United States v. Strock, Case #15-CV-0887-FPG

UNITED STATES OF AMERICA, Plaintiff, v. LEE STROCK, et al. Defendants.

Case #15-CV-0887-FPG

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

January 31, 2018

DECISION AND ORDER

INTRODUCTION

Plaintiff United States of America ("Plaintiff") acting on behalf of the Department of Defense, Department of the Air Force ("Air Force"), Department of the Army ("Army"), Department of Veterans' Affairs ("VA"), and the Small Business Administration ("SBA") commenced this action alleging violations of the False Claims Act ("FCA" or "Act"), 31 U.S.C. §3729 et seq., a common law fraud claim, and an unjust enrichment claim. ECF No.1.

Currently pending before the Court are Plaintiff's Motion for Leave to File Response to Defendants' Notices of Supplemental Authority ("Plaintiff's Motion") (ECF No. 35) and Defendants' Motions to Dismiss (ECF Nos. 13, 17, 18, 19) pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure ("FRCP"). For the following reasons, Plaintiff's Motion is GRANTED and Defendants' Motions to Dismiss are GRANTED.

BACKGROUND

The following facts are derived from Plaintiff's Complaint and are assumed true for purposes of Defendants' Motions. See DPWN Holdings (USA), Inc. v. United Air Lines, Inc., 747 F.3d 145, 147 (2d Cir. 2014).

I. Statutory and Regulatory Background

The Veterans Benefits Act ("VBA") and Small Business Act each present a framework designed to encourage contract awards to service-disabled veteran owned small businesses ("SDVOSBs"). ECF No. 1 at ¶¶ 16-25. To be eligible for special contracting programs reserved for SDVOSBs, the VBA, Small Business Act, and Federal Acquisition Regulation ("FAR") have each established similar qualifications: that a business must be at least 51% owned by one or more service-disabled veteran(s), and such service-disabled veteran(s) must control the business's day-to-day operations. Id. at ¶¶ 18-19, 22, 27. More broadly, regulations also require that the service-disabled veteran(s) control the "strategic policy setting" (as termed by the VBA and VA) or "long-term decision making" (as termed by the SBA regulations) of the business. Id. at ¶¶ 19, 23. Further, VA regulations place limits on the role that a non-veteran may play in the management of an SDVOSB firm. Id. at ¶ 20. These limits include barring a non-veteran's exercise of actual control, or the power to control, the service-disabled veteran participating in the program, and prohibiting a non-veteran's receipt of compensation which exceeds that of the business's highest officer (which must be the service-disabled veteran). Id.

The VBA and SBA authorize contracts to be set aside for SDVOSBs, with awards occurring on a "sole-source" basis (not through a competition) or through competitions in which participation is limited to veteran-owned firms. ECF No. 1 at ¶¶ 17, 21. SBA and FAR regulations require firms to represent that they qualify as an SDVOSB in their offer on a specific contract, and the SBA provides that any misrepresentation regarding SDVOSB status shall be subject to civil prosecution under the FCA. Id. at ¶¶ 24-25, 28. FAR regulations further require all contractors to complete representations and certifications (which include certifying that the business qualifies as an SDVOSB) in the Online Representation and Certification Application ("ORCA"). Id. at ¶ 29.

II. Parties

At the times relevant to this action, Defendants Lee Strock ("Strock") and Kenneth Carter ("Carter") were the owners and officers of an Erie County, New York based construction business, Defendant Strock Contracting, Inc. ("SCI"). Id. at ¶¶ 2, 10-12. Defendant Cynthia Ann Golde ("Golde") was an SCI employee and assisted Strock and Carter with SCI's operations. Id. at ¶ 13. Neither Strock nor Carter are service-disabled veterans and thus SCI did not qualify as an SDVOSB. Id. at ¶¶ 35-36, 50.

In order to gain access to, and profit from, contracts set aside for performance by qualified SDVOSBs, Defendants recruited Terry Anderson ("Anderson"), a New York State Parole Officer and service-disabled veteran, and developed a scheme to nominally appoint Anderson as the President and majority owner of a newly-formed company. ECF No. 1 at ¶¶ 31, 33. In or around 2006, Strock met with Anderson at least once to discuss the formation of an SDVOSB. Id. at ¶ 32. Veteran Enterprises Company, Inc. ("VECO") was subsequently formed, with Anderson as a "figurehead" President and 51% owner, Strock as Vice President and 30% owner, and Carter as Secretary, or in a similar officer position, and 19% owner. Id. at ¶¶ 31, 37. Golde was employed as VECO's office manager. Id. at ¶ 59. VECO's operations were setup in the same building as SCI—a building owned by either Strock or SCI. Id. at ¶¶ 2, 56-57.

