This Extension of U.S. Criminal Law Is Unnecessary

On June 3, 2011, Senator Patrick Leahy (D-Vt.) and Representative David Price (D-N.C.) re-introduced the Civilian Extraterritorial Jurisdiction Act (CEJA), which aims to extend U.S. criminal jurisdiction in to U.S. citizens working abroad as federal contractors or employees. Leahy and Price introduced similar legislation in the last congressional session. However, that attempt died in committee because of concerns that it would extend to U.S. intelligence workers and cause them to pause before undertaking their crucial missions. The most recent version would “carve out” an exception for intelligence agency contractors.

Since 2000, the Military Extraterritorial Jurisdiction Act has placed U.S. government contractors within the reach of U.S. prosecutors only if they are employed by the Department of Defense. Some observers have argued strongly for a broader criminal jurisdiction, which would include non-DOD contractors as well. They point to a number of crimes committed by U.S. government contractors and employees working abroad. One of these crimes was the shooting of unarmed Iraqi citizens in 2007 by U.S. government contractors for Blackwater. Another was the drugging and gang raping of Jamie Leigh Jones, a young woman from Texas, by her coworkers who were working overseas as a government contractor for Halliburton.

Senator Leahy set forth his expectations for the CEJA in a recent press release:

This bill would . . . provide greater protection to Americans, as it would lead to more accountability for crimes committed by U.S. government contractors and employees against Americans working abroad. . . . Ensuring criminal accountability will also improve our national security and protect Americans overseas. Importantly, in those instances where the local justice system may be less than fair, this explicit jurisdiction will also protect Americans by providing the option of prosecuting them in the United States, rather than leaving them subject to hostile and unpredictable local courts.

We are concerned about this unnecessary expansion of U.S. law abroad. Extraterritorial application of U.S. law should be reserved for only exceptional cases and then only when there is a demonstrated need. Here, there is absolutely no evidence that contractors are committing crimes overseas and not being held accountable for such crimes. Similarly, there is no evidence that such legislation is necessary to protect contractors from overzealous local foreign prosecutors, nor is there evidence that such prosecutors would be prevented from acting if such legislation were enacted.

Ifrah Law’s Blog Wrap-up, February 19 – March 8

This is the third of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.

1. Will the Internet Taint a Loughner Verdict?

Is it impossible for accused Tucson shooter Jared Lee Loughner to get a fair trial because jurors will inevitably be looking online for information about the shootings that is inadmissible in court? We think not – and we propose a workable solution to an increasingly common problem.

Read the full post here on the Crime in the Suites blog.

2. The ‘Delete’ Key Doesn’t Help These Insider-Trading Defendants

These hedge-fund employees evidently thought that hitting the “delete” key and destroying hard drives was all they had to do to conceal their conduct. We explain why that doesn’t work, and we look ahead to the next steps in a major insider-trading probe that has implicated traders at major Wall Street firms.

Read the full post here on the Crime in the Suites blog.

3. Big Boeing Award, New Rules Won’t End DOD Conflicts of Interest

After a very convoluted process, the Boeing Co. received a $35 billion contract to build refueling tankers for the Air Force. New conflict of interest rules are in place, but we explain why the defense industry and the Pentagon will probably remain cozy.

Read the full post here on the Crime in the Suites blog.

4. Ifrah Quoted in News Outlets Coast to Coast

The Ifrah Law firm has been quoted last week in news outlets from The Washington Post and ABC News to Associated Press and a number of the country’s daily newspapers. We give a quick summary of those quotes on issues relating to white-collar crime and marketing fraud.

Read the full post here on the Crime in the Suites blog .

5. With a Veto, N.J. Governor Stays Out of the Game

To many people’s surprise, the governor of New Jersey vetoed a bill that would have permitted online gaming within his state. We explain why he did that and what the next steps are likely to be in state efforts to legalize e-gaming.

Read the full post here on the Crime in the Suites blog.

6. Are DOJ, SEC Getting Too Cozy?

Sen. Charles Grassley (R-Iowa) has asked the SEC and the Justice Department to explain why they are sharing information about their investigations with the targets of the probes. We look into the inter-agency cooperation and conflicts and we see matters differently than the senator did.

Read the full post here on the Crime in the Suites blog.

7. The Recession’s Effect on Federal Prison Sentences

Have the recession, and the cost-cutting measures that it necessitated, led to an increase in good-time credits in the federal system in order to save taxpayer dollars? In an article published in the Los Angeles Daily Journal, we say that may be the case, and we endorse that development.

Read the full post here on the Crime in the Suites blog.

