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The L-3 Communications Settlement With The US Government Over Fraud Charges Stemming From EOTech Holographic Weapon Sights

Friday, November 27th, 2015

For those interested in details of L3’s settlement with the US Government.

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Click to view .pdf

The Details – UNITED STATES OF AMERICA v. L-3 COMMUNICATIONS EOTECH, INC., L-3 COMMUNICATIONS CORPORATION, and PAUL MANGANO

Wednesday, November 25th, 2015

As most of you know by now, the US Government sued L-3 Communications and its subsidiary EOTech as well as EOTech’s CEO, Paul Mangano for fraud regarding issues with their Holographic Weapon Sights which have been purchased by the Departments of Defense, Homeland Security, and Justice. While we have provided a copy of the case, many won’t take the time to actually read it so we’ve extracted some of the pertinent information for you. What the Government’s attorneys have done is demonstrated a pattern of fraudulent behavior on the part of L-3 on how the sights work in various environments. In particular, they’ve named EOTech CEO Paul Mangano due to his part in the scheme.

This is a civil fraud action by the United States of America (the “United States” or the “Government”) against Defendants L-3 Communications EOTech, Inc. (“EOTech”), L-3 Communications Corporation (“L-3”), and EOTech’s President, Paul Mangano (“Mangano,” and collectively with L-3 and EOTech, “Defendants”), to recover treble damages and civil penalties under the False Claims Act, 31 U.S.C. § 3729 et seq., and damages under the common law theories of mistake of fact and unjust enrichment, arising from a scheme to defraud the United States Department of Defense (“DoD”), the Department of Homeland Security (“DHS”) and the Federal Bureau of Investigation (“FBI”) in connection with EOTech’s knowing sale of defective holographic weapon sights (also referred to herein as “combat optical sights” or “sights” and sometimes abbreviated “HWS”).

The suit shows that EOTech knew about issues as far back as 2006 and failed to alert the Government. Rather, the Government had to discover the issues on their own.

Since at least 2006, Defendants knew about defects in their weapons sights that caused product failures, particularly in the extreme environmental conditions in which Special Forces operate. Instead of making a prompt disclosure of the defects, Defendants delayed disclosure for years, until they believed they had a fix or were compelled to make a disclosure because of employee or other complaints.

By 2006, Defendants knew that the sights failed to perform as represented in temperature extremes. Specifically, they learned that the sights experienced a condition referred to as “thermal drift,” meaning that the sight’s point of aim differed from its point of impact (or “failed to hold zero”) when subjected to hot or cold temperature. Although EOTech was contractually required to disclose any information concerning the reliability of the sights, EOTech waited nearly a decade to disclose the defect. In more recent years, as EOTech subjected new models of the sights to qualification testing, the test engineer documented thermal drift in every sight tested in report after report. Finally, in March of 2015, the FBI independently discovered the thermal drift defect and presented EOTech with the very same findings that the company had documented internally for years. Shortly thereafter, EOTech finally disclosed the thermal drift defect to DoD.

By early 2007, Defendants knew of a separate performance failure in cold temperature. Beginning around 32 degrees Fahrenheit, the sights’ aiming dot became significantly distorted, affecting the accuracy of the sight and worsening as the temperature approached -40 degrees. At sub-zero temperatures, the distortion of the aiming dot affected the accuracy of the sights by more than 20 inches for every 100 yards. EOTech delayed disclosing the defect for more than a year, and until it had a fix in place. Even then, EOTech presented its fix to DoD as an upgrade to a quality product that already conformed to specifications.

By 2008, Defendants also knew that their sights failed to perform as represented in humid environments. Defendants knew that the sights leaked, allowing moisture to enter and causing a degradation of the reticle (i.e., the circle and aiming dot in the sight necessary for acquiring a target). Although the sights were always sensitive to humidity, in 2008 EOTech inspected a large shipment of returns from DoD and noticed damage caused by moisture in nearly every sight. In the years that followed, moisture-related complaints (typically dimming or disappearing reticles) became the number one reason for EOTech’s customer returns, and EOTech’s own testing repeatedly confirmed that the sights were not properly sealed and quickly degraded when exposed to moisture.

