United States v. Strock

UNITED STATES OF AMERICA, Plaintiff, v. LEE STROCK, KENNETH CARTER, CYNTHIA ANN GOLDE, andSTROCK CONTRACTING, INC., Defendants.

Case #15-CV-0887-FPG

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

September 23, 2019

DECISION AND ORDER

INTRODUCTION

Plaintiff, the United States of America ("the Government"), files its amended complaint against Defendants alleging violations of the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., (Counts I, II, III), common law fraud (Count IV), unjust enrichment (Count V), and payment by mistake (Count VI). ECF No. 48. The Government alleges that Defendants knowingly misrepresented that their company, Veteran Enterprises Company, Inc., ("VECO"), qualified as a service-disabled veteran owned small business ("SDVOSB") in order to obtain and profit from construction contracts that were set aside for SDVOSBs.

On January 31, 2018, this Court granted Defendants' motions to dismiss the Government's initial complaint but granted leave to amend. ECF No. 39; United States v. Strock, No. 15-CV-0887-FPG, 2018 U.S. Dist. LEXIS 15928, at *1 (W.D.N.Y. Jan. 31, 2018). On October 29, 2018, the Government filed an amended complaint. ECF No. 48. On February 22, 2019, Defendants moved to dismiss the amended complaint, and those motions are now before the Court. ECF Nos. 51, 52, 53, 54. For the reasons stated below, Defendants motions to dismiss are GRANTED.

BACKGROUND

I. The Establishment of VECO

The Government alleges that, before establishing VECO, Defendant Lee Strock owned a construction company—Defendant Strock Contracting, Inc.—that participated in and received millions of dollars in contracts from a Small Business Administration ("SBA") 8(a) program for companies owned by economically and socially disadvantaged individuals. ECF No. 48 ¶ 28. But once Strock Contracting "graduated" from this 8(a) program, Strock could no longer use it to obtain federal contracts and began looking for other contracting opportunities. Id. ¶ 29.

He found such an opportunity in SDVOSB programs established by the Small Business Act, the Veterans Benefits Act, and other federal laws which call for certain contracts to be set aside for SDVOSBs only. Id. ¶¶ 16-19; see generally PDS Consultants, Inc. v. United States, 907 F.3d 1345, 1349 (Fed. Cir. 2018) (describing federal laws enacting SDVOSB programs). To qualify as an SDVOSB, a business must, among other things, be at least 51% owned by one or more service-disabled veteran(s) who must control the business's day-to-day operations and make strategic policy and long-term decisions for the company. Id. ¶ 18, 26.

Lee Strock decided to recruit a service-disabled veteran to a head a company that he could use to obtain SDVOSB contracts, since Strock himself was not a service-disabled veteran. Id. ¶ 30. To that end, in or around 2006, Strock met with Terry Anderson, whom he knew was a service-disabled veteran, to discuss the formation of an SDVOSB. Id. ¶ 31. As a result, VECO was formed with Anderson appointed as a "figurehead" President and 51% owner, Strock as Vice President and 30% owner, and Defendant Kenneth Carter as Secretary and 19% owner. Id. ¶ 32. Defendant Cynthia Golde, who, along with Carter also worked for Strock Contracting, was employed as VECO's office manager. Id. ¶¶ 2, 50.

Though Anderson was VECO's president and majority owner, he played a limited role in managing VECO's day-to-day operations. Id. ¶¶ 44-82. Instead, Strock controlled VECO's day-to-day and long-term business operations, and he and Carter performed other key business functions that Anderson did not. Id. ¶¶ 69-82. The Government alleges that under Strock's general direction, email accounts were set up in Anderson's name but were used by other VECO personnel to make it appear as if Anderson was sending emails regarding VECO contracts. Id. ¶¶ 78-79. In addition to his limited management role, Anderson received limited financial benefits from VECO: he was paid less than 5% of VECO's profits, and, despite his majority ownership, was not the highest paid employee. Id. ¶¶ 96, 97.

II. SDVOSB Certification and Submission of Bids and Claims

To obtain SDVOSB set-aside contracts, federal regulations require businesses to represent that they qualify as an SDVOSB in their offer on a specific contract. Id. ¶¶ 20-23. Some regulations require businesses to "self-certify" that they qualify as SDVOSBs in an online database and update this certification annually, id. ¶¶ 20-21, while other regulations related to contracts awarded by the Department of Veterans' Affairs ("VA") require the business to apply to the VA and demonstrate their SDVOSB status to be included in an online database of eligible businesses. Id. ¶ 22. Defendants certified that VECO was an SDVOSB. Id. ¶¶ 3, 36-39, 41.