8. FTC Cracks Down on Merchants’ Empty Promises

On March 2, 2011, the FTC took the unusual step of convening a press conference, in person and online, to describe a multi-agency law enforcement initiative aimed at cracking down on misleading “work from home” and other business opportunity offers. We were among the first observers to listen and, the next day, to be in a position to describe what the FTC is up to.

Read the full post here on the FTC Beat blog.

Big Boeing Award, New Rules Won’t End DOD Conflicts of Interest

After a decade of delays and embarrassing missteps, on February 24 the Air Force awarded one of the largest contracts in military history, a $35 billion deal to build nearly 200 giant airborne refueling tankers, to the Chicago-based Boeing Company. At one point, the Air Force had awarded the contract to a team composed of Northrop Grumman and EADS North America, a unit of European Aeronautic Defence & Space Co. In 2008, however, the Government Accountability Office upheld Boeing’s protest of the contract and the process began anew.

Part of the drama surrounding the contract occurred when Darleen Druyun, a senior Air Force procurement official, was alleged to have held employment discussions with Boeing while she was still employed at the Air Force and involved in the contract award. Druyun pleaded guilty to corruption and served prison time, as did the then CFO of Boeing. This blatant instance of impropriety spurred calls for reform of the conflict of interest rules for federal procurements. In addition, the recent consolidation within the defense industry, coupled with its explosive growth, often resulted in companies with a broad range of services and affiliates, with the distinct possibility that a conglomerate company could have input into Defense Department decisions that would help award a contract to an affiliate.

Partially in response to those concerns, the Department of Defense issued in late 2010 its final rules regarding organizational conflicts of interest. The department had initially proposed rules that provided a comprehensive approach applying to virtually all of its procurements. The final rules, however, turned out to be significantly narrower than the rules initially proposed.

Most significantly, the new rules are limited to major defense acquisition programs (MDAPs) and pre-MDAPs. An MDAP is an acquisition program that is not a highly sensitive classified program and is either designated by the Secretary of Defense as an MDAP or is estimated to cost at least $300 million for initial research, development, testing, and evaluation or an eventual total cost of at least $1.8 billion. Pre-MDAPs are programs in certain developmental phases that have been identified to have the potential to become a MDAP.

The new rules also mandate that the Department should obtain advice on MDAPs and pre-MDAPs from objective and unbiased sources and that contracting officers should resolve conflicts of interest in a manner that will promote competition and preserve the Department’s access to the expertise and experience of qualified contractors. The rules require that the relevant contracting office consider specific areas of risk, such as common ownership between entities providing management support services to an MDAP or pre-MDAP and an entity competing for that program or awards for development of software to an affiliate of a competing entity.

Although the new rules attempt to limit the potential for organizational conflicts of interest and the basis for bid protests, we don’t anticipate a radical change in the approach of bid protesters. It still remains common practice for federal employees to enter the private sector — and they will continue to seek employment in the industries that they got to know in the public sector. Furthermore, companies will continue to broaden their services by acquiring or expanding into affiliated companies. This combination of facts should continue to contribute to future bid protests concerning alleged conflicts of interest.

It’s Not Just the Conviction — It’s Also the Consequences

Attention: top executives in the healthcare industry. Take heed, or you could be forced to seek employment in a different industry, as three former top executives at Purdue Pharma recently found out.

In May 2007, Purdue Frederick, a subsidiary of Purdue Pharma L.P., pleaded guilty to felony misbranding of its painkiller drug, Oxycontin, as part of a settlement with federal prosecutors. The charges were that, over a five-year period, the company knowingly made misleading claims about the addictive nature of Oxycontin by claiming that it was less prone to abuse than similar drugs because it was a long-acting narcotic. The subsidiary was automatically debarred from receiving any new government contracts, but the parent company signed a non-prosecution agreement and paid $634 million to settle charges against it. It was able to avoid criminal prosecution and thus remain eligible for new government contracts.

Additionally, the U.S. attorney reached a plea deal with the three top executives of Purdue, who all avoided jail time by agreeing to perform community service and to pay substantial penalties. The three executives all pleaded to a criminal misdemeanor, as “responsible corporate officers,” for failing to prevent, detect or correct federal drug violations. Under the responsible corporate officer doctrine, an officer can be held strictly liable for failing to properly exercise authority to detect and prevent the misconduct of his or her subordinates, even if there is no evidence of the officer’s own misconduct. The doctrine creates a duty on an executive to be aware of his subordinates’ activities and to stop any wrongdoing. With this plea agreement, it seemed as if the three executives might have gotten off with a “slap on the wrist.”

However, after the three executives were convicted, the Department of Health and Human Services debarred them for 20 years from involvement in any federally financed health care program. After a number of administrative appeals, the debarment was reduced to 12 years. Still, the executives appealed to the district court and sought to have the debarment vacated or remanded.