Defendants, however, waited to disclose the problem until 2013, when, once again, they believed they had arrived at a solution. And again, EOTech pitched its fix as an upgrade to a
quality product that conformed to specifications.

Once again, EOTech never disclosed these issues to the Government. Instead, internal testing at the FBI brought them to light.

Finally, in March 2015, the FBI discovered what EOTech had known for years. In conducting its own testing of the sights for zero stability, the FBI exposed the sights to normal temperature variations for the state of Virginia, a temperature range much narrower than -40 to 140 degrees Fahrenheit. A ballistics team then tested the sights for point of aim/point of impact accuracy, or zero stability, and similarly found significant drift at both higher and lower temperatures.

After discovering the problem in March 2015, the FBI immediately presented its findings to EOTech. Shortly thereafter, EOTech disclosed the issue to Crane, but stated that the problem was only recently discovered and that it was devoting substantial efforts toward finding a solution.

When asked about the company’s previous efforts at finding a solution for thermal drift, a former EOTech optics engineer explained that the company knew for years that thermal drift was an inherent design flaw with the “Generation II” model of the product that was specially designed for military use, and that no fix existed without substantial modification of the product.

Many have wondered why CEO Paul Mangano was specifically named. The key is in this passage from the suit:

Both Mangano and EOTech’s contracting officer acknowledged that EOTech was contractually obligated to notify Crane if the sights deviated from the contractual specifications. Mangano also testified that L-3’s ethics policy requires disclosure of quality issues to the Government.

And this:

The decision maker on disclosure of quality-related defects was Mangano. As the Co-founder testified, until a solution was in place, Mangano “did not want this [defect] disclosed to the marketplace at all and he specifically communicated that.” According to two EOTech employees, the Co-founder fought repeatedly with Mangano over whether to disclose the distortion defect, with the Co-founder supporting immediate disclosure and Mangano opposing it. Moreover, Mangano admitted at a deposition that the decision to disclose a quality issue to a customer ultimately was his.

Mangano’s decision to hide defects goes back to at least 2007.

By email dated September 16, 2007, Mangano reported to other senior managers that “[t]he take-away from this past Friday’s Red Review is that we will not be in a position to fully disclose to Crane and Colt/Canada [a Canadian EOTech customer] until November at the earliest.” Mangano added that “[w]e will only disclose to Crane and Colt/Canada. Given that we have no product returns over the years from other military customers reporting the issue, we see no need to communicate the patent defect.”

Internally at EOTech, employees knew this course of action was wrong. This statement may be the most damning of all.

Shortly thereafter, a sales and marketing employee wrote to the Co-founder “in confidence” about Mangano’s email, stating, “I have an issue with this . . . Is it worth risking one person’s life on this? What if there is a guy in the mountains in Afghanistan, and he brings up his sight picture on the enemy who has the drop on him with an AK[?] He takes aim as quickly as possible and puts a shot that misses wide due to the distortion of the reticle. He’s dead a fraction of a second later from a 7.62 mm round. This is a dramatic example, but this is the risk that is posed the longer the end-user is unaware of the risk.”

The sales and marketing employee added that “[w]e have been sitting on this issue for a long time and it makes me very uncomfortable that we have still done nothing about this to protect soldiers and LEOs [law enforcement officers] of both this country and those across the globe from getting killed. What if it has happened already?

Another issue that comes up in the suit is that Naval Surface Warfare Center Crane, which acts as Program Manager for Special Operations Forces Weapons on behalf of USSOCOM needs to institute a more robust testing and quality control regimen. I believe that they relied too heavily on the vendor (L-3 Communications) to self monitor for adhering to specifications. While this may have made sense early in the war, in order to quickly field equipment to troops in the field, there has been plenty of time to allow acquisition best practices to become the norm. Additionally, if EOTech is an ISO certified company, someone needs to conduct a thorough audit.

