The Government recently indicted an Army veteran for allegedly using his status as a service-disabled veteran to help a company qualify as a service-disabled veteran-owned small business and falsely obtain nearly $40 million in healthcare facility construction task orders from the Department of Defense.

The indictment is an indication that the government is continuing to aggressively pursue small businesses that fail to comply with set-aside requirements, and is a reminder that businesses benefiting from small business programs must be fully compliant with the complex regulations governing those socio-economic programs. It is also a reminder that the consequences of failing to meet those requirements are real – the Army veteran, Joseph Dial Jr., is facing over a century in prison.

Army Veteran Indicted for Using His Status to Unlawfully Qualify a Service-Disabled Veteran-Owned Small Business

In 2008, an individual identified as “Person A” in the unsealed indictment sought a service-disabled veteran to use to qualify a new business, United Medical Design Builders, LLC, (UMDB) as an eligible service-disabled veteran-owned small business (SDVOSB) for purposes of competing for SDVOSB set-aside construction contracts. Person A allegedly met Dial, a service-disabled Army veteran with a 30% disability rating from the U.S. Department of Veterans Affairs (VA), when he ran a subcontract project for Bart’s Electric Company, Inc. on an Air Force base. Person A presented UMDB as a 50/50 business relationship, under which Dial would act as project manager and learn to run a construction company. Dial allegedly agreed to let Person A use Dial’s name and veteran status for UMDB in exchange for payment. UMDB then went on to win an Army multiple award indefinite quantity task order contract in May 2009, under which four task orders were awarded between 2011 and 2012, with a cumulative, approximate dollar value of $32,502,202

Veteran Wasn’t Present on the Job When His Service-Disabled Veteran-Owned Small Business Won Government Contracts

However, at the time UMDB won the contract Dial was (1) still employed at Bart’s Electric Company, and (2) unable to provide the capital necessary to buy in to UMDB. Although UMDB was formed in 2008, Dial remained with Bart’s Electric Company until April 2010, which is when he moved to the Kansas City area to transition into his role at UMDB.

According to witnesses, Dial was rarely present in the UMDB office and all business decisions were approved by Person A without consulting Dial. In fact, day-to-day operations were run by yet another individual, identified as Person B in the indictment. Due to Dial’s rare presence, his signature was obtained on a blank sheet of paper and scanned for official correspondence, and at other times, a signature stamp was used. Dial did, however, have a direct role in submitting System for Award Management (SAM) certifications, allegedly directing an individual identified as Witness D on the selections to make for the annual certifications.

Where Did This Business Go Wrong When Declaring Itself a Service-Disabled Veteran-Owned Small Business?

To qualify as an SDVOSB, the VA regulations at 38 C.F.R. § 74 require one or more service-disabled veterans to:

1. Unconditionally and directly own at least 51% of the concern.
2. Control its day-to-day management and operations.

The indictment asserts that UMDB was clearly not an eligible SDVOSB for the following reasons:

• Dial was unable to buy in to the company in the beginning, and it is unclear whether this occurred later.
• Persons A and B controlled the business.
• Assuming Dial was the only eligible service-disabled veteran involved in the concern, he was required to:
  1. Devote full-time to the business, which was not possible when he worked for another contractor and was physically absent until April 2010.
  2. Hold the highest officer position, which was not possible when he was the program manager.
• In the case of a limited liability company, which UMDB was, Dial was required to serve as a management member with control over all decisions of the concern.
• Dial was required to have the managerial experience to the extent and complexity needed to run the concern, which was not possible when he was to receive training on how to run the concern.
• Finally, the VA regulations prohibit a non-veteran from exercising actual control or to have the power to control the concern.

What Are the Penalties Associated with Misrepresenting a Business as a Service-Disabled Veteran-Owned Small Business?

The indictment includes multiple counts of major program fraud and wire fraud. If convicted on all counts Dial faces a century or more in prison, in addition to fines and forfeiture judgment. No doubt Dial, who is currently represented by the public defender’s office, will mount a vigorous defense, but the indictment serves as a reminder that socio-economic small business programs require more than lending one’s name to a business.

Takeaways

In light of this indictment, a business seeking to qualify as a service-disabled veteran-owned small business must ensure that they are complying with all of the requirements associated with this classification. For example, service-disabled veterans must not only hold the highest officer position in the company, but also must actively run its day-to-day activities.