Lawsuit: Defense Contractor Fired Whistleblower for Reporting Accounting Irregularities

The allegations against spare-parts conglomerate TransDigm mirror previous claims against the ‘Martin Shkreli of defense contracting.’

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A federal lawsuit filed last month accuses defense contracting conglomerate TransDigm of retaliating against a former vice president of finance at a subsidiary firm for calling attention to accounting practices she deemed improper, such as allegedly fiddling with transaction dates to meet quarterly revenue targets. The whistleblower says she was told not to inform anyone else at the company about her findings, and within weeks her job was publicly listed on hiring websites. She was even asked to clean the women’s restroom at the facility where she worked, which she perceived as part of an effort to make her life miserable.

In the complaint, 55-year-old Phyllis Santistevan-Sullivan alleges that an internal performance review conducted after she reported her findings explicitly stated that “her concerns that she raises are all certainly valid.” But the review added that she “comes across aggressive” and needs to work on “employing more tact in her approach to difficult situations.”

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To Sullivan, this was “basically trying to make me sound like I’m not a team player,” she told the Prospect in an interview. “Over and over again, when men speak up, it’s allowed, but when women speak up, it’s emotional.”

Other former employees corroborated Sullivan’s claims that TransDigm had little regard for anyone who resisted company practices. “They tolerated zero dissent,” said one former sales employee, who asked to remain anonymous. “It was always understood that what was going on in the finance side of TransDigm was certainly clever. It was clever with a wink and a nod.”

The lawsuit is the latest legal quagmire for a company that has elicited rare and strikingly bipartisan condemnation for its practices. Initially backed by investment giant Warburg Pincus, TransDigm operates more like a private equity–style rollup firm than an aerospace company. Its specialty is to use borrowed money to scoop up every company that makes certain small parts for civilian and military aircraft. After acquisition, TransDigm has free rein to jack up prices without losing market share, since aviation manufacturers and the Pentagon have no other options. The company skillfully uses government procurement rules to hide the true cost increases.

According to numerous inspector general reports, TransDigm raised profit margins as high as 3850.6 percent for its parts. One media report called the company “the Martin Shkreli of defense contracting.” After a 2019 hearing where Freedom Caucus and Squad members alike excoriated TransDigm executives for ripping off the government, the company returned an unprecedented $16.1 million in excess profits to the Defense Department. At a 2022 hearing, after another audit revealed the exact same price-gouging, lawmakers asked TransDigm to return more money; they have not yet done so. “It’s not a yes or no answer,” said CEO Kevin Stein.

The corporate accounting claims in the lawsuit mirror allegations that have been leveled against TransDigm in the past, including the advancement of sales at the end of a quarter to hit revenue targets. And overall, the suit paints a picture of an institution obsessed with its bottom line that will stop at nothing to bring in astronomical profits, including steamrolling whoever gets in the way. “Employees who speak up and oppose fraudulent financial practices get squashed,” the lawsuit concludes.

TransDigm did not respond to a request for comment on the lawsuit.

SULLIVAN GREW UP IN POVERTY in a small town in northern New Mexico, in a three-bedroom mobile home for a family of eight that was heated by wood. She worked various odd jobs to get through college, manning the service desk at a Pep Boys and washing dishes.

Armed with an accounting degree and a CPA license, Sullivan started her career at Big Four auditing firm KPMG, and then moved over to the company side, first in consumer electronics and later the aerospace industry, where she has worked since 2009. She has three children and close to 30 years of experience in public accounting.

In 2018, she was recruited to AvtechTyee, a maker of aerospace electronic systems and subsidiary of TransDigm based in Everett, Washington, by a former boss, Dave Bender, who was the incoming president. Sullivan started as AvtechTyee’s controller; later, the title changed to VP of finance. The job involved monitoring accounting and financial reporting.

TransDigm executives sat in on the interview process and maintained an active role in Sullivan’s job duties. She reported not only to Bender, the company president, but TransDigm’s group controller. Performance reviews were conducted on TransDigm letterhead.