However, on Dec. 13, 2010, U.S. District Judge Ellen Segal Huvelle affirmed the 12-year debarment order. The judge noted that the executives’ guilty plea acknowledged that they were “responsible corporate officers” and that they had the “responsibility and authority either to prevent . . . or to promptly correct” the misleading claims regarding Oxycontin.

Obviously, a 12-year debarment from any federally financed health care program for an executive is effectively a death sentence for future employment in the health care industry. This highlights the severe collateral consequences of any criminal conviction for both companies and individuals who participate in federal procurement programs, as well as the need for corporate executives and their attorneys to understand in advance what the potential fallout can be from a criminal proceeding.

Who Woke the Sleeping SBA?

According to a recent Wall Street Journal article, the Small Business Administration is now on the hunt to ferret out bad actors that wrongly take advantage of government programs under its direction. The SBA is notorious for sitting on its hands when it comes to enforcing compliance by companies that claim to qualify under its contract programs. Inaction and lack of oversight have been so bad that the head of the House SBA committee considered shutting down the SBA’s HUBZone program. (See our earlier blog post on this situation.)

And suddenly there was movement. The SBA conducted some 1000 on-site visits in fiscal year 2010 to government contractors participating in the HUBZone program. The number of visits is up more than 40% from the year prior and up significantly more from 2008 and earlier, when the SBA rarely conducted any such visits. The purpose of the visits is to ensure that the companies are in fact operating out of designated economically distressed communities – one of the two major requirements of the HUBZone program, which was implemented to promote commerce in such struggling communities.

The SBA’s increased oversight seems to be the result of scrutiny by the House small business committee and the Government Accountability Office. The latter has conducted at least three reviews of the SBA’s HUBZone program since 2007. But the SBA nonetheless seems naive to the extent of problems with the program. Joseph Jordan, the SBA’s associate administrator for government contracting and business development, was quoted by the WSJ as saying: “The vast majority of these firms are well-intentioned and well-behaved, but occasionally you find a bad actor.” Mr. Jordan’s statement stands in contrast to GAO findings. The GAO reported in 2009 that of the companies it examined that were certified by the SBA as HUBZone contractors, an embarrassing number (almost 50%) were unqualified.

Perhaps all this time that the SBA has not acted to vet out bad actors, it has done so out of naivete as opposed to apathy. Regardless – taxpayer dollars should not be squandered by fraudulent contractors. We hope the SBA is not only awake, but aware.

Settlement Indicates Widespread Abuse of SBA Preference Programs

Last month, the U.S. Department of Justice settled a case with a Maryland company that shows, yet again, how common it is for companies to abuse the preference programs that the Small Business Administration runs.

In this case, it was the SBA’s Historically Underutilized Business Zone (HUBZone) program that was the target. Beltsville, Md.-based CSI Engineering and CSI Design Build – along with their president, Debdas Ghosal –agreed to pay the government $200,000 to settle claims that they used false statements to obtain government contracts set aside for HUBZones.

The HUBZone program was established in 1997 to encourage businesses to locate in economically depressed areas. The program provides some priority in government contracts to companies that have their main offices in economically depressed areas and that draw at least 35 percent of their workforce from those designated areas.

But, according to the Justice Department, CSI Design Build falsely told the government that its principal office was located in a designated HUBZone. Actually, CSI Design Build operated as a part of CSI Engineering, which is not located in a HUBZone. Based on its false representations, the company won contracts with the Army, the Department of Labor, the Department of Homeland Security and the Smithsonian Institution.

The CSI companies’ manipulation of the program in order to win lucrative government contracts set aside for HUBZone businesses is representative of historical and widespread problems with the program — and with the SBA’s oversight.

In July 2008, the Government Accountability Office reported that ten D.C.-area companies were improperly certified for the HUBZone program. For example, companies listed phony HUBZone area addresses (including a Starbucks coffee shop!) while operating out of locations not within HUBZones. Regardless of these blatant false claims, these companies were certified by the SBA, which apparently didn’t even do the most basic due diligence. The SBA’s response to the GAO findings was that the problems were unique to the D.C. area.

Rep. Nydia Velazquez (D-N.Y.), chairwoman of the House Small Business Committee, asked the GAO to do a broader study. In March 2009, the GAO testified that out of 36 firms from four different states with eligibility, more than half didn’t actually qualify. The GAO estimated that potentially hundreds or even thousands of companies with HUBZone certification likely shouldn’t have had it.

Velazquez said she would urge the SBA to shut down the program until it could fix the problems. Although that didn’t happen, the GAO has continued its review. Not surprisingly, more problems have surfaced.

