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Former Security Contractor Execs Sentenced for $31 Million Financial Fraud

July 2, 2013 — When government contractors file false claims with the government, they are robbing taxpayers. The federal False Claims Act allows the government to work with informants and tipsters to fight fraud against the U.S. government. Under the qui tam provisions of the statute, whistleblowers can file a lawsuit on behalf of the government against those committing fraud and share in the government’s recovery.

Two Men Sentenced for Defrauding SBA Program of Money Intended for Disadvantaged Small Businesses

Two Virginia residents have been sentenced for their parts in a financial fraud scheme that defrauded the U.S. government of over $31 million. The money had been ear-marked for disadvantaged small businesses under the Small Business Administration’s (SBA) Section 8(a) program. The SBA’s Section 8(a) program gives qualified small businesses access to sole-source and competitive-bid contracts that are set aside for disadvantaged and minority-owned small businesses.

Virginia residents Joseph Richards and David Lux have been ordered to serve 27 and 15 months, respectively, following their March 2013 guilty pleas to charges of conspiracy to defraud the government. In addition to prison time, the men were ordered to perform community service. Richards was ordered to pay over $120,000 in restitution, and Lux was ordered to forfeit over $115,000.

Mr. Richards and Mr. Lux were executives at a security contracting firm called Company A in court records. In about 2001, Keith Hedman formed Company A, which was approved to participate in the SBA section 8(a) program based on the eligibility of its purported president and CEO, an African-American woman. According to the Justice Department, that woman left the company in 2003, Mr. Hedman became Company A’s sole owner, and the company was no longer eligible to participate in the section 8(a) program. The loss of section 8(a) eligibility led Mr. Hedman to create another company for which he could claim eligibility in the program.

Mr. Hedman created security contractor Company B in 2003. Before applying to the section 8(a) program, he hired a Portuguese woman with a history of social disadvantage to serve as a figurehead owner. In reality, Mr. Hedman was the ultimate decision maker. The application was approved based on misrepresentations, and Company B fraudulently retained section 8(a) eligible status until February 2012.

Mr. Richards and Mr. Lux became part of the fraud scheme in 2005 and 2008, respectively. Mr. Richards and Lux received ownership stakes, and in return the two men agreed to help mislead the SBA and other government agencies about Company B’s section 8(a) eligibility. They took a number of actions to that end, including overcoming a protest by another company that accused Mr. Hedman’s companies of improperly obtaining a $48 million contract with the Coast Guard. They helped prepare documents and reports submitted to SBA and other government agencies. Mr. Richards also moved onto the payroll of Company B to assist Mr. Hedman in its illegal operations. Mr. Lux helped withdraw funds that Mr. Hedman distributed to conspirators, including the two defendants.

The financial fraud scheme resulted in government contracts worth over $153 million, from which Company B obtained over $31 million in contract payments. The conspirators improperly obtained over $6.1 million from those funds. Six other individuals have pleaded guilty for their parts in the scheme and are awaiting sentencing.

Whistleblowers Can Use False Claims Act to Attack Fraud Against the Government

Tipsters have valuable information, and they need to understand their rights under the False Claims Act before they collaborate with the government. The qui tam lawyers at Waters & Kraus provide skilled representation to informants in government contractor fraud cases. Contact us by email or phone our whistleblower attorneys at 855.784.0268 to find out more about how we can assist you.

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