PORTLAND, Ore. - The owner and four employees of a Coos Bay business pleaded guilty to conspiring to defraud the United States by selling $10 million worth of knock-off parts to the Department of Defense, including parts intended to keep the rotors on military helicopters.
"The financial cost of this fraud - more than $10 million - is significant, but the human cost could have been much higher," said Greg Bretzing, Special Agent in Charge of the FBI in Oregon. "The counterfeit hardware that Kustom Products passed off as real could have led to catastrophic failures of trucks and helicopters used by our military.
The guilty pleas came from Kustom Products, Inc. owner Harold Ray Bettencourt II, 60, of Coos Bay; his sons, Bo Bettencourt, 34, Nicholas Ryan Bettencourt, 32, and Peter Tracy Bettencourt, 28, of North Bend; and the company's office manager, Margo Antoinette Densmore, 43, of Coos Bay.
"The actions of these defendants in putting their own greed before the safety of military personnel warrant serious repercussions," said Amanda Marshall, US Attorney for Oregon. "We will bring the full extent of this criminal activity to the Court's attention during the sentencing hearing."
The matter is scheduled for sentencing on December 10 and 11, 2014.
The United States Attorney charged that KPI, Bettencourt and the others conspired to commit wire fraud, money laundering and trafficking in counterfeit goods and services.
As part of the plea, the defendants agreed to forfeit all proceeds traceable to the fraud, including $365,503.26 in funds from 20 bank accounts, eight vehicles, one boat, two boat trailers, two jet skis, and three all-terrain vehicles.
The defendants' scheme, as laid out in Court during the guilty plea hearing, related to the defendant's actions while contracting to provide supplies to the Department of Defense from 2006 through 2010.
The DOD sought equipment, supplies, and services that were filled through purchase orders awarded to DOD contractors, including KPI.
Some of these products were identified as critical application items, meaning that they were items essential to weapons systems performance or operation, or to preserve the life and safety of military
The contracts were awarded through a web-based posting of contract solicitations.
Each contained the specific details about the items to be procured, including the requirements related to the specific part desired by Original Equipment Manufacturer (OEM) part number and by approved OEM vendor, whether the part was a critical application, and whether the part was
required to be manufactured in the United States.
In solicitations for specific products, the
contractor was required to supply the "exact product" and to certify that fact by stating that the bid was "without exception."
KPI, acting through the individual defendants, lied to the DOD in order to secure what the government found to include 750 fraudulent contracts with a value in excess of $10 million.
In some contracts, the defendants supplied counterfeit Freightliner parts and shipped some parts on pallets that falsely contained the logo and heat treatment certification stamp of Timber Products
In essence, the defendants told the government they would supply a specific part from an approved vendor but instead knowingly provided a knock-off part. This allowed them to under-bid the competition and generate substantial profits for KPI and the individual defendants.
To highlight one contract, the United States set out the defendants' actions related to the provision of aviation locknuts.
In 2008, KPI was awarded contracts to supply aviation locknuts to the DOD, which were used to secure the blades to the main rotary assembly of the Kiowa helicopter.
The locknuts were flight critical and of proprietary design to be acquired from only
two approved manufacturers, SPS or Bristol Industries.
Rather than obtain the locknuts from one of the approved sources, Nicholas Bettencourt contacted Coloc Manufacturing in Texas and
arranged with them to make and deliver thousands of non-conforming locknuts for fulfillment of the contract. Coloc was unaware that the parts they were contracted to manufacture were proprietary and were to be used in a flight-critical military application.
In August 2008, the defective locknuts were detected throughout the military supply chain, which triggered the issuance of a DOD-wide safety alert, a worldwide inspection of all aircraft and stockpiles.
After DOD notified KPI about the defective parts, Nicholas Bettencourt provided the DOD officials with false information in an attempt to cover up the acquisition of the defective locknuts.
KPI was also contacted by a DOD inspector, who requested KPI officials provide a
written response as to the cause of the deficiency. KPI told the government the parts were pulled from the wrong storage bin.
Even after the defendants were notified of the deficiency, instead of replacing the defective parts with authentic parts from the approved manufacturers, they went back to Coloc and directed them to re-machine another batch of non-conforming locknuts to more closely resemble the authentic part.
The additional defective locknuts were shipped to the DOD.
The second batch of defective locknuts were detected in the supply chain, DOD officials requested acquisition records from KPI. In response, Nicholas Bettencourt, in conjunction with Margo Densmore, created false records that reflected that the correct parts were ordered by KPI and supplied to the military.
Several more requests for records were made by DOD officials, and in response to these requests, Harold Bettencourt II provided the DOD with falsified records and false explanations as to the origin of the defective locknuts.
KPI, through Margo Densmore, altered purchase orders to indicate that the correct parts were ordered, and produced those altered documents to DOD officials and investigators.
Harold Bettencourt II also provided DOD officials with these false purchase orders and provided DOD officials with a price
quote from a parts dealer for authentic conforming parts that KPI never actually ordered.
Harold Bettencourt II obtained this quote for the purpose of deceiving the DOD into believing that the correct parts had been ordered, the US attorney said.
The United States alleged that these actions by the defendants compromised the integrity of the aviation supply chain and put service members in harm's way.