The district court granted motions to dismiss for failure to state a claim, finding the relator did not sufficiently allege which of the defendants participated in a scheme to create sham minority-owned businesses in order to obtain federal contract set-asides, nor when the misconduct occurred or what agencies or contracts were involved. The court granted the relator 21 days to address the deficiencies in his complaint.
Defendants Vratsinas Construction Company; VCC LLC; VCC Global LLC; VCC Construction Corp.; KSJ Construction LLC; Demo Specialties Inc.; Construction Management Services Inc.; Diversified Construction Materials and Services LLC; Sam Alley; Donald Davis; and Jason Keeney collectively moved to dismiss a third amended complaint alleging the defendants fraudulently obtained construction contracts set aside for small businesses.
Lazo alleged the defendants falsified and manipulated qualification criteria from federally-funded construction and development programs to gain certification under the Southern California Minority Supplier Development Council as a minority business enterprise and as a minority-owned disadvantaged small business and to qualify as an SBA 8(a) small business. The relator’s complaint alleged the defendants recruited individuals who met the program requirements to act as owners, despite having no relevant construction experience, and used their sham ownership to obtain the proper certifications.
The complaint alleged KSJ was a sham MBE and that it partnered with VCC to obtain bond licenses and other benefits it could not have done on its own. The complaint also alleged the defendants engaged in a sham subcontractor scheme in which they would conceal the lowest legitimate bid for projects, then award the contract to a sham subcontractor, such as KSJ or Demo, at an inflated price. The project owner would be unaware that the project was being completed by a different subcontractor and pay the inflated price, after which defendants would pay the subcontractor the lower, concealed rate and pocket the remainder of the government’s money.
Lazo also alleged the defendants conspired with subcontractors to submit inflated invoices to the government, in part by billing for materials that were never used on their projects. In exchange, the subcontractors were offered kickbacks or promised future work. The complaint also alleged the defendants would doctor the charges that the government had agreed to by having employees tear out pages of project bid books, manipulate bid numbers by redacting the original pages, make photocopies of the doctored pages, and substitute them into the books for the original pages in order to misrepresent the terms of the initial deal to the project owners. They also created fictitious entities with names similar to those of legitimate subcontractors, so they could issue sham invoices to a recognized entity.
Lazo also alleged the defendants padded insurance costs and abused California’s tax increment financing method so that California was forced to pay defendants tax credits for the inflated cost of their work.
In their motion to dismiss, the defendants first argued that the the first-to-file bar prevents Lazo from substituting himself in for original plaintiff, John Doe. As originally filed, the case identified the relator as “John Doe” and Lazo as the relator’s attorney. However, when the first amended complaint was filed, Lazo himself was identified as the relator. The defendants argued that when the initial complaint was filed, it did not state the relator was proceeding pro se, and therefore Lazo could not be the original plaintiff and is instead improperly intervening. Since courts have found that amending a complaint to name persons other than the government as plaintiffs is not permitted, the defendants argued the complaint must be dismissed.
In response, Lazo maintained that he was the original anonymous relator, and that he proceeded as John Doe because he feared the defendants would threaten the non-defendant subcontractors and vendors named in the suit if they communicated with his office or otherwise disclosed the misconduct. According to Lazo, by the time he filed the first amended complaint, those concerns had been alleviated and he therefore disclosed his identity.
The defendants disputed this reasoning, noting that Lazo had already been identified as the attorney for John Doe on the original complaint and arguing that the rationale for allowing Doe plaintiffs to proceed is when there is risk of harm to that plaintiff, not to others. However, the court held that while Lazo’s reasoning was perplexing, the defendants had not shown that he was not John Doe. The court therefore denied the motion to dismiss on these grounds.
Next, the defendants argued Lazo failed to state a claim. While he named thirteen projects and listed several allegedly fraudulent schemes, the defendants argued there was no connection alleged between the projects and schemes nor with payments to the federal government. They also argued Lazo failed to provide a single specific detail about the involvement of, or injury to, the federal government, including the who, what, when, where, and how of the misconduct.
In response, Lazo argued that the specific details of a single transaction are not required by the Ninth Circuit and that the Rule 9(b) requirements are less stringently applied when the alleged fraud is complex or occurred over a period of time. The court reviewed each of the alleged schemes in turn.
First, the court considered the allegation the defendants created sham MBEs to win contract set-asides. The defendants argued the complaint did not state who obtained the allegedly fraudulent MBE certifications, or when or from whom, nor what was allegedly false about the certifications. Further, Lazo did not state which government agency, project, contract, or employees were involved. Lazo argued that he outlined the details of the scheme and identified the contracts and subcontracts, as well as the entities involved, but the court agreed this was not enough. The court noted Lazo did not state when these projects and the alleged fraud took place and that the contracts and subcontracts are not identified in the complaint.
Lazo argued that timing is not required under Rule 9(b) but the court explained that there is a difference between requiring a precise time frame and allowing a complaint to proceed that is utterly devoid of reference to any time frame during which the alleged conduct occurred. Because Lazo failed to allege when the fraud occurred, the court held his complaint failed to meet Rule 9(b) requirements.
Next, the defendants argued that the relator did not allege which defendants created fake bid documents or which bids were replaced, nor identify the sham entities. He also did not state what was false about the invoices or when the alleged misconduct took place. Again, Lazo argued the Ninth Circuit does not require this level of detail, and that identifying the scheme and several of the subcontractors is enough.
On this part of the complaint, the court found Lazo met most, but not all, of the pleading requirements, because he had alleged the names of the sham entities and pocket subcontractors. However, he did not define any timeline for the allegations. Accordingly, the court gave Lazo leave to amend his complaint to address this deficiency.
Next, the defendants argued Lazo failed to provide details of the alleged insurance scheme and the court agreed. The court found the relator identified some details of the alleged fraud but not which subcontractors participated and when it occurred. The court again granted Lazo leave to amend.
With regard to the change order scheme, the defendants argued Lazo did not identify the pocket subcontractors, the cost plus contracts, or the lump sum contracts, nor who directed the scheme or a single alleged fraudulent change order, who submitted it, or to whom. The defendants made the same arguments regarding the rebate and TIF fraud schemes. The court agreed that more specificity was required because the complaint did not identify who participated in the scheme or when. Again, the court allowed Lazo leave to amend.
Finally, the defendants argued that the allegations regarding the SCLARC project do not state a FCA claim because the purported fraud is not alleged with particularity and it was not clear how convincing a project owner to fire one general contractor and hire another is fraud, let alone how it results in any false claims to the government. In response, Lazo asserted that he had learned more relevant facts, which the court decided could be alleged in an amended pleading.
