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Focus on Regulation

DOJ announces one of largest False Claims Act recoveries concerning U.S. Government small business programs

Last week, the Department of Justice (DOJ) announced a $16 million settlement with Virginia-based government defense contractor, ADS Inc., to resolve allegations that ADS and its subsidiaries violated the False Claims Act by submitting claims for payment under fraudulently obtained small business set-aside contracts. DOJ reported that the ADS settlement “ranks as one of the largest recoveries involving alleged fraud in connection with small business contracting eligibility.”1

According to DOJ’s announcement, several ADS-affiliated companies claimed to meet certain eligibility criteria that qualified them to receive contracts set aside for small businesses under the Small Business Administration (SBA)’s set-aside programs. The government alleged that ADS and its purported small business subsidiaries concealed the smaller entities’ affiliation with ADS and knowingly misrepresented their size, ownership structure and other eligibility criteria. The investigation was prompted by a whistleblower, Ameliorate Partners LLP, which will receive approximately $2.9 million from the government’s recovery. The settlement also resolved allegations that ADS participated in an illegal bid-rigging scheme that inflated prices charged under certain government contracts.

The ADS settlement follows on the heels of DOJ’s announcement last year of its investigation of an alleged scheme to defraud SBA’s 8(a) small business program, which resulted in multiple criminal pleas and fines. In that matter, the government alleged that an officer of the Far East Construction Corporation (Far East), a small business, conspired to win multiple federal contracts set aside for small disadvantaged businesses under the 8(a) program. Instead of performing the work themselves, Far East entered into an agreement with an ineligible company, whereby the ineligible company would perform the work and Far East would receive a three perfect fee in exchange for use of its small business status.

Each year, the Federal government sets aside billions of dollars in contracts exclusively for small businesses. Companies that qualify as a small business or a small business owned by one or more women, minorities, or veterans under SBA rules may be eligible to compete for lucrative government set-aside contracts. Allegations of fraudulent misrepresentation by both large and small businesses involving government small business programs are not uncommon. The SBA’s Office of Inspector General recently reported that it has “identified numerous instances where firms that do not meet the criteria to be either ‘small’ or ‘disadvantaged’ have improperly obtained contracts under SBA contracting programs.”2

These two cases send a signal that DOJ may become more proactive at combatting small business contracting fraud.  In the ADS settlement announcement, SBA General Counsel Christopher Pilkerton commented that “identifying and aggressively pursuing instances of civil fraud by participants in these procurement programs and other set aside contracting programs, is one of SBA’s top priorities.” These recent cases underscore the importance of ensuring that small business eligibility representations are accurate, as the penalties for misrepresentation can be severe.

1 U.S. Department of Justice, Press Release No. 17895 (Aug.10, 2017), available at https://www.justice.gov/opa/pr/defense-contractor-ads-inc-agrees-pay-16-million-settle-false-claims-act-allegations.

2 U.S. Small Business Administration, Office of Inspector General, FY 2017 Congressional Budget Justification, https://www.sba.gov/sites/default/files/FY17-CBJ-oig.pdf.