“Right from the beginning, they had a say on the position,” Sullivan said. “They give you the deadlines. On a day-to-day basis, they give you ad hoc reporting that needs to be reported up to corporate. All the direction comes from TransDigm.” The lawsuit names both the subsidiary and the parent company, alleging that TransDigm was a joint employer with AvtechTyee, with “heavily integrated operations.”

Sullivan received positive evaluations for her work for the first two years, until, she said, she uncovered issues with how AvtechTyee handled its accounting. Like all TransDigm subsidiaries, AvtechTyee had certain revenue targets it was expected to hit. If the company made those targets, investors would reward them with higher stock prices.

The former TransDigm employee told the Prospect that the targets were nonnegotiable. “The guys from Cleveland would sit down and you would tell them where you would finish the quarter and the year,” the employee said. “Our [finance] guy always had extra money in a figurative sock somewhere. That’s what he called it, he called it his sock. If we were getting to the end of a fiscal quarter and things were getting tough, he’d pull out some reserve somewhere to get us over the line.”

This was similar to what Sullivan says she encountered. She alleges that transactions were moved forward into the end of the quarter to either hit the revenue target, or moved out of a quarter where targets were already hit, to juice the next quarter. Consistently hitting revenue targets triggered bonuses for top executives.

Improper revenue recognition to manipulate earnings numbers is a well-known regulatory issue, which the Securities and Exchange Commission has been tracking for over two decades. An analysis in the trade publication Accounting Today estimated that 60 percent of whistleblower actions pursued by the SEC involve improper revenue recognition. “It’s always been the number one way that executives can manipulate results to achieve targets and also get paid,” said Francine McKenna, a lecturer at the University of Pennsylvania Wharton Business School.

TWO SPECIFIC AVTECHTYEE INCIDENTS stood out to Sullivan. According to the lawsuit, the company shipped an unfinished prototype airplane component to Lockheed Martin four days before the end of 2019, booking hundreds of thousands of dollars in the fourth quarter. The part, which was part of a research and development project, was returned three months later, and it took more than a year to get completed. Sullivan alleged to the Prospect that the vice president of engineering told her he was pressured to ship the part early.

In a second R&D program, AvtechTyee booked around $500,000 in payments from Boeing at the end of the first quarter of 2020, which were supposed to only be filed once certain milestones were hit. “If you look at the purchase order, we were nowhere close to those milestones,” Sullivan said. While AvtechTyee booked the revenue, Boeing wasn’t even informed of the invoice. Sullivan only figured this out when the payment went past due. There were other instances, she alleged in the lawsuit, of her company “fail[ing] to account for product returns, or account[ing] them at times when quarterly targets were met.”

McKenna said that these incidents align with other corporate practices she’s researched. “If a whistleblower is alleging a chronic situation where the firm is pushing stuff through that’s not ready for prime time, and it ages, with invoices not getting paid, the SEC should see that pattern,” she said, adding that the SEC has of late been settling revenue manipulation cases as disclosure violations, rather than violations of accounting standards.

An exploration of SEC records shows only one instance in which the agency contacted TransDigm, a 2017 note regarding the closing of a review of business the company did with Sudan and Syria. Revenue recognition issues have not come up in regulatory or audit reports.

However, TransDigm’s accounting practices have come into question before. In 2017, the subscription-only website Capitol Forum reported on the company’s tendency to use “channel stuffing” to meet revenue targets. This tactic involves pushing extra inventory onto exclusive distributors at the end of quarters so TransDigm could book the revenue, even if the distributors had no purchasers. “I’ve seen distributors with as much as a year’s worth of inventory on certain high-margin part numbers just so the company makes a quarter or their fiscal year,” said one former manager. The following year, a report indicated that TransDigm distributor inventories were at record highs.

The Capitol Forum has also reported that TransDigm would hold quarterly meetings with subsidiaries to review earnings strategies to increase earnings before interest, taxes, depreciation, and amortization, known as EBITDA. Sullivan also alleged that AvtechTyee would track work orders in a way that increased EBITDA, by pushing off the expenses associated with that work into a different quarter. Company president bonuses were often based on EBITDA, according to former TransDigm employees.

