Manhattan U.S. Attorney Files And Settles Civil Fraud Lawsuit Against Subcontractor For Violating The Federal Disadvantaged Business Enterprise Regulations
Kleinberg Electric Admits Responsibility for Fraudulent Conduct and Agrees to Pay $936,000
Preet Bharara, the United States Attorney for the Southern District of New York, Barry Kluger, the Inspector General of the Metropolitan Transportation Authority (“MTA”), and Douglas Shoemaker, Regional Special Agent-in-Charge of the U.S. Department of Transportation, Office of the Inspector General (“USDOT-OIG”), announced today that the United States has filed and simultaneously settled a civil fraud lawsuit against a subcontractor, KLEINBERG ELECTRIC INC. (“KLEINBERG”), for engaging in fraudulent conduct designed to take advantage of the Disadvantaged Business Enterprise Program in order to secure a subcontract on a federally-funded project for the design and construction of the Fulton Street Transit Center Dey Street Concourse (the “Dey Street Project”). KLEINBERG caused the prime contractor of the Dey Street Project to falsely represent to the MTA that KLEINBERG paid hundreds of thousands of dollars to a disadvantaged business enterprise (“DBE”) to perform legitimate work on the contract when, in reality, the DBE did not perform a “commercially useful function,” as required by the program’s regulations, and instead received a commission for the fraudulent use of its DBE status. As part of the settlement, KLEINBERG admitted and accepted responsibility for violating the DBE regulations governing the Dey Street Project and agreed to pay $936,000. The settlement was approved yesterday in Manhattan federal court by U.S. District Judge P. Kevin Castel.
Manhattan U.S. Attorney Preet Bharara said: “Kleinberg Electric painted a veneer of legitimacy on a subcontract that did not comply with the Disadvantaged Business Enterprise Program, and in doing so, subverted the aim of helping qualified minority and women-owned businesses succeed. Today’s settlement will help to ensure that all contractors who receive federal funds, whether they are prime contractors or subcontractors, follow the law.”
MTA Inspector General Barry Kluger said: “The civil settlement announced today is the result of the joint efforts of the Office of the United States Attorney, my Office, and the USDOT-OIG to combat construction fraud and protect the integrity of the federal Disadvantaged Business Enterprise Program. Today’s announcement demonstrates our continued commitment to create and maintain a level playing field in which all qualified disadvantaged business enterprises have a fair and equal opportunity to bid for, receive, and participate in MTA projects. I wish to thank the United States Attorney for the Southern District of New York and his staff for their strong and sustained efforts and our continuing partnership.”
USDOT-OIG Regional Special Agent-in-Charge Douglas Shoemaker said: “The Disadvantaged Business Enterprise Program is a business assistance program of the USDOT which helps economically and socially disadvantaged small businesses compete in the marketplace. Disadvantaged Business Enterprise fraud harms the integrity of the program and adversely impacts law-abiding small business contractors trying to compete on a level playing field. Working with our federal, state, and local law enforcement and prosecutorial colleagues, we will vigorously pursue those who violate the law, and expose and shut down fraud schemes that adversely affect public trust and USDOT-assisted transit programs.”
Background on DBEs
In 1980, the USDOT issued regulations in connection with a program to increase the participation of minority and disadvantaged business enterprises in federally-funded public construction contracts. To become certified as a DBE, a company must be owned and controlled by socially and economically disadvantaged individuals; be an independent business whose viability does not depend on its relationship with other firms; employ its own work force and own equipment necessary to perform its work; and be able to meet its financial obligations.
Recipients of USDOT construction grants, such as the MTA, are required to establish a DBE program that sets goals for the percentage of a project’s work that should be awarded to DBEs (“DBE goals”). General contractors on construction projects must make good faith efforts to meet the relevant DBE goals. The MTA has established a DBE program and requires companies that are awarded public works contracts to meet certain DBE goals.
Under the USDOT regulations, general contractors can count funds paid to DBEs toward the attainment of the DBE goals only if the DBEs performed a “commercially useful function.” A DBE subcontractor performs a “commercially useful function” only when it is responsible for the execution of the work of the contract; it actually performs, manages, and supervises the work involved; and it furnishes the supervision, labor, and equipment necessary to perform its work.
A DBE does not perform a “commercially useful function” if “its role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation.”
According to the allegations in the complaint:
The MTA set the DBE participation goal for the Dey Street Project at 10 percent of the project (or approximately $12.7 million). KLEINBERG was hired as a subcontractor for the Dey Street Project by the prime contractor, Slattery Skanska (“Skanska”). KLEINBERG expressly represented to Skanska that it would contract with J&R Rey as a second-tier DBE subcontractor for $600,000 in order to help Skanska reach its DBE goal for the contract. Between September 2005 and April 2007, at least 34 monthly requisitions were submitted to the MTA for the Dey Street Project including certifications of progress towards meeting the contract’s DBE participation goal. Relying on representations from KLEINBERG, Skanska reported to the MTA that J&R Rey was performing legitimate work on the contract. In reality, KLEINBERG never intended for J&R Rey to perform any legitimate tasks on the contract and J&R Rey never in fact performed any work on the contract. Indeed, the President of J&R Rey confirmed to the MTA’s Office of Inspector General that J&R Rey never performed a commercially useful function on the Dey Street Project. Instead, KLEINBERG paid J&R Rey “commissions” for the sole purpose of fraudulently using J&R Rey’s DBE status to earn DBE credit for the prime contractor.
Under the settlement agreement, KLEINBERG admitted, acknowledged, and accepted responsibility for causing false certifications to be submitted to the MTA representing that J&R Rey performed certain work and received certain payments, when in fact, J&R Rey never performed any work and received a commission from KLEINBERG for the fraudulent use of its DBE status. KLEINBERG also agreed to pay the United States $936,000 in damages.
Mr. Bharara praised the work of the MTA Office of Inspector General and the USDOT office of Inspector General for their invaluable work on this case.
The case is being handled by the Office’s Civil Frauds Unit.
Assistant U.S. Attorneys Lara Eshkenazi, Mara Trager, and Ellen London are in charge of the case.