COFC: False Information in SDVOSB Application Proper Grounds for VA Removal

While most of the rules for SDVOSB eligibility now reside with the SBA, the VA is still responsible for verification of entities for inclusion into its database of verified SDVOSBs and VOSBs. A recent Court of Federal Claims case describes what sort of conduct might get a business removed from the VA’s database–even if that conduct doesn’t run afoul of the SBA’s SDVOSB rule.

While the conduct in this case is somewhat egregious, it is a good reminder that VA has the power to thoroughly investigate the eligibility of an SDVOSB and can revoke the verified status based on inaccurate statements in an application.

In BTR Enterprises of SC, LLC v. United States, 140 Fed. Cl. 500 (2018), the court considered the VA’s decision to cancel BTR’s verified status in the Center for Veterans Enterprise’s database of SDVOSBs. This case was decided under the old versions of the rules, but it is still relevant as the current control regulations are similar to the old version.

BTR submitted its application for CVE verification in November 2015. The application included a resume stating that the service-disabled owner (Mr. Roberts) would “manage all aspects of the business including the day to day operations as well as all financial decisions” and that he “works for BTR Enterprises of SC LLC on average 40 hrs per week.”

Based on the application, CVE added BTR to the CVE database in December 2015, stating that “that BTR “must inform CVE of any changes or other circumstances that would adversely affect its eligibility.”

In November 2016, Mr. Roberts was charged with perpetrating a scheme and artifice to defraud relating to VA disability benefits, obstruction of justice, and witness tampering. CVE obtained a copy of this indictment. The case does not go into the circumstances that led to the filing of this indictment. Mr. Roberts eventually pled guilty to some of the charges.

In March 2017, VA Office of Inspector General special agents visited Mr. Roberts’ residence and interviewed him. Mr. Roberts told the agents that ” “he had last worked in approximately 2009.” He also said that “most days he did not want to get out of bed and when he did he couldn’t concentrate and that is why his companies all failed.” He also stated that “he was unable to ‘maintain substantially gainful employment’ and has not worked or had any income since 2009.”

While it is not clearly spelled out in the decision, there is some indication that the agents were investigating the disabled status of Mr. Roberts for purposes of whether Mr. Roberts was entitled to VA disability benefits. In that context, the statements make more sense. However, statements that might support disability status can run counter to facts that support control over an SDVOSB. That appears to be what happened in this case.

Mr. Roberts also said that “he never worked alone and would be unable to fulfill those contracts without the assistance of his wife, his mother and his father.” In addition, “he was unable to work due to PTSD and cannot run a company and his prior companies failed due to his inability to ‘maintain substantial gainful employment.'”

CVE issued a Notice of Proposed Cancellation to BTR in May 2018. CVE stated that BTR was ineligible for three reasons:

  1. “Mr. Roberts had not maintained the required “’good character.’”
  2. Based on “recent statements made by the SDV Mr. Roberts, [the VA] has become aware that the SDV has been unable to work and hat [sic] he would not be able to operate his businesses without the assistance of his wife, his mother, and his father.” This means that Mr. Roberts “did not control BTR in accordance with the requirements of section 74.4, specifically that he did not manage BTR’s day-to-day operations, contrary to his prior assurances.”
  3. “CVE could not reasonably conclude that Mr. Roberts managed BTR ‘as a result of SDV Mr. Roberts’ indication that he relies on the assistance of his wife, mother, and father to operate his businesses.’” “CVE therefore could not ascertain whether without non-veterans BTR would be viable or if Mr. Roberts’ dependence on nonveterans interfered with his independent business judgment.”

CVE concluded:

[T]he SDV has indicated that he relies upon the assistance of several nonVeteran persons to operate his businesses. This information was not disclosed to CVE during the verification of [BTR] as required by 38 CFR § 74.21(c)(4), and as such, CVE cannot reasonably determine whether the participant submitted false information in its verification application . . . .

BTR responded to the notice of cancellation, attempting to explain away Mr. Roberts’ statements.

It argued that the “indictment is ‘nothing more than a federal accusation which is unproven,’ and is not sufficient grounds to cancel verification for failure to meet the good character requirement.” It also alleged that “that statements regarding Mr. Roberts’ inability to work and his family’s involvement in managing BTR were ‘taken out of context.’” More specifically, ” “no one in the family has much of anything to do with the business . . . The day to day management, long term decision making, and control all rests with Brian, the SDV.” The involvement of Mr. Roberts’ family was limited to his wife, who” “provides emotional and moral support.”

On August 13, 2018, CVE issued its Notice of Verified Status Cancellation to BTR, stating “that it could not conclude that that Mr. Roberts met the good character requirement, the control requirement of managing day-to-day operations, or the requirement that non-veterans not exert undue influence over the service-disabled veteran.” The conclusion that Mr. Roberts did not maintain day-to-day operation of BTR and that non-veterans exerted too much control over BTR was based on the recent statements that “he would not be able to operate his businesses without the support of his wife, his mother, and his father.”

The court, in reviewing BTR’s complaint, held that the VA did not “act arbitrarily or capriciously in canceling BTR’s verified status because it had a rational basis for concluding that Mr. Roberts had submitted false information in his application materials regarding control of BTR.”

CVE was allowed to rely on the notes of the OIG special agents “which plainly were inconsistent with the representations Mr. Roberts made to become eligible for award of set-aside contracts.” Mr. Roberts stated that “he never worked alone and would be unable to fulfill those contracts without the assistance of his wife, his mother and his father,” had not worked since 2009, and that “he was unable to work due to PTSD and cannot run a company.” This is at odds with the verification application, which stated that Mr. Roberts managed “all aspects of the business including the day to day operations as well as all financial decisions” and worked “on average 40 hrs per week.”

As to the argument that these statements were taken out of context, the court was not buying that: “We assume this is a polite way of saying that plaintiff should be given a pass for lying to the OIG Special Agents because he was concerned about not losing his VA benefits for being 100% disabled. We are unsympathetic.”

The court summed up that CVE’s decision was rational.

BTR’s application made no mention of Mr. Roberts receiving any aid from his wife, mother, or father in the management of BTR. . . . The OIG notes and the response to the Notice of Proposed Cancellation both present a different picture of which, how many, and to what extent non-veterans–not limited to Mr. Roberts’ wife–controlled the operations of BTR. Reasonable confusion existed regarding who managed the business, and thus CVE’s conclusion that BTR could not continue as a verified entity in the database was not arbitrary.

This case makes clear that inaccurate statements in a CVE SDVOSB application can be enough to revoke the business’s verified statements. Importantly, even though matters regarding SDVOSB ownership and control have now been moved under the SBA’s regulations in 13 C.F.R. part 125, the VA still retains independent regulations governing good character and related matters. While the statements about the family members operating the business could have been used to show that Mr. Roberts was not in control of the business, the court’s emphasis was that the inaccurate statements alone were enough to support the revocation of the verified status.

It is a good reminder that statements in an CVE SDVOSB application must be truthful and not leave out important matters. It is usually better to explain a situation rather than attempt to stay silent on important aspects of how an SDVOSB is operated. In addition, a veteran’s statements in different contexts (e.g. SDVOSB status versus disability status) must be consistent, or risk running afoul of the rules for one program or the other.