Leo Burnett Pays $15.5 Million to Settle Allegations It Defrauded the U.S. Army

(MoneyWatch)  Leo Burnett has agreed to settle a whistleblower lawsuit alleging that it overbilled the U.S. Army by $20 million on its advertising account. The suit alleges that Burnett systematically overbilled the government by pretending that agencies it owned were independent subcontractors. It funnelled the excess billings into a secret account, and the agency's CFO was let go when he complained about it.

• Read the announcement here.
• Read the settlement here.
• Read the original complaint here.
• Read the amended complaint here.

The suit was unsealed by a judge yesterday. Filed in 2004, it was originally brought by Greg Hamilton, Leo Burnett's former vp finance. Later, Michelle Casey, former vp/corporate controller, joined the suit. Here are the highlights from the original complaint and the amended complaint:

Leo Burnett won the $360 million contract to promote the Army in 2000. The suit states:

Since being awarded the Army advertising contract in June of 2000, LBUSA [prosecutors' shorthand for Leo Burnett USA] cheated the government out of more than $20 million by engaging in the following fraudulent conduct: First LBUSA falsely protrayed its advertising unit, called ILEO [presumably iLeo, the interactive unit], as a third party subcontractor when ILEO was actually a department of LBUSA. LBUSA profited both by charging higher subcontractor rates and by passing off its own fees as out of pocket subcontractor expenses.

On minority contracting:

LBUSA in fact tacked on hidden, unallowed mark-ups in its proposals and bills to the government.

Copywriters were billed to the government at the same rate as top executives. This resulted in such egregious overbillings that the practice was internally rejected by LBUSA's outside auditors.

Leo Burnett was also accused of "deliberately billing for services that either were not performed, or were performed on another contract." The orginal complaint states:

Ray DeThorne was the LBUSA executive vice president and account director for the Army account. Mary Haggerty was the director of operations for the Army account. Both DeThorne and Haggerty had responsibility for and knowledge of, the fraudulent practices described.

But the amended complaint omits the line about responsibility and knowledge, simply naming them as involved in the account.

Leo dissolved its Chemistri division and hired the employees directly under LBUSA, as ILEO, in Nov 2002. The suit alleges:

LBUSA knowingly submitted false and fraudulent bills to the United States for services performed by ILEO as if ILEO was a third party independent subcontractor.

To avoid using the Leo Burnett accounting system, Hamilton was ordered to prepare bills on Quickbooks. Then, the suit states:

In 2003, LBUSA charged the Army approximately $560,000 more than LBUSA was charged for subcontracting work done by the Hispanic-owned subcontractor agency Cartel Creativo.

LBUSA charged $150 for Cartel's time, while Cartel charged only $100 per hour.

LBUSA's former chief financial officer, Eric Martinez, internally objected to keeping the money unlawfully overcharged and obtained as a result of work by Cartel and other minority subcontractors... As a result, the $560,000 and other sums obtained by overcharging ... have been kept hidden in a secret, segregated cash account. ... this cash account currently amounts to more than $1 million.

Martinez ordered an audit, but before the audit could be done, former CEO Linda Wolf fired him and he was replaced by Bob Maloney as LBUSA CFO in December 2003, the suit states.

In mid-2003, a government contracting expert retained by LBUSA, Jimmy Jackson, found $2.5 million in overbilling. He classified it as a liability that Burnett had to pay back to the government. But DeThorne and Haggerty claimed they had "a letter" from the Army approving the overbill and the money was changed from liability to income on the agency's books.

Ernst & Young later told them they could not keep the money.

• For more of BNET's coverage of ad agency pricing issues:
• WPP's In-House Commercial Production Shop Courts Controversy With Clients
• Levi's Asks for Transparency and Media Buyers Balk