Navistar Pays $50M To Settle Military Vehicle Pricing Fraud Allegations

Navistar International Corp. NAV is paying $50 million to settle claims that it overcharged the U.S. Marines for suspension systems on armored military vehicles, clearing another issue ahead of its merger with Volkswagen AG's TRATON Group.

The allegations against Navistar Defense LLC, which is 70% owned by Cerberus Capital Management, surfaced when a federal judge unsealed a 6-year-old whistleblower complaint in December 2019.

The civil suit claimed Navistar violated the False Claims Act by forging invoices, catalog prices and other data during negotiations of a multibillion-dollar contract for mine-resistant, ambush-protected (MRAP) vehicles and related components from 2006 to 2013.

In August 2017, the U.S. Department of Justice accused Navistar Defense of making false and misleading statements during price negotiations and a resulting audit. The Justice Department claimed Navistar Defense overcharged by $88 million for independent suspension systems in 2009 and 2010. It sought treble damages and penalties totaling $264 million.

The government said it relied on the fraudulent sales invoices in agreeing to Navistar's inflated prices.

A Government Shaming

"We expect those doing business with the government to be truthful and transparent," said  Brian Boynton, acting assistant attorney general for the Justice Department's Civil Division. "Today's settlement demonstrates our commitment to pursue those who knowingly provide false information to government procurement officials for their personal gain."

Navistar agreed last Thursday to pay the $50 million to settle the allegations without admitting any wrongdoing. The whistleblower, identified as former Navistar government contracts manager Duquoin Burgess, will receive $11 million of the settlement. 

In a press release, the government shamed Navistar for its behavior despite agreeing to allow the company to avoid admitting wrongdoing. 

"The settlement evidences our commitment to go after any contractor who treats America's dedication to our troops as a get-rich-quick scheme at the expense of the taxpayer and the safety of our military personnel," said Acting U.S. Attorney Channing D. Phillips for the District of Columbia.

Added Special Agent in Charge Thomas Cannizzo of the Naval Criminal Investigative Service (NCIS) Southeast Field Office: "Fraud is not a victimless crime. 

"It steals money from American taxpayers, damages the integrity of the Department of the Navy procurement process, degrades the readiness of the services by compromising the quality of goods and services used to protect the nation, and squanders more money through the funding of criminal investigations, which could have been avoided simply by individuals doing the right thing."

Dumping Debt

Separately, Navistar is planning to redeem the second round of debt as it comes closer to becoming a TRATON subsidiary.

In a filing with the Securities and Exchange Commission last Thursday, Navistar said it would redeem $225 million in bonds from the Illinois Finance Authority in 2020. The bonds have a conditional redemption date of July 2 this year.

In April, Navistar told holders of $600 million in notes due in 2025 that it would "conditionally" pay them off early — assuming the TRATON merger concludes.

Holders would get $1,071.25 for each $1,000 they own. It's not exactly the 9.5% interest originally promised, but still a positive return. Navistar could renege in the unlikely event the definitive agreement — under which TRATON is paying $3.7 billion for the 83% of Navistar it did not already own — should fail at the last minute.

The closing will not occur before Navistar reports second-quarter fiscal earnings this month. The company releases its figures but has suspended analyst calls pending the merger.

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