FedEx 'Used 9/11 to Profit,' Whistleblower Says

FedEx used bogus security excuses to justify late deliveries, alleges insider.

May 5, 2011 — -- A whistleblower has alleged that FedEx "used 9/11 to profit," defrauding the government by falsely blaming security delays related to the terror attacks for slow deliveries and then failing to pay penalties for packages that arrived late.

The allegations emerged in a lawsuit that was unsealed this week after FedEx agreed to settle the case with the U.S. Department of Justice for $8 million, without admitting wrongdoing. The case was initially brought to the Justice Department by a former FedEx employee who alleged she had been instructed by managers to justify late deliveries by blaming the beefed-up security measures at government buildings that came after the September 11 terror attacks.

"They used 9-11 to profit," said Mary Garofolo, the former employee. "And they did it for years."

Entire shipments headed for the government were branded with a code – code 5 -- to indicate security delays even before they were loaded into the trucks for delivery, she said. The company was then able to prioritize delivery to private customers without the risk of having to pay out refunds to government customers whose packages were arriving late, the lawsuit claims.

Sally Davenport, a FedEx spokeswoman, said the company still disputes those allegations, telling ABC News that "the government didn't identify one shipment where a security delay code had been applied and where there wasn't a security delay."

"We determined that it was in the best interest of the company to avoid a costly protracted legal battle with the government," she said. "FedEx has worked hard to strike a balance between our customers' need for prompt deliveries and the government's need for the highest level of security."

But government officials said they welcomed the lawsuit and the ensuing settlement.

"We cannot let companies cheat the government by failing to live up to their contractual responsibilities and concealing their improper conduct," said Brian D. Miller, Inspector General for the General Services Administration.

Lawyers for Garofolo, who brought the case to the government's attention, claim in their suit that the company made liberal use of the security exemption, not just at one or two facilities, but at federal buildings around the country. They said the Justice Department's decision to pursue the case was evidence of how seriously they took the allegations.

"FedEx's practice was widespread," said Steven McCool, one of Garofolo's lawyers. "They saw an opportunity to keep using the [security] code in a way that allowed them to profit significantly."

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Julie Grohovsky, another one of Garofolo's lawyers, said the use of the security exemption continued at least until the fall of last year, long after their client filed her first legal complaint in 2006. The complaint was unsealed by the U.S. District Court on May 3.

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"We are confident had this case gone to trial there would have been an overwhelming amount of evidence," Grohovsky said.

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