III. VECO's Operations

Though Anderson was VECO's President and the majority owner of the company, Defendants permitted him to play only a limited role in managing VECO's operations. ECF No. 1 at ¶ 55. While serving as VECO's President, Anderson continued to work full-time as a New York State Parole Officer through 2013. Id. at ¶ 33. He did not have a key to enter the office building and Golde or other employees in the building had to grant him access when he wished to enter. Id. at ¶¶ 85-86. As VECO's President, Anderson's duties included the following: signing paperwork(including payroll documents, tax returns, subcontractor agreements, blank checks, insurance renewals, and contract bid proposals) (Id. at ¶¶ 61, 66); attending "pre-award" and "post-award" meetings held by various government entities (Id. at ¶ 70); and occasionally traveling to VECO's work sites to perform inspections (ECF No. 1 at ¶ 71).

Anderson's role as President was limited in that: he did not have access to payroll records for VECO employees (Id. at ¶ 64); he was not given VECO's bank account statements (Id. at ¶ 65); he was not involved in VECO's bid submissions or responses to government Requests for Proposals, except for his role in signing bid proposals and other contract documents (Id. at ¶ 66); other than the tasks described above, he performed little or no supervision of VECO's work on government contracts and "performed little or no management of VECO's day-to-day operations" (Id. at ¶¶ 72-73, 78); he did not act as project manager for any of VECO's contracts (ECF No. 1 at ¶ 74); he did not prepare labor and material cost estimates for any of VECO's contracts (Id. at ¶¶ 75-76); he did not make personnel decisions (such as whether to hire or terminate employees), and he did not regularly participate in the employee interview process (Id. at ¶¶ 79-81); and he played no role in identifying, approving, or seeking bids from, VECO's subcontractors (Id. at ¶ 83). In fact, it was Strock, not Anderson, who controlled VECO's day-to-day and long-term business operations and Strock and Carter performed other key business functions that Anderson did not perform. Id. at ¶¶ 76-82, 87.

In addition to Anderson's limited role in managing VECO's operations, he received limited financial benefits from the company. Anderson was paid less than five percent of the profits that VECO earned and, despite his title and majority ownership, he was not the highest paid VECO employee. ECF No. 1 at ¶¶ 90-92. He also had the lowest spending limit of all authorized users ofthe VECO company credit card and did not have the authority to draw cash from the account, despite being President of the company. Id. at ¶¶ 98-100.

IV. Plaintiff's Allegations

The gravamen of Plaintiff's Complaint is that (1) Defendants, while knowing that VECO did not qualify as an SDVOSB, falsely certified and represented that it did qualify in order to gain access to, and ultimately obtain, government contracts that were set-aside for award to qualified SDVOSBs; and (2) Defendants subsequently submitted claims for payment for the services performed under the awarded contracts.

A. Defendants' Misrepresentations of VECO's SDVOSB Status

One category of Plaintiff's allegations involves Defendants submissions of false statements certifying VECO's status as an SDVOSB. Broadly, Plaintiff alleges that, at various times between 2008 and 2013, Defendants falsely certified or verified that VECO qualified as an SDVOSB under the relevant statutory and regulatory frameworks, knowing that VECO did not meet such qualifications. Id. at ¶ 3. Plaintiff further alleges that, during this time period, VECO bid on, and was awarded, approximately $24 million in "contracts from the VA, [Army, and Air Force] that were set aside on a sole source basis for [SDVOSBs] or through competitions limited to [SDVOSBs]." ECF No. 1 at ¶¶ 2, 54, 108. More specifically, Plaintiff alleges as follows:

First, Plaintiff alleges that Defendants submitted an application to the VA to have VECO recognized as an SDVOSVB in which they falsely represented that VECO qualified as an SDVOSB, while knowing that it did not. Id. at ¶¶ 40-42, 49.

Second, Plaintiff alleges that "Strock directed or caused Golde or other employees of [SCI]" to enter information in various online databases, "including the Central Contractor Registration System and the Online Certifications and Representations Application (ORCA),representing that VECO was an [SDVOSB]" while knowing that VECO did not meet the statutory and regulatory qualifications. Id. at ¶¶ 43, 45-46, 49. Plaintiff further alleges that "[t]he information in ORCA was periodically updated to state that VECO was an [SDVOSB]." Id. at ¶ 44.

Third, Plaintiff alleges that Strock and Carter caused Golde to submit false representations that VECO qualified as an SDVOSB under VA or SBA requirements when submitting bids on various contracts between 2008 and 2013. Id. at ¶¶ 108, 110-111. Plaintiff has listed these contracts on an Exhibit ("Exhibit A") attached to Plaintiff's Complaint. ECF No. 1-1. For ten of the contracts listed on Exhibit A, Plaintiff provides more specific allegations as representative examples. See ECF No.1 at ¶ 108; ...