While L-3 Communications was quick to settle the suit with a $25.6 Million fine, we wait to see if the Government will recommend debarment for L-3 Communications, just EOTech, or not at all. Additionally, there are several other user groups not represented in this suit, such as State and Local government agencies, domestic consumers and international customers.

We have extracted some of the most significant sections of the suit, but we still encourage you to read the entire filing which is available here.

UPDATED – US Government Sues L3 Communications for Fraud Involving EOTech Sights – L3 Settles for $25.6 Million

Tuesday, November 24th, 2015

We can finally tell you the rest of the story regarding L3 Communications’ EOTech Sights.  The Department of Justice has been investigating EOTech for some time and has finally filed suit (US v. L-3 Communications EOTech Inc., 15-cv-09262) in US District Court, Southern District of New York (Manhattan).

Specifically, the Government’s allegations concentrate on the performance of the Holographic Weapon Sights at temperature extremes as well as in high moisture environments. The Government also claims that EOTEch failed to disclose testing that demonstrated the inaccuracy issues in those environments.

In addition to naming L-3 and EOTech as defendants in the Government’s suit, they also named EOTech’s president, Paul Mangano which isn’t very common. They are seeking unspecified triple damages plus civil penalties of as much as $11,000 for each fraudulent claim.

L-3 has been aware of the pending action, having mentioned the issue in their July 2015 SEC filing as well as setting aside $26 million.

Update – By mid-afternoon, L-3 had settled with the government for $25.6 million which clearly indicates L-3 has known since summer how much the US Government would be willing to accept in relief. Their quick action helped turn a drop in stock value of more than 6% at mid-day, yet they still closed the day down from opening prices.

What remains, is for L-3 to answer to domestic consumers, state and local governments as well as international customers.

Below is the filing. In suggest you read it. The Government’s case is compelling.

United States v. L-3 Communications Eotech, Inc., et al-1

Click to view .pdf

UPDATED – Major International EOTech Distributor Ends Relationship

Thursday, November 5th, 2015

As you may recall, we recently published an article regarding L3 Communications’ EOTech sights. In that article we shared L3’s SEC filings, changes in their user manuals and a USSOCOM Safety of Use Message which mentions Point of Impact shifts in both the low and high temperature ranges of EOTech holographic sights issued to the government.

But apparently, issues surrounding the sights have been brewing since at least Spring. In a recent memorandum to customers obtained by SSD, distributor Elite Defense discloses that EOTech has not been delivering product since April of this year.  It’s our understanding that Elite Defense is the single largest distributor of EOTech sights with extensive international sales of the brand.  Even more interesting than the secession of deliveries, is that Elite Defense has chosen to terminate their long distributorship.  Unfortunately, it seems EOTech has not acknowledged this action, nor Elite Defense’s proposal to convert their customer base to direct sales with EOTech.  It’s like they’ve gone radio silent.   

Elite Defense Customer Letter EOTech

Click to view .pdf

When queried, Elite Defense offered no comment regarding the memorandum other than to ask where we obtained it. That, we’re keeping to ourselves.

UPDATE – We just received this message from Elite Defense:

When Elite Defense released the letter to our international customers on 11/3/15 (published by SSD 11/5/15), we had not received any formal contact from EOTech about the termination of the relationship or our proposed transition plan. However, on the afternoon of November 4, EOTech reached out to Elite Defense. Elite Defense and EOTech are now working together to develop a plan that will focus on what is most important: a smooth transition for our customers.

TacJobs – EOTech Vice President of Sales and Marketing

Friday, October 2nd, 2015

Sure, the position announcement is over a month old, but after our recent story regarding issues with EOTech’s Holographic Weapon Sights, it’s got to make one wonder. 

  

If you’re interested in filling the position, visit www.l-3com.com/careers.

USSOCOM Issues Safety of Use Message for EOTech Enhanced Combat Optical Sights – Plus More Goings On

Wednesday, September 30th, 2015

Over the past few weeks, three separate issues have come to our attention regarding EOTech’s line of Holographic Weapon Sights (HWS). While we initially thought they weren’t related as they came up one by one, we realized they were all connected once we had looked into all three. Consequently, we believe they should be presented together, along with the source documentation.

