The Justice Department’s efforts to crack down on fraud against the government over the last few years have been tremendous. DOJ’s effort is not just on the criminal front but also through aggressive use of the False Claims Act on the civil side. Pfizer paid $2.3 billion to settle civil and criminal health care fraud claims. GlaxoSmithKline paid $3 billion for the same. Bank of America had to pay $1 billion to resolve a civil case against it related to the foreclosure market. The numbers are staggering. For an interesting overview, check out this website which summarizes the 100 biggest False Claims Act cases. The smallest penalty for these 100 cases was over $50 million. The government isn’t joking around here.
When the government goes after government contracting fraud on the criminal side, though, it frequently relies on the Major Fraud statute, 18 U.S.C. § 1031. The statute imposes a 10-year penalty when someone defrauds the United States of more than $1 million. Now, that sounds like a lot of money but it’s nothing when it comes to government contracts. The government offers contracts of $1 million all the time. Quite kindly, the government capped the fine for violating the statute at $10 million. It also gives a nice, long 7-year statute of limitations. Most criminal offenses have a 5-year limitations period, so this gives the government even more time to uncover this type of fraud.
And uncover fraud they did, in a case against several executives of a Virginia-based security contracting firm in the Eastern District of Virginia. Two executives were sentenced in mid-June 2013 after pleading guilty to conspiracy to commit major contract fraud. These two executives, Joseph Richards and David Lux, joined six others who had already pleaded guilty. The executives admitted they had perpetrated a scheme using two companies to obtain sole-source and competitive-bid contracts set aside for minority and disadvantaged small businesses. The program at issue was the Small Business Association’s Section 8(a) program.
The details of the conspiracy are fairly well described in the statement of facts to which Mr. Richards agreed as part of his plea agreement. In short, though, the defendants created a company (referred to as “Company B”) and chose an employee to be the “figurehead owner” because she was of Portuguese descent and had a socially disadvantaged background. However, that employee had no decision-making power over Company B. The statement of facts recounts that she “did not regularly work” for Company B for three years and “was rarely (if ever) in the office.” Company B was actually run by another defendant, Keith Hedman.
The defendants misled the SBA as to who had decision-making control over Company B in several ways, including by opposing the protest of another small business who challenged Company B’s Section 8(a) status.
If I had to guess, the fact that was likely the nail in the coffin was when Mr. Lux helped Mr. Hedman withdraw more than $1 million in cash from Company B. Mr. Hedman then disbursed it to Mr. Lux and Mr. Richards as well as to other co-conspirators. Mr. Lux and Mr. Richards each received $100,000. It’s one thing to commit fraud, but when you create a paper trail showing a $100,000 cash payment, you know you have a problem come sentencing time.
The total value of contracts awarded to the companies was $153 million, so it was easy for the government to make out a case for major fraud. Mr. Richards received a sentence of 27 months and Mr. Lux was sentenced to 15 months. They were each ordered to perform community service and to pay restitution in excess of $110,000.
UPDATE 6/21/13, 4:12 pm: Keith Hedman, the CEO, was sentenced today to 72 months in prison. That means 6 years for those of you who were not mathletes in high school.
[…] this major fraud case out of the Eastern District of Virginia. (See my other post about this case here.) According to the government, Ms. Hamilton was the “figurehead” owner of a company created by […]