The Largest DBE Contracting Fraud. Yes, Ever.

Government contracting fraud has been a hot area for the Department of Justice these last few years. And who can blame it? It’s a huge amount of money being handed out by many agencies, sometimes with less oversight than is appropriate.

There’s even a database researched by the Project on Government Oversight called the “Federal Contractor Misconduct Database.”  It lists the top 100 government contractors and then the number and amount of (supposed) misconduct committed by them. I can’t vouch for the accuracy of the site but it’s an interesting read.

One area of government contracting fraud that has clearly caught the attention of the government is the program allowing for set asides for minority-owned or disadvantaged businesses.

Romeo Cruz, one of the defendants behind the largest case of Disadvantaged Business Enterprise (DBE) fraud in history, surrendered himself to the Bureau of Prisons earlier this month. According to the government, he was involved in a 15-year, $136 million DBE scheme.

Winning DOT DBE Funds

The focus of the scheme was transportation funds. The U.S. Department of Transportation sets aside an enormous amount of funding for DBE projects, nearly $40 billion each year. This money is then distributed to state agencies so they can fund transportation projects. In order to receive DBE funds, the state agencies must line up DBE eligible businesses.

On paper, MCC was an ideal candidate for Pennsylvania’s DBE grants. Under the DBE guidelines, Mr. Cruz was presumed disadvantaged due to his Asian descent. And, since he told Pennsylvania Department of Transportation (PennDOT) officials that he held independent control over the company, MCC was put on PennDOT’s approved DBE contractor list; PennDOT could point to MCC and other DBE certified companies as justification for why their state deserved a share of the federal DBE funds.

In return, however, MCC was required to fulfill its DBE contracts by performing a “commercially useful” function.  In other words, MCC itself had to carry out a certain amount of the work under the DBE contracts.

Not “Commercially Useful”

Mr. Cruz used his company, Marikina Construction Corporation (MCC), to funnel DBE funds into non-eligible companies. He worked with two individuals at Schuylkill Products Inc. (SPI), Dennis Campbell and Timothy Hubler. SPI is not a DBE.

MCC apparently became a funneling operation. SPI and its wholly owned subsidiary, CDS Engineers, ended up performing and managing MCC’s contracts. The government contended that MCC did not perform a “commercially useful” function. In return, Mr. Cruz accepted a small fixed fee for the DBE contracts he gave over to SPI and CDS.

Between 1994 and 2007, the conspiracy was working full-tilt. During that time, Mr. Cruz was PennDOT’s largest recipient of DBE funds, receiving more than $121 million in contracts that he passed on to SPI and CDS.

Allegations of Cover-Up

As architects of the largest ever DBE fraud, Mr. Cruz and SPI managers allegedly went to great lengths to maintain their artifice.

  • Mr. Cruz lied to PennDOT when he initially applied for DBE certification. Mr. Cruz gave false information about MCC’s capitalization and independence, assuring PennDOT that he was the sole decision maker in all MCC’s business dealings.
  • Over a 15-year period, Mr. Cruz filed false applications for DBE renewal with PennDOT, assuring them of his control, ownership, and managerial independence.
  • SPI and CDS used MCC business cards, email addresses, and second cell phones to fool general contractors and crane rental companies into thinking they were working with MCC employees.
  • SPI managers outfitted SPI vehicles with magnetic plaques to cover up or disguise SPI logos when conducting onsite visits and transporting workers.

The Collapse and the Outcome

In 2008, the conspiracy crumbled and Mr. Campbell, Mr. Hubler, and Mr. Cruz all pleaded guilty. Mr. Campbell, who pleaded only to DBE fraud was sentenced to 24 months in prison. Mr. Hubler, pleading to both tax fraud and DBE fraud, received a 33-month sentence.

Ultimately, Mr. Cruz’s fate is the most troubling. Like Mr. Hubler, Mr. Cruz pleaded guilty to tax and DBE fraud. While he did lend his name to the scheme, Mr. Cruz’s sentence of 33 months seems disproportionately high given that he received only a small fixed fee payment for the contracts. He was ordered to pay $119 million in restitution.

There can be little question that this is one of those unfortunate cases where the Sentencing Guidelines led to a lengthy sentence when the individual defendant did not gain much from the scheme. Moreover, even though the sentence was likely driven by a high “loss” amount, the government did not really lose $119 million. SPI and CDS provided services under the fraudulently-obtained contracts.

But, hey, it’s not as though the Guidelines are famous for being fair.

This entry was posted in Government contracting fraud, Sentencing, Tax fraud and tagged . Bookmark the permalink.

3 Responses to The Largest DBE Contracting Fraud. Yes, Ever.

  1. Pingback: Where Are They Now? An Update on Past Posts | Grand Jury Target

  2. Pingback: Great Decision on Loss Amount Calculation in Government Contracting Fraud Case | Grand Jury Target

  3. Pingback: An Appeals Court Finally Takes a Practical Approach to Sentencing in Government Contracting Case (and an Interesting 4th Amendment Issue) | Grand Jury Target

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