DBE | The Contracting Education Academy

June 16, 2016 By AMK

Consulting firm found guilty in DBE fraud case

Transit Safety Management, Inc., was sentenced Thursday to making a false statement to the government in connection with its certification for “favored contracting status.”

US DOT The firm’s president, Susan Madigan, pleaded guilty earlier this year to one criminal count of lying to a state agency about the firm’s status as a disadvantaged business enterprise (DBE).

The company was sentenced by U.S. District Court Judge Nathaniel M. Gorton to five years of probation and a fine of $84,000.

In order to qualify for favored status, a company’s management must be controlled by a socially or economically disadvantaged individual such as a woman or minority. The purpose of the program is to give an economic advantage to minorities and women who run their own companies. However, the manager cannot also engage in employment that would prevent him or her from devoting sufficient attention to the affairs of the company.

In this case, investigators discovered that TSM’s purported owner, Madigan, was a full-time employee of a federal agency and the business was really operated by her husband making it ineligible for certification.

Keep reading this article at: http://www.newburyportnews.com/news/local_news/georgetown-firm-found-guilty-in-fraud-case/article_79eeaae0-be38-5753-8b69-3f79e3d31284.html

See earlier report on this case at: http://contractingacademy.gatech.edu/?p=9107

February 3, 2016 By AMK

DOJ finds federal employee’s business ownership fraudulent, fines DBE firm $84,000

A Massachusetts-based transportation consulting company has been charged by the U.S. Department of Justice with making a false statement in connection with its certification for favored contracting status.

Transit Safety Management, Inc. (TSM) was charged with one count of making a false statement to a state agency in order to maintain its status as a Disadvantaged Business Enterprise (DBE).

In order to qualify as a DBE, a company’s management must be controlled by a socially or economically disadvantaged individual such as a woman or minority. The purpose of the program is to give an economic advantage to minorities and women who run their own companies. However, the manager of the DBE cannot also engage in employment that would prevent her from devoting sufficient attention to the affairs of the DBE. In this case investigators discovered that TSM’s purported owner was a full-time employee of a federal agency and the business was really operated by her husband making it ineligible for certification as a DBE.

TSM provided consulting services to the railroad industry, focusing on safety and operations management. Shortly after it was founded in 1999, TSM’s owner certified the company as a DBE. As such, TSM was able to take advantage of federal regulations aimed at promoting the participation of minority and disadvantaged businesses in federally-funded public construction contracts. Under the DBE regulations, a contractor on federally-assisted transportation projects must either subcontract a percentage of its work to a DBE or show that it made a good faith effort to subcontract work to a DBE but was unable to do so. This requirement makes the DBE status a valuable and potentially lucrative designation.

In order to maintain its DBE certification, TSM had to make yearly affirmations that it was still eligible and that nothing had changed that would affect its eligibility for the favored DBE status. Despite this, TSM lied about whether it met the criteria for DBE status. According to court documents, TSM’s owner was hired as a full-time employee with a federal agency in 2005. As a full-time federal employee, TSM’s purported manager could not control TSM under the regulations. Nevertheless, TSM failed to disclose this change and continued to make its yearly affirmations to maintain is DBE status.

As part of its plea agreement, TSM has agreed to pay a fine of $84,000 and dissolve its operations.

United States Attorney Carmen M. Ortiz; Todd Damiani, Special Agent in Charge of the U.S. Department of Transportation, Office of Inspector General, Office of Investigations; and Harold H. Shaw, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division, made the announcement of the plea agreement. The case is being prosecuted by Assistant U.S. Attorney Eugenia M. Carris of Ortiz’s Public Corruption Unit.

The details contained in the Information are allegations. The defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

Source: http://www.justice.gov/usao-ma/pr/massachusetts-company-charged-connection-disadvantaged-business-enterprise-fraud

October 20, 2015 By AMK

Appeals court allows DBE fraud convictions to be offset by contract performance

In a recent ruling, Philadelphia’s U.S. Court of Appeals broke from precedent by allowing a defendant credit toward the financial judgement rendered even though the work performed was done fraudulently.