In August 2010, the GAO announced findings from an additional investigation. GAO investigators submitted four bogus certification requests to the SBA. Investigators used clearly false business addresses such as that of a public storage facility, a city hall, and even the Alamo. The SBA certified three of the companies even though a simple Internet search would have revealed the obvious falsehoods. The fourth was not certified. But that was because the SBA repeatedly lost documents submitted by the GAO, which decided to withdraw the application.

Is the SBA utterly incompetent? Are there no procedures in place requiring its employees to thoroughly review HUBZone certification requests? This is not an obscure government program. According to Business News Daily, the SBA claimed that $12.4 billion in federal contracts were granted through HUBZone in fiscal year 2009. Fortunately, however, the GAO has brought HUBZone problems to the attention of the Justice Department and Congress. Now, perhaps the SBA too will be more active in monitoring and weeding out bad actors.

GTSI Settlement Could Mark Crackdown on Contracting Abuses

The U.S. Small Business Administration has announced a tough settlement with GTSI Corp., one of the nation’s largest government contractors. GTSI, which had been accused of improperly obtaining contracts that are meant for small businesses, avoided a one-year suspension from new work for the federal government. But two of its top executives are stepping down, three others are suspended, and the company has agreed to immediately cease working as a subcontractor to small businesses serving as prime contractors.

The SBA has taken strong action here, both in bringing the charges earlier this month and in forcing this settlement. But it’s actually the SBA’s tough enforcement stance in this case that’s unusual, not the questionable practice itself.

GTSI was accused of getting contracts set aside for small businesses by putting forth smaller companies as supposed prime contractors when GTSI itself actually took the lead role in the work. GTSI, a Beltway giant that received $540 million in federal contract awards in 2009, isn’t exactly what Congress had in mind when it enacted preferences for small businesses.

Anyone who follows government contract awards knows that this type of activity represents business as usual in the contracting game. Our law firm has represented several small businesses owned by service-disabled veterans that have lost lucrative business opportunities to phony “small” or phony “service-disabled” small businesses, so we have seen this practice up close.

Federal programs created to help small and disadvantaged businesses are constantly being abused by companies that aren’t eligible. The use of small businesses as fronts and the setting up of phony service-disabled companies are just two of the many types of finagling that go on. Companies will hold out a woman or minority member as president or CEO, in name only, in order to bid on and win contracts set aside for woman-owned or minority-owned businesses. Other contractors will set up temporary office space in economically depressed areas in order to land contracts set aside for companies headquartered in historically underdeveloped areas.

These maneuvers and others like them fly in the face of the public policies underlying the government’s programs designed to aid small and disadvantaged businesses. They also violate federal laws and regulations that require, for example, financial and operational control by the woman or minority president or CEO who is being described as the company’s leader.

The problem has been that government agencies, including the SBA, simply do not actively seek out or weed out fraud and abuse. Instead, the government relies on industry self-regulation, hoping that other companies will police their competitors and will notify the government through status protests whenever a company wins a government set-aside under false pretenses. (A status protest is a mechanism by which a company that bid on but lost a government set-aside may file a protest with the contracting agency.)

The system worked in this case. The government first learned about GTSI’s actions when a New Mexico-based woman-owned small business, Wildflower International Ltd, protested the Department of Homeland Security’s award in 2008 of a small business set-aside contract to MultiMaxArray, Inc. Wildflower contended that MultiMaxArray was nothing more than a front for GTSI. The government’s investigation followed.

But this type of self-policing rarely works to effectively root out bad actors. When a protest shows that a company is not qualified, the government may cancel the contract, but it seldom takes the next, much tougher, step, which is to suspend or debar the company from bidding on future contracts. As a result, the bad actor simply moves on to new contract opportunities. Some companies even jump from one set-aside opportunity to the next, holding themselves out as woman-owned, then minority-owned, then veteran-owned, and so forth, transforming their status like a chameleon changes colors, pending the next lucrative opportunity.

GTSI is a good example of how a company may maneuver its way through the government contracting process unscathed while repeatedly being called out as a bad actor. According to American Small Business League President Lloyd Chapman, the SBA Office of Inspector General recommended GTSI for debarment more than five years ago for acts similar to those that were alleged this month. Yet the SBA did not act until now –billions of dollars in government contracts later.

After SBA Administrator Karen Mills announced the action against GTSI on October 1, she stated that her agency “has no tolerance for fraud, waste and abuse in any of our programs.” Writing in the Huffington Post, Chapman replied that the SBA “has helped large businesses hijack federal small business contracts every day” that Mills has been in office and said that 60 of the top 100 recipients of federal small business contracts are actually large businesses.

Still, perhaps it’s now a good time to hope that SBA’s action against GTSI signals a new, tougher stance in ridding government set-aside programs of bad actors. Perhaps those set-asides will then be more readily accessible by those they were intended for in the first place.