United States v. Neary
| Decision Date | 24 August 2021 |
| Docket Number | Civil Action 20-14167 (FLW) (TJB) |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. CHRISTOPHER R. NEARY, SHERMAN BARTON, VE SOURCE, LLC, and VERTICAL SOURCE, INC., Defendants. |
| Court | U.S. District Court — District of New Jersey |
NOT FOR PUBLICATION
The United States of America (the “Government”) has filed suit against Christopher R. Neary (“Neary”), Sherman Barton (“Barton”) VE Source, LLC (“VE Source”), and Vertical Source, Inc. (“Vertical Source”) (together “Defendants”) to recover damages under the False Claims Act (“FCA”) for allegedly fraudulently obtaining government contracts intended for legitimate service-disabled, veteran-owned small businesses (“SDVOSBs”). Before the Court are two separate motions to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6) by Neary, Barton, and VE Source (the “VE Source Defendants”), and by Vertical Source. The VE Source Defendants argue that the Government cannot state a claim under the FCA because VE Source is a legitimate SDVOSB. Vertical Source moves to dismiss the Complaint on the grounds that the Complaint does not include sufficient allegations to show that VE Source is the alter ego and mere instrumentality of Vertical Source. For the reasons set forth herein, the Motions to
Dismiss filed by both the VE Source Defendants and Vertical Source are DENIED.
The Small Business Act provides that the Government shall establish an annual goal that “not less than 3 percent of the total value of all prime contract and subcontract awards for each fiscal year” shall be awarded to “small business concerns owned and controlled by service-disabled veterans.” 15 U.S.C. § 644(g)(1)(A)(ii). The Small Business Act requires all federal agencies to report to the U.S. Small Business Administration (“SBA”) whether they have accomplished their annual goal for SDVOSBs. Id. § 644(h). Thereafter, the SBA reports to the President and Congress, as well as the public, whether the government met the goal to award contracts to firms owned and controlled by service-disabled veterans. Id. The Small Business Act further authorizes federal agencies to set aside the award of certain federal contracts to eligible SDVOSBs either (1) on a sole-source basis for contracts of $5 million or less for manufacturing contracts, and $3 million or less for other contracts, and (2) through competitions limited to SDVOSBs. 15 U.S.C. § 657f(a)-(b).
To implement the provisions of the Small Business Act, SBA regulations and the Federal Acquisition Regulations (“FAR”) establish regulatory criteria that companies must meet to obtain contracts reserved for SDVOSBs. These regulations define an SDVOSB as a small business concern[1] “[n]ot less than 51 percent of which is owned by one or more service-disabled veterans or, in the case of any publicly owned business, not less than 51 percent of the stock of which is owned by one or more service-disabled veterans; and (ii) [t]he management and daily business operations of which are controlled by one or more service-disabled veterans or, in the case of a service-disabled veteran with permanent and severe disability, the spouse or permanent caregiver of such veteran.” 48 C.F.R. §§ 2.101, 52.212-3 (defining service-disabled veteran-owned small business concern); see also 15 U.S.C. § 632 (q)(2) (same). Under SBA regulations, “[c]ontrol by one or more service-disabled veterans means that both the long-term decisions making and the day-to-day management and administration of the business operations must be conducted by one or more service-disabled veterans.” 13 C.F.R. § 125.13(a). Relevant here, “[i]n the case of a limited liability company, one or more service-disabled veterans . . . must serve as managing members, with control over all decisions of the limited liability company.” Id. § 125.13(d).
The Small Business Act provides that firms that misrepresent their status as an SDVOSB “shall be subject to” civil prosecution under the False Claims Act. 15 U.S.C. §§ 657f(d), 637(m)(5)(C). SBA regulations require a contractor to “self-certify” that it meets the criteria of an SDVOSB. See 13 C.F.R. § 125.18; 48 C.F.R. §§ 19.1403(b), 52.519-1(c)(7). From 2009 to 2012, businesses were required to enter an annual certification as to their eligibility for SDVOSB contracts in a government database known as the Online Representations and Certifications Application (“ORCA”). From July 2012 to the present, businesses enter these certifications in the online System for Award Management (“SAM”). 13 C.F.R. § 125.33(a); 48 C.F.R. §§ 4.1201, 4.1202. They are then “are incorporated by reference into the contract.” 48 C.F.R. § 52.204-19. A contractor's self-certified status may be challenged by the contracting officer, the SBA, another bidder, or any other interested party. See 13 C.F.R. § 125.27; 48 C.F.R. §§ 19.302(b), 19.307(b)(1).
