Hydro Extrusion Portland, Oregon aluminum manufacturer, settles criminal and civil charges over false testing

by Ben Vernia | April 23rd, 2019

On April 23, the Department of Justice announced that Hydro Extrusion Portland, Inc., an Oregon-based manufacturer of extruded aluminum, has agreed to pay more than $46 million to victims – including the United States – of its misrepresentations of aluminum testing. According to DOJ’s press release:

An Oregon aluminum extrusion manufacturer has agreed to pay $46 million to NASA, the Department of Defense, and others to resolve criminal charges and civil claims relating to a 19-year fraud scheme that included falsifying thousands of certifications for aluminum extrusions provided to hundreds of customers.

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, Assistant Attorney General Jody Hunt of the Justice Department’s Civil Division, U.S. Attorney G. Zachary Terwilliger for the Eastern District of Virginia, Inspector General Paul K. Martin of the NASA Office of Inspector General, Special Agent in Charge Loren ‘Renn’ Cannon of the FBI’s Portland Field Office and Special Agent in Charge Bryan Denny of the Defense Criminal Investigative Service’s (DCIS) Western Field Office made the announcement.

According to court documents, Hydro Extrusion Portland, Inc., formerly known as Sapa Profiles Inc. (SPI), and its corporate parent, Hydro Extrusion USA, LLC, formerly known as Sapa Extrusions Inc. (SEI), admitted to providing customers, including U.S. government contractors, with falsified certifications after altering the results of tensile tests designed to ensure the consistency and reliability of aluminum extruded at the companies’ Oregon-based facilities. Tensile testing involves slowly stretching and then ripping apart a sample of the metal using a machine, which then measures the force applied to the sample at each stage of the test.

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According to court documents, SPI has agreed to plead guilty to one count of mail fraud, and SEI has entered into a deferred prosecution agreement (DPA) in connection with a criminal information filed today charging the company with mail fraud.  As part of the plea agreement, SPI has agreed to pay $34.1 million in combined restitution to NASA, the Department of Defense’s Missile Defense Agency (MDA), and commercial customers.  SPI has also agreed to forfeit $1.8 million in ill-gotten gains.  The plea agreement remains subject to acceptance by the court at a plea hearing currently scheduled for May 13, 2019, before U.S. District Judge Liam O’Grady.  The DPA with SEI is conditioned on the court’s acceptance and SPI’s satisfaction of the plea agreement’s terms.

SPI also agreed to pay $34.6 million as part of a related civil settlement to resolve its liability under the False Claims Act for causing a government contractor to invoice MDA and NASA for aluminum extrusions that did not comply with contract specifications.  Government contractors purchased aluminum extrusions for use on rockets for NASA and missiles provided to the MDA.  Under the terms of the civil settlement agreement, SPI will satisfy the $34.6 million settlement through credits totaling $23.6 million for its restitution payments as part of the criminal plea agreement, plus additional payments of $6 million to NASA and $5 million to the MDA.

According to the companies’ admissions, employees at SPI facilities in the Portland area generally altered the tests in one of two ways.  First, from in or about 1996 through in or about 2006, an SPI plant manager led a scheme to make thousands of handwritten alterations to failing test results by changing failing numbers that fell below the minimum required test results to appear to be passing.  Those numbers were then typed onto a certification and provided to customers.  Second, from in or about 2002 through September 2015, Dennis Balius, the SPI testing lab supervisor, led a scheme to alter tests within SPI’s computerized systems and provide false certifications with the altered results to customers. Balius also instructed employees to violate other testing standards, such as increasing the speed of the testing machines or cutting samples in a manner that did not meet the required specifications.  Balius pleaded guilty in July 2017 and was sentenced to three years in prison and ordered to pay over $170,000 in restitution.

According to court documents, the SPI employees generally engaged in these practices to conceal the inconsistent quality of aluminum extrusions produced by SPI, avoid the costly scrapping of metal and accompanying production delays, improve SPI’s and SEI’s profits, and receive bonuses that were calculated in part based on a production metric.

In addition, the companies admitted that SPI’s customers included U.S. government contractors who in turn provided aluminum extrusions produced by SPI to NASA and the MDA for use in “frangible joints” in rockets provided to NASA and missiles provided to the MDA, respectively.  According to court documents, the replacement cost of frangible joints provided to the MDA that included SPI extrusions is approximately $15.3 million, and NASA incurred approximately $9 million in investigative and other costs to determine the impact of SPI extrusions on NASA operations.

As described in the civil settlement agreement, NASA maintains that SPI’s manufacturing processes lacked sufficient controls and produced extrusions unable to pass mechanical properties testing.  NASA further maintains that it identified SPI’s out-of-specification extrusions as the cause of two failed rocket launches, which resulted in the loss of important scientific missions.  SPI disputes NASA’s positions, and except for those facts admitted to in the DPA and the plea agreement, the claims resolved by the civil settlement are allegations only. There has been no determination of liability.  To protect the government supply chain, NASA both suspended SPI from government contracting and proposed SPI for debarment government-wide.  The exclusion from government contracting has been effective since Sept. 30, 2015.

A number of significant factors contributed to the Department’s criminal resolution with the companies.  Among these, the companies received significant credit for their cooperation with the Department’s investigation and their engagement in extensive remedial measures to address the misconduct, including the termination and severance of employees who were involved, the implementation of state-of-the-art equipment to automate the tensile testing process, company-wide audits at all U.S. tensile labs, increased resources devoted to compliance and revamping internal quality controls and quality audit processes.  However, the companies did not receive more significant mitigation credit, either in the penalty or the form of resolution, because the companies did not voluntarily self-disclose the full extent of their misconduct to the Department.

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