Federal Set-Aside Contract Fraud Leads to $21.3 Million False Claims Act Settlement

by Nicholas K. Ono and Marisa Aratangi

Broadway Electric Inc. (“Broadway”), Cornerstone Contracting Inc. (“Cornerstone”), Chief Executive Officer John Oehler, and President Christian Blake (collectively, the “Defendants”) agreed to pay $21.3 million to resolve False Claims Act (“FCA”) allegations that they improperly obtained federal contracts reserved for service-disabled veteran-owned small businesses (“SDVOSB”) and other eligible small businesses. In the settlement agreement, the Defendants admitted, acknowledged, and accepted responsibility for, inter alia, accessing SDVOSB set-aside contracts that they were not eligible to bid on their own by working with multiple purported small businesses.

Federal contracts may be “set aside,” i.e. reserved, for small businesses that meet specific eligibility requirements, including those owned, controlled, and operated by service-disabled veterans of the United States Armed Forces. The settlement resolves allegations that, from approximately April 2017 to May 2025, the Defendants engaged in a coordinated scheme to obtain federal set-aside contracts for which Broadway and Cornerstone were not eligible by using purported SDVOSBs and other small businesses as pass-through entities.

What Are Service-Disabled Veteran-Owned Small Business Contracting Programs?

SDVOSB contracting programs provide preferential access to government contracts for businesses that are majority-owned by veterans with service-connected disabilities. These programs, including federal and state-level initiatives, allow qualifying businesses to compete for set-aside and sole-source contracts, helping them scale through public procurement opportunities.

Key Benefits of SDVOSB contracting programs include:

1. Set-Aside Contracts: Federal agencies have a goal to award at least 5% of all prime contracting dollars directly to certified SDVOSB firms. State programs (such as New York) mandate similar minimum participation goals for state contracts.
2. Sole-Source Contracts: Agencies can directly award contracts to SDVOSB firms without a competitive bidding process under certain conditions.
3. Subcontracting Opportunities: Large prime contractors are required to establish subcontracting goals with SDVOSB firms to win lucrative federal awards.

To qualify and participate, a business must be certified by the Small Business Administration as an SDVOSB. Certification has several baseline criteria, including:

1. The business must qualify as a “small business” based on the North American Industry Classification System size standards for its industry.
2. At least 51% of the business must be unconditionally owned and controlled by one or more veterans.
3. The veteran owners must possess a documented service-connected disability rating from the Department of Veterans Affairs.
4. The disabled veteran owners must control the daily business operations and long-term decision-making.
5. For veterans who are permanently and severely disabled and unable to manage daily business operations, their business may still qualify if their spouse or permanent caregiver is assisting in the management of the business.

The Federal Government Reserves Certain Contracts For Specific Categories Of Small Businesses

The federal government reserves contracts, known as set-asides, for small businesses to ensure fair competition, prevent large corporations from monopolizing federal spending, and support economic development. These programs ensure taxpayer dollars help build local economies, drive innovation, and promote diversity in public procurement.

These SDVOSB programs are intended to provide contracting opportunities to qualifying veteran entrepreneurs. Assistant Attorney General Brett A. Shumate of the Justice Department’s Civil Division emphasized the importance of protecting programs intended for small businesses and service-disabled veterans, stating, “Congress intended certain federal contracts to be set aside for small businesses and for service-disabled veterans who sacrificed for this country.” [CITE] Reflecting the government’s commitment to honoring those sacrifices and safeguarding the integrity of these programs, Shumate further stated, “[the Justice Department] will hold accountable those who fraudulently obtain, or assist others in fraudulently obtaining, these set-aside contracts.” Id.

How misrepresenting eligibility for set-aside contracts triggers False Claims Act liability

Misrepresenting eligibility for set-aside government contracts can lead to liability under the FCA because the government relies on a company’s certification that it meets the requirements of programs reserved for specific groups, such as small businesses or SDVOSBs. If a company fraudulently claims eligibility for a program to obtain a contract, it may be liable for attempting to secure federal funds. As a result, any payment that the company receives under the inappropriately awarded contract may be considered a “false claim,” even if the company completed the job in a satisfactory manner. This could expose the company to substantial civil penalties and damages under the FCA.

What types of business arrangements may raise concerns about control, ownership, or eligibility in government contracting programs?

Certain business arrangements may raise concerns in government contracting programs when they create questions about whether the company truly meets the ownership or eligibility criteria for a set-aside contract. For example, regulators may scrutinize relationships in which a qualifying individual or entity appears to hold ownership on paper while another person or entity exercises actual control over the business’s operations, finances, or decision-making.

Similar concerns may arise when affiliated companies share employees, resources, management, offices, or contract performance responsibilities in a manner that makes it vague as to who is truly controlling the business.

Although not necessarily per se violations of the FCA, if the business arrangements are used to create the appearance of eligibility for a set-aside program when the company would not otherwise qualify, they may trigger investigations and potential liability under federal contracting regulations and the FCA.

The Role Of Whistleblowers In Uncovering Government Contracting Fraud

The False Claims Act allows private parties to file suit on behalf of the United States for false claims and share in any recovery. The Whistleblower provision of the FCA allows private parties to file lawsuits on behalf of the federal government to report fraud in government contracting and share in any recovery obtained by the government.

The alleged claims against Broadway and Cornerstone arose from a qui tam lawsuit filed by two whistleblowers, a veteran of the United States Air Force and an executive with an SDVOSB firm.

The legal team at Miller Shah LLP has extensive experience handling False Claims Act and whistleblower matters. In July 2020, Miller Shah LLP played a key role in uncovering a fraudulent scheme by Novartis Pharmaceutical Corporation, which led to the company agreeing to a $642 million settlement to resolve FCA violations. With deep expertise in investigating and litigating cases involving illegal kickbacks and false claims, Miller Shah LLP helps whistleblowers navigate complex federal healthcare regulations and protect their rights.