Unfortunately, this isn’t the place to get a second opinion. First, it would be near impossible to provide any type of informed opinion with just a thumbnail sketch of the situation. Second, these forums aren’t the place for providing that type of advice.
I can say that it isn’t out of the ordinary for a manager to lie, particulary when he or she was involved in a questionable employment decision. Sometimes it’s hard, if not impossible, to determine whether an employee is lying, but your lawyer should have made that determination when the initial investigation took place. If it turns out that you should have know about the unlawful conduct, you may just have to face up to the liability. Having said that, the decision to litigate or settle is for the insurance company to make—it’s their money on the line.