Diverse Construction Group: Staged HUBZone Offices and Hidden Affiliation

Diverse Construction Group agreed to pay $100,000 to resolve allegations of staged HUBZone offices and hidden affiliation used to obtain reserved government construction contracts. It was part of a $4,470,000 resolution with Northland Associates, its president and the companies’ bond broker. Someone who knew the office or handled the construction paperwork could see a relationship the companies allegedly kept from the government.

The Justice Department’s May 4, 2020 announcement described an alleged arrangement in which Diverse secured set-aside contracts while its undisclosed affiliate, Northland, received subcontracts to fulfill them. The office story made that relationship unusually concrete: witnesses described files moved between the companies’ offices to prepare for government inspections.

The Ownership Split and the Working Business

The government alleged that Northland supplied much of Diverse’s operation despite the company’s majority veteran ownership. According to the Justice Department, the veteran owned 51% of Diverse and senior Northland officials owned 49%.

The government described Northland maintaining a bid calendar with deadlines for both companies’ contracting opportunities. It said Northland staffed Diverse with former Northland employees and handled its accounting, expediting, estimating, purchasing, contracting and clerical work. Diverse’s subcontracts then went to Northland for fulfillment.

That account follows a construction project from the decision to bid through estimating, purchasing and performance. The alleged hidden affiliation ran through the work that kept the bidder in business.

The Justice Department explained that a business must count its affiliates’ income and employees with its own, and neither business qualifies for small-business set-asides if they exceed the size limits together.

The service-disabled veteran ownership and HUBZone claims gave the alleged arrangement its purpose. These programs reserve opportunities for qualifying businesses. In the Justice Department’s account, Diverse’s qualifying identity opened the door while Northland’s people, administration and subcontract work sat behind it.

The HUBZone Office Allegedly Staged for Inspection

The staged-office allegation concerned files moved into Diverse’s qualifying location to make it appear operational. The Justice Department described what witnesses saw:

The Congressional Research Service’s 2017 report, Small Business Administration HUBZone Program, describes a program intended to create jobs and increase investment in economically distressed communities. It identifies a principal office in a HUBZone and employee residency as separate requirements. The benefit reaches businesses through reserved contracts, sole-source awards and price-evaluation preferences.

We see the absurdity in the government’s account: a program meant to bring work to a community was allegedly shown boxes brought in for an inspection.

For construction businesses, the office question also has a practical distinction. In its 2008 examination of HUBZone fraud controls, the Government Accountability Office described the principal office as the location where the greatest number of qualifying employees worked. It explained that the construction calculation excluded employees doing most of their work at job sites to fulfill specific contracts. The office staff and the crews on a project answer different parts of the operating story.

That examination also showed how easily an address could substitute for an operation. GAO obtained certifications for fictitious businesses using fabricated employee information and documents, including an application listing a coffee shop as its principal office. The later CRS report described the Small Business Administration’s response to earlier fraud findings: application reviews requiring supporting leases, tax returns and payroll records.

The same office discrepancy was alleged in the separate CFP Group case. In its 2010 settlement announcement, the Justice Department alleged that CFP obtained a Department of Veterans Affairs fire-alarm installation set-aside by claiming a Maryland HUBZone office where no employees worked. The government alleged that its president actually worked in Vienna, Virginia. That case shows why someone familiar with the daily workplace can know more about a claimed office than the application reveals.

The Affiliation Question Reached Sworn Declarations

The Justice Department alleged that the response to scrutiny concealed the relationship further. When the Small Business Administration questioned the companies’ affiliation in 2009, Northland’s president and Diverse’s majority owner submitted sworn declarations misrepresenting it.

The government also alleged that, shortly afterward, Diverse routed more than $1 million to Northland through a Northland subsidiary in an effort to hide the affiliation. Diverse’s own settlement: $100,000.

Diverse, Northland and Northland’s president admitted that their conduct violated federal regulations designed to encourage contract awards to service-disabled veteran-owned small businesses and businesses operating in HUBZones.

The Bond Broker Allegedly Helped Open the Door

The government alleged that Rose & Kiernan helped Diverse obtain the bonding needed to pursue government construction work despite knowing, or having reason to know, about the concealed affiliation. The insurance and surety brokerage acted as bond broker for both Diverse and Northland.

Federal construction bidders generally must post performance and payment bonds, the Justice Department explained, and the bonding company must ensure that the contractor will perform the work.

The settlement with Rose & Kiernan and its senior vice president resolved allegations that they knew or should have known the companies were affiliated in violation of Small Business Administration rules and had taken steps to hide that affiliation. The Justice Department alleged that their help securing bonds substantially contributed to Diverse submitting false payment claims.

Diverse’s Payment Within the Larger Settlement

Beyond Diverse’s obligation, Northland and its president each agreed to pay $2,125,000. The Justice Department reported that Rose & Kiernan had already paid $120,000.

Qui tam cases under the False Claims Act triggered the investigation. The U.S. Attorney’s Office for the Northern District of New York coordinated with the inspectors general for the Small Business Administration, Department of Veterans Affairs and Department of Transportation, the Defense Criminal Investigative Service and Army Criminal Investigation Command.

What the Construction Records Reveal

This case connects eligibility representations to ordinary construction administration: who tracked the bids, prepared the estimates, handled purchasing, kept the accounts and received the subcontracts. The office and bonding accounts add different views of that same relationship.

An estimator may know whose staff prepared the price. An accounting employee may know which business administered the contracts and where subcontract payments went. An office employee may know why files arrived before inspectors did. A person involved in bonding may know how the relationship between the bidder and the business behind it was presented.

Those perspectives give substance to an affiliation concern. We build set-aside fraud cases with insiders who know the operating business behind the government’s paperwork.

How Much Money Can a Whistleblower Get From a Qui Tam Lawsuit?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. In this case, the Justice Department announced a $1 million whistleblower reward from settlement proceeds the government would receive from Diverse, Northland and Northland’s president.

You Know the Business Behind the Bid

If you know who ran the bids, worked in the claimed office or arranged the bonds, speak to one of our whistleblower experts about the construction operation you saw. We build your strongest set-aside fraud case with you and bring in government procurement whistleblower lawyers who understand set-aside eligibility and construction contracting. We stay beside you as your knowledge of the business becomes the evidence behind the case.