DOJ has SBA SDVOSB and Section 8(a) Fraud in its Crosshairs©

November 28, 2018.

Last week federal prosecutors in San Diego obtained the conviction of Andrew Otero and his company, A&D General Contracting, for fraudulently securing $11 million in government set-aside contracts meant to benefit service-disabled veterans.  Otero and A&D used a “rent-a-vet” scheme to manipulate the Small Business Administration (SBA) into awarding the company status as a service-disabled veteran owned small business (SDVOSB) even though Otero had never even been in the military, and then successfully bid on U.S. Army and Department of Veterans Affairs (VA) contracts set aside exclusively for such businesses.  The Government’s successful prosecution of Otero and his company is the latest evidence that federal law enforcement has SBA SDVOSB and Section 8(a) fraud in its crosshairs.

Over the course of the last five years, law enforcement has dramatically ramped up efforts to improve oversight of the government programs designed to benefit small, minority-owned and service-disabled veteran businesses.  The Department of Justice (DOJ), alongside the Inspector Generals of the VA and the SBA have begun aggressively using criminal remedies as well the civil False Claims Act (FCA) to combat fraud on these programs.   This enforcement initiative paired with several favorable, federal court decisions has been a boon to the federal Treasury, as well as qui tam whistleblowers reporting small business fraud.

The SBA’s “Section 8(a) Program” provides set-aside and sole-source government contracts to small businesses owned and controlled by members of socially or economically disadvantaged groups, such as a member of a Native American tribe, an African-American or a physically disabled person.  The SBA also has a similar priority program for SDVOSBs.   The SBA considers a “small” business to be one that is independently owned and operated, not dominant in its field of operations, and small compared to others in the industry, as determined from factors such as the number of employees and average annual sales receipts.[1]  When a person obtains Section 8(a) or SDVOSB status through fraud and deceit, however, and then uses this unearned status to obtain government contracts, the SBA presumes the Government’s loss to be the full amount paid out under the fraudulently-induced contracts.[2]

Section 8(a) program and SDVOSB fraud is rampant, and the role that whistleblowing insiders can play in combatting this fraud is critical.  For example, in 2014, the Government Accountability Office reviewed just a sample of businesses that the SBA had certified as Women-Operated Small Businesses and found that forty percent (40%) of the companies in the sample were not eligible.[3] And, in 2018, the SBA’s Office of Inspector General (OIG) reviewed a sample of twenty-five Section 8(a) firms – a sample that included the fifteen firms with the largest Section 8(a) set-aside contracts in 2016 and ten firms that had been the subject of complaints to the OIG hotline – and, disturbingly, found that twenty of these twenty-five firms were ineligible for Section 8(a) status.[4] The fifteen firms with the largest set-aside contracts collectively had received $461 million in government contracts to which they were not entitled.     In response to these findings, the OIG recommended the development of “a robust system for tracking complaints that are received regarding firms’ continuing eligibility for the Section 8(a) Program, and tracking the actions taken to address the complaints.”[5]  The most likely source of such complaints concerning a firm’s eligibility is, of course, insiders such as qui tam plaintiffs blowing the whistle.

The Department of Justice likewise has recognized the importance of whistleblowers in the detection and prosecution of fraud on the SBA programs benefitting minority-owned and service-disabled veteran-owned small businesses — programs which are designed to serve disadvantaged populations rather than established corporate interests.  In recent years, the DOJ has intervened or filed statements of interest in several qui tam cases involving such fraud.[6]   In 2017, the DOJ achieved settlements in seven such lawsuits, and in the first nine months of 2018, the DOJ resolved five such actions. In one of the 2017 settlements, ADS Tactical, Inc. paid $16 million – a record amount in this type of case – to resolve allegations that it secretly controlled and struck deals with small “puppet” companies to win special government contracts reserved for service-disabled veteran owned and other small businesses.[7]   In contrast, in 2013, the Government reported no settlements at all involving SBA’s Section 8(a) program or SDVOSB program fraud.

In tandem with this increased law enforcement focus on fraud against the SBA’s programs designed to benefit minority- and veteran-owned small businesses, the courts have issued several opinions that facilitate the ability of whistleblowers to redress this type of fraud.  In 2014, the Court of Appeals for the Federal Circuit ruled that when a contractor uses deception to obtain Section 8(a) status, and then uses this status to obtain government contracts, the claims submitted under those contracts are false claims within the meaning of the FCA.[8]  The Federal Circuit’s opinion is likely to be viewed as persuasive by other courts around the nation.  And with regard to the question of how to measure damages when a contractor fraudulently obtains small minority-owned business status, in 2016 and 2017, two federal district courts applied the SBA’s presumption of loss rule, opining that damages equal the total value of Government funds paid to ineligible contractors.[9]

In short, as of the date of this posting, whistleblowers who bring forward credible information of fraud on the SBA’s Section 8(a) and SDVOSB programs are likely to encounter government lawyers and judges receptive to their allegations.  The executive and judicial branches are placing a high priority on ensuring that the SBA’s small business programs benefit minority groups and service-disabled veterans as intended.

[1] 15 U.S.C. § 632(a)(1)-(2)(A); 13 C.F.R. §§ 121.101-121.109.

 

[2] See 15 U.S.C. § 632, added by Public Law 111-240, September 27, 2010, 124 Star 2504, United States Public Laws, 111th Congress – Second Session.

 

[3] United States Government Accountability Office Report to Congressional Requesters, “Women-Owned Small Business Program,” (Oct. 2014), available at https://www.gao.gov/assets/670/666431.pdf.

 

[4] SBA OIG Audit Report, “Improvements Needed in SBA’s Oversight of 8(a) Continuing Eligibility Process,” Report Number 18-22, September 7, 2018, available at: https://www.oversight.gov/sites/default/files/oig-reports/SBA-OIG-Report%2018-22.pdf.

 

[5] Id. at 11.

 

[6] See A1 Procurement, LLC et al v. Thermcor, Inc. et al., Civil Action No. 2:15-cv-00015-RBS-DEM (E.D. Virginia), Dkt. 95, Notice by United States of America Statement of Interest, July 30, 2015; United States ex rel. Guzder v. MKM Engineers, Inc., et al, Civil Action No. 4:05-cv-00895 (S.D. Texas), Dkt. 47, Statement of Interest of the United States, Feb. 29, 2008; United States ex rel. Sansbury et al v. LB&B Associates, Inc. et al, Civil Action No. 1:07-cv-00251 (D.D.C.), Dkt. 38, Notice of election to intervene in part and decline in part, Apr. 14, 2011; U.S. ex rel. Head v. Kane Co. et al., Civil Action No. 1:05-cv-00317 (D.D.C), Dkt. 40, Government’s Notice of Intervention, Mar. 26, 2009.

 

[7] Department of Justice Office of Public Affairs, “Defense Contractor ADS Inc. Agrees to Pay $16 million to Settle False Claims Act Allegations Concerning Fraudulently Obtained Small Business Contracts” (August 10, 2017), available at: https://www.justice.gov/opa/pr/defense-contractor-ads-inc-agrees-pay-16-million-settle-false-claims-act-allegations.

 

[8] Veridyne Corp. v. United States, 758 F.3d 1371 (Fed. Cir. 2014).

 

[9] United States ex rel. Savage v. Washington Closure Hanford LLC, 2017 WL 3667709, (E.D. Wash. Aug. 24, 2017); United States v. Singh, 195 F. Supp. 3d 25, 28–29 (D.D.C. 2016).