A United States District Court ruled that there are instances where a surety and its broker could face liability for its principal’s violation of the Federal Government’s False Claim Act.
In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (July 31, 2017), an individual whistleblower brought an action under the False Claims Act alleging that construction companies, their principals, sureties, and others participated in fraudulent schemes to obtain set-aside government contracts. The principals had obtained the government contracts in question by submitting performance and payment bonds issued by various sureties.
At least in part, the whistleblower relied on a theory of “indirect presentment” and alleged that the sureties’ and broker’s actions led to the submission of false claims, and continued to do so upon becoming aware of the principals’ fraudulent activity.
The principals’ sureties and their broker sought to dismiss the case at an early stage, but the Court found that there were sufficient allegations that the sureties and broker knew or should have known the principals were fraudulently asserting their status as a service-disable veteran-owned small business. Whether the allegations against the sureties and the broker are ultimately proven remains to be seen, as the case is still ongoing in the United States District Court of Columbia.
However, the sureties and the broker continue to face significant exposure in the form of three times the damages sustained, which could include the economic benefit obtained by the allegedly fraudulent conduct.
It should also be pointed out that the individual whistleblower is seeking to recover anywhere between 15% – 30% of the proceeds awarded to the government.
This case serves as another example of the increasing scrutiny and exposure on those who stretch the requirements to obtain contracts under set-aside government programs, thereby negating the program’s fundamental purpose – which is to assist those targeted groups to increase their share in the marketplace. For some insightful guidelines to comply with government set-aside programs, see our post on the dos and don’ts.