Every year, the federal government awards at least three percent of all federal contracting dollars to service-disabled veteran-owned small businesses (SDVOSB), and limits competition for certain contracts to businesses that participate in the SDVOSB program. For a company to be eligible to compete for these contracts, the business must be classified as a small business, be at least 51 percent owned and controlled by one or more service-disabled (service-connected disability) veterans, and have one or more service-disabled veterans manage the day-to-day operations and make long-term decisions. SDVOSB must be verified through Veteran Affairs Center for Verification and Evaluation (CVE) to leverage their business with the U.S. Department of Veteran Affairs (VA) and the Federal Aviation Administration (FAA). Once an SDVOSB is verified, the company is added to the Vendor Information Pages (VIP) – a database of businesses eligible to participate in a VA’s SDVOSB program. A business may be removed from the VIP for numerous reasons, including protest decisions and other negative findings. Such action occurred against First State Manufacturing Inc. (First State), and below is the appeal and final finding.
First State Manufacturing Inc. CVE Appeal SBA No. CVE-184-A, 2021 WL 1578357
Decision issued April 8, 2021
In November 2020, the United States Attorney’s Office (USAO) filed a complaint against First State, industrial sewing and textile company that specializes in military contacts, for violations of the False Claims Act (FCA). The complaint claimed that between June 2014 and November 2017 two First State’s executive team members bribed an Amtrak official to win lucrative contracts and then covered up the bribery. Additionally, the complaint claimed First State allegedly sold substandard items to the government for inflated prices and covered up the acts by creating false records and a fictitious company. Prior to the November 2020 complaint, the USAO criminally tried First State executives and the Amtrak official who plead guilty to criminal charges related to their roles in the scam. To resolve the FCA suit, the USAO and First State entered into a Consent Judgement approved by the court, and First State agreed to pay $393,250.06 to the United States.
On December 15, 2020, the CVE sent First State a Notice of Proposed Cancellation (NOPC) letter. This letter notified First State of the CVE’s belief that the company’s verified status should be canceled. The proposed cancellation was based on the USAO’s suit against First State for violations of the FCA. First State had 30 days to reply to the CVE explaining why the FCA suit should not justify a cancellation.
In a two-page response dated December 22, 2020, First State stated the actions referenced in the NOPC letter took place over three years ago and First State had taken several actions to prevent a similar situation from occurring. First State stated all employees involved in the original violation were terminated, skilled key individuals were hired, an internal forensic analysis was completed by outside experts, financial standards were revised, and the company’s ethics training and standards were updated. Additionally, First State provided a copy of a letter from the Federal Railroad Administration (FRA) dated May 14, 2019. In this letter, the Suspension and Debarment Official “determined the likelihood of future harm to the Federal government did not warrant the suspension or debarment of [First State].” First State did not mention the FCA complaint nor the Consent Judgment in their NOPC reply.
On January 19, 2021, the CVE issued a Notice of Verified Status Cancellation formally canceling First State’s status as a verified SDVOSB. The CVE found that the judgment against First State established good cause for canceling its verified status in accordance with 38 CFR § 74.21 (e) and constituted a negative finding warranting removal from the VIP database pursuant to 38 CFR § 74.2 (e). Also, since First State did not give notice to the CVE of changes that would affect its eligibility within 30 days as required by 38 CFR § 74.15 (b), the cancellation was also warranted. First State appealed this decision to the Small Business Administration (SBA) Office of Hearings and Appeals (OHA) on February 2, 2021.
In its appeal, First State argued the CVE erred in canceling its verified status because the issues noted in the NOPC letter were three to five years old and did not affect the company’s “present responsibility.” First State also argued by focusing on the Consent Judgment, the CVE disregarded evidence demonstrating First State had made all necessary corrections and was currently “responsible.” Additionally, they noted the company was not late in responding to the agency because the Consent Order was not approved by the court until November 17, 2020, fewer than 30 days before the NOPC letter was sent to First State.
The SBA OHA denied First State’s appeal for several reasons. For First State to be found “responsible”, the SBA OHA determined the company must “have a satisfactory record of integrity and business ethics.” Due to the USAO filing an FCA action against First State and because First State agreed to enter a Consent Judgment without admitting liability, the SBA OHA found the CVE had adequate reasons to be concerned about First State’s “responsibility”.
The SBA OHA also found First State’s response to the NOPC was “brief, vague, and lacking in supporting detail” – specifically, First State did not describe in detail the new financial and ethical controls it had implemented and how those controls would prevent future occurrences of similar incidents. Also, the SBA OHA took exception that First State characterized its misdeeds as a one-time “incident” attributable to its former Executive Vice Presidents Messrs. Crothers and Gonzalez. Furthermore, First State could not justify why the misconduct was undetected for several years. Finally, the SBA OHA noted First State did not mention the FCA suit even though the CVE specifically raised it in its NOPC.
Regarding the FRA’s decision not to pursue debarment against First State, the SBA OHA stated the FRA made its decision in May 2019, more than two years before the USAO filed the FCA complaint against First State. In the FRA’s original decision, the debarment official cautioned that the USAO had not determined whether to bring an FCA action against First State. Therefore, the SBA OHA determined the CVE could properly determine the FRA letter was not dispositive.
The SBA OHA appeared to agree that First State was not late in responding to the NOPC letter. However, the OHA determined this was immaterial because, in its opinion, the CVE had sufficient basis for canceling First State’s verification status regardless of the notice requirement. Additionally, the SBA OHA noted that First State was seeking CVE verification in early 2018, less than one year after its misconduct with Amtrak, but stated it was unclear if First State disclosed this misconduct to the CVE during the verification process.
Due to the SBA OHA ruling, First State’s SDVOSB verification status remains canceled. They can no longer bid on SDVOSB set-aside contracts until the SBA or the CVE determines the company’s status can be restored. First State can either reapply for SDVOSB status verification in six months, or they can appeal the verdict with the Court of Federal Claims and have the SBA OHA ruling reversed.
If you are a Veteran with a business and have a problem with a government contract, status applications, or status denials, please contact the experienced attorneys at Veterans Advocacy Law Group via our online contact form.