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Transportation Department program fails to root out bad contractors

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A Transportation Department program designed to help women, minority and  disabled owners compete for federal contracts, in fact, may be disadvantaging  the very people it is intended to help by failing to root out bad actors.

The Transportation Department’s Disadvantaged Business Enterprise program has  continued to give money to contractors in the process of being debarred or  suspended for defrauding taxpayers, depriving more deserving firms of millions  of dollars, the agency’s internal watchdog reports.

“Weaknesses in DBE program management and implementation have allowed  ineligible firms to win DBE contracts and have left the majority of DBE firms  without work,” the department’s inspector general said.

The report shines a poignant light on Uncle Sam’s continuing inability to  punish wayward contractors or protect taxpayers from instances of procurement  fraud.

Federal agencies are supposed to suspend or debar federal contractors who  have tried to defraud taxpayers, thus preventing them from getting new  business.

Keep reading this article at: http://www.washingtontimes.com/news/2013/sep/30/transportation-department-program-fails-to-root-ou/

 

Audit finds rampant trouble with women and minority contracting program

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Minnesota has failed for three years to meet federal requirements for a program designed to steer millions of dollars in state transportation projects to minority- and women-owned businesses.

The program has been so plagued by mismanagement and weak oversight that some firms were awarded multimillion dollar contracts for which they might not have otherwise qualified.

In one case, nearly $1.6 million for buying materials on the Union Depot project in St. Paul was funneled through a minority- or women-owned firm to a non-minority-owned contractor. In another case on the same project, nearly $2 million was improperly credited to a non-minority-owned firm.

The findings and others, included in an internal audit of the Disadvantaged Business Enterprise (DBE) program, have led to a shake-up in the Minnesota Department of Transportation’s Office of Civil Rights and may result in additional investigations.

“This is absolutely a wake-up call,” said state Sen. Scott Dibble, DFL-Minneapolis, chairman of the Transportation and Public Safety Committee. Given the gravity of the issues raised by MnDOT’s internal audit, Dibble said he may ask the Legislative Auditor’s Office to conduct its own independent review.

Transportation department officials said they are moving quickly to address the shortcomings cited in the audit of the DBE program.

“This is a high priority for Commissioner [Charles] Zelle and the agency. We need to ensure that all contractors have an opportunity to work on MnDOT projects,” MnDOT spokesman Kevin Gutknecht said in an e-mail. “MnDOT fully supports diversity and believes that a diverse workforce, internally and externally on MnDOT projects provides a stronger and better outcome and better projects.”

The 30-year-old DBE program has long been plagued with fraud and oversight problems at both the federal and state levels. In 2010 and 2011 alone, U.S. Department of Transportation fraud investigations led to $88 million in recoveries, restitutions and fines, along with 10 federal indictments and eight criminal convictions.

Keep reading this article at: http://www.startribune.com/local/east/224726392.html?page=all&prepage=1&c=y#continue 

Fraudulent DBE firm denied $882,000 discharge in bankruptcy

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Wisconsin Attorney General J.B. Van Hollen has announced that on September 5, 2013, the bankruptcy court for the Eastern District of Wisconsin denied discharge of an $882,000 debt owed to the Wisconsin Department of Transportation (DOT) for overcharges made by Buveck Consultants, LLC, and its owner, Thomas L. Burse.  Burse and Buveck overbilled the Wisconsin DOT $1.3M through the Disadvantaged Business Enterprise Program.  Burse also lied to obtain certification in the program, claiming to possess three college degrees despite possessing none.  DOT discovered these deceptions, debarred the company from participation in DOT contracts, and offset $500,000 in pending Burse/Buveck claims against the $1.3M owed.

In November 2011, Burse filed bankruptcy for himself and his company in Milwaukee, seeking to discharge the $882,000 balance.  The DOT objected to discharge in the Burse bankruptcy, asserting that the debt was incurred by fraud.

Although the balance is also owed by the prime contractors that employed Buveck, and despite the fact that all of the fraud was committed through the LLC, the bankruptcy court upheld the Department’s objection to Burse’s discharge.  The court awarded judgment against Burse for $882,000, providing that prime contractors compelled to pay any portion of that claim shall also have the right to collect from Burse under the state’s judgment.  Debra L. Remington and Mark Bromley represented the Department.  Kathleen Chung represented the DOT.

A copy of the Amended Complaint is available here.

‘Good faith efforts’ — effective enforcement or a convenient excuse?

