Posted by Kristin Graham Koehler and Paul Sampson
Government investigators have continued to hone in on one particular type of business arrangement—the use of so-called minority or disadvantaged business enterprises (“MBEs” and “DBEs”) to secure government contracts. Myriad state and federal contracts require MBE or DBE participation, or at least grant advantages to MBE or DBE bidders. As recent prosecutions have demonstrated, businesses have used MBEs or DBEs to win lucrative government contracts, only to perform the work themselves and retain all – or virtually all – of the money the government had intended for the MBEs or DBEs.
In July 2014, the former owner and COO of Schuylkill Products Inc., a Pennsylvania-based construction company, after having pled guilty, was sentenced to 51 months in prison and leveled a fine of $25,100 by a federal judge in Pennsylvania for what the U.S. Department of Transportation called the largest DBE fraud in U.S. history. Prosecutors alleged that the DBE fraud involved more than $136 million in government contracts in Pennsylvania over a period of more than 15 years. According to the allegations, the construction company used a DBE as a front to gain lucrative DBE contracts, but then performed all work under the contracts and gave only a small cut to the DBE, even though the DBE was actually the contract award recipient. See United States v. Nagle, et al., No. 1:09-cr-00384 (M.D. Pa.).
In a separate case out of Chicago, the owner of an MBE recently pleaded guilty to one count of mail fraud for failing to disclose that his MBE was not performing the work on a $3.5 million sewer service contract with the city of Chicago. Prosecutors had alleged that the MBE owner invoiced the city for work performed under the contract, even though another company, headed by a coconspirator, was performing the work. Prosecutors further alleged that the MBE owner retained approximately 15 percent of the payments from the city before passing the rest on to his coconspirator’s company, which actually performed the work. In March 2014, a federal judge in Illinois sentenced the MBE owner to 17 months in prison and ordered him to pay $533,749 in restitution for his role in the scheme. See United States v. Brunt et al., No. 1:11-cr-00017 (N.D. Ill.).
Although these were criminal resolutions, these types of cases could also easily lend themselves to state or federal qui tam cases. Companies either serving as – or utilizing – MBEs or DBEs in order to obtain government contracts would be well served to adhere closely to the contractual requirements regarding the MBE/DBE relationship, as this is an area that continues to be scrutinized closely by the government.
Posted by Kristin Graham Koehler and Nicholas J. Giles
Under certain federal laws, as well as those of a number of states and cities, minority-owned business are often afforded preferential treatment in securing certain government contracts. These laws typically set aside a certain number of contracts for minority-owned businesses, or require the winning bidder to utilize minority-owned subcontractors for a certain percentage of the contract’s work. These laws are designed to address the racial disparity in business ownership by ensuring minority business owners are given the opportunity to succeed.
Many of those seizing the opportunities, however, are not minorities at all. Abuse of these programs is rampant and growing, prompting government agencies and law enforcement across the country to crack down on the abuse, often through criminal prosecution. In June, for instance, a federal judge in Virginia sentenced an Arlington businessman to two years in prison for his role in funneling lucrative government contracts intended for minority-owned firms to a security company through a shell entity. United States v. Richards, No. 1:13-cr-00076-001, 2013 WL 2957963 (E.D. Va. June 14, 2013). And, in September, a federal judge in Chicago sentenced two individuals to four-and-a-half and three years in prison respectively for securing cable contracts through an African-American college student whom they put forward as a front company. United States v. Giovenco, No. 1:11-cr-00316 (N.D. Ill. Oct. 10, 2013); United States v. Potter, No. 1:11-cr-00316 (N.D. Ill. Oct. 10, 2013).
Contracting rules often require explicit certification of eligibility, and, therefore, running afoul of minority business laws presents a risk of civil liability as well, including under the False Claims Act. In June, several Dayton, Ohio-based businesses and their owners agreed to pay $2.9 million to resolve allegations that they set up and controlled a sham minority-owned business to exploit the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. United States ex rel. Parker v. TesTech, Inc., No. 2:10-cv-01028 (S.D. Ohio June 11, 2013). In March of last year, Caddell Construction of Alabama, agreed to pay $1.15 million to settle allegations that it had engaged a Native-American owned company under a Department of Defense initiative, when, in reality, that company performed no real work under the contract. And, in 2012, a Cleveland-based construction company, Anthony Allega Cement Contractor, Inc., paid $500,000 to settle allegations that it used a similar sham “pass through” entity to satisfy the Department of Transportation’s minority subcontracting requirement under its DBE program.
As abuse continues to plague these programs, expect jurisdictions at all levels – federal, state and local – to turn increasingly to their false claims acts as an enforcement mechanism.