Employment of veterans returning from service is of critical importance to our country and our economy — those who serve our country should be afforded every opportunity to succeed in business when they return from service. Unfortunately, a recent federal criminal case in New York shows that fraud knows no bounds, highlights some serious government procurement integrity issues at the Department of Defense, and also provides guidance regarding loss calculation in government contract fraud cases.
In United States v. White, No. 10-CR-00516 (S.D.N.Y.), the Government alleged that Mr. White, through a company named Mitsubishi Construction Corporation, won four contracts with the Department of Veterans Affairs (VA) and the Army to perform construction work in New York City, Montrose, New York, Coatesville, Pennsylvania, and Baltimore, Maryland. The total value of the contracts was over $16 million. Two of the contracts were designated for veteran-owned small businesses, and two were designated for service-disabled, veteran-owned small businesses.
A pretty significant issue for Mr. White was that he was not a veteran, much less a service-disabled veteran. In fact he never served in the U.S. armed forces. Rather, Mr. White was a felon with several prior convictions, including convictions for forgery (forging a judge’s signature on a document to avoid an eviction), attempted grand larceny (bank fraud), and for, remarkably, offering a false instrument in connection with a bid for a government contract. Mr. White served time in jail for these prior offenses, and in fact was on parole when he committed the crimes in this case. Another issue was that Mr. White stated that his company, Mitsubishi Construction Corporation, was owned in part by “Shinsuke Muraki of Mitsubishi Heavy Industries USA, Inc.” and even used the familiar Mitsubishi logo on his company documents, but in actuality Mr. White owned 100% of the company and had no affiliation whatsoever with the Mitsubishi company or any of its affiliates. The Court stated in its Sentencing Opinion that the fraud “was as simple as it was brazen.” See United States v. White, No. 10-CR-00516 (S.D.N.Y. Oct. 2, 2012) (Sentencing Opinion).
Mr. White was charged with mail fraud and three counts of major fraud against the United States. Mr. White was also charged with one count of false statements to a government official (he told a VA official that an Army veteran, who worked for the company as a laborer, owned 51% of the company), and one count of obstruction of justice (Mr. White attempted to corroborate his statement to the VA official by persuading the veteran to say he was the majority owner and offered a promotion and stock in the company in exchange for his “assistance”). The veteran declined to go along with the scheme, and instead assisted the VA by recording telephone conversations with Mr. White in which Mr. White said, “Yeah, tell ‘em you own fifty-one percent,” and instructing the veteran to say that he invested $5,100 in the company. Another former company employee testified at trial that Mr. White offered the employee $5,000 in cash to say that the veteran was a Vice-President at the company.
A jury found Mr. White guilty of all counts. He was sentenced to 41 months in prison, three years of supervised release, and a $30,000 fine. The Government sought a much longer sentence, 14 years, based on the total value of the contracts received by Mr. White’s company. Mr. White’s counsel argued that the amount paid to Mr. White’s company, approximately $4.9 million (Mr. White also claimed that the Government owed him hundreds of thousands of dollars for uncompensated work as well), should be used to determine the sentence rather than the total value of the contracts (under the United States Sentencing Guidelines the loss amount is a significant driver in the sentence calculation). Additionally, the defense argued that Mr. White’s personal gain was nominal, the Government received significant value for the work Mr. White’s company provided, and there were no allegations that the work was done poorly or incompletely.
The Court, in a written opinion, held that the loss to the Government in this case was not the face value of the contracts, but rather, the “loss is the value of the benefit the defendant obtains — in this case, the actual or intended profit under the contract — not the full face value of the contract.” See United States v. White, 10-CR-00516, Sentencing Opinion, (October 2, 2012). The Court held that the “nature of White’s crime cannot obscure the fact that he at least partially performed under the contracts he fraudulently received.” Id. at 4. This is a significant opinion because it drastically reduced the loss amount, thus drastically reducing the potential sentence under the Sentencing Guidelines.
This case will certainly be cited by the defense bar in future government contract fraud cases, but it may have had a different outcome had the Government cited to the loss presumption provision of the Small Business Jobs Act of 2010. That provision states that for every contract set aside for small business, there will be a presumption of loss to the Government “based on the total amount expended on the contract” whenever it is established that a business concern willfully sought and received the award by misrepresentation. The Senate Report on the Jobs Act explained the need for this presumption:
Under current law, the government has difficulty proving loss when the fraud was in the inducement to receive a contract and not in the performance of the contract. The SBA IG testified that such cases still involve both the societal loss and the programmatic loss to the Federal government. To solve this problem, the bill creates an irrefutable statutory presumption that small business size or status fraud constitutes a loss to the government of contracting dollars diverted to large firms on a dollar-for-dollar basis. The Committee intends that this presumption shall be applied in all manner of criminal, civil, administrative, contractual, common law, or other actions, which the United States government may take to redress such fraud and misrepresentation.
S. Rep. No. 111-343, at 8 (2010).
As previously reported here, the Small Business Administration (SBA) issued a proposed rule to implement this statutory presumption a little over a year ago, but has yet to issue a final rule. However, even without the implementing regulations, the loss presumption is valid law and part of the Small Business Act at 15 U.S.C. § 632(w). While district court judges look primarily to the Sentencing Guidelines as the judge did in White, this statutory presumption may influence a judge in future small business size or status misrepresentation cases, and we may see much tougher sentences than the one given in White.
Another issue raised by the defense that was not addressed by the Court in its Sentencing Order but may have played a role was the argument that the government agencies from which Mr. White received the contracts “were under internal investigation questioning the very process regarding the lax methods of issuing contracts to companies not qualified on the face of the bids due to false or missing information.” We reported on this issue earlier this year, specifically the release of a report by the Inspector General of the Department of Defense entitled “Inadequate Controls Over the DoD Service-Disabled Veteran-Owned Small Business Set-Aside Program Allow Ineligible Contractors to Receive Contracts.” According to the Report, the DoD’s procurement mistakes resulted from its having no mechanism in place to ensure that awardees met applicable requirements but instead relying “on contractors to self-represent their SDVOSB status, without confirming the accuracy of the representations.” Blaming the government for your crimes is typically not an effective argument, but it may have had some traction in this case based on the Inspector General’s report.
This case demonstrates that fraud can be as broad and wide as the human imagination, and also that the government must implement tighter procurement controls to detect and stop fraud against the government. It also demonstrates that your mother was right: you shouldn’t lie.
Brian Stolarz and Katie Calogero are the attorneys responsible for the content of this article.