Two recent decisions from the United States District Court for the District of Columbia and the United States Court of Federal Claims highlight that sureties and bond producers are not immune to the potentially severe consequences of the False Claims Act (“FCA”) and related federal fraud statutes. In each case, the Court determined that sureties and bond producers can face potential liability under these fraud statutes for direct and indirect submission of false claims to the federal government.
For several years we have warned of the potential exposure for sureties and surety bond producers for direct and indirect violations of the FCA and related fraud statutes which carry criminal and civil penalties including treble damages of those sustained by the government, fines between $5,000 and $10,000 per violation, forfeiture of claims and debarment. Two recent decisions demonstrate that our warnings were well-founded. In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017), Plaintiff-relator Andrew Scollick filed suit on behalf of the United States against multiple defendants, including government contractors, their sureties, bonding agency and individual bond producer alleging a scheme to defraud the government by submitting bids for government construction contracts while fraudulently claiming service-disabled veteran-owned small business (“SDVOSB”) status. The District Court initially dismissed the FCA claims against the bonding defendants, but ultimately allowed them to proceed after Scollick amended the complaint to allege that the bonding defendants knowingly provided bonding for dozens of government construction contracts worth millions with the knowledge that the bonded contractor did not in fact qualify as a SDVOSB. In particular, Scollick asserted that the bonding defendants’ underwriting and due diligence would have reasonably revealed facts about the contractor that they knew or should have known violated the government’s SDVOSB contracting requirements, and therefore the bonding defendants perpetuated the alleged fraud by continuing to do business with the contractor.