Supplemental Conditions

Did a DBE Compliance Program Prevent Jail Time?

Posted in Disadvantage Business Enterprises (DBE)

Another week and another case of DBE fraud resulting in significant fines.  This one involves Connecticut construction firm that agree to pay $2.4 million in fines to settle the fraud allegations.  The story follows an all to familiar “pass through” fact pattern:  a construction company obtains transportation contracts, commits to performing work using certain DBE firms, and then those firms perform no commercially useful function and act as merely a pass through.

What is notable is what the firm did when it discovered the fraud.  According to the firm’s settlement agreement, when the firm first learned of the alleged fraud, it self instituted  a strong DBE compliance program.  Because of the compliance program, the firm and its employees avoided prosecution.  As I have blogged about before and discussed in my DBE compliance webinar,  a strong DBE compliance program can be a mitigating factor if your firm is accused of DBE fraud.

While the $2.4 million fine is no doubt significant, it still beats jail time for the company executives.

Is the False Claims Act Big Labor’s New ‘Area Standards’ Weapon?

Posted in False Claims Act

In early March, the United States Federal Court for the Southern District of Ohio unsealed a complaint filed by the Painters and Allied Trade’s Council No. 6 against a painting contractor under the False Claims Act.  (A copy of the complaint can be viewed here: Complaint)  The Complaint is brought against a non-union painting subcontractor performing painting work on a project subject to the Davis-Bacon Act (prevailing wage).  According to the Complaint, the Painters Union “organizing” effort (meaning picketing, hand-billing, and bannering) at the project, where it learned that the painting subcontractor was allegedly not paying Davis-Bacon wage rates to its employees but was submitting certified payroll to the general contractor that it was (a big no-no).

As we have talked about before, the False Claims Act applies to claims submitted by contractors and subcontractors on a project receiving federal funding.  The False Claims Act permits the party bringing the claim to recover up to 30% of what is recovered for the government.   As we have said, it makes bounty hunters out of former or disgruntled employees with knowledge of a contractor’s transgression. Moreover, the False Claims Act does not require actual knowledge.  A contractor can violate the Act through deliberate ignorance (see no evil, hear no evil, speak no evil) or reckless disregard (I do not know if it is false, but its non of my business).

Damages under the False Claims Act are also significant and the party bringing the action on behalf of the government is entitled to up to three times the actual loss, plus per claim penalty and attorneys fees.  As we have said, with a False Claims Act action, even when you win you lose because of the expense in defending such a claim.

The defendant in the Painters Union case has not yet filed an answer so it is unclear what its defense will be.  However, as we have seen, unions are increasingly aggressive in increasing their shrinking market share.  We will have to see if this case is a one-off isolated incident or signals a more organized effort on the part of Big Labor.

Will the Ironworkers Face Civil Lawsuits?

Posted in Unions

In the wake of the indictment of 10 members of Ironworkers 401, most of the attention, rightfully, has focused on the potential criminal liability of the Ironworkers Union and its indicted members.  What has not occurred, at least not yet, is the filing a civil lawsuits by the contractors against the Local 401 for the activities alleged in the indictment.

As I have written about, Section 303 of the Labor Management Relations Act states that anyone harmed by an unfair labor practice can file a civil suit for damages in federal court.  I have advocated that filing an action under Section 303 against a union for illegal secondary is preferable because the right to a trial by jury and the ability to take discovery.   Contractors who suffered acts of violence or extortion at the hands of the Ironworkers would appear to have a strong case under Section 303, especially in light of the federal criminal indictment.

A search of the federal dockets shows that apparently no contractor has yet to file such a claim against Local 401.  One has to wonder if that will last.

No Transportation Work, No Need to Worry About DBE Fraud? Think Again

Posted in Disadvantage Business Enterprises (DBE)

On March 13, 2014, the Department of Justice announced that a the owner of a Chicago based utility contract was sentenced to 17 months in federal prison and ordered to pay over $500,000 in restitution for DBE fraud scheme used to obtain over $5 million in contracts from the City of Chicago.