Last year, the company settled an investor lawsuit over “staggering” executive and board compensation. TransDigm’s executive chairman made $68 million in 2020, and its CEO made $22 million.

WHEN SULLIVAN STARTED TO CORRECT the accounting issues, she initially thought they came from operations, which handles shipping. But she was gradually pointed in the direction of the vice president of sales, Kevin Hanson, who had been with the company for ten years and had a positive reputation within the company. “To be up front, I felt like it wasn’t even my boss running the facility,” she said. “Everything was coming from Kevin.”

Sullivan told the Prospect that she attempted to raise accounting issues with Hanson at a meeting about financial reporting for engineering. “I asked if we had people working on that, he yelled at me and got beet red,” she recalled, noting that company president Dave Bender, who was in the room, didn’t intervene.

The lawsuit points out that TransDigm and AvtechTyee had a “retaliatory culture,” and while Sullivan didn’t discuss specifics, she cited several instances of peers, including VPs of finance at other divisions, who would suddenly disappear. She tried to reach out to them but they wouldn’t respond, perhaps due to nondisclosure agreements.

“I have a CPA license so I know right from wrong,” Sullivan said. She eventually decided that she had to report the situation to Bender. One night in November 2020, she told her boss that revenue manipulation was being done “intentionally and unlawfully,” per the lawsuit, and she singled out Hanson.

The response was not what Sullivan hoped for. “Dave looked at me and I knew he was not on my side,” she said.

Immediately, Bender placed on Sullivan what she referred to as a “gag order.” She was not allowed to speak with TransDigm’s group controller about revenue recognition unless Bender was in the room. And she was not allowed to send any emails about it unless Bender screened them first. “I just said OK and I left,” she told the Prospect. “There would have been nothing I could say to change his mind.”

Weeks later, Sullivan received her 2020 performance review, the one that stated her concerns were “certainly valid” but took issue with her tone. Her review score, which the previous year exceeded expectations, was reduced to a “marginal” rating. Sullivan refused to sign the review, and the lawsuit states that she quickly became “ostracized” within the company.

At the height of the pandemic, several AvtechTyee executives worked from home, but the company resumed in-person operations and Sullivan was asked to come in. “I was given women’s bathroom cleaning duties,” she said. “I was not only required to come in, but required to clean the bathroom. They were assigning an executive to that.”

Soon after, Sullivan learned from a colleague that her job position was posted online. One day, she was at the office late and saw a man knocking at the door, whom she let in. It turned out that he was interviewing for Sullivan’s job. She appealed to HR, but the director cautioned her to keep quiet or she would be perceived as a “crybaby.”

Sullivan’s replacement was hired in May 2021, and she was terminated. She asked for an explanation for the firing and claims she was given none, which would violate state law in Washington.

Hanson, meanwhile, was promoted to president of Korry Electronics, another TransDigm subsidiary.

SULLIVAN ALLEGES RACIAL AND GENDER DISCRIMINATION as part of the complaint, recounting an incident where she heard Bender called Mexico “the basement” of the United States. (Sullivan is Mexican American.) She was one of only two female executives at AvtechTyee, and the only person of color.

The lawsuit also alleges unlawful retaliation in violation of the Sarbanes-Oxley Act’s protections for whistleblowers, and a wrongful discharge claim under common law. She’s asking for lost wages and bonuses, medical and retirement benefits, punitive and compensatory damages, attorney’s fees, and the expungement of any negative items in her personnel and employment files.

AvtechTyee and TransDigm filed motions to extend the time frame for their response to the complaint; it is now due March 31 and April 3, respectively.

Thinking back on the experience, Sullivan’s voice cracked. “I think people need to know, they have to have the right to fight back,” she said.

“It’s not an easy thing,” she continued. “They make you believe that you are incompetent, and that you don’t have the experience or knowledge to know right from wrong and do your job. They’re not going to make me feel like I’m the failure. They’re the ones failing the people, the government and employees.”

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