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[Note: The following article is taken from a blog operated by Bryan Cave’s Airport Concessions Law blog.  The article was originally published on July 5, 2013.  A link to the blog appears at the end of this excerpt.]

Over the years, I have often heard complaints within the airport industry about the Good Faith Efforts (“GFE”) standard contained in the federal regulations governing Disadvantaged Business Enterprises. The complaints generally decry the use of GFE and consider the GFE requirements more form than substance, a convenient excuse for non-compliance. Although there may be some merits to the complaint, the effectiveness of the GFE standard hinges upon the manner in which recipient applies the standard to a bidder’s efforts to meet the goal.

The GFE requirements for GFE on a federally assisted contract that contain contract goals is governed by 49 CFR Part §26.53. Section 26.53 provides that when a DBE goal is established, the recipient can award the contract only to a bidder or offeror that has made a GFE to achieve the contract goal. The GFE Guidance is contained in Appendix A to Part 26 and outlines the factors or efforts that should be considered in making the determination. It is important to note that the list of factors contained in Appendix A is not intended to be exhaustive and other factors may be considered in making the GFE determination.

The GFE guidance articulates a clear standard that requires that the bidder’s efforts to meet the goal must be reasonable and necessary steps to meet the goal. The scope, intensity and appropriateness of the bidder’s efforts should be evaluated in order to determine if the efforts would reasonably lead the bidder to obtaining sufficient DBE participation. Mere pro forma efforts are not good faith efforts to meet the goal. The guidance also cautions the recipients not to reject bona fide GFE by a bidder or offeror to meet the goal. In short, the determination of a bidder or offeror’s good faith efforts is a judgment call and the recipient must make a reasoned and balanced decision in making the GFE determination.

Keep reading this article at: http://bryancaveairportconcessionslaw.com/good-faith-efforts-fact-or-fiction/ 

Ohio business owners pay $2.9 million to settle DBE fraud case

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Prominent Washington Township (Ohio) developers David C. and Shery Oakes, along with their former business partner Sherif Aziz, have agreed to pay the U.S. government nearly $2.9 million to settle civil claims that they defrauded the government by making false statements about a civil engineering company called TesTech to obtain millions of dollars in federally funded transportation contracts.

Federal prosecutors allege the Oakeses and Aziz submitted false claims for payment for airport and highway projects in Ohio, Kentucky, Indiana and Michigan from April 2005 to June 2009. They did it, prosecutors say, by holding out Aziz as TesTech’s owner and president to qualify for a federal minority set-aside program while the company actually was owned and controlled by the millionaire Oakeses.

The Oakeses’ attorney, David N. Reed of Dayton, said the couple would have no comment. David Oakes owns a civil engineering company called CESO Inc. and Shery Oakes is owner of luxury home builder Design Homes and Development Co. Their company and TesTech are all located in Washington Twp. Aziz’s attorney, William E. Hunt of Cincinnati, did not return a phone call seeking comment.

In a settlement agreement released to the Dayton Daily News on Thursday by federal officials, the Oakeses and Aziz admit no liability and the government reserves its right to bring criminal charges. The parties agree that the government has a valid claim against the defendants for more than $5 million, and the government can go after the full amount if the defendants try to avoid their obligation to pay the settlement amount of $2,883,946.30.

Keep reading this article at: http://www.mydaytondailynews.com/news/news/crime-law/testech-owners-pay-29-million-to-settle-civil-suit/nYDXg/

DBE bid protests: One contractor’s loss is another’s gain

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Lately, competition for public works projects is fierce, and bidders, using every possible advantage to obtain contracting opportunities, seem resigned to combing through a low bid to determine if “all I’s are dotted and T’s are crossed.”

As part of this process, the Disadvantaged Business Enterprise (“DBE”) compliance requirements have turned out to be a fertile ground for bid protests, particularly on federally funded state highway projects.  The DBE program provides a vehicle for woman and minority-owned, small businesses to participate in public projects.  As part of this program, contractors on federal public contracts are required to meet certain DBE subcontracting goals (for example, 12% of the total bid amount must be subcontracted to certified woman or minority-owned firms).

The requirements for demonstrating DBE participation, however, can be complicated and fraught with pitfalls for both DBEs and contractors alike.  Failure to comply with the DBE bidding requirements to the letter is a common basis for finding a bid non-responsive, and, thus, provides numerous bidders with a basis to protest, including (i) questioning a prime contractor’s achievement of the project’s DBE goal or good faith efforts to meet that goal, (ii) the legitimacy or certification of a listed DBE entity, or (iii) a DBE’s ability to perform a Commercially Useful Function on a project.

