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"A cybersecurity company faked hacks and extorted clients to buy its services, according to an ex-employee. In a federal court this week, Richard Wallace, a former investigator at cybersecurity company Tiversa, said the company routinely engaged in fraud -- and mafia-style shakedowns. 

To scare potential clients, Tiversa would typically make up fake data breaches, Wallace said. Then it pressured firms to pay up. "Hire us or face the music," Wallace said on Tuesday at a federal courtroom in Washington, D.C.. CNNMoney obtained a transcript of the hearing. The results were disastrous for at least one company that stood up to Tiversa and refused to pay.

In 2010, Tiversa scammed LabMD, a cancer testing center in Atlanta, Wallace testified. Wallace said he tapped into LabMD's computers and pulled the medical records. The cybersecurity firm then alerted LabMD it had been hacked. Tiversa offered it emergency "incident response" cybersecurity services. After the lab refused the offer, Tiversa threatened to tip off federal regulators about the "data breach."

When LabMD still refused, Tiversa let the Federal Trade Commission know about the "hack." The FTC went after the lab, giving the company a choice: sign a consent decree (basically a plea deal which means years of audits and a nasty public statement) or fight in court. The CEO of LabMD, Michael Daugherty, chose to fight, because a plea deal would have tarnished his reputation and killed the business anyway, he said.

Daugherty lost that battle in 2014, having run out of steam. The lawsuit killed LabMD, which was forced to fire its 40 employees last year. "We were a small company," he said. "It's not like we had millions of dollars to fight this and tons of employees."

"The fight with the government was psychological warfare," he told CNNMoney. "There was reputation assassination. There was intimidation. We thought we were extorted. My staff and management team was demoralized. My VP left. My lawyer left." Daugherty launched a website and wrote a book about the ordeal. Cause of Action, a government watchdog group, picked up his case."

Michael Daugherty, is a Senior Writer for Cyber Defense Magazine and is a Board Member at Snoopwall the powerhouse cyber-security firm and is author of The Devil Inside the Beltway: The Shocking Expose of the US Government's Surveillance and Overreach Into Cyber-security, Medicine and Small Business.

Michael Daugherty, is a Senior Writer for Cyber Defense Magazine and is a Board Member at Snoopwall the powerhouse cyber-security firm and is author of The Devil Inside the Beltway: The Shocking Expose of the US Government's Surveillance and Overreach Into Cyber-security, Medicine and Small Business.