Flouting Affiliation Rules When Pursuing Small Business Set-Asides Can Lead to FCA Woes

Stinson - Government Contracting Matters
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Stinson - Government Contracting Matters

If you were somehow still wondering whether small businesses really need to be concerned about the affiliation rules in the Small Business Administration (SBA) regulations, the answer is a resounding “Yes.” Furthermore, running afoul of those rules can easily lead to liability under the False Claims Act (FCA), as most recently demonstrated by an Oklahoma contractor’s settlement with the Department of Justice (DOJ).

The DOJ announced in early June that Tulsa, Oklahoma-based contractor The Ross Group Construction Corporation (Ross Group), and its corporate affiliates, have agreed to pay over $2.8 million to settle allegations that they violated the False Claims Act (FCA) by improperly obtaining federal set-aside contracts reserved for disadvantaged small businesses. Set-aside contracts serve an important function by allowing small businesses to participate in federal contracting and gain valuable experience to help them compete for future economic opportunities. Announcing the settlement, the DOJ made clear (again) that it “will pursue those who knowingly obtain set-aside contracts to which they are not entitled and thereby prevent deserving small businesses from receiving the assistance that Congress intended.”

The case against Ross Group alleged that the company fraudulently induced the government to award certain small business set-aside contracts to several affiliated entities that did not meet eligibility requirements relating to size, ownership, and operational control. According to DOJ, Ross Group was ineligible for the small business set-aside opportunities but created two companies, PentaCon LLC and C3 LLC, to obtain the set-aside contracts in question. The United States further alleged that Ross Group maintained operational control over the day-to-day and long-term management decisions of the two purported small businesses, including controlling their financial affairs and business operations, and that, as a result, neither PentaCon nor C3 satisfied the size and eligibility requirements to participate in the set-aside programs. DOJ further alleged that Ross Group, PentaCon, and C3 concealed their affiliation from the United States and knowingly misrepresented the eligibility of PentaCon and C3 for the set-aside contracts.

The lawsuit, United States ex rel. Southwind Construction Services, LLC v. The Ross Group Construction Corporation, et al., Case No. 15-0102-R (W.D. Okla.), was filed in federal district court in the Western District of Oklahoma under the whistleblower provision of the FCA. That provision permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery. In this case, the whistleblower will receive approximately $520,000.

The DOJ is not the only part of the Government that takes this type of procurement fraud seriously. The Ross Group settlement is the result of a coordinated effort among the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office for the Western District of Oklahoma, DCIS, the Inspector General Offices of the SBA, the General Services Administration, the Department of Veterans Affairs, and the Army Criminal Investigation Division Major Procurement Fraud Unit.

The lesson? Contractors seeking to pursue small business set-aside contracts must first make sure they understand the affiliation rules—and all other requirements set forth in the SBA regulations. Then they must take actions to ensure they are fully compliant with those rules. Doing otherwise risks whistleblowers and knocks on your door from government investigators.

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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