For example, a general contractor who submitted a bid which came in “second,” may challenge award of the project to the apparent low bidder on the basis that the DBE firm that the low bidder proposes to use is either not properly certified to perform the work proposed or is not a legitimate DBE firm.  Such protests provide a lucrative opportunity for the second low bidder who may ultimately be awarded the project.

Keep reading this article at: http://www.ac-lawyers.com/news/2013/05/14/dbe-bid-protests-one-contractors-loss-is-anothers-gain

Deadline to comment nears as major changes to US DOT’s DBE program loom

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There is a federal Notice of Proposed Rulemaking (NPRM) pending that could spell major changes in the way the U.S. Department of Transportation administers its disadvantaged business enterprise (DBE) program.  DBE requirements are a part of all contracting performed by the nation’s airports, state highway departments, and transit systems.

Some predict that if the new rules go into effect as currently proposed, DBEs will see a decrease in contract opportunities and an increase in the burden on DBE-certified firms.

The deadline for comments to the USDOT proposed rule was originally November 5, 2012, but was extended to 11:59pm on December 24, 2012.  The NPRM can be found at http://www.regulations.gov/?sms_ss=gmail&at_xt=4d46cf13eca091f6,0#!docketDetail;D=DOT-OST-2012-0147;dct=FR%2BPR%2BN%2BO%2BSR.

DBE firms and businesses who could potentially benefit from DBE contracting are being urged by several advocacy groups to submit comments by the deadline.  Contractor trade associations already have been active in submitting comments, pro and con.

The following is a summary of the most significant proposed changes:

Rebuttal of Economic Disadvantage: The most noteworthy proposed revision is USDOT’s desire to broaden the areas which automatically rebut a presumption of disadvantage.  Currently, a Personal Net Worth (“PNW”) exceeding $1.32 million automatically rebuts the presumption of economic disadvantage, but a local Office of Minority and Women Business Enterprises (an OMWBE operated by an airport, highway department or transit system) may rebut the presumption if it has a “reasonable basis to believe the individual is not socially or economically disadvantaged.”  USDOT proposes including, as part of that rule, a second statement taken from USDOT’s guidance (which is currently not an official mandate):

  • If the person demonstrates an ability to accumulate substantial wealth, has unlimited growth potential, or has not experienced or has not had to overcome impediments to obtaining access to financing, markets, and resources, the individual’s presumption of economic disadvantage is rebutted, even if it individual’s PNW is less than $1.32 million.

USDOT states that with this language, it is appropriate for recipients (certifying agencies such as OMWBE) to review the total fair market value of the individual’s assets and determine if that level appears to be “substantial” and indicates an ability to accumulate substantial wealth.  The purported purpose of this provision is to give recipients a tool to exclude an individual who, in overall asset terms, is what a reasonable person would consider to be a wealthy individual, even if their liabilities bring their PNW below the $1.32 million cap.  Notably, USDOT also seeks comment as to whether a more “bright-line” approach would be preferable, such as saying that someone whose Adjusted Gross Income on his or her Federal income tax return was over $1 million for two or three years in a row would lose the presumption of economic disadvantage, regardless of PNW.

New Personal Net Worth Form: USDOT proposes a newly designed PNW statement required of all applicants.  The new form would include all assets owned by the individual, including ownership interests, personal assets, and the value of the personal residence.    USDOT also seeks comment on whether the spouse of an applicant owner should have to file a PNW statement.

Transfers:  USDOT proposes to directly add a paragraph into the regulation restating the requirement that assets transferred to an immediate family member for less than fair market value within the last two years can be counted toward an individual’s PNW calculation.  USDOT also proposes that transfers from business owners to the companies be counted toward the owner’s PNW to avoid artificially depressing that owner’s PNW.

Certification Related Provisions:  USDOT also proposes several changes to how ownership and control are determined.  Specifically, the rule will require applicants to submit additional proof as to the sufficiency of their initial capital contribution and the circumstances of any funding streams to the firm since its inception, including collateral value, proof of asset ownership, and more stringent guidelines relating to deposits made by the applicant.

