updated 7/10/2007 8:43:21 PM ET 2007-07-11T00:43:21

An embroidery company agreed to pay $500,000 and its sales manager pleaded guilty to conspiracy for falsely claiming that American flag patches sold for military uniforms were made in the United States, the U.S. attorney’s office said Tuesday.

Moritz Embroidery Works won a 2004 contract to sell millions of the shoulder patches to the Defense Department for 22 cents apiece.

Federal agents, acting on a tip from a Moritz competitor, searched the plant and found that the patches were actually manufactured in Thailand, in violation of Moritz’s contract and federal laws that bar the Defense Department from procuring clothing not produced in the United States.

The sales manager, Brian Moritz, was sentenced to one year probation and 100 hours of community service, prosecutors said.

Of the $500,000 the company agreed to pay in the out-of-court settlement, $100,000 will go to Action Embroidery Corp., the California competitor that provided the tip. Such payments are authorized by the federal False Claims Act and designed to encourage people and corporations to come forward with information about fraud against the government.

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