In the summer of 2017, a District Judge sitting in the District of Columbia issued a decision holding that a surety could be held liable under the False Claims Act where it becomes aware of facts suggesting that a bonded principal is fraudulently participating in a government set-aside program and nonetheless continues to do business with that principal. United States ex rel Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017). Although the Narula decision arose in the context of a motion to dismiss, where the court’s findings are limited to determining the viability of the claims as plead, the decision has drawn close scrutiny (and criticism) from professionals across the surety industry. Many underwriters have exercised additional caution prior to bonding set-aside contractors due, in large part, to the draconian penalties that may be imposed for violations of the False Claims Act, including treble damages. The close scrutiny and additional caution unfortunately appear to have been well-founded.
On September 4, 2019, the United States Attorney’s Office for the Western District of North Carolina announced that it had entered into a settlement agreement with a surety to resolve allegations that the surety violated the False Claims Act by bonding a general contractor that submitted false claims to the government for services performed under fraudulently obtained government contracts. The surety agreed to pay $1,040,035.20 to resolve the government’s allegations.
The government alleged that South Carolina general contractor Claro Company, Inc. (“Claro”) made materially false, fictitious, and fraudulent statements and representations, or material omissions, to gain entry into and to continue participation in the 8(a) program and that Claro’s surety knew or should have known that Claro was not eligible for 8(a) set-asides. The government contended that the surety knew or should have known that Claro was not controlled by a socially and economically disadvantaged individual, and that it was affiliated with and controlled by another entity and/or individuals that did not meet the SBA’s definition of being socially and economically disadvantaged; that neither the affiliation nor control were disclosed to the SBA; and that Claro made material misrepresentations regarding its financial status to the SBA in order to avoid early graduation from the 8(a) program. The government further contended that despite the foregoing allegations, the surety continued to do business with Claro by bonding its projects and therefore allowing it to continue to fraudulently bid for contracts under the preferences in the 8(a) program. In announcing the settlement, the government acknowledged that the claims resolved in the settlement are allegations only and there has been no determination of liability against the surety.
As of this writing, detailed information regarding the government’s investigation and allegations are not publicly available. It is, thus, not clear at this time whether this settlement marks the next step in a trend by the government (and qui tam plaintiffs), which started with Narula, to pursue recovery under the False Claims Act against sureties, or if this settlement is a one-off due to the unique facts and circumstances of the Claro matter. We all hope it is the latter.