Additionally, VECO submitted bids for, and was awarded, numerous SDVOSB contracts. Id. ¶¶ 11-42. VECO submitted invoices for payment on these contracts. The invoices included a certification that the contract was performed in accordance with its terms and conditions, which included the requirement that the contract be performed by an SDVOSB. Id. ¶¶ 113, 119, 124, 129, 134, 139.

LEGAL PRINCIPLES

I. The FCA

"The FCA was enacted in 1863 to combat fraud by defense contractors during the Civil War." Bishop v. Wells Fargo & Co., 823 F.3d 35, 43 (2d Cir. 2016) ("Bishop I") (citation omitted), vacated on other grounds, 137 S. Ct. 1067 (2017). Though it has been amended numerous times, the Act's "focus remains on those who present or directly induce the submission of false or fraudulent claims[,]" and the Act "imposes significant penalties on those who defraud the Government." Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1995-96 (2016).

II. Federal Rule of Civil Procedure 9(b) Standard & the FCA

"It is self-evident that the FCA is an anti-fraud statute" and "claims brought under the FCA fall within the express scope of Rule 9(b)." Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1476-77 (2d Cir. 1995) (citing Fed. R. Civ. P. 9(b)). Rule 9(b) states that "[i]n alleging fraud . . . a party must state with particularity the circumstances constituting fraud." United States ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 25 (2d Cir. 2016) (quoting Fed. R. Civ. P. 9(b)). "That ordinarily requires a complaint alleging fraud to (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." United States ex rel. Chorches for Bankr. Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, 81 (2d Cir. 2017) (citations and internal quotation marks omitted).

Ultimately, the sufficiency of a complaint under the Rule 9(b) standard "depends upon the nature of the case, the complexity or simplicity of the transaction or occurrence, the relationship of the parties and the determination of how much circumstantial detail is necessary to give noticeto the adverse party and enable him to prepare a responsive pleading." United States v. N. Adult Daily Health Care Ctr., 205 F. Supp. 3d 276, 285 (E.D.N.Y. 2016) (citations omitted).

III. Federal Rule of Civil Procedure 12(b)(6) Standard

Under Federal Rule of Civil Procedure 12(b)(6), when a party moves to dismiss a complaint for failure to state a claim upon which relief can be granted, "the Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor." Kane ex rel. United States v. Healthfirst, Inc., 120 F. Supp. 3d 370, 382 (S.D.N.Y. 2015). However, "this principle is inapplicable to legal conclusions or threadbare recitals of the elements of a cause of action, supported by mere conclusory statements." N. Adult Daily, 205 F. Supp. 3d at 285 (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)) (internal quotation marks and alterations omitted).

Ultimately, "[a] complaint must plead enough facts to state a claim to relief that is plausible on its face." Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)) (internal quotation marks omitted). This requirement is met when a complaint includes "factual content sufficient to allow a court to reasonably infer the defendant's liability." United States ex rel. Coyne v. Amgen, Inc., 229 F. Supp. 3d 159, 168 (E.D.N.Y. 2017) (citing Twombly, 550 U.S. at 556).

DISCUSSION

I. The Government's FCA Claims: Counts I, II, and III

In Counts I, II, and III, the Government alleges that Defendants violated the FCA by:

1) presenting, or causing to be presented, false claims in violation of 31 U.S.C. § 3729(a)(1), and, as amended, 31 U.S.C. § 3729(a)(1)(A) (Count I);

2) making or using a false record or statement in violation of 31 U.S.C. § 3729(a)(2), and, as amended, 31 U.S.C. § 3729(a)(1)(B) (Count II); and3) conspiring to submit or cause to be submitted a false claim or to make or use a false record or statement in violation of 31 U.S.C. § 3729(a)(3), and, as amended, 31 U.S.C. § 3729(a)(1)(C) (Count III).

ECF No. 48 ¶¶ 151-164. The Government alleges these violations occurred from 2008 to 2013.¹

Subsection (A) imposes liability on any person who "knowingly² presents, or causes to be presented, a false or fraudulent claim for payment or approval[.]" 31 U.S.C. § 3729(a)(1)(A). To state a claim under subsection (A), a plaintiff must show that the defendant "(1) made a claim, (2) to the United States Government, (3) that is false or fraudulent, (4) knowing of its falsity, and (5) seeking payment from the federal treasury." United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 113 (2d Cir. 2010), rev'd on other grounds, 563 U.S. 401 (2011).

Additionally, an alleged "misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the [FCA]." Bishop v. Wells Fargo & Co., 870 F.3d 104, 107 (2d Cir. 2017) ("Bishop II"...