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A case study of the government’s struggle to police procurement fraud

On January 5, the Pentagon’s Defense Logistics Agency (DLA) awarded a contract worth up to $33 billion over 10 years to a privately held equipment supplier called Atlantic Diving Supply, Inc., or ADS.

Only small businesses were legally permitted to bid on the contract, and ADS has been accused of defrauding the Pentagon by falsely claiming to be a small business. According to the most recent official tally of top government contractors, ADS is ranked as the 24th largest federal contractor in fiscal year 2019 with more than $3 billion in sales and ADS is the only “small business” among the top 50 that year.

ADS’s gargantuan new award for work on a Pentagon logistics program landed after the company’s majority owner, Luke M. Hillier, personally agreed to pay $20 million in 2019 to settle civil charges that his company defrauded the same program by falsely claiming to be a small business, among other accusations. An ADS spokesperson told the Project On Government Oversight (POGO) that Hillier is “unavailable for comment” and emails to him went unanswered.

In the months before Hillier’s settlement, three non-ADS executives including a former state politician pleaded guilty in a felony scheme. According to the Justice Department, Hillier  — referred to as “Person Y” in court records — allegedly created the scheme to allow ADS to benefit from contracts set aside by law for small businesses owned by socially and economically disadvantaged individuals, often women- and minority-owned ventures. Companies controlled by those non-ADS executives then allegedly would partner with ADS to perform work on the contracts.  The arrangement allegedly allowed ADS to benefit even though ADS is mostly owned by Hillier and thus was not eligible to bid on the contracts directly.

Keep reading this article at: https://www.pogo.org/investigation/2021/02/how-a-small-business-kingpin-wins-billions-in-defense-contracts/

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Why bylaws and operating agreements matter in applications for small business certification

If you are a business owner, when is the last time, if ever, that you read your corporate bylaws or your LLC’s operating agreement? 

Do you understand how they affect your control of the business?

Understanding how your corporate documents affect an owner’s ability to control a business is vitally important, and even more so when applying for Disadvantaged Business Enterprise (DBE), Minority Business Enterprise (MBE) or Women’s Business Enterprise (WBE) certification.  All three of these certifications require that the woman or minority owner legally controls the company.

You may be surprised how many owners think that they own a controlling share of their company, when, in fact, their corporate documents hamper their control.  Some do not realize this until they are going through the certification process.  Perhaps the company drafted its corporate documents itself or used an attorney that wasn’t familiar with the certification requirements.  In any event, a review by a knowledgeable attorney prior to submission of the certification application could have helped reach a different outcome.

Where we most often see issues hampering the control of an owner are in quorum and voting requirements. T his is highlighted by several recent decisions by the U.S. Department of Transportation, denying DBE certification based on issues with the companies’ corporate documents.

Keep reading this article at: https://www.natlawreview.com/article/why-bylaws-and-operating-agreements-matter-your-application-disadvantaged-enterprise

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COFC confirms ‘rule of two’ analysis applies before agency decides to utilize a multiple-award vehicle

The U.S. Court of Federal Claims (COFC) issued a decision on Nov. 30, 2020 that supported the Small Business Administration’s position regarding the Rule of Two analysis requirements for government acquisitions.

The central question surrounding the case was whether the U.S. Army could cancel a Federal Acquisition Regulation (FAR) Part 8 service-disabled veteran-owned small business (SDVOSB) set-aside procurement under the General Services Administration’s Federal Supply Schedule (FSS) and move the requirement to a multiple-award indefinite-delivery, indefinite-quantity (MAIDIQ) contract vehicle that the plaintiff, The Tolliver Group, Inc. (Tolliver), did not hold.

In its protest, Tolliver argued, in part, that the Army’s actions violated the Rule of Two because the agency was required to determine whether two or more small businesses were capable of performing the requirement prior to choosing to put the procurement on the MAIDIQ contract.

The COFC’s decision confirms that the Rule of Two analysis applies before an agency elects to procure a requirement from a multiple-award contract (MAC) vehicle under FAR Part 16.5.

The Rule of Two requires contracting officers to set aside any acquisition over the simplified acquisition threshold for small business participation when there is a reasonable expectation that (1) offers will be obtained from at least two responsible small business concerns and (2) the award will be made at fair market prices.

In Tolliver, the Army argued that a Rule of Two analysis was not required because—according the Small Business Jobs Act, as implemented in 15 U.S.C. § 644(r)—federal agencies have the discretion to issue MACs without first conducting a Rule of Two analysis to determine whether it should be set aside for small businesses.

Keep reading this article at: https://www.jdsupra.com/legalnews/cofc-confirms-rule-of-two-analysis-83418/

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Judge rules that lying about 8(a) eligibility violates False Claims Act

Another court has joined the growing chorus of judges who are singing the same tune on set-aside fraud:  when a government contractor lies about its eligibility for a set-aside contract, it violates the False Claims Act, and can be sued by either the Department of Justice or a whistleblower.

The new case is United States ex rel. Montes v. Main Building Maintenance Inc., and the decision was issued on December 22, 2020, by Judge Jason Pulliam of the Western District of Texas.

This is a qui tam case brought under the False Claims Act by a whistleblower, or “relator” as it’s called under that statute.  The relator alleges that two parents, Robert and Elvira Ximenes, created a company, JXM, to bid on government contracts reserved (or, in technical terms, “set aside”) for contractors that qualified for the so-called “8(a) Business Development program” for small businesses that are owned by “socially and economically disadvantaged people or entities.”

To qualify for such set-aside contracts, the business must first be “certified” as eligible by the Small Business Administration (SBA).  And to be eligible for such certification, the business must make a series of representation to SBA about who both owns the business, and who controls the business.

Keep reading this article at: https://www.natlawreview.com/article/federal-judge-texas-rules-lying-about-eligibility-8a-business-development-program

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Court of Appeals issues important decision on application of False Claims Act to set-aside contracts

On December 3, 2020, the United States Court of Appeals for the Second Circuit issued its decision in United States v. Strock, a ruling that will significantly strengthen the hand of the government, and of qui tam whistleblowers, in False Claims Act cases against companies awarded government set-aside contracts but do not meet the requirements of the particular set-aside.

The contracts at issue in Strock were set aside for service-disabled, veteran-owned small businesses (SDVOSBs).

Still, the Court’s reasoning also applies to other types of set-aside contracts, such as small business, women-owned small business, or HUBZone set-asides.  This decision should hearten whistleblowers who have information about fraud in government contracting set-aside programs.

The Facts Of United States v. Strock

The government sued Strock Contracting, its owner Lee Strock, and one of Strock’s employees.  The government alleged that Strock set up a new company called Veteran Enterprises Company (VECO) to bid on SDVOSB-reserved contracts from the Army, Air Force, and Veterans Administration. Strock, however, was not a disabled veteran.  Instead, he recruited another individual, a disabled veteran named Terry Anderson.

Keep reading this article at: https://www.natlawreview.com/article/court-appeals-issues-important-decision-application-false-claims-act-to-set-aside

Read the full decision in this case at: https://www.ca2.uscourts.gov/decisions/isysquery/36dc4bcd-69b0-4890-b0e2-56e98757e39f/3/doc/19-4331_opn.pdf#xml=https://www.ca2.uscourts.gov/decisions/isysquery/36dc4bcd-69b0-4890-b0e2-56e98757e39f/3/hilite/

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