An Alabama-based construction company has agreed to pay more than a million dollars to settle allegations that it violated the False Claims Act by fraudulently representing that it was mentoring a minority-owned small business under the Department of Defense’s mentor-protege program.

The settlement puts to rest the Justice Department’s False Claims Act contention that the contractor used its so-called “protege” as little more than a pass-through entity and failed to provide real mentoring services to the small business.

According to a Department of Justice press release, in 2003, Caddell Construction agreed to mentor Mountain Chief Management Services, a Native American-owned company, under the DoD mentor-protege program.  Caddell informed the Army Corps of Engineers that it would use Mountain Chief as a subcontractor on two Corps construction projects.

According to the government, that’s not what happened.  The government alleged that Caddell never mentored Mountain Chief and that Mountain Chief never performed any work on the projects.  Instead, Caddell used Mountain Chief as a pass-through entity to obtain payments for the time and costs Caddell claimed to have spent in mentoring Mountain Chief.

The $1.15 million settlement ends the False Claims Act case, but it is not the end of the story.  Caddell’s former director of business development and Mountain Chief’s former president have both been criminally indicted and are awaiting trial.  And, in December, Caddell entered into a $2 million non-prosecution agreement with the government to settle the criminal matter, bringing the company’s total losses to more than $3 million.

Hopefully, blatant mentor-protege fraud of the sort the government alleged occurred in this case is rare.  However, the Caddell case is an indication that the government is stepping up its oversight over mentor-protege programs.  If mentors do not do what they agreed, they may pay a steep price.

Finally, it is worth highlighting the fact that Mountain Chief’s president is under criminal indictment.  In cases like these, the government often focuses on the big companies, but it is well worth remembering that small contractors can face severe penalties for playing along with small business program violations.