A Recent $21.3 Million Settlement To Resolve Alleged SDVOSB Fraud Scheme Signals A Renewed Focus On Protecting Veterans And Small Businesses?

The Department of Justice recently announced that Broadway Electric, Inc., its subsidiary Cornerstone Contracting, Inc., CEO John Oehler, and President Christian Blake (collectively, “Broadway-Cornerstone”) have agreed to pay $21.3 million to resolve allegations that they improperly obtained federal contracts reserved for service-disabled veteran-owned small businesses (“SDVOSBs”) and other small businesses in violation of the False Claims Act (“FCA”). The case was originally brought under the qui tam provisions of the FCA, by two whistleblowers – an Air Force veteran and an executive of an SDVOSB firm.

Federal contracts set aside for small businesses that meet specific eligibility requirements, including SDVOSBs, are intended to provide contracting opportunities to qualifying veteran entrepreneurs. Neither Oehler nor Blake are service-disabled veterans, and neither Broadway nor Cornerstone qualified as a “small business concern” as required. Instead, the complaint alleged, from April 2017 through May 2025, Broadway-Cornerstone worked with small businesses to obtain subcontract awards on set-aside contracts for which it was not eligible. These are commonly referred to as “pass through” agreements where the small business obtains the contract on behalf of the large business and then “passes through” all (or substantially all) of the work to the large business.

Conduct at Issue

Under the arrangements at issue here, the partnering small business served as the prime contractor in name and received a fixed percentage of the contract value regardless of the scope of work performed. Broadway-Cornerstone selected contracting opportunities, determined whether and how the small businesses would participate, oversaw the preparation and submission of bids, controlled contract performance, and received or distributed the remaining contract revenue. In certain instances, the complaint alleged, Broadway-Cornerstone used service-disabled veterans’ and other small-business owners’ email domains and signature authority to communicate with government authorities, creating the appearance that the small business independently controlled and performed the work. The settlement agreement specifically notes that Oehler and Blake were informed that SDVOSBs must control contract performance and receive benefits commensurate with their work, and that one small business partner raised compliance concerns in response to which Oehler and Blake failed to make changes.

Settlement Agreement

Interestingly, although the initial qui tam Complaint was filed against both the large and small businesses, the Government intervened as to only the large businesses and settled only with them. Under the terms of the settlement agreement, Broadway-Cornerstone admits responsibility for identifying contracting opportunities and preparing and pricing bids submitted in the names of small businesses; controlling project execution and payroll; paying the small businesses a fixed percentage of total contract value; and using small-business email domains and signature authority in communications with federal agencies. Broadway will pay $17,075,000 plus all interest accrued. Oehler will pay $4 million, $2 million of which is restitution. Blake will pay $225,000, $125,000 of which is restitution. The whistleblowers, an Air Force veteran and an executive of an SDVOSB firm, will receive $3,674,250 and an additional $87,832.73 for attorneys’ fees and costs.

Conclusion

This is by far the largest settlement involving SDVOSB since a 2022 $48.5 million settlement. This settlement (and the underlying case, United States ex rel. Welch, et al. v. American First Contracting Inc., et al., No. 3:23-cv-0525 (N.D.N.Y.)), underscores the government’s continued commitment to protecting the integrity of federal procurement programs designed to benefit America’s veterans and small business owners. This resolution was the result of coordination between nine different government entities, including the Justice Department’s Civil Division, the Department of Veterans Affairs Office of Inspector General, and the Small Business Administration Office of Inspector General. Pass-through schemes involving SDVOSB contracts have been the subject of prior enforcement actions, but the sheer number of agencies involved in this investigation, the relatively high settlement amount, and the fact that only the large business (rather than the small business partners that acted as the pass-throughs) was the subject of the Government’s enforcement could signal an intensified focus on these arrangements. Contracting organizations (and especially large businesses) should be mindful of government scrutiny when contemplating control and performance of such contracts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.