Yet Another False Claims Act Case Involving the DOT’s DBE Program

Readers of this blog know that I have been warning that actions brought under the False Claims Act against contractors violating DBE programs have been increasing.  Last week, I wrote about a False Claims Act case brought by a project manager, employed by a third party subcontractor, that resulted in a $2 million award to him and over $10 million award to the government.

On the heels of that case, is news out of the Southern District of New York of a False Claims Act case brought by the U.S. Attorney for the Southern District of New York, against Moretrench American Corporation, who allegedly used a “pass through” entity to meet its DBE subcontracting goals on the World Trade Center Project.  (Readers of this blog also know that the Southern District of New York is a hot bed of DBE fraud prosecutions, including several high profile cases in the last few years.)

According to the complaint, Moretrench made the common mistake of hiring a certified DBE that performed no commercially useful function.  Instead, Moretrench placed is employees on the DBE’s payroll and had those employees perform work using Moretrench equipment.  Moretrench then submitted payment applications certifying that the DBE performed work for Moretrench.  The complaint seeks only money damages and raises claims under the civil portion of the False Claims Act.  Therefore, Moretrench and its executives are lucky that they are not facing criminal mail and wire fraud charges, which the DOJ could have easily brought given the facts alleged.  (However, the DOJ can always bring additional charges later and we will see what happens.)

Whistleblowing Project Manger Awarded $2 Million in DBE Fraud Case

While criminal prosecutions involving construction company executives violating federal, state, and local disadvantaged business enterprise programs (DBE) rightfully receive most of the attention, of equal or greater concern to contractors should be whistleblower lawsuits brought under the False Claims Act for violations of DBE regulations.  As I talked about in my recent DBE compliance webinar (available for free by clicking HERE) the False Claims Act makes bounty hunters out of disgruntled former employees because the Act entitles the whistleblower to up to 30% of the amount recovered on behalf of the government.

On May 1, 2014, the FBI announced a $12 million settlement against Chicago based McHugh Construction for violations of the DOT DBE program and similar Illinois and Chicago DBE programs.  What is important about the case, is that it was filed under the False Claims Act by a project manager of a subcontractor to McHugh.  The case was then picked up — as is often the case under the False Claims Act – by the Department of Justice.  For his effort in making the initial filing the project manager will receive in excess of $2 million.  Not a bad pay day for the little work that he did in filing the lawsuit.

Now more than ever, contractors cannot ignore their DBE compliance duties.  Like with any other criminal activity, the Department of Justice cannot prosecute every case either because they lack the resources or they decline prosecution because of the size of the matter.  However, under the False Claims Act, the hundreds of people working on a construction project have incentive to sue contractors for violations of DBE rules.

Plaintiff’s attorney are aggressively pursuing whistleblower claims against contractors that violate the DBE regulations.  Moreover, many terminated and disgruntled employees contact an attorney about potentially suing their former employer.  Usually that inquiry involves whether they have a claims for some form of discrimination.  Many are disappointed to learn they do not, however, you can be sure that the attorney they speak with will ask the potential client about any potential False Claims Act claims.  Even when you win a whistleblower action you lose because you are forced to spend significant money defending the action, which is typically not covered by insurance.

Whistleblower actions, yet another reason to make sure your firm is complying with DBE regulations.

Did a DBE Compliance Program Prevent Jail Time?

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.

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

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.

DBE Compliance Webinar Download

Concerned about complying with the DOT’s DBE regulations?  Download my free DBE compliance webinar here.

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

• 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.

Sentencing in DBE Front Scheme

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

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

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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Why You Need A DBE Compliance Audit

THE RISK IS REAL: 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) Disadvantaged Business Enterprise (DBE) Program. A third individual, the owner of the firm that was used as a “front” or “pass through” firm, Marikina Construction Corp., in the scheme received a prison sentence of nearly three years.

The sentencing of these individuals is not the result of an isolated incident. In recent years, we have become aware that federal prosecutors and the DOT 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.

The stakes are indeed high for contractors that do not abide by the DOT’s DBE rules. In addition to facing a federal investigation for violating DBE rules, contractors who flout the rules can see bids challenged and lost and be forced to defend costly whistleblower lawsuits. Furthermore, contractors that operate under a State or Local DBE program are not immune to risk.

You can help protect your firm from these avoidable problems by having a cost effective DBE Compliance Audit performed. We assist firms throughout the country in identifying potential DBE Program compliance issues and assist them in implementing changes to their standard operating procedures so that they can avoid criminal investigations and expensive lawsuits. The DBE Rules are complex and a DBE Compliance Audit is one way your firm can help avoid the cross hairs of the prosecutor’s gunsight.

To learn more on how we can help assure that your company complies with Federal, State, or Local DBE rules, please email Wally Zimolong at wally@zimolonglaw.com or call at (215) 665-0842.