$4.5 Million False Claims Act Settlement Underscores DOJ's Focus on Fraud in Small Business Programs

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During the webinar on “The False Claims Act: 2019 Takeaways and 2020 Trends” earlier this year, Matt Feinberg and Jackie Unger noted that the SBA’s small business programs are fertile ground for False Claims Act (FCA) enforcement and predicted increased enforcement in 2020 and beyond. A recent settlement has shown this to be true and illustrates that the risk of FCA liability can extend to affiliates and business partners of purported small businesses that contract with the federal government.

On May 4, 2020, the DOJ issued a press release stating that Northland Associates, Inc. (Northland), its president James Tyler, and The Diverse Construction Group, LLC (Diverse) agreed to pay over $4.3 million to resolve two qui tam cases alleging that the defendants engaged in a decade-long scheme to fraudulently obtain over $50 million in contracts set aside for service-disabled veteran-owned small businesses (SDVOSBs) and small businesses operating in historically underutilized business zones (HUBZones). 

According to the press release and other public information, Northland, Tyler, and Hunter Grimes, a service-disabled veteran (now deceased), formed Diverse as a sham SDVOSB and HUBZone company based in Plessis, New York (a HUBZone). Though Diverse was majority owned by Grimes, and he was named as managing member, the company was really controlled by its 49% owner, Northland, from Northland’s office in Liverpool, New York, which is not a HUBZone. For instance, the press release states that Northland maintained a “bid calendar” with deadlines for upcoming Northland and Diverse contracting opportunities, staffed Diverse with former Northland employees, funneled Diverse subcontracts to Northland, and performed various administrative duties for Diverse, including its accounting, expediting, estimating, purchasing, contracting, and clerical work. To make the Plessis office appear operational for eligibility purposes, boxes of files were temporarily moved from Northland’s Liverpool office to Diverse’s office in Plessis. 

The parties also misrepresented the relationship between Northland and Diverse in sworn declarations from Tyler and Grimes submitted to SBA in response to a size protest. According to the press release, “Diverse funneled more than $1 million to Northland through a Northland subsidiary in an effort to hide the parties’ affiliation.”  Ultimately, as part of the settlement, Northland, Diverse, and Tyler admitted that their conduct violated federal regulations governing SDVOSB and HUBZone certification and procurements.

Rose & Kiernan, Inc., the bonding agent used by Northland and Diverse, also entered into a settlement agreement with DOJ despite not being named as a defendant in the qui tam cases. The press release explains that the settlement agreement “resolves allegations that Rose & Kiernan knew or should have known that Diverse and Northland were affiliated in violation of SBA regulations and that those companies took steps to hide their affiliation from the government to obtain and receive payment on government set-aside contracts.” Rose & Kiernan faced liability under the FCA based upon its alleged assistance in obtain bonding for Diverse, which DOJ considered to be “a critical action in furtherance of Diverse’s and Northland’s fraud on the government, and served as a substantial factor in causing Diverse to submit false claims for payment to the United States.”

As part of the settlement agreements, Northland will pay $2,125,000, Tyler will pay $2,125,000, Diverse will pay $100,000, and Rose & Kiernan has paid $120,000. The qui tam relators will receive $1,000,000 of the settlement proceeds. 

The settlement makes clear that ensuring the integrity of federal small business procurement programs is a top priority for the federal government. In light of this focus, government contractors—and other businesses that operate closely with them—would be wise to take stock.

  • Proactively assess and ensure your eligibility. Government contractors must be proactive in ensuring their eligibility for small business programs and small business set-aside contracts, including consideration of the impact of any affiliates on an entity’s size and ability to meet control requirements. This is particularly important because the FCA imposes liability for misrepresentations of small business status not only when a contractor actually knows it is not eligible, but also when a contractor has reason to question its eligibility but fails to investigate further (essentially burying its head in the sand in response to any red flags regarding eligibility).
  • Consider the eligibility of small business contractors with whom you are affiliated or to whom you provide contracting assistance. Affiliates and business partners of government contractors must be vigilant as well. While FCA liability usually is imposed on the contractor who submits the false claims, the settlement shows that other individuals or companies who have knowledge of (or deliberately ignore the possibility of) a contractor’s fraud and whose actions play a critical role in causing a false claim to be submitted may also face liability. 
  • Keep in mind the severe repercussions for FCA liability. On June 19, 2020, DOJ announced an increase in civil FCA penalties to adjust for inflation. The minimum penalty increased from $11,181 to $11,665 per claim, and the maximum penalty increased from $22,363 to $23,331 per claim. Monitoring for and protecting against small business misrepresentations is all the more important given the high stakes of ever-increasing civil penalties in addition to possible administrative action such as suspension or debarment, and potential criminal charges for the most egregious conduct.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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