Alleged Bidding Scheme In Connection With Department Of Energy Subcontracts Ends In A Criminal Fraud Conviction

Vinson & Elkins LLP

Vinson & Elkins LLP

A recent enforcement action announced by the Antitrust Division of the U.S. Department of Justice included a notable plot twist – the investigation did not turn up an antitrust crime, but instead revealed a criminal conspiracy to violate the Procurement Integrity Act (“PIA,” 41 U.S.C. §§ 2101-2107). Conducted jointly by the Antitrust Division, the U.S. Attorney in the Eastern District of Louisiana, and the Department of Energy’s (“DOE”) Office of Inspector General, the investigation uncovered an illegal bidding scheme designed to corrupt the process by which DOE procures certain services and equipment in support of the nation’s Strategic Petroleum Reserve (“SPR”). A participant in the conspiracy, Cajan Welding & Rentals, Ltd. (“Cajan”), agreed to plead guilty to conspiring to defraud the United States and to violate the PIA.

The facts of the case are somewhat unusual. Cajan had sought federal subcontracts to provide maintenance services and equipment rentals to the sites of the SPR, the United States’ emergency supply of crude oil stored in underground salt caverns along the Gulf of Mexico in Louisiana and Texas. A key employee of the prime contractor responsible for managing and operating the SPR (identified in court documents as “Co-conspirator A”) had both a familial relationship and a significant financial relationship with the owner of Cajan. Neither Co-conspirator A nor Cajan disclosed the relationship.

In connection with his role with the prime contractor, Co-conspirator A created non-public pricing and cost estimates for equipment and services needed to operate the SPR, which were used by DOE to prepare bid solicitations and evaluate proposals. The information thus constituted “source selection information” as defined in PIA.1 Co-conspirator A provided this same information to Cajan in an effort to help Cajan win DOE subcontracts, by either leaving hard copies in Cajan’s office or sending the information over email. Over the course of roughly eight years, Cajan used the illicitly obtained information to secure over 50 subcontracts for SPR maintenance work. In total, Cajan received over $15 million from DOE funds, and Co-conspirator A received over $800,000 in financial benefits from Cajan in return for having provided the source selection information.

As part of the resolving Plea Agreement, Cajan pleaded guilty to one count of conspiracy to defraud the United States and to violate the PIA in violation of 18 U.S.C. § 371. The PIA, which was passed in 1988 in response to a major investigation of fraud in the defense contracting industry, prohibits persons from knowingly obtaining source selection information or bid or proposal information before the award of a Federal agency procurement contract to which the information relates.2 It also prohibits certain individuals from knowingly releasing source selection information or contractor bid or proposal information, including current and former federal government officials and individuals acting on behalf of or advising the government with respect to a federal procurement.3 Violations of PIA carry civil and criminal penalties for individuals and companies that knowingly exchange source selection information or contractor bid or proposal information. Contracting agencies can also take administrative actions, such as cancellation of a procurement or an awarded contract, or suspension or debarment from government contracting.

Government contracts and subcontracts present lucrative opportunities for federal contractors, and the pressure to secure them can be great. Companies looking to win business from the government may look for ways to distinguish themselves from the competition. However, this enforcement action highlights the risks involved in an offeror trying to circumvent the normal bidding process, which is intended to be unbiased, impartial, and free from corruption or fraud. Cajan’s conviction is especially interesting because it demonstrates the range of charges prosecutors have at their disposal to penalize misconduct. The outcome in the Cajan case is not the typical disposition from an investigation led by the Antitrust Division. The Antitrust Division may have started by looking for more traditional anticompetitive conduct – such as bid-rigging or price-fixing – and instead discovered a unique scheme that may not have deprived the U.S. Government of the best price, but corrupted the integrity of the procurement process. It is important for prospective government contractors and subcontractors to have in place a code of business ethics and conduct related to the procurement process. While securing a government contract can be a boon for business, getting caught up in an investigation or prosecution – whether it be for an antitrust crime or a violation of the PIA – is not worth the risk.

1 See 41 U.S.C. § 2101(7).

2 41 U.S.C. § 2102(b).

3 41 U.S.C. § 2102(a).

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Vinson & Elkins LLP

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