In United States v. Nagle, the Third Circuit provided instruction on how to calculate the amount of “loss” defendants are attributed when being sentenced in a Disadvantaged Business Enterprise (“DBE”) fraud case. Going forward, in a DBE fraud case, the loss calculation must include consideration of the fair market value of the services rendered to the government under the affected contract, or contracts.
In Nagle, the co-owners of a non-DBE entity were convicted of, and pled guilty to, crimes related to the use of a certified DBE as a front to acquire subcontracts, which had been allocated for DBEs. The Defendants owned a bridge beam manufacturing company, and controlled the company’s wholly owned subsidiary, which functioned as the company’s construction and engineering branch. Neither the Defendants’ company nor its subsidiary were certified DBEs. Therefore, in order to be awarded contracts intended for DBEs, the Defendants arranged for a DBE entity to be registered as the subcontractor of record on the contracts; however, the Defendants’ non-DBE entity performed all of the work on those contracts. This arrangement resulted in government money, which had been intended to go to DBEs, passing directly through a DBE entity and going to a non-DBE company. Between 1993 and 2008, the DBE entity received hundreds of government subcontracts worth over $100 million dollars.
One owner pled guilty to conspiracy to defraud the United States, and the other was found guilty of various fraud and fraud-related charges following trial.
The U.S. District Court for the Middle District of Pennsylvania determined that the amount of “loss” each Defendant would be responsible for would be equal to the face value of the contracts that the DBE firm was awarded while the Defendants served as executives at the non-DBE firm. One owner was found responsible for $135.8 million in losses, and the other was found responsible for $53.9 million in losses.
On appeal, the Defendants argued that the “loss” should not be measured by the face value of the contracts awarded to the DBE firm. Instead, they claimed that they were entitled to receive a credit for the services performed on those contracts, to offset the amount of loss.
The Third Circuit held that in a DBE fraud case, the amount of loss attributable to defendants should be calculated by taking the face value of the contracts and subtracting the fair market value of the services rendered. The court further clarified that “fair market value” can be calculated by the value of the materials supplied, the cost of the labor necessary to assemble the materials and the value of transporting and storing those materials. However, the court ended its opinion by stating, without clarification, that District Courts responsible for calculating loss in a DBE fraud case should keep in mind that the goal of the DBE program was frustrated by the fraud. It is unclear how this final statement will actually effect a District Court’s loss calculation going forward and practitioners should take note that the door remains somewhat ajar. That said, United States v. Nagle is an important development in the analysis of “loss” in a DBE fraud case.