Good Faith Efforts:  USDOT adds some clarification for establishing Good Faith Efforts to meet the DBE goal.  USDOT states that prime contractor bidders whose bid includes a promise to include DBEs after the contract awarded is not to be considered as a good faith effort. USDOT proposes that bidders would have two options: (1) bidders may submit Good Faith Effort documentation along with original bids, or (2) Bidders may submit good faith documentation within one day of being notified of their winning bid.

Counting Trucking Operations:  USDOT proposes to revise the current requirements for how much of a DBE trucking company’s involvement can be counted towards a DBE goal. The proposal would give credit to a DBE that leases trucks from non-DBE entities but uses its own employees as drivers.  This change is already implemented in many states.

There are several ways to submit comments on these proposed rule changes.  The easiest way is to simply file comments online at the regulations.gov web site.   Go to www.regulations.gov and then type in docket number OST–2012–0147.   This will connect you to a web page where you can type-in and/or upload your comments. Be sure to include the docket number in any submission you make.

Please note that all comments, including any personal information you provide, will become part of the docket and will be publicly posted without change at www.regulations.gov.

GDOT audit finds flaws in disadvantaged business certification process

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An audit completed amid concerns about airport contracts found flaws in the Georgia Department of Transportation’s process to certify businesses with “disadvantaged” status for government contracts. The internal audit discovered calculation errors in more than two-thirds of the sampling of applications it reviewed.

The findings of the audit raise questions about the disadvantaged business certification process GDOT had been using, but it’s not clear how many of the applicants reviewed went on to win contracts.

The “disadvantaged business enterprise” certifications give firms special consideration, since agencies set goals to award a certain percentage of contracts to disadvantaged firms.

Keep reading this article at: http://www.ajc.com/news/business/gdot-audit-finds-flaws-in-disadvantaged-business-c/nTHtQ/.

Federal agency finds misuse of DBE program in Oregon

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A  Federal Highway Administration investigation has determined that three Oregon contracting firms worked together to exploit a federal minority contracting program, and the Oregon Department of Transportation never noticed.

The firms – Bud Construction LLC, Emery and Sons Inc., and Salt and Pepper Construction Co. – “contrived a relationship” to meet Diversity Business Enterprise program requirements for a $35 million ODOT project on Oregon Route 217 that was completed in February, according to FHWA officials.

Emery and Sons used Salt and Pepper’s project involvement, which included supervision of trucking operations, to reach the project’s 6 percent DBE goal. But Bud Construction handled those operations instead, according to the FHWA. As a result, Salt and Pepper’s contribution was nullified, and Emery failed to meet DBE project requirements, the investigation concluded.

“It was pretty obvious what was going on,” FHWA spokesman Doug Hecox said. “Everyone around (the project) was pretty up front about it.”

Keep reading this article at: http://djcoregon.com/news/2012/09/12/federal-agency-finds-misuse-of-dbe-program-on-odot-project/

Business owner convicted of largest DBE fraud in U.S. history

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The United States Attorney’s Office for the Middle District of Pennsylvania has announced that Joseph W. Nagle, of Deerfield Beach, Florida, was convicted after a four-week jury trial before Senior United States District Court Judge Sylvia H. Rambo in Harrisburg.

Late Thursday, the jury returned a verdict of guilty on 26 of 30 charges in the indictment including conspiracy to defraud the United States Department of Transportation (USDOT) and commit wire and mail fraud, 11 counts of wire fraud, six counts of mail fraud, conspiracy to commit money laundering, and 11 counts of money laundering.

According to the U.S. Department of Transportation, this scheme, which lasted for over 15 years and involved over $136 million in government contracts, is the largest reported Disadvantaged Business Enterprise (DBE) fraud in the nation’s history.

According to United States Attorney Peter J. Smith, Mr. Nagle faces up to five years’ imprisonment on the conspiracy count; up to 20 years’ imprisonment on each of the wire and mail fraud counts; up to 10 years’ imprisonment on the money laundering conspiracy and each of the money laundering counts of conviction; and $250,000 in fines and mandatory restitution on each of the convictions. Nagle was acquitted on four counts of wire fraud. No date has been set for sentencing.

Mr. Nagle was president, chief executive fficer and part-owner of Schuylkill Products Inc. (SPI) and its wholly-owned subsidiary CDS Engineers Inc. (CDS) until April 2009, when SPI was sold. SPI was based in Cressona, Pennsylvania and manufactured concrete bridge beams used on highway construction projects in Pennsylvania and surrounding states. CDS was SPI’s erection division and installed SPI’s bridge beams, as well as other suppliers’ products, on highways in Pennsylvania and surrounding states. Mr. Nagle was convicted of joining an on-going 15-year conspiracy to defraud USDOT, the Pennsylvania Department of Transportation (PennDOT), and the Southeastern Pennsylvania Transportation Authority (SEPTA) in connection with the federal government’s DBE program when he became president in April 2004.

