U.S. Attorney Preet Bharara's handling of insider trading cases has come in for caustic criticism here, but when he does something right, he deserves a cheer. We're glad to see the fraud case he brought and settled against a Port Authority construction contractor who brought in a "Disadvantaged Business Enterprise" — DBE — solely to help win the contract, but not to do any useful work. From the press release from the U.S. Attorney's office:
USDOT set the DBE participation goal for the LaGuardia Project at 17% of the project's cost (or approximately $1.8 million). An intermediary contractor was hired by the prime contractor on the LaGuardia Project to install the bollard structural steel, and this intermediary contractor hired RMD as a subcontractor. The contract between the intermediary and RMD required RMD to provide materials provided by a DBE or woman-owned business, and RMD represented to the intermediary contractor that it would use the DBE MS Construction Co. ("MS") to supply approximately $1.1 million in bollard structural steel. RMD provided the intermediary contractor with invoices and other documentation purportedly from MS so that the intermediary contractor could claim credit toward its DBE contract requirements. The payments to MS were incorporated into a report signed by the president of the intermediary contractor and submitted to the prime contractor to show that the intermediary contractor was meeting its DBE goals as required by the contract with the prime contractor. In reality, RMD knew that MS was not actually supplying the steel, which instead was supplied by several third-party suppliers, none of which was a DBE. RMD paid MS a percentage of the amount paid to the actual steel suppliers for the sole purpose of fraudulently using MS's DBE status to earn DBE credit for the prime contractor.
Pursuant to the settlement agreement, RMD admitted, acknowledged, and accepted responsibility for the fact that one of its employees caused false certifications to be submitted to USDOT representing that a DBE performed certain work on, and received certain payments in connection with, the LaGuardia Project, when in fact the DBE never performed any work and merely received a commission from RMD for the fraudulent use of its DBE status. RMD also agreed to pay the United States $416,000 in damages.
It's interesting that, in contrast to the insider trading cases, this was handled with a civil penalty rather than with criminal charges. If you are curious about how to become a Disadvantaged Business Enterprise for federal contracting purposes, you can check out the affidavit certification, which reads in part:
I certify that I am socially disadvantaged because I have been subjected to racial or ethnic prejudice or cultural bias, or have suffered the effects of discrimination, because of my identity as a member or one or more of the groups identified above, without regard to my individual qualities.
I further certify that my personal net worth does not exceed $750,000, and that I am economically disadvantaged because my ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially and economically disadvantaged.
The Department of Transportation website explains: "There has been, since 1983, a statutory provision requiring DOT to ensure that at least 10% of the funds authorized for the highway and transit financial assistance programs be expended with DBEs." Maybe it's time not only to enforce the laws against fraud in these programs, but to rethink these programs fundamentally, or at least revisit the laws governing them. It may be that the fraud is not accidental, but that the government has set up — with a huge pot of money and complex bidding requirements — what amounts to an invitation, or at least an inducement, to fraud.