March 2014

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.

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.

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.

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.