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Contractor and Subcontractor Liability in Qui Tam Litigation Under the False Claims Act Involving DBEsz

Whistleblower claims alleging that government contractors have improperly designated or used disadvantaged business enterprises (DBEs) can lead to substantial penalties under the False Claims Act.

The False Claims Act (“FCA”) is a federal statute that offers a reward to ordinary citizens who report fraud committed by federal government contractors. Typically, the citizen (referred to as a “whistleblower” or “relator”) will allege that the contractor fraudulently received or retained federal money by submitting false claims or causing false claims to be submitted to the U.S. government.

False Claims Act Whistleblower Claims Involving DBE Subcontractor Fraud

Many whistleblower claims under the FCA involve alleged fraud related to the use of disadvantaged business enterprises (DBEs) as subcontractors. These claims typically relate to the DBE’s legitimacy (i.e. whether the entity qualifies for DBE status) and whether the DBE actually performed the requisite work under the general contractor’s federal contract. Similar allegations can arise at the state level as well.

4 Key Issues in FCA Whistleblower Cases Involving DBEs

When seeking to utilize DBEs, government contractors must comply with a multitude of regulations. DBEs must comply as well; and, if either party fails to comply, both can potentially face liability under the FCA and analogous state statutes. Some examples of these regulations are below.

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  • DBE Responsibility for Materials and Supplies – When a DBE delivers supplies or materials to be used for the performance of a government contract, the DBE also must be responsible for negotiating pricing, determining the quality and quantity of the supplies or materials, ordering and installing (where applicable) the supplies or materials, and paying for the supplies or materials delivered.
  • Serving a “Commercially Useful Function” – A DBE must perform a “commercially useful function” under the government contract. This is determined based on multiple factors and can be industry-specific, and it is clear that serving as a “pass-through” entity is not sufficient to meet federal or state requirements.
  • More than an “Extra Participant” in the Contract – A DBE does not perform a commercially useful function if its role is limited to that of an “extra participant” in the contract and simply serves as an intermediary through which funds are passed in order to create the appearance of DBE participation.
  • DBE Labor, Equipment, Financial Resources, and Expertise – If a DBE lacks the labor, equipment, financial resources, or expertise to perform the subcontracted work and the general contractor or another party effectively performs the work, then it cannot be designated as a contract participant. In this scenario (as in each of the scenarios above), the general contractor and the DBE are both putting themselves at risk for a whistleblower lawsuit, government investigation, and civil or criminal prosecution.
  • Qualification for DBE-Restricted Contracts – Perhaps it goes without saying; but, when bidding for a contract that falls under a DBE program, the entities designated as DBE subcontractors must actually qualify as DBEs under the relevant program guidelines. Misrepresenting companies as DBEs (in addition to mispresenting actual DBEs as contract participants) can expose both the contractor and the subcontractor to FCA fraud liability.

In whistleblower cases under the FCA (also referred to as “qui tam litigation”), the relator is entitled to receive a portion of any damages awarded, usually between 15 percent and 30 percent, as well as attorneys’ fees and costs. Since it is not necessary for a relator to have personally suffered any harm in order to have standing to file an FCA lawsuit, this provides the potential for a financial windfall, and it can serve as a powerful incentive for anyone with knowledge of government contracting fraud to act as a whistleblower.

A major step in FCA qui tam litigation is the government’s decision regarding intervention. Once the government conducts a preliminary investigation, it can decide to intervene in the relator’s suit and move forward with civil or criminal prosecution, or it can decline to do so. Intervention is widely recognized as increasing the potential for recovery against the defendant, and the majority of whistleblower claims in which the government declines to intervene do not move forward in private litigation.

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Examples of DBE Fraud Cases that Resulted in Penalties for the Contractor and Subcontractor

Here are four examples of cases in which general contractors and DBEs faced substantial penalties as a result of the government’s decision to intervene in whistleblowers’ FCA claims. These cases are discussed for illustrative purposes only. Oberheiden, P.C. did not serve as defense counsel in any of these cases. Click here to read about our firm’s experience and case results in FCA matters.

1. President and Vice President Plead Guilty to Using DBE as a “Front” Company

The president and vice president of a company pleaded guilty to mail fraud following allegations that they fraudulently used their company to secure government procurement contract with DBE requirements. The company reportedly entered into a $5.2 million subcontract to perform various services, allegedly knowing that it lacked the labor, equipment, and financial resources required to perform under the subcontract. The work the company agreed to perform was allegedly performed by various third parties, and the president and vice president allegedly received fees for work performed by these third-party entities. The president and vice president were each sentenced to six months of home confinement, two years of probation, a $50,000 fine, and they were jointly ordered to pay $188,000 in criminal restitution as a result of perpetrating the DBE fraud scheme.

2. President Pleads Guilty to Money Laundering in DBE Fraud Scheme

The president of a construction company pled guilty to money laundering charges in connection with a DBE fraud scheme. The president obtained three DBE subcontracts on behalf of his company, allegedly misrepresenting the company as a certified DBE. He also allegedly conspired with the owner of another company to put its employees and expenses on his company’s books in order to create the false appearance that his company was performing under the DBE subcontracts. The president was sentenced to three years of probation and a $25,000 fine, and he was forced to forfeit $237,000 to the government. The owner of the other company was also sentenced to three years of probation for his role in the DBE fraud scheme.

3. One Company Removed from List of Minority Vendors, Another Faces Debarment Proceedings, and a Third Reaches a Settlement Following DBE Fraud Scheme

A major municipality undertook enforcement action following an investigation into a sham minority contracting scheme. This enforcement action included pursuing debarment proceedings against one contractor, removing a second from the municipality’s list of certified minority businesses, and negotiating a settlement with a third.

The municipality’s Office of Inspector General (“OIG”) reportedly determined that the companies colluded in order to make it appear that one of them, a certified minority vendor, provided equipment and supplies for a million-dollar contract that another signed with a government contracting agency. According to the OIG, in reality, the certified minority vendor was only used for its name and minority certification. The companies and their owners also allegedly generated false invoices in an effort to conceal their scheme.

4. Prime Contractor Agrees to Pay $1.85 Million, DBE Faces Debarment for Fraudulent Scheme

The same OIG announced that a government contractor agreed to pay $1.85 million to resolve an investigation into a DBE subcontracting arrangement which also resulted in the initiation of debarment proceedings against the subcontractor. According to the OIG, the contractor subcontracted with a registered woman-owned business to provide certain supplies under its general contract with a city procurement agency. In total, the subcontract accounted for 40 percent of the general contractor’s nearly $200 million contract with the city procurement agency.

However, according to the OIG, other non-minority businesses provided the supplies, and the general contractor simply paid the registered woman-owned business for the use of its name and woman-owned business certification. In total, the general contractor paid the subcontractor more than $410,000. The general contractor cooperated with the investigation, and agreed to undertake various compliance efforts in addition to paying $1.85 million. The woman-owned business lost its registration and was barred from participating in government contracts for two years.

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As you can see, the consequences of facing allegations of DBE fraud in connection with a government contract can be substantial. If your government contracting business is under investigation, if you own a DBE and your business is under investigation, or if you have any other reason to be concerned about allegations of government contract fraud, it is important that you engage federal defense counsel immediately.

At Oberheiden, P.C., our federal False Claims Act defense lawyers bring centuries of combined experience to representing government contractors and DBEs. Our defense team also includes multiple former federal agents who previously investigated government contract fraud cases at the Federal Bureau of Investigation (FBI), the U.S. Department of Justice (DOJ), and other agencies. To discuss your situation in confidence, call 888-680-1745 or request a free consultation online now.

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