On February 2, the Department of Justice announced that Colorado-based MCC Const. Corp. has agreed to plead guilty to conspiracy to commit major fraud against the United States and pay a combined fine and forfeiture of $1.8 million to settle criminal allegations that the firm conspired to defraud the government by using front companies to obtain SBA 8(a) contracts set aside for economically disadvantaged small businesses. According to DOJ’s press release:
The Justice Department announced today that MCC Construction Company (MCC) has agreed to pay $1,769,294 in criminal penalties and forfeiture for conspiring to commit fraud on the United States by illegally obtaining government contracts that were intended for small, disadvantaged businesses.
The court agreement was announced today by Assistant Attorney General William J. Baer of the Justice Department’s Antitrust Division, U.S. Attorney Channing D. Phillips of the District of Columbia, Assistant Director in Charge Paul M. Abbate of the FBI’s Washington Field Office, Inspector General Peggy E. Gustafson of the Small Business Administration (SBA), Inspector General Carol Fortine Ochoa of the U.S. General Services Administration (GSA), Special Agent in Charge Brian J. Reihms of the Defense Criminal Investigative Service’s (DCIS) Central Field Office and Director Frank Robey of the U.S. Army Criminal Investigation Command’s Major Procurement Fraud Unit (MPFU).
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MCC was a construction management company and general contractor headquartered in Colorado.A criminal information was filed last month in the U.S. District Court for the District of Columbia charging MCC with one count of knowingly and willfully conspiring to commit major fraud on the United States. MCC waived the requirement of being charged by way of federal indictment, agreed to the filing of the information and accepted responsibility for its criminal conduct and that of its employees. U.S. District Judge Ketanji B. Jackson accepted the company’s guilty plea today. The plea agreement is subject to the court’s approval at a sentencing hearing scheduled for March 15, 2016.
According to court documents, MCC conspired with two companies that were eligible to receive federal government contracts set aside for small, disadvantaged businesses with the understanding that MCC would, illegally, perform all of the work. In so doing, MCC was able to win 27 government contracts worth over $70 million from 2008 to 2011. The scope and duration of the scheme resulted in a significant number of opportunities lost to legitimate small and disadvantaged businesses.
Under the illegal agreement, the companies awarded these government contracts were allowed to keep 3 percent of the value of the contracts for allowing MCC to use the companies small business status to win the contracts.
Court documents state that MCC violated the provisions of the SBA 8(a) program. The SBA 8(a) development program is designed to award contracts to businesses that are owned by “one or more socially and economically disadvantaged individuals.” To qualify for the 8(a) program, a business must be at least 51 percent owned and controlled by a U.S. citizen (or citizens) of good character who meet the SBA’s definition of socially and economically disadvantaged. The firm must also be a small business (as defined by the SBA) and show a reasonable potential for success. Participants in the 8(a) program are subject to regulatory and contractual limits. Also, under the program, the disadvantaged business is required to perform a certain percentage of the work. For the types of contracts under investigation here, the SBA 8(a)-certified companies were required to perform 15 percent or more of the work with its own employees.
MCC, along with the two 8(a) companies used to illegally obtain the contracts, engaged in and executed a scheme to defraud the SBA by, among other things:
- Allowing the two 8(a) companies to retain a guaranteed percentage of each contract for simply obtaining the contracts for MCC;
- Allowing the two 8(a) companies to perform no labor on these projects;
- Performing the accounting and government reporting for the two 8(a) companies on certain projects;
- Falsely representing to the government that MCC employees were in fact employees of the 8(a) companies;
- Obtaining certain contracts on behalf of the 8(a) companies without first informing those 8(a) companies prior to bidding; and
- Conspiring with the 8(a) companies to hire straw employees for the 8(a) companies whose labor and salaries were paid for by MCC.
For the contracts obtained through this scheme on which MCC made a profit, MCC’s profit was at least $1,269,294. The criminal penalty in this case includes a $500,000 fine and a forfeiture money judgment of $1,269,294.
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Comment: In other SBA fraud cases, the government has taken the position that for sentencing purposes, the loss amount equals the entire contract amount, following the reasoning of several courts that SBA programs are “government benefits” for purposes of an application note of the U.S. Sentencing Guidelines. In this case, the plea agreement bound the government to a loss merely exceeding $550,000, resulting in a significantly smaller sentencing guidelines offense level (17 vs. 24). This issue has been the subject of much litigation this past year, resulting in an Eleventh Circuit decision, U.S. v. Martin, 796 F.3d 1101 (9th Cir. 2015), which rejected the application of the “government benefits” provision in such cases; and a Third Circuit decision, U.S. v. Nagle, 803 F.3d 167 (3rd Cir. 2015), holding that although set-asides contracts are “government benefits,” the defrauding contractor must receive credit for the value of services provided.