admitting guilt.

FM: You and Robinson's family (he had died in 2003) received a percentage of the settlement under the qui tam law. Were you then able to exhale, or did you have to endure further complications?
       JH: Though the initial judgment was $62 million, Northrop settled for $99 million, which included the portion for both me and Rex Robinson for damages and also the statutory attorney fees to our attorneys. Northrop also had to pay another $35 million to $36 million in unallowable costs. When a defense contractor is accused of wrongdoing, its legal fees are fronted by the government. Only after they settle, or are found guilty, do they repay the government for these charges.

FM: Can you describe how you and your family survived after you left your job? How did you and they end up in a homeless shelter?
       JH: After we had cashed in all of our savings and also any money I had been able to save in a 401K at Northrop, the short-term disability ran out and we were up against it. We signed up for public aid and food stamps as well as applying for Section 8 housing assistance, which helped us to remain at least for a while in our home. My wife, Mary, and I started looking for work in earnest. In fact, I had been looking for a long time over eight months and all I had to show for it were 400 rejection letters from any high-tech jobs. I was told that I would need to broaden my job search to other fields than electronics or product assurance because I would never work in that industry again. Everything I had gone to school for, all my experience in the U.S. Coast Guard was pointless and gone. I was now delivering newspapers, sweeping parking lots for $20, working part time at a gas station and cleaning toilets at the local Moose lodge for $3 an hour. Every toilet I cleaned was another loaf of bread or gallon of milk on the table for our children so I was at least thankful for that.

Mary also went to work at night putting wires on transformer coils and working at a packaging plant boxing up parts to be shipped. But she developed carpal tunnel syndrome and had to stop. We had five children to raise. We slowly and methodically fell behind until we landed in a homeless shelter for two months until we could find another qualifying house under section eight to move into.

Mary really helped me to understand that regardless of how the case turned out I still had a responsibility to her and our children to do my best to keep them warm and fed and could not relegate the responsibility to anyone else. Without her love and understanding I know I would not have survived the ordeal.

We must not forget the families of integrity keepers. They mostly do not ask to make this journey and fall by the wayside when the accolades are passed out for the whistleblowers. They're like the families of service men and women and first responders — family members are unsung heroes.

We must not forget the families of the integrity keepers. Family members are unsung heros."

FM: This is a stereotypical question, but I have to ask: With all the trials you've endured, if you had a choice, would you blow the whistle again?
       JH: You probably know that I'm asked this question a lot and I answer it two ways.

First, if I had known the crushing effect it would eventually have on my family and done it anyway, I'd have to be one of the most evil persons ever and no better than the people who committed the alleged fraud. How do you give your children back their youth when it has been spent in poverty and missed opportunities?

Second, you also have to understand most persons of integrity don't go looking to blow the whistle. They usually get caught up in it and find themselves swept along by forces that are larger than themselves.

So if I could shield my family from the repercussions of my choice, yes I would.

FM: Can you describe the attempts against your life and family members?
       JH: While the case was still unrolling, I was driving to work at the newspaper routes I managed when the right front tire of my car sheared off and my right fender dug into the road and I came to an abrupt stop. When I told [Agent] Richard Zott about this he assigned a federal agent to walk down the highway with me. We found all five of the lug bolts that had sheared off, and we found the nuts to be at the very ends of the lug bolts. Richard told me that if this technique works right, you are traveling at highway speeds when the tire shears off, the fender digs in and flips the car over and over. Even if you are fastened in, the accident will snap your neck and you die. I found out later while writing my book that the same thing happened to my oldest son and my oldest daughter. Fortunately, none of us were injured.

Back then, Richard had offered to put us into witness protection, but I declined when he said he couldn't help us find a job or a home, and now being close to 50, I couldn't do that again.

FM: Dr. Joseph T. Wells, CFE, CPA, began the ACFE in 1988 with the basic tenet that it's wiser and cheaper to prevent and deter fraud than to have to deal with it after the fact. The Northrop Grumman frauds were byzantine and thoroughly complicated, but what could have the corporation done years before to begin to deter these crimes? 
       JH: A runaway middle to upper management at Northrop had the autonomy to cover up the problems and maintain plausible deniability.

As we dug through the documents, we saw what appeared to be deliberate manipulations of the inventory tracking systems to make the numbers always come out in Northrop's favor.

FM: Apparently, Northrop Grumman had no inkling of the Tone at the Top concept. How did procedures go so wrong at that company? In your counseling other whistleblowers, do you find that many C-suite executives in big corporate America (and possibly other global companies) also ignore basic tenets of leading with anti-fraud behavior?
       JH: The DOJ is overwhelmed and understaffed and underfunded and a lot of the bigger corporations know this. So, if — and that is a big if — they are caught with their hands in the cookie jar, they pay a fine in what is becoming known as the "fraud tax." They give back to the government about 10 percent of what they are alleged to have taken. They basically sign a no-fault agreement so nobody is held accountable. Then the whistleblower has to sign a non-disclosure agreement and business resumes as usual with the same people getting bonuses for mitigating the possible loss to the company.

FM: How is your life now? Your wife and family members? How is your health? Any PTSD? Do you ever have contact with any former Northrop Grumman coworkers?
       JH: It is now 10 years since the case settled and in a lot of ways our life is a lot better. Mary and I do travel; lately it has been to speak with others about our experience. I went back to school and obtained a degree in law and paralegal studies and I work for a few lawyers under the False Claims Act on complex multi-state litigation. One of the cases I worked on settled last year for $2.2 billion for alleged pharmaceutical fraud. The FCA has retrieved $44 billion to $46 billion of stolen taxpayers' money since 1986.

Mary and our children are in good health, but my health was severely damaged during this case. I developed type 2 diabetes as a result of the stress and fatigue when I was working as an independent newspaper delivery agent for 10 years; for five years I worked 365 days a year, 12 hours a day.

I don't feel I have any PTSD nor does Mary or any of our children. After I left Northrop I haven't had any contact with any of my former colleagues or workmates.

FM: What are some of the lessons you've learned?
       JH: It is always best to tell the truth no matter how hard that might be. After the case ended, I was driving with one of my sons. He looked over at me and said he was proud of me, and he learned lessons from my example. No matter how hard things got, he said I never left them nor blamed them but did my best along with their mother to provide for them. He said that even if we didn't have the best we always had a roof over our heads and food on the table and love in the family, so who could ask for more than that? He then said, "Thank you, dad."

From this, I learned what is really important in my life is my family and the love we have for each other.

Dick Carozza, CFE, is the editor-in-chief of Fraud Magazine. 





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