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Whistleblower to Cost Contractor $12M

Monday, May 12, 2014

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Future public contracts will remain available to a Chicago contractor, despite a $12 million settlement over claims that it routinely used disadvantaged- and women-owned businesses as pass-through entities to obtain such work.

James McHugh Construction Co. Inc. will pay $7.2 million to the U.S. government and $4.8 million to the State of Illnois to settle allegations by a former project manager that it defrauded the government programs, authorities announced May 1.

In exchange, McHugh will not be barred from future government contracts, prosecutors said.

McHugh Construction
Photos: James McHugh Construction Co.

McHugh Construction will pay $12 million in a civil settlement agreement to resolve allegations that the company falsified disadvantaged-business enterprise requirements on several projects.

In conjunction with the settlement, McHugh also donated $2 million to support M/WBE (Minority/Women Business Enterprise) and DBE (Disadvantaged Business Enterprise) programs in the city, Chicago Mayor Rahm Emanuel announced.

Under the settlement, the company admits no wrongdoing.

"It's important that McHugh and other companies realize that compliance with these requirements is both a good business decision and the right thing to do," said Zachary T. Fardon, U.S. Attorney for the Northern District of Illinois.

"It was more costly in the long run for McHugh to avoid its obligations to hire women- and minority-owned businesses than it would have been simply to comply with the requirements and retain disadvantaged businesses to actually particpate in these public construction projects," Fardon said.

Whistleblower Suit

The settlement arose from a lawsuit filed under seal in 2008 by Ryan Keiser, who was a project manager at three of the McHugh construction sites for Perdel Contracting Corp. and Accurate Steel Installers Inc.

The lawsuit, also unsealed Thursday, was filed under the whistleblower provisions of the federal and Illinois False Claim Acts. Federal and state statutes permit private individuals to sue for false claims on behalf of the government and share in any recovery.

According to the FBI, the company allegedly failed to follow federal and state requirements for the participation of disadvantaged businesses in contracts for seven public construction projects. The work was on roads, highways and transit lines between 2004 and 2011.

Keiser said he had come forward after McHugh managers insisted that he create false paperwork to cover up the scheme, according to his attorneys, Loevy & Loevy.

'Right Out in the Open'

"What angered me the most was that McHugh's managers were so matter-of-fact about cheating the WBE and DBE programs," Keiser said.

"It happens right out in the open. So many of the prime contractors are doing it and all of them know what's happening. The suppliers have to play along to get the business. And none of them has any concern that they will get in trouble.

"The City of Chicago's leaders and similar politicians throughout the country just don't seem to care. That's why I had to blow the whistle," Keiser said.

Keiser will receive 17 percent of the $12 million settlement, or $2,040,000. Of that total, $1,224,000 will come from the federal share, and $816,000 from the state's portion.

Company: 'Troubled'

McHugh violated the False Claims Acts by making false statements about requirements to include disadvantaged businesses in the projects, the governments claimed.

McHugh expressely denies the claims, and the settlement is neither an admission of liability by McHugh or a concession by the governments that their contentions were not well-founded.

DBE programs

The settlement arose from a 2008 lawsuit filed by former project manager Ryan Keiser. "What angered me the most was that McHugh's managers were so matter-of-fact about cheating the WBE and DBE programs," Keiser said.

McHugh's chairman, Patricia H. McHugh, and president, Bruce E. Lake, issued a statement offering a "heartfelt apology to our employees and clients for any distraction this situation might have caused."

"We are troubled by this inquiry, particularly because we are a company that has built a reputation as the industry leader for supporting minority- and women-owned companies. ... While we fully cooperated with that investigation, we did not wait for it to be complete to begin strengthening our commitment to compliance," the company said.

The settlement was reached on behalf of the U.S. Department of Transportation, the Illinois Department of Transportation, the Illinois State Toll Highway Authority, and the Regional Transportation Authority.

'Pass-Through' Performance

According to the governments' claims, McHugh falsely stated that Perdel and Accurate Steel, which are both certified as DBEs owned by Elizabeth Perino, would perform or had performed work on several projects to satisfy DBE participation requirements.

