Rose & Kiernan: Surety Support for the Northland-Diverse Set-Asides

Rose & Kiernan paid $120,000 to resolve allegations that its bond brokerage support for the Northland-Diverse set-asides helped a contractor obtain government payments through concealed affiliation. The insurance and surety broker worked for both construction companies. The government alleged that the broker and a senior vice president knew or should have known the companies were hiding their relationship, yet helped Diverse obtain the bonds it needed. For someone inside a brokerage, this case puts a familiar file at the center of the story: what the broker knew about the business it was helping to bond.

The Department of Justice’s May 4, 2020 announcement described a scheme to obtain small-business set-aside contracts for The Diverse Construction Group and subcontracts for its undisclosed affiliate, Northland Associates. The opportunities were reserved for service-disabled veteran-owned small businesses and businesses operating in historically underutilized business zones, or HUBZones.

Northland, Diverse and Northland’s president admitted that their conduct violated the federal regulations designed to encourage those awards. The broker’s settlement resolved allegations about its knowledge of the concealed affiliation and its help obtaining required bonding.

What Are the Rules for Small Business Set Asides?

Small-business set-aside eligibility depends on the program, the applicable size standard, ownership and control, and affiliation. In its account of this case, the government explained that applicants had to report their income and employees along with those of their affiliates. Affiliation meant the power of one business to control another, or a third party’s power to control both. When the combined businesses exceeded the applicable limits, neither qualified for the small-business contracts.

Diverse’s ownership split was 51% held by a service-disabled veteran and 49% held by senior Northland officials. The government’s account of concealed affiliation went much further than the ownership percentages.

Northland allegedly kept a bid calendar covering both companies’ upcoming opportunities, staffed Diverse with former Northland employees and handled its accounting, expediting, estimating, purchasing, contracting and clerical work. Diverse sent subcontracts back to Northland to fulfill.

Those are the daily workings of a construction business: deciding which jobs to pursue, estimating what they will cost, buying what the job needs and handling the accounts. We see the absurdity in a business presented as independent while another company allegedly kept its books, priced its bids and handled its purchases.

The Office Prepared for Inspectors

The HUBZone allegation concerned an office made to look operational for government inspections. Witnesses recounted moving boxes of files from Northland’s office in Liverpool, New York, outside a HUBZone, to Diverse’s office in Plessis, New York, inside one.

Files on a road trip. The alleged purpose was to make the qualifying address look like the place where the business operated.

The Congressional Research Service’s 2017 report, Small Business Administration HUBZone Program, explains why the office mattered. The program requirements it described included a principal office in a HUBZone, employee residence in qualifying areas and commitments about contract performance. Its account of application reviews described leases, tax returns and payroll records as evidence of eligibility. A location on an application represented a business operating in the community the program was intended to help.

The report also described an earlier Government Accountability Office test, reported in 2008:

One test application used a coffee store’s address. That finding helps explain the importance of the witnesses’ account in the Northland-Diverse case: a convincing address and paperwork can tell a different story from the people who know where the work happens.

Why the Bond Broker Mattered

The government alleged that Rose & Kiernan’s help obtaining bonds was a critical action in the scheme and a substantial factor in causing Diverse to submit false payment claims. Federal construction contractors generally had to post performance and payment bonds, and the bonding company had to ensure the contractor would perform the work.

Rose & Kiernan acted as the bond broker for both Northland and Diverse on government construction projects. The settlement with the brokerage and its senior vice president addressed allegations that they knew or should have known about both the affiliation and the companies’ efforts to hide it to obtain set-aside contracts and payments.

That is what gives the broker’s role its own significance. The government’s allegation connected a decision made before payment, helping Diverse obtain required bonds, to the false claims that followed. Someone working with both businesses could have information about the relationship that the eligibility disclosures concealed. What reached the broker, and what happened after it arrived, are central questions for a whistleblower who knows that side of the transaction.

The Records Behind the Separate Company Names

The useful evidence connects the eligibility story with the people making decisions, the work performed and the money received. In this case, the government’s account included an effort to conceal the relationship after the Small Business Administration questioned it.

The government alleged that Northland’s president and Diverse’s majority owner submitted sworn declarations misrepresenting the companies’ relationship. Shortly afterward, Diverse allegedly routed more than $1 million to Northland through a Northland subsidiary to hide their affiliation. That route gives the payment records a purpose beyond showing that a subcontractor got paid: they can show how the connection between the companies was obscured.

We work with the insider to connect the ownership, office and bond records to what the government was told.

An employee handling the bonds may see the financing side. An estimator may know who prepared the bid. Someone doing the accounting may know where the money went.

The Settlement Payments and the Investigation

The broker’s payment was a small part of the $4,470,000 resolution. The announcement said Northland and its president would each pay $2,125,000, and Diverse would pay $100,000.

Whistleblower lawsuits under the False Claims Act triggered the investigation. The U.S. Attorney’s Office for the Northern District of New York worked with the Small Business Administration’s inspector general and other civilian and military investigators. The announcement identified VA set-aside contracts.

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 announcement said the whistleblowers would receive a $1 million whistleblower reward from the government’s recovery from Northland, Diverse and Northland’s president.

A Separate Surety Case With the Same Question

North American Specialty Insurance agreed to a separate settlement in 2019 over allegations that it continued bonding Claro despite knowing or having reason to know about undisclosed control, affiliation and financial representations that undermined the contractor’s small-business eligibility. That matter involved the Small Business Administration’s 8(a) program and included Department of Agriculture contracts.

North American Specialty was the surety in that case. Rose & Kiernan was the broker in this one. The shared question is what the business providing or arranging the bonds knew about the contractor’s eligibility, and how its decision helped the contractor reach government money. That question can make a brokerage insider’s knowledge valuable well before the contractor’s request for government payment appears.

You Know the Business Behind the Bond

If you handled bonds for businesses that presented themselves as separate while sharing the people, office or money, speak with our Whistleblower Experts about the bonds you placed. We build your strongest government procurement whistleblower case with you around the eligibility claims and the bond decisions. We bring in government procurement fraud whistleblower lawyers who understand construction contracting and stay beside you throughout the case.