What is important about this case is that it involved only City of Chicago contracts, not projects partial or wholly funded by the Department of Transportation.  In my recent webinar on complying with DBE programs (free download here), I underscored that contractors and their executives that operate under a State, County, or Municipal DBE program need to be just as vigilant in complying with those programs as they do the federal DOT program

When fraud is committed using a DBE program, the underlying crime is usually mail or wire fraud.  The federal mail and wire fraud statutes apply equally to the DOT’s DBE program and state and local DBE programs.  That is because whenever you submit a payment application or other certification that falsely states that a DBE performed a certain percentage of work, you have likely committed wire or mail fraud.  In fact, wire fraud is what the contractor in the Chicago pleaded guilty to.

The Hidden Dangers of Failing to Follow DBE Rules (Part 2): The False Claims Act

Posted in Disadvantage Business Enterprises (DBE), False Claims Act
Mega-law firm Wilmer Hale recently published a its 2013 False Claims Act Year in Review.  The report is an insightful read for any business dealing with the federal government.  However, two statistics in particular should stand out for the construction industry:
  • False Claims Act suits hitting an all-time high of 753 in 2013, and
  • Government enforcement concerning disadvantaged business status is a particular focus of the Department of Justice.
Background on the False Claims Act
The False Claims Act authorizes private individuals to bring a civil claim in the name of the United States against anyone who fraudulent obtained money or property from the government. The person who brings the action is entitled to 30% of the amount recovered for the government.   (For the history buffs out there, the roots of the Act date back to the Civil War and was passed in an effort to ferret out profiteering and overcharging by contractors supplying war goods to the Union. Indeed, for years the Act was known as the Lincoln Laws.)
The elements of a False Claims Act claim are:
(1) a claim or statement to get the government to pay money;
(2) that is false or fraudulent; and
(3) that defendant knew was false or fraudulent.
Importantly, actual knowledge or specific intent to defraud the government is not necessary to be liable under the False Claims Act, reckless disregard for or deliberate ignorance of the truth are sufficient.
DBE Regulations and the False Claims Act.

A contractor that fails to follow DBE rules in turn almost always violates the False Claims Act.  The violation occurs when a contractor submits a payment application that certifies that a certain percentage of work was performed by a DBE when in reality the DBE performed no commercially useful function.  Importantly, to violate the False Claims Act the contractor need not be a knowing participant in the DBE fraud so long as it is shown that the contractor recklessly or deliberately disregarded the existence (I don’t know about it and I don’t what to know about it) of the DBE fraud.

 

Winning is Still Losing.

 

The False Claims Act makes bounty hunters out of disgruntled employees.  Couple this with an increased interest on part of the trial lawyers bar makes the risk of facing a False Claims Act claim significant.  Because the Act is complex and the risks of losing so severe, defending a False Claims Act action is not cheap.  Even if a contractor successfully defends the action and it is ultimately dismissed, the attorneys fees will undoubtedly impact a firm’s bottom line.

The biggest takeaway for contractors working under a federal, state, or local DBE program is that they simply cannot ignore or fail to investigate potential wrongdoing involving the DBE program.

Sentencing in DBE Front Scheme

Posted in Disadvantage Business Enterprises (DBE)

As we have written about before, DBE fraud involving a pass-through scheme, whereby a certified DBE performs no commercially useful function but receives a a commission for allowing their status to be used by a prime contractor, is by far the most common form of DBE fraud.

While less common, but no less illegal, is a the form of DBE fraud known as a front scheme.  There a DBE is certified and performs a commercially useful function but the DBE is not actually owned and operated by a socially and economically disadvantaged individual.

A recent case from Idaho shows that federal prosecutors are just as willing to prosecute DBE front schemes as they are DBE pass-through schemes and the consequences of engaging in this type of scheme are just as severe.  Elaine Martin, former president of Marcon, Inc. a certified DBE, was sentenced to 7 years in jail, ordered to forfeit over $3 million, pay over $120,000 in fines, and pay prosecution costs of $32,575, for her role in a DBE front scheme.  Martin submitted false documents in order to become a certified DBE.  The documents submitted made it appear that Marcon was owned and controlled by Elaine Martin.  In reality, other persons and shareholders had a role in the firm that raised questions about Marcon’s independence.  Martin was also guilty of concealing her net worth for DBE and SBA purposes and tax evasion – among other transgressions.

The Hidden Dangers of Failing to Follow DBE Rules (Part 1): Bid Challenges

Posted in Disadvantage Business Enterprises (DBE)

Criminal indictment is not the only threat to contractors who fail to follow the Department of Transportation’s Disadvantaged Business Enterprise (DBE) regulations.  While the risk of jail and civil fines is real, it is limited to those contractors that knowingly violate the DBE rules by engaging in a scheme to use the DBE program to commit fraud.  However, even contractors not knowingly engaging in a fraud scheme face a significant risk when they fail to follow the DBE regulations in the form of bid rejections and challenges.