Joseph Nagle and Ernest Fink, defendants in the case, co-owned Schuylkill Products Inc. (Schuylkill), a manufacturer of concrete beams used in highway bridge work (United States of America v. Joseph W. Nagle and Ernest G. Fink, U.S, Court of Appeals for the Third Circuit, Sept. 30, 2015). SPI entered into an arrangement with a disadvantaged business enterprise (DBE) known as Marikina Engineers and Construction Corporation (Marikina).

Background

The U.S. Department of Transportation (USDOT) provides funds to state transportation agencies to finance transportation projects nationwide. These funds are used for highway construction, provided through the Federal Highway Administration (FHWA), or towards mass transit systems, provided through the Federal Transit Administration (FTA), or for airports, provided through the Federal Aviation Administration (FAA). In Pennsylvania, the FHWA provides funds to the Pennsylvania Department of Transportation (PennDOT).

Federal regulations require states that receive USDOT funds to set annual goals for participation in public transportation contracts by DBEs (49 CFR § 26.21). A DBE is a small business that is at least 51% owned by an individual or individuals who are both socially and economically disadvantaged and whose management and daily operations are controlled by one or more of the disadvantaged owners. State agencies set DBE goals when soliciting bids for a contract, and bids for the contract must show how the contractor will meet the goal. If the prime contractor is not a DBE, the goals are met by pledging that certain subcontractors that will work on a contract are DBEs. Typically, state DOTs certify businesses as DBEs. A business must be certified as a DBE before it or a prime contractor can rely on its DBE status in bidding for a contract. In order to count towards a contract’s DBE participation, a DBE must perform what is known as “Commercially Useful Function” on the contract. Therefore, a certified DBE whose “role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation” cannot be counted towards DBE participation (Id. § 26.55(c)(2)).

The Case

Court records show that in 1993 the Schuylkill firm entered into an arrangement with Marikina, a Connecticut corporation owned and managed by Romeo P. Cruz. Because Cruz was of Filipino descent, Marikina qualified as a DBE for USDOT projects. Marikina was certified as a DBE in Connecticut and Pennsylvania, among other states. Schuylkill and Marikina agreed that Marikina would bid to serve as a subcontractor for highway and transit contracts that had DBE participation requirements. If Marikina was selected for the subcontracts, Schuylkill and a subsidiary would perform all of the work on those contracts. Schuylkill would pay Marikina a fixed fee for its participation but otherwise keep the profits from the scheme. To conceal the scheme, Schuylkill used fake Marikina letterhead, provided employees with fake Marikina business cards, put magnetic signs with Marikina’s logo on the sides of Schuylkill’s vehicles, and used a rubber stamp with Cruz’ signature to endorse checks. In court, it was undisputed that Schuylkill had in fact performed the work for which Marikina had bid, constituting fraud by virtue of misrepresentation of DBE status.

Between 1993 and March 2008, Marikina was awarded contracts under PennDOT’s and the Philadelphia transit system’s DBE program worth $135.8 million.

Ultimately, Fink pled guilty to one count of conspiracy to defraud the United States, and a jury found Nagle guilty of conspiracy to defraud the United States, wire fraud, mail fraud, conspiracy to engage in unlawful monetary transactions, and engaging in unlawful monetary transactions. Cruz and two of Schuykill’s employees were indicted separately, and they pled guilty to the charges along with agreeing to cooperate with the prosecution of Nagle and Fink.

The District Court concluded that the appropriate legal standard to calculate the amount of loss was the face value of the contracts Marikina received, and that the defendants were not entitled to a credit against the loss for the work performed because they had not allowed a legitimate DBE to perform the work.

