Convictions in Massive DOT DBE Fraud Case Put Spotlight on Illegal Small Business “Pass-Throughs”

“Guilty.”

That was the verdict Pennsylvania jurors handed down on 26 of 30 charges against Joseph W. Nagle, stemming from what an FBI press release called a 15-year scheme to commit fraud within the DOT’s Disadvantaged Business Enterprise program.  Nagle, the former president, CEO and part-owner of Schuylkill Products Inc. was convicted of conspiracy to defraud the DOT, 11 counts of wire fraud, six counts of mail fraud, and 11 counts of money laundering, among other charges.  Nagle faces the possibility of many years in federal prison and millions of dollars in fines and restitution.

Nagle’s crimes, which involved using a small company as a “front” to pass DBE work through to non-DBE concerns, should serve as a warning that small government contractors can face penalties much more severe than a successful SBA size protest for serving as “pass-throughs” to other businesses.

Beginning in 1993, Nagle and other executives entered into an arrangement with Marikina Construction Company, a certified DBE.  Under the arrangement, Marikina would receive DOT DBE prime contracts, then pass through all of the work to SPI and SPI’s subsidiary.  SPI and the subsidiary received all the profits, while Marikina was paid a small fixed fee for allowing itself to be used as a pass-through.

The scheme continued until 2008, and ultimately involved over $136 million in DOT DBE contracts—the largest known DOT DBE fraud in history.  Nagle and his co-conspirators succeeded in keeping their arrangement secret for so long in part because of the efforts they took to cover it up.  For instance, SPI employees would carry Marikina business cards and use Marikina email addresses.  Similarly, when SPI performed its work on the DBE contracts, it would use magnetic placards and decals of the Marikina logo to replace its own logo on its vehicles.

The former owner of Marikina, as well as three former SPI executives, previously pleaded guilty to numerous charges stemming from the scheme.  All four men also await sentencing.

The Schuylkill Products verdict comes on the heels of news I blogged about last month, involving a half-million dollar settlement in a DBE fraud case in Ohio.  You don’t have to be a psychic to read the tea leaves here: the DOT is using criminal law to severely crack down on fraud and abuse within the DOT DBE program.  The question now is whether the government will soon begin filing criminal charges regarding alleged pass-throughs for other set-aside contracts, such as those within the 8(a), SDVOSB, HUBZone and WOSB program, or for violations of the FAR’s limitations on subcontracting on ordinary small business set-aside contracts.

Stay tuned.

2 thoughts on “Convictions in Massive DOT DBE Fraud Case Put Spotlight on Illegal Small Business “Pass-Throughs”

  1. This type of fraud was rappant early in the 8(a) program. I had thought that the federal government had gotten a handle on this type of fraud. I quess not. As a company that assist small busineses gain their federal designations and certifications we are vigilant about trying to make sure that clients are above board and honest.

    • Thanks for the comment, Nathan, and for doing your part to make sure everyone plays by the rules. The government has been focused more in recent years in rooting out this kind of fraud, and I believe those efforts have improved the situation. However, as this situation and the one in Ohio show, illegal pass-throughs are still a very real problem.

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