Strict minority set asides or quotas are almost always unconstitutional.  Disadvantaged business contracting programs, like the DOT’s DBE program, are not quotas (a fact that DOT underlines in its regulations).  Rather, they are goals that contractors must use “good-faith efforts” to achieve.  In fact, many contractors would be surprised to know that a State Transportation agency cannot reject a bid because it fails to include a commitment to subcontract work that meets or exceeds the stated DBE goal.  However, for its bid to be accepted, the contractor must be able to demonstrate “good faith efforts” in attempting to meet the stated DBE contracting goal.

When contractors fail to meet DBE contracting goals, DBE regulations can collide with public procurement laws that require an award to a contractor that is the lowest responsible and responsive bidder.  Failing to document adequate good-faith efforts is grounds for a state transportation agency to reject a bid or for challenge to be filed by a disgruntled bidder on the basis that it is non-responsive.   Such was the case in M.K. Weeden Construction, Inc. v. Montana Dept. of Transportation.  That case involved bids for a $15 million project to prevent rock slides along Interstate 80.  Montana DOT established a 2% DBE participation goal for the project.  Plaintiff, M.K. Weeden, was the low bidder but it did not meet the 2% DBE participation goal.  Its bid contained only a 1.83% participation goal.  Montana DOT rejected Weeden’s bid as non-responsive.  Apparently, the only effort that Weeden made to contract with certified DBE’s was a “mass emailing to 158 DBE subcontractors without any follow up.”  The MDT administrative appeal board and then the federal district court all agreed with MDT that Weeden failed to show good-faith efforts to meet its hiring goals.  Unfortunately for Weeden, it was out of the project and out of pocket for preparing the bid and for challenging the rejection.

 Appendix A to Part 26 of the DBE regulations sets forth the types of efforts contractors can show in documenting good-faith efforts.  Among those efforts include:

  1. through all reasonable means, aggressively soliciting DBE’s to perform available work;
  2. breaking out contract work to increase the likelihood that DBE goals will be achieved;
  3. subcontracting work to a DBE that a contractor intended to self-perform; and
  4. negotiating prices with DBE firms.

Clearly mass emailing 158 DBE firms falls woefully short of these efforts.  It is unclear if Weeden was aware of what the DOT considered good faith efforts.  If it was, perhaps without much additional effort it may have been able to meet its DBE goal or at least document its good faith efforts sufficiently so that it bid would not have been rejected.

Certainly, losing a bid is not as severe as jail time, but few contractors would argue that it a lost bid is painless.  Indeed, besides the  potential profit on the project that was lost, the cost of bid preparation alone can sometime reach into the several thousands of dollars.  Bid challenges – yet another reason to make sure to follow DBE guidelines.

The DOT’s Disadvantaged Business Enterprise Program: The Huge Cost of Non-Compliance

Posted in Disadvantage Business Enterprises (DBE)

Join us for a webinar on Mar 27, 2014 at 2:00 PM EDT.

Register now!

https://attendee.gotowebinar.com/register/5788498068269059073

On January 13, 2014, the Department of Justice announced that two former executives of Schuylkill Products, Inc. had each been sentenced to 2 years in federal prison and forced to pay $119 million is restitution because of their role in what the FBI called the largest ever fraud involving the Department of Transportation’s (DOT) DBE Program

In recent years, federal prosecutors and the DOT’s Inspector General have significantly stepped up enforcement of the DOT’s DBE Program and have brought several high profile cases resulting in civil penalties and jail time. Additionally, contractors who fail to understand the DOT’s DBE rules can see bids challenged and lost and be forced to defend costly whistleblower lawsuits. Moreover, contractors that operate under a State or Local DBE program are not immune to risk.

Construction attorney Wally Zimolong, Esq., will lead a program that will discuss best practices for contractors and subcontractors in complying with the DOT’s DBE program and how to avoiding government investigations, bid challenges, and whistleblower lawsuits related to non-compliance. Wally counsels clients throughout the nation on issues related to compliance with federal, state, and local D/M/WBE programs.

After registering, you will receive a confirmation email containing information about joining the webinar.

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