The FBI stated that Perino was charged with federal mail fraud in 2011, and the case remains pending. In February 2012, Illinois placed both of her companies on interim suspension.

Illinois Attorney General Lisa Madigan said, "Our investigation revealed that McHugh Construction falsely used subcontractors to help secure bids for major construction projects funded by and for Illinois taxpayers.

"The company used women-owned businesses to submit false claims to the state and federal governments for millions of dollars when, in fact, those businesses never completed the level of work required by law."

McHugh allegedly made the false statements on bids for the contracts, final contracts and claims for payment.

whistleblower protection acts

"We are troubled by this inquiry, particularly because we are a company that has built a reputation as the industry leader for supporting minority- and women-owned companies," said chairman Patricia McHugh.

Contrary to McHugh's statements, the governments contend that Perdel and Accurate Steel often functioned as "pass-throughs" and performed little, if any, work that would qualify for participation credit under federal and state DBE requirements.

Projects Exceeded Experience

The settlement covers McHugh's contracts on the following projects:

  • Washington/Monroe Viaduct over Interstate 90/94 for the Chicago Department of Transportation (CDOT) in 2005;
  • Red Line Howard Station for the Chicago Transit Authority (CTA) in 2006;
  • North Avenue Bridge for CDOT in 2006;
  • Brown Line for the CTA in 2006;
  • Eastbound Interstate 88/Fox River Bridge for the Illinois State Toll Highway Authority in 2007;
  • Westbound Interstate 88/Fox River Bridge for the toll highway authority in 2008; and
  • Wacker Drive Viaduct Reconstruction from Randolph to Monroe streets for CDOT in 2010.

According to the governments' claims, work that Perdel and Accurate Steel contracted for McHugh "often exceeded the companies' capacity and experience." The projects were "substantially greater in size and scope" than what Perdel and Accurate Steel had previously performed, but their "expertise to perform larger and more complex projects did not change correspondingly."

Instead of Perdel and Accurate Steel performing, managing, or supervising the work that McHugh said they would, McHugh frequently managed union workers they each hired, the FBI said. In some cases, McHugh directed the other companies as to which union crews to hire.

According to the FBI, McHugh also selected certain suppliers on each of the contracts, determined the quantity and quality of materials, negotiated the priced, and drafted purchase orders for Perdel and Accurate Steel to put on their letterhead.

McHugh settlement

"... McHugh recognizes the seriousness of the allegations and the need to continue improving our compliance and training programs, but we dispute any suggestion that we intentionally disregarded the requirements of DBE programs," the company said in a statement.

"That kind of conduct violates federal and state provisions that are designed to give a share of the actual work of government-funded construction projects to minority- and women-owned businesses," the FBI stated.

Compliance Agreement

In a related administrative settlement and compliance agreement, McHugh agreed to:

  • Implement a corporate compliance program;
  • Appoint a compliance officer who is knowledgeable about DBE programs;
  • Be subject to an independent monitor for three years;
  • Submit periodic reports to the government agencies and officials; and
  • Make six presentations to those agencies and officials to discuss and promote compliant policies and procedures for working with DBE firms.

The three-year administrative monitoring settlement and compliance agreement involves McHugh and the Federal Transit Administration, the Federal Highway Administration, and the U.S. and Illinois Transportation Departments and their procurement officers, and the city of Chicago.

In exchange, those entities agree not to bar McHugh from future government contracts.

"... McHugh recognizes the seriousness of the allegations and the need to continue improving our compliance and training programs, but we dispute any suggestion that we intentionally disregarded the requirements of DBE programs," the company stated.


Tagged categories: Contractors; Contracts; Department of Transportation (DOT); Ethics; Federal Highway Administration (FHWA); Subcontractors; Whistle blowing

Comment from Kathleen Wickstrom, (5/12/2014, 8:54 AM)

I guess if you have enough money you can buy who and whatever you want. I think the companies (DBE/WBE) who allowed themselves to be used "pass through companies" should be stripped of their disadvantaged status.

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