Chicago Ad Agency To Pay $15.5M For Overbilling Army

CHICAGO (STNG) -- Chicago-based advertising firm Leo Burnett Co. Inc. will pay $15.5 million to settle a federal “whistleblower” lawsuit alleging the company submitted false claims to the U.S. Army for work performed on an ad campaign.

Leo Burnett will make a cash payment of $12.1 million and credit the Army $3.4 million for work performed but not billed, according to the settlement announced Tuesday by U.S. Attorney's office. At the same time, the government announced it was joining in the private whistleblowers’ amended lawsuit filed Monday and unsealed Tuesday in U.S. District Court in Chicago.

According to the settlement, Leo Burnett held a contract with the Army from 2000-05 to provide ad services on the Army’s recruiting campaign “Army of One.” The contract authorized Leo Burnett to bill for its own labor costs, as well as for services provided by independent contractors.

For example, according to a release from the U.S. Attorney's office, if Leo Burnett created and aired a TV commercial to boost Army enlistment, it could bill for its own labor costs in producing the commercial, as well as out-of-pocket costs paid to TV stations that aired the commercial.

The settlement resolves allegations that Leo Burnett improperly submitted invoices from its internet division and an affiliated company as third party independent contractors to increase profit margin, and failed to include lower cost smaller subcontractors in proposing, negotiating and billings its hourly rates in 2000 and 2001.

Leo Burnett’s hourly labor rates in the contract were supposed to be a weighted average from employees of both Leo Burnett and minority subcontractors. The government claimed Leo Burnett inflated these rates by excluding the lower minority subcontractor rates from its calculation.

The government also claimed that Leo Burnett claimed Web site development and advertising work was done by a third-party, independent contractor when, in fact, it was done by Leo Burnett’s own internet advertising unit. By passing off its own labor costs as out-of-pocket expenses, Leo Burnett was able charge significantly higher rates, according to the release.

The settlement resolves a lawsuit filed in 2004 under the False Claims Act on behalf of the United States by two former Leo Burnett employees. Greg Hamilton, former vice president, and Michelle Casey, former comptroller, will receive $2.79 million as their share of the recovery. Under the False Claims Act, suits are filed under seal to allow the government to investigate allegations and decide whether to take an active role in litigation.

The settlement agreement states that Leo Burnett does not admit any liability, and it settled to avoid the expense, delay and uncertainty of litigation. The company also agreed to pay an undisclosed amount in attorney fees to the plaintiffs’ attorneys, Michael Behn and Steven Cohen of Chicago.

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