Trent Cotney, Partner, Adams and Reese LLP
If you are familiar with the Disadvantaged Business Enterprise (DBE) sponsored by the U.S. Department of Transportation (DOT), you know it is intended to level the playing field for small businesses owned by those who are economically and socially disadvantaged. The program was created to address past discrimination in contracts for federally assisted transit, highway and airport projects.
However, as a recent case illustrates, when companies take advantage of the system, courts will not hesitate to prosecute.
The defendants – a painting subcontractor and its owner – were involved in two federally funded contracts to perform repairs to Philadelphia’s Amtrak 30th Street Station and Girard Point Bridge. Both projects had DBE requirements, so the defendants planned to purchase their painting supplies from DBE-certified Markias, Inc. However, Markias did not actually provide the materials but instead acted as a “pass-through.” They acquired the materials from non-DBE suppliers and added a fee of 2.25 percent to the cost. Upon receiving the materials, the defendants provided one check to the paint suppliers and another to Markias for its pass-through services. Believing that the defendants had used DBE-certified suppliers, the Pennsylvania Department of Transportation (PennDOT) awarded DBE credits to the defendants for the total cost of the paint supplies.
Once the facts were uncovered, a federal grand jury charged the defendants with federal wire fraud and they were convicted.
After that ruling, the defendants appealed the decision and argued that the property aspect of wire fraud had not been proven and that PennDOT’s losses were miscalculated.
The Third Circuit reviewed the details and deter-
mined that the wire fraud statute was, in fact, applicable because PennDOT's funds satisfied the property element. The court determined that the defendants schemed to obtain millions of PennDOT funding by misrepresenting the DBE qualification.
Interestingly, the appeals court agreed with the defendants’ assertion that the district court miscalculated PennDOT’s losses and that dollar amount influenced the defendants’ sentencing. The district court had reasoned that the defendants’ profits were equal to PennDOT’s losses. However, the appeals court ruled that approach to be inaccurate. It stated that the defendants’ profits were not entirely fraudulent since they had committed to DBE-certified services for only some of their work. Therefore, the loss calculation was remanded to the district court to be reexamined.
Working with DBE-certified companies can benefit all parties and this DOT program is definitely worth supporting. However, contractors must use caution and ensure they do not get caught up in fraudulent deals between customers and DBE pass-throughs. If you are trying to satisfy a DBE requirement, make certain the people you are doing business with are actually DBE-certified and are not acting only as pass-throughs for other companies. Violating the terms of this program can lead to criminal conviction and law enforcement agencies, including the DOT, FBI and U.S. Attorney’s offices, take fraudulent DBE activity quite seriously.
For more information on DBE, please visit www.floridaroof.com/dbe.
The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP and FRSA General Counsel. You can contact him at 813-227-5501 or trent.cotney@arlaw.com.
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