SDVOSB Fraud: Indictment In “Secret Side Agreement” JV Case

SDVOSB fraud allegations, stemming from a “secret side agreement” between two joint venture partners, have resulted in a grand jury indictment against the companies and their owners.

According to a Department of Justice press release, an SDVOSB and non-SDVOSB executed a joint venture agreement that appeared to meet the SBA’s requirements, but later undermined the JV agreement with a secret agreement that provided that the non-SDVOSB would run the jobs–and receive 98% of the revenues.

The DOJ press release states that Action Telecom, Inc. and A&D General Contracting, Inc. formed a joint venture named Action-A&D, A Joint Venture.  The parties signed a joint venture agreement specifying that Action (which supposedly was an SDVOSB) would be the managing venturer, employ a project manager for each SDVOSB contract, and receive a majority of the JV’s profits.

But six months later, the owners of the two companies “signed a secret side agreement that made clear the JV was ineligible under the SDVOSB program.”  For instance, the side agreement stated that A&D (apparently a non-SDVOSB) would run the joint venture’s jobs and retain 98% of all government payments.  Additionally, consistent with the side agreement, A&D–not Action–appointed the joint venture’s project manager.  The side agreement specified that it superseded the original joint venture agreement, and that its purpose was to allow A&D to “use the Disabled Veteran Status of Action Telecom” to bid on contracts.

The DOJ says that twice, the government asked the joint venture for information about itself.  Both times the joint venture provided the original JV agreement, but not the secret side agreement.

Over time, the joint venture was awarded approximately $11 million in government contracts.

On April 7, a grand jury returned a 14-count indictment against the companies and their owners.  The charges include wire fraud, conspiracy, and major government contract fraud, among others.  The defendants were arraigned on April 21.  The same defendants also face civil charges in a False Claims Act lawsuit pending in California federal court.

As is the case with all criminal defendants, Action, A&D and their owners are presumed innocent.  But if they are found guilty, they deserve some tough penalties.  After all, an SDVOSB joint venture agreement is worthless if the parties develop a secret side agreement to circumvent and undermine the requirements for SDVOSB management and control.  If it turns out that the the government’s allegations are true, the defendants not only defrauded the government (and honest SDVOSBs) but actually thought it was a good ideal to document their fraud in writing.  There used to be a TV show about crooks like that.