Paragon Systems to Pay $52 Million to Settle False Claims Act Allegations

Paragon Systems, a security services contractor based out of Virginia, has agreed to pay $52 million to settle allegations of violating the False Claims Act. The company was alleged to have used shell companies to obtain contracts set aside for small businesses and the use of the shell companies was a ruse to conceal their actual size and the fact that they were not eligible for small business contracts. They improperly received government contracts  including winning contracts specifically reserved for special groups, such as Woman-Owned Small Businesses (WOSBs) and Service-Disabled Veteran Owned Small Businesses (SDVOSBs). By allegedly participating in this fraudulent activity, Paragon executives also violated portions of the Anti-Kickback Statute. The $52 million settlement is notable in that it is the largest civil recovery in over a decade by the Department of Homeland Security Office of Inspector General.

As part of the settlement, the whistleblower will receive more than $9 million as a whistleblower reward. As the Inspector General of the DHS states, “The settlement sends a clear message that the Federal Government will continue to investigate and prosecute fraud, waste, and abuse to protect small businesses owned by service-disabled veterans and other socially and economically disadvantaged individuals. I am grateful for the continued partnership with the Department of Justice and for the whistleblower who initiated the complaint.”

Paragon’s Alleged Fraudulent Small Business Scheme

Paragon’s executive, including the company’s president, vice president of business development, vice president of operations, compliance manager, and contracts manager, were all implicated in the alleged scheme. The Department of Homeland Security sets aside select contracts exclusively for small businesses. The purpose is to encourage small business growth and enable small businesses to participate in government procurement. To be eligible for these contracts, businesses must meet specific criteria with regards to the number of employees and revenue as set by the Small Business Administration.

The Paragon executives were alleged to have engaged female relatives and friends to serve as figurehead owners of purported small businesses. These fake businesses were then used to apply for government contracts related to security services at federal buildings. It was ostensibly the plan all along to have the actual work subcontracted to Paragon, and therefore the small business cover was just a ruse to obtain the contracts purposed for smaller businesses.

Anti-Kickback Violations by Paragon Executives

By allegedly engaging in the purported small business scheme, the Paragon Executives also violated the Anti-Kickback Statute. The Anti-Kickback Statute (41 U.S.C. §§ 8701–8707) was passed to prohibit individuals and companies from providing a “kickback” to solicit bids in the federal procurement process. The statute is intended to forbid bribery and prevent other illicit behavior with regards to federal contracts funded by taxpayers. Paragon allegedly violated the Anti-Kickback Statute by concealing payments that Paragon benefited from. When the subsidiary companies won the small business government contracts, they made payments to Paragon.

These payments were disguised as “consulting payments” to these fake shell companies. These payments totaled over 300 separate payments and more than $11 million. These actions fall under the jurisdiction of the Anti-Kickback Statute as kickbacks were made to individuals to funnel money away from government contracts and thereby undermined the fair bidding process fundamental to federal procurement.

Whistleblower Reward for Reporting False Claims Act Violations

