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Focus on Regulation

Indictment in $40M Alleged Fraud Case Signals Increased Scrutiny of SDVOSB Government Contractors

On December 1, 2017, the U.S. Department of Justice announced the federal grand indictment of an army veteran for allegedly engaging in major government program fraud by using his status as a service-disabled veteran to obtain contracts set-aside for service-disabled veteran-owned small businesses (SDVOSBs), despite the fact that he did not control the management and daily operations of the company to which the contracts were awarded.

In the case, U.S. v. Dial Jr., the veteran has been charged with four counts of major program fraud as well as wire fraud in connection with his company United Medical Design Builders, LLC (“UMDB”) receiving over $40 million in government contract funds from the U.S. Army Corps of Engineers between 2008 and 2015.  Specifically, the Government alleged that Dial, who is a disabled Army veteran, acted only as a “figurehead” of UMDB in order for UMDB to obtain a SDVOSB set-aside contract to build health care facilities.

Pursuant to Small Business Administration (SBA) regulations, 13 C.F.R. §§ 125.12-14, to be eligible for the SDVOSB program, a business must 1) be a small business, 2) be 51% unconditionally and directly owned by an one or more service-disabled veterans and 3) the service-disabled veteran(s) must control the management and daily operations of the SDVOSB as well as hold the highest officer position in the SDVOSB.  Here, the Government alleged that UMDB was ineligible for SDVOSB set-asides because Dial did not control the management and daily operations of the company. Instead, the Government argued, UMDB was managed by another person who was not a disabled veteran. According to the indictment, Dial was approached and chosen by a representative of UMDB (“Person A”) who was seeking to find a disabled veteran in order for the company to qualify for SDVOSB set aside contracts. The government claims Dial was provided payments in exchange for letting Person A use Dial’s name and status on the SDVOSB contracts.  The indictment alleges that Dial was rarely in the company’s office, and that Person A “made all of the business decisions” for UMDB, and other employees ran the “day-to-day operations” of the company.

If convicted of government contract and wire fraud, Dial could face significant time in federal prison, as well as fines and forfeiture. For further information, see the Department of Justice, Indictment: Veteran Charged In $40 Million Government Contract Fraud Scheme (Dec. 1, 2017), https://www.justice.gov/usao-ks/pr/indictment-veteran-charged-40-million-government-contract-fraud-scheme. The indictment is available here.

This indictment serves as stark reminder that individuals and firms face significant liability when bidding on and performing small business set-aside contracts for which they are ineligible because they do not meet the small business ownership and control requirements.

SDVOSBs are facing increased scrutiny by regulators, as the ability to qualify for SDVOSB and veteran owned small business (VOSB) set-asides opens the door to lucrative government contracting opportunities. This is even truer in the wake of the recent 2016 Kingdomware Technologies Supreme Court decision, which required that the Department of Veterans Affairs (“VA”) comply with statutory set-aside contract preferences for SDVOSBs and VOSBs. 136 S. Ct. 1969 (2016).  Specifically, the Supreme Court required that the VA must follow the “Rule of Two”, which provides that the contracting officer must restrict competition to VOSBs if the contracting officer reasonably believes that two or more VOSBs will submit offers and that the contract can be awarded at a “fair and reasonable price”. 38 U.S.C. § 8127(d).

Service-disabled veterans and veterans that currently are or seek to take advantage of federal contracting opportunities should ensure that his or her business meets the small business ownership and control requirements both when applying for contracts and during contract performance.  Companies that wish to collaborate with or have an ownership stake in SDVOSBs and VOSBS should also be careful to not trigger changes in the size and eligibility status of an SDVOSB or VOSB.