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MWBE Contracting Fraud Conviction Signals Shift of the Enforcement Landscape and Alerts Companies to Reassess Compliance

“Those who scheme to defraud minority-owned businesses and their own employees must face the consequences of their actions. My office will continue to prosecute scam artists that try to take advantage of New Yorkers,” said New York State Attorney General Barbara Underwood in a press release.

Attorney General Underwood’s statement follows the December 7, 2018 conviction of Michael Martin, a former Albany, New York contractor, for defrauding minority-and women-owned business enterprises (MWBE), leaving a number of owners and their families financially devastated.

Martin’s scheme was wide-ranging and included “fraudulently obtain[ing] public construction contracts, willfully fail[ing] to pay over $400,000 in wages to dozens of employees and steal[ing] over $150,000 from a minority-owned business and over $200,000 from an insurance company,” according to Attorney General Underwood. The judge ordered Martin to a pay $800,000 to the victims and, in addition, imposed on Martin a prison sentence of 3.5 to 12 years.

For contractors in the construction field, this should be a wake-up call. The conviction and sentence come almost a year and half after the 2017 Manhattan federal court decision reversing the 2016 convictions of Larry Davis and his company, DCM Erectors. While that Manhattan federal judge may have declined to find criminality in a contractor’s misrepresentations to the government of MWBE utilization on a project because the government suffered “no loss”, the New York State Attorney General is making it clear that predator contractors who exploit the MWBE program and steal from minority contractors will still be prosecuted by the state and may face significant prison terms for their actions.

In the 2017 federal district court case, Davis and DCM were prosecuted under the theory that they had obtained more than $500 million worth of contracts from The Port Authority of New York and New Jersey by claiming MWBE participation credits worth millions of dollars when, in actuality, DCM self-performed the work or arranged for the work to be performed by other, non-MWBE contractors. The federal judge overturned the jury’s fraud conviction stating the Port Authority got “exactly what it paid for;” the agency’s desire to employ more MWBEs was merely “aspirational” and not central to the defendants’ contracts; and the defendants’ misrepresentations did not go to an essential element of the bargain and did not subject the Port Authority to actual or potential economic harm.

While the indictment in that federal case was not dismissed, the decision may have created the impression in the construction community that the decision could promote less law enforcement focus on fraudulent activity relating to MWBE programs. The New York State Attorney General’s prosecution of Martin signals otherwise. The New York State Attorney General’s office has obviously made a commitment to prosecute fraud that arises in connection with MWBE participation on projects and the landscape remains dangerous to those who seek to exploit the MWBE program or to take advantage of MWBE contractors.

Key takeaway: For all who partake in projects involving MWBE participation, take notice, and more importantly, take appropriate measures to ensure their projects do not become the focus of a law enforcement investigation or prosecution. 

Appropriate measures may include hiring an independent consultant with expertise in the rules and regulations relating to MWBE compliance and familiar with the fraudulent schemes that have been devised to corrupt the MWBE program. Such a consultant will help ensure the integrity of MWBE participation plans and the activities surrounding the participation of MWBE contractors on construction projects.

Such consultants can ensure:

  1. Good faith efforts have been undertaken to meet MWBE participation goals;
  2. Good faith efforts have been properly documented;
  3. MWBE contractors selected to work on projects can perform a commercially useful function; and,
  4. Relationships between contractors and MWBE firms have not been corrupted by fraudulent arrangements and schemes.

 


About the Authors

Thomas A. McShane
President of Investigations and Monitoring

Thomas A. McShane directs complex investigations of alleged corrupt practices for corporations in several industries and spearheaded the development of the firm’s Integrity Monitorship Program under which Guidepost Solutions has been retained on behalf of government authorities to monitor major capital construction projects and private entities. He works with numerous governmental and quasi-governmental authorities including The Port Authority of New York and New Jersey, the Federal Highway Administration, the Office of the Attorney General of the State of New York, and the Department of Investigation of the City of New York, among others. Tom served as counsel to the New York State Commission on Government Integrity to investigate the roots of corruption in the institutions of government throughout the State. Tom can be reached at tmcshane@guidepostsolutions.com.

Joseph Jaffe, Esq.
Chief Compliance Officer

Throughout his career, Joseph Jaffe has overseen and participated in a host of investigative and fact gathering assignments for governments and state, federal, and private entities related to allegations of employee dishonesty, fraud, sexual harassment, union corruption, theft, prevailing wage violations, corporate compliance and governance, money laundering, construction accidents, and violations of the Foreign Corrupt Practices Act and the U.S. Securities and Exchange Commission. He has served as District Attorney for Sullivan County, New York and spent seven years in the U.S. Attorney’s Office for the Southern District of New York as an Assistant U.S. Attorney. Joe’s experience extends to the private sector serving as an Independent Private Sector Inspector General, integrity monitor and outside compliance officer for regulatory agencies. Joe can be reached at jjaffe@guidepostsolutions.com.

Mary Stutzman
Senior Managing Director

Mary Stutzman, a business intelligence and investigative professional, has more than 25 years of experience serving Fortune 500 companies and major international law firms. She has participated in several monitorships involving the creation and implementation of compliance policies and procedures and the assessment of compliance activities in a number of different industries. This includes the creation and oversight of a women and minority business enterprise program at a manufacturing company. Prior to joining Guidepost Solutions, Mary spent several years with a consulting firm that specialized in corporate investigations and business intelligence assignments, including due diligence, litigation support, asset searches, background screening and competitive analysis. Mary can be reached at mstutzman@guidepostsolutions.com.

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