While the SBA's regulations regarding SDVOSB contracting apply to most federal agencies, the VA, in 2010, changed its process and no longer permitted its businesses to self-certify as to SDVOSB status. (Compl. ¶ 44.) As opposed to permitting self-certification, the VA requires entities to submit documentation to show their eligibility for SDVOSB status as part of an application to the VA's Center for Verification and Evaluation (“VA CVE”). 38 C.F.R. § 74.2(a). The VA CVE then reviews a company's submissions to determine whether it meets the VA's requirements for SDVOSB status. Id. The VA defines an SDVOSB the same as do the FAR and SBA regulations. 38 C.F.R. § 74.1. While the VA maintains this separate certification procedure, its process intersects with the SBA in several aspects. For example, the VA requires that any contractor applying for SDVOSB verification be registered in SAM, which will show the contractor's self-certification as an SDVOSB for non-VA contracts. See 28 C.F.R. § 74.2(f). Additionally, if the SBA determines that a contractor does not qualify as an SDVOSB, VA regulations provide that the contractor “may be immediately removed” from the VA's database of verified SDVOSBs. See 38 C.F.R. § 74.2(e).
Barton is a veteran with a service-connected disability. (Compl. ¶ 14.) According to the Government, in 2009, Neary, Robert Pao (“Pao”), who at the time worked for Neary's company Vertical Source, and Ron Norton (“Norton”), a salesman for a company selling outdoor sports products to retailers, discussed options to create a business that could take advantage of government contracting opportunities, in particular those set aside for SDVOSBs. (Id. ¶¶ 22-23.) Because neither Neary, Pao, nor Norton were service-disabled veterans, Norton proposed forming an SDVOSB with Barton, who he knew from an auto club. (Id. ¶¶ 23-24.) In the summer of 2009, Neary, Norton, and Pao met with Barton to discuss forming an SDVOSB. (Id. ¶ 25.) At that time, Barton was employed at the VA and was nearing retirement. (Id. ¶¶ 25-26.) As such, Barton expressed that he did not want to play an active role in the proposed business. (Id. ¶ 26.) Barton was allegedly told that he would not need to take an active role in the business and would only need to be a 51% owner on paper. (Id.) Barton agreed to the arrangement. (Id.) However, Barton purportedly did not take any steps to form the business. (Id. ¶ 27.) Rather, as alleged, Norton prepared the paperwork to incorporate the business and registered VE Source as a limited liability company in Delaware in July 2009. (Id. ¶¶ 27-28.) At the time VE Source was formed, Barton was still employed by the VA and held a 51% ownership position in VE Source and the remaining 49% was split equally between Neary, Pao, and Norton with each holding a 16.33% share. (Id. ¶¶ 27-28, 32.) Shortly thereafter, Norton began registering VE Source in various government databases to begin pursuing SDVOSB set-aside contracts.[3] (Id. ¶ 32.)
Once formed, VE Source and Vertical Source began sharing an office and employees. (Id. ¶ 34.) Norton apparently expressed concern to Neary, Barton, and Pao about these arrangements and suggested separating the companies. (Id.) At the time VE Source was formed, Pao was a fulltime employee of Neary's company, Vertical Source. (Id. ¶ 36.) In that role, Pao was responsible for product sourcing, manufacturing, and production for both Vertical Source and VE Source and, additionally, was the main point of contact between VE Source and the Government. (Id.) In particular, Pao was responsible for identifying government business opportunities and determining if they were worth bidding, drafting proposals, and submitting them on behalf of VE Source. (Id. ¶ 37.) Neary was heavily involved in VE Source's day-to-day business operations and controlled the company's books and records. (Id. ¶ 38.) For example, Neary handled all the bills and finances until VE Source began paying Charles Moran, a Vertical Source employee, to serve as VE Source's bookkeeper. (Id.)
In 2010, VE Source began the process to obtain SDVOSB set-aside contracts from the VA. (Id. ¶ 42.) In that connection, on June 2, 2010, VE Source self-certified as an SDVOSB with the VA. (Id. ¶ 43.) That status was valid for one year. (Id.) In late 2010, the VA changed its process and no longer permitted businesses to self-certify their SDVOSB status. (Id. ¶ 44.) Instead, the VA began requiring entities to submit documentation to show their eligibility for SDVOSB status as part of an application to the VA CVE. (Id. (citing 38 C.F.R. § 74.2(a) (2010-2018).) On March 2, 2012, VE Source applied to the VA CVE to be verified as an SDVOSB. (Id. ¶ 46.) Neary and Barton were primarily involved in submitting the application...
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