The settlement shakedown: federal and state governments are extracting and pocketing huge payments from big businesses, perverting justice along the way.

• Author: Shackford, Scott

In September 2007, the "Moonlight Fire" ripped through 67,000 acres of northern California, forcing the evacuation of 100 homes and the exertion of thousands of firefighters over 16 days. More than two-thirds of the wreckage occurred on federal land, so the government had a keen interest in assessing blame.

What one U.S. attorney called "the largest recovery ever ... for damages caused by a forest fire" had instead come to symbolize a trend of government shaking down deep-pocketed defendants.

State and federal officials quickly located a culprit: Sierra Pacific Industries, one of the biggest lumber producers in the United States. A logging company contractor working for Sierra Pacific on Labor Day struck a rock with a bulldozer, investigators claimed, setting off the sparks that kindled the initial blaze. Though the company insisted it was not at fault and did not start the fire, it settled with the federal government in 2012 after Judge Kimberly Mueller for the Eastern District of California suggested in pre-trial orders that Sierra Pacific could be held liable for the fire, under complex California forestry regulations, even if the contractor didn't start it.

The settlement was a massive haul for the feds: $55 million to be paid out over five years, with the lumber giant also agreeing to hand over more than 20,000 acres of its land. Yet to Sierra Pacific, it still may have seemed like a good deal. According to company filings, at one point the U.S. attorneys investigating the case claimed more than $1 billion in damages. The state of California also made its own separate demand for $8 million from the company.

After Sierra Pacific opened its pocketbook, evidence began emerging that the settlement was based on improper prosecutorial withholding of key information, and even straight-up lies. By October 2014, after Sierra had delivered $29 million of its settlement to the Department of Justice (DOJ), the company was asking the District Court to void the agreement due to "fraud upon the court." The alleged fraudsters' motive? To secure a financial windfall for both the state and the federal government.

While such post-facto complaining might sound par for the course from expensive corporate defense attorneys, the charges had enough merit to stop the state-level lawsuit in its tracks and send shockwaves throughout the Golden State's legal system. In February 2014, Plumas County Judge Leslie C. Nichols found that the California Department of Forestry and Fire Protection and the California attorney general's office, which jointly investigated the fire with the DOJ, engaged in "egregious and reprehensible conduct" in the case, failing to turn over thousands of pages of documents indicating that several other people could be responsible for the fire--people who lacked Sierra's deep pockets. Also revealed in a 2013 audit: For years, Cal Fire had been secretly and illegally stashing money from settlements in a nonprofit under its control rather than depositing it in California's general fund. According to Sierra Pacific's filings, Cal Fire demanded a check for $400,000 for this fund as part of a settlement offer.

Nichols declared that the state had engaged in "a systematic campaign of misdirection with the purpose of recovering money from the defendants." California was ordered to pay $32 million to reimburse Sierra Pacific's court costs and fees, and the judge tossed out the state's lawsuit.

In the wake of the scandal, all the judges in the district representing that part of California were recused from considering the case, and Ninth Circuit Chief Justice Alex Kozinski--who...