The Appeals

Initially, Fink objected to the loss calculation on the basis that the proper loss amount was the pecuniary harm suffered by an actual DBE that did not receive the contracts — in other words, the profit an actual DBE would have received on the contracts. Nagle objected to the loss calculation on the grounds that: 1) there was no evidence another DBE was willing to perform the contracts, 2) the highway department and the transit agency received what they paid for under the contracts, and 3) the largest conceivable actual loss was the value of the contracts less overhead and expenses. A District Court found that they were responsible for the face value of the contracts Marikina received without any credit for the work performed on the contracts.

Before the Third Circuit Court of Appeals, Nagle and Fink insisted that the amount of loss they were responsible for was not the face value of the contracts Marikina received. Instead, they said that they were entitled to a credit for the services they performed on the contracts (100%), therefore reducing the loss to $0.

The Court of Appeals noted that while the transportation agencies did not receive the full benefit of the contracts in that the Government’s interest in having a DBE perform the work was not fulfilled, they did receive the benefit of having the building materials provided and assembled. The Court concluded that despite the DBE fraud, the District Court should calculate the amount of loss by taking the face value of the contracts and subtracting the fair market value of the services rendered under those contracts. This includes, the Appeals Court noted, “the fair market value of the materials supplied, the fair market cost of the labor necessary to assemble the materials, and the fair market value of transporting and storing the materials.” The Appeals Court also ruled that, “if possible and when relevant, the District Court should keep in mind the goals of the DBE program that have been frustrated by the fraud.”

The Significance

Time will tell what the District Court decides on re-sentencing Nagle and Fink and whether monetary penalties for DBE fraud, of any dollar level, are imposed. The Nagle decision explicitly governs a DBE case, thus it could affect similar DBE fraud cases in the future. The case also could become an important precedent for defendants in cases dealing with other sorts of fraud, including fraud involving contracts with 8(a), woman-owned, veteran-owned, HUBZone, and other small businesses.

October 14, 2015 By AMK

Mass. AG cracksdown on DBE/MBE misrepresentations in subcontracts

The Massachusetts Attorney General is taking action to ensure that general contractors working on public construction are complying with state requirements to use DBE/MBE subcontractors.

In August 2015, the Attorney General filed suit (Comm of MA v. CTA Construction Co., Inc. et al., Suffolk Superior Court Civ. Action No. 2015-02491) against multiple contractors for allegedly violating the Massachusetts False Claims Act by making misrepresentations over their compliance with requirements for working with Minority Business Enterprises (MBE), Women Business Enterprises (WBE) and/or Disadvantaged Business Enterprises (DBE).

The defendant contractors immediately settled for a combined $1.4 million.

Keep reading this article at: http://www.jdsupra.com/legalnews/attorney-general-crackdown-on-dbe-mbe-58815/

October 25, 2013 By AMK

IG: Debarred firms remain listed for transportation set-asides

The Department of Transportation IG has alerted the department that it found three suspended or debarred firms currently listed in state Disadvantaged Business Enterprises directories as eligible to participate in the DBE program.

The IG issued a management advisory stemming from a recent audit into the DBE program, noting that federal regulations explicitly exclude suspended or debarred firms from receiving federally funded contracts.

Keep reading this article at: http://www.fedweek.com/item-view.php?tbl=3&ID=5412

Read DOT IG’s letter at: http://www.oig.dot.gov/sites/dot/files/DBE%20Management%20Advisory.pdf

Transit Safety Management, Inc., was sentenced Thursday to making a false statement to the government in connection with its certification for “favored contracting status.”

A Massachusetts-based transportation consulting company has been charged by the U.S. Department of Justice with making a false statement in connection with its certification for favored contracting status.

In a recent ruling, Philadelphia’s U.S. Court of Appeals broke from precedent by allowing a defendant credit toward the financial judgement rendered even though the work performed was done fraudulently.

The Massachusetts Attorney General is taking action to ensure that general contractors working on public construction are complying with state requirements to use DBE/MBE subcontractors.

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