Safety Of Use Message Issued
Although it’s the last one we uncovered, we’ll begin with the most glaring piece of information. On 14 September, the SOF Weapons Program Management Office at NSWC Crane released a Safety of Use Message regarding issues with EOTech’s Enhanced Combat Optical Sights (ECOS), which is how they refer to HWS. This certainly caught our attention as the PMO is responsible for USSOCOM weapons. That message ultimately serves as the linchpin, tying together the other two issues we’ll soon address.

This critical bit of information would have been a stand-alone article, but it added credence to the others and offered coherence to some otherwise inexplicable issues. It also allowed us to concentrate on the facts presented in the various documentation. We will introduce the other issues after you get a chance to read the SOUM, which was obtained by Soldier Systems Daily. The Message has no date-time-group but was transmitted via official email traffic to SOF units on 14 September, 2015 and there are no markings limiting distribution.

Screenshot (64)

Click to view .pdf

While there is a great deal of information in the SOUM, two glaring issues stick out. The first is the reliability of the HWS in extreme temperatures, referred to as “Thermal Drift”. The PMO has noted a +/- 4 MOA shift at -40 Deg F and 122 Deg F. Second, is the concern over the claim by EOTech that their HWS are parallax free which was the subject of a previous Safety of Use Message from the same office issued 16 March, 2015. In this case they noted between 4 and 6 MOA parallax error depending on temperature conditions. Despite the PMO working with EOTech to rectify the issues, they still have not been resolved.

EOTech Updates User Manuals
EOTech seems to have officially backed off their previous claims regarding operational temperature ranges as well as parallax free attributes. Upon investigation, we noted that EOTech had changed the public specs for their HWS. Specifically, they published new manuals in June, 2015 which are available from the individual product listing pages on their website. Normally, this wouldn’t be that big of an issue by itself, but taken in conjunction with the other two pieces of information and what was removed from the manuals, it becomes so.

For example, they no longer claim that the Optics are “Parallax free”. They’ve also eliminated the temperature range from the manuals which is a pretty important factor for military operations. In the updated manuals, EOTech didn’t alert users to issues at extreme temperatures. Instead, they deleted references to operational temperature range altogether. Interestingly, both of these issues are addressed in the PMO’s Safety of Use Message we referenced earlier.

Although not addressed in this SOUM by the PMO, we also noticed in the latest versions (June 2015) of the user manuals that each click of sight adjustment is now “Approx. 0.5 MOA” rather than the more reassuring “0.5 MOA” cited in older manuals.

Here are some examples of old and new user manuals:

EXPS3 User Manual January 2011

EXPS3 User Manual June 2015

L3 Communications SEC Filing
The last issue we’ll address is actually the first one that came to our attention. In L3 Communications’ most recent 10-Q SEC Quarterly filing of early August for Q2, they mention issues with the HWS. This is a document prepared by EOTech’s parent company L3 Communications, advising their investors of any issues, good or bad, which might affect their investment. While companies obviously put on a public face, SEC filings have weight because they are legal submissions to the government. They must be accurate, regardless of the news.

L3 mentions recognizing “an aggregate liability of $26 million in anticipation of a settlement related to a product specification matter regarding a holographic weapon sight product in the Warrior Systems sector of the Electronic Systems segment.” As we are unaware of any pending civil suits regarding the HWS, the question remains as to whom EOTech might owe such a large sum of money. We must point out that the government has acknowledged issues with the HWS in at least two SOUM from the SOF Weapons PMO. We’d also like to mention that the Quarterly filing talks of possible consequences if the company is implicated in wrongdoing regarding government contracts.

The SEC filing goes on to state that while, “The Company does not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows. However, under U.S. Government regulations, an indictment of the Company by a federal grand jury, or an administrative finding against the Company as to its present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against the Company that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term.” They also recognize that, “Foreign government contracts generally include comparable provisions relating to terminations for convenience or default, as well as other procurement clauses relevant to the foreign government.” This can be pretty serious stuff.