USDOT provides billions of dollars a year to states and municipalities for the construction and maintenance of highways and mass transit systems on the condition that small businesses, owned and operated by disadvantaged individuals, receive a fair share of these federal funds. In Pennsylvania, PennDOT and SEPTA receive these funds and they require contractors to award a percentage of their subcontracts to eligible DBEs.

Mr. Nagle was convicted of participating in the scheme, which ran from 1993 to 2008, where he and other executives at SPI diverted over 300 PennDOT and SEPTA construction contracts to SPI and CDS that were reserved for DBEs. Mr. Nagle and his co-conspirators executed the scheme by using a small Connecticut highway construction firm known as Marikina Construction Corporation as a front company to obtain these lucrative government contracts.

Marikina was owned by Romeo P. Cruz, of West Haven, Connecticut, a naturalized American citizen born in the Philippines. Marikina was certified by PennDOT and SEPTA as a DBE. Although Marikina received the DBE contracts on paper, all the work was performed by SPI and CDS personnel, and SPI and CDS received all the profits. In exchange for letting SPI and CDS use its name, Marikina was paid a small fixed-fee, set by SPI.

The scheme was carried out for over 15 years because of the numerous fraudulent steps the co-conspirators took to conceal the scheme. SPI and CDS personnel routinely pretended to be Marikina employees by using Marikina business cards, e-mail addresses, stationery, and signature stamps, as well as using magnetic placards and decals bearing the Marikina logo to cover up SPI and CDS logos on SPI and CDS vehicles.

Previously, four former executives associated with SPI, CDS, and Marikina entered guilty pleas for their roles in the scheme:

Romeo P. Cruz, the former owner of Marikina, pleaded guilty to conspiracy and tax fraud charges in 2008 and 2009. Ernest G. Fink, of Orwigsburg, Pennsylvania, SPI’s former vice-president, chief operating officer, and owner, pleaded guilty to conspiracy in 2010. Timothy G. Hubler, of Ashland, Pennsylvania, CDS’ former vice-president in charge of field operations, pleaded guilty to conspiracy and tax fraud charges in 2008. Dennis F. Campbell, of Orwigsburg, Pennsylvania, SPI’s former vice-president in charge of sales and marketing pleaded guilty to conspiracy charges in 2008. All four testified during the Nagle trial and await sentencing.

“Preventing and detecting DBE fraud are priorities for the Secretary of Transportation and the USDOT Office of Inspector General,” said Doug Shoemaker, OIG Regional Special Agent in Charge. “This significant conviction, in what is the largest reported DBE fraud case in USDOT history, will serve as a clear signal that severe penalties await those who would attempt to subvert USDOT laws and regulations. Prime contractors and subcontractors are cautioned not to engage in fraudulent DBE activity and are encouraged to report any suspected DBE fraud to the USDOT-OIG. Our agents will continue to work with the Secretary of Transportation, the Administrators of the Federal Highway and Transit Administrations, and our law enforcement and prosecutorial colleagues to expose and shut down DBE fraud schemes throughout Pennsylvania and the United States.”

“Schemes to defraud the Department of Transportation’s Disadvantaged Business Enterprise program cheat not only the government and taxpayers, but also cheat those small, minority-owned businesses that the program is intended to help,” said Special Agent in Charge George C. Venizelos of the Philadelphia Division of the FBI. “This long-term joint investigation, culminating in the conviction announced here today, shows our determination to work together with our partners to safeguard the taxpayer dollars that support these important programs.”

The investigation was conducted by the FBI, the U.S. Department of Transportation Inspector General’s Office, the U.S. Department of Labor Inspector General’s Office, and the Criminal Investigation Division of the IRS. Senior Litigation Counsel Bruce Brandler and Assistant United States Attorney Kim Douglas Daniel handled the prosecution.

— from an FBI News Release issued Apr. 6, 2012 at http://www.fbi.gov/philadelphia/press-releases/2012/former-president-and-owner-of-schuylkill-products-convicted-in-largest-disadvantaged-business-enterprise-fraud-in-nations-history.

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