A $700-Million Fraud
Late last month, NASA announced the results of its internal investigation into the causes of two failed launches from 2009 and 2011. The causes of the two botched missions, it found, were one and the same: defective materials used in structurally significant parts of the launch vehicles. The aluminum extrusions used in the fairings of the launch vehicles—the enclosures used to carry the satellites through the atmosphere—did not meet the material specifications laid out by NASA. They thus failed to open properly during both launches, tanking the missions and costing NASA north of $700 million.
The ensuing investigation revealed that aluminum manufacturer Sapa Profiles Inc. (SPI) had falsely certified the properties of the extrusions based on test results that never happened. Further digging unearthed a long-running scheme in which fraud was committed repeatedly by key SPI employees with respect to the quality of the materials provided to NASA and other customers.
Falsified Testing
To be deemed fit for sale to NASA or other government customers, SPI’s aluminum extrusions had to pass tensile tests aimed at “ensuring the consistency and reliability” of the product. Tensile testing is a somewhat arduous process that involves stretching and breaking up metal samples and using machinery to verify the amount of force required to do so. Court proceedings unveiled that SPI compromised this quality assurance process in two major ways.The first involved a plant manager making handwritten adjustments (by the thousands) to failed tests. Those notes were then transcribed by more junior employees onto a typed certification that was provided to customers as verification that the materials they were receiving had passed testing.
The next involved widespread instruction to lab workers to administer tests in ways that were insufficient to truly verify material properties. SPI’s testing lab supervisor from 2002 to 2015 had employees speed up testing machines or cut metal samples in ways inconsistent with established testing guidelines.
Cui Bono?
As with most crimes, SPI’s deception can largely be explained by examining what the perpetrators stood to gain. Critical to understanding how fraudulent behavior could persist for so long is the incentive structure that led multiple high-level employees to falsify tests at scale.
That such behavior was sanctioned by company leadership reflects a few themes. First, corporate profits were at stake. Inconsistencies in aluminum quality would have been damaging to SPI’s brand. Scrapping extrusions that didn’t meet standards would have also been costly and time consuming. There was a clear benefit to the bottom line realized by pushing substandard product through the process. Next, personal compensation was often at stake. Key personnel were bonused on a production metric that encouraged them to keep the manufacturing process moving forward at any cost. Given such incentives, it’s easy to see how the fraud might have continued indefinitely without intervention.
Settled (For Now)
Just prior to NASA’s release of the results of its investigation, SPI parent Norsk Hydro ASA agreed to pay $46 million to settle the charges of fraud made against it by NASA, the Department of Defense, and other customers in the private sector. The sum will undoubtedly go some way towards making the impacted parties whole in the short-term. Still, the incident leaves lingering questions about the integrity of supply chains critical to publicly-funded projects.
Jim Norman, NASA’s director for Launch Services at NASA Headquarters in Washington, offered this takeaway. “When testing results are altered and certifications are provided falsely, missions fail… It is critical that we are able to trust our industry to produce, test and certify materials in accordance with the standards we require. In this case, our trust was severely violated.” SPI itself may be debarred from government contracting, but time will tell if other materials providers will learn from its mistake.