The SEC Quarterly filing can be found here.

Putting It All Together
As you can see, the three pieces of information certainly seem related when presented together. In the same quarter, EOTech changed their HWS user manuals and acknowledged in an SEC filing, “aggregate liability of $26 million in anticipation of a settlement related to a product specification matter regarding a holographic weapon sight product…” In the next quarter, USSOCOM issues a Safety Of Use Message that addresses the very information removed from the HWS user manuals.

Data Was Right There In The Open
The documentation was readily available prior to its publication here, to anyone who knew where to look. While EOTech has made no public statements so far, regarding the issues with the performance of their family of HWS, they certainly haven’t hidden them either. To the contrary, we wouldn’t have discovered the issues so easily if they’d tried to hide them. They’ve published new versions of their user manuals and made them available to the public, as well as making an SEC filing which is public record and acknowledges there is an issue afoot. While it would be nice to see EOTech publicly acknowledge the issue, it would be interesting to find out how long they’ve known about it. Regardless, the only thing that remains up in the air, is whether L3 Communications will be required to pay that $26 million, to whom they would pay it, and if there will be any additional stipulations.

Let’s Hope They Fix It
In closing, we suggest that both commercial and military users of EOTech HWS read the SOUM, since EOTech has still not specifically addressed its customers regarding the issues. We hope that they do soon and offer a solution to rectify these issues.

EOTech Will Be Attending The NRA Annual Meeting & Exhibits

Friday, April 3rd, 2015

EOTech NRA

EOTech will be present at the upcoming NRA Annual Meeting & Exhibits, running April 10th through 12th. They will be at Booth #2333 displaying the latest in their line of Holographic Weapon Sights, in addition to new thermal and night vision technology.

www.eotechinc.com

EOTech Is Introducing Two New Weapon Sights, Discontinuing Older Models

Friday, December 5th, 2014

EOTech 518 558

EOTech recently sent out a letter to their distributors announcing two new Holographic Weapon Sights, the 518 and 558. These sights combine the AA battery compatibility of the 512 with the side buttons and quick detach mounting base of the EXPS models. With this change, EOTech is halting production of the 556, 553BLK, 553TAN, 516, and 517 sights. Additionally, the Zombie Stopper line is also being discontinued for 2015. The full announcement can be read below:

Holographic Weapon Sight Program Changes

Dear EOTech Distributors,

EOTech is proud to announce the introduction of the Model 518 and 558 Holographic Weapon Sights. These models blend the advantages of the 512 and its AA batteries with the side buttons and quick detach mounting base of the EXPS models. These new offerings will allow EOTech to streamline production and will replace the 556, 553BLK, 553TAN, 516 and 517. Effective immediately, EOTech will not be accepting new orders for Model 553 (Black and Tan), 556, 516, and 517 Holographic Weapon Sights. All orders that have been placed with EOTech to date will be filled and no changes to these orders are expected. We are providing advance notice of these product line changes in order for your company to adjust its future product purchasing plans.

We request that you carefully review these changes and notify your buyers and purchasing teams so no additional orders for these items are placed. Additionally, effective 12/03/2014, MAP restrictions on these discontinued models will be lifted to assist you in the movement of any remaining inventory.

The EOTech Zombie Stopper and Zombie Stopper 2 will no longer be available as part of the 2015 program. Orders for these items can still be submitted and they will be filled until existing inventory is depleted.

EOTech will continue to provide exceptional customer service and warranty support on all of the discontinued products as per the contact information provided in the literature included with every EOTech item.

If you have questions and would like to discuss the changes noted above or if you need information about adding new items to your program, please contact your EOTech sales representative directly and they will provide additional information and options.

We appreciate your understanding and assistance in helping us, to help you, minimize the impact of this product discontinuation on your company. We also thank you for your continued support and success of the EOTech product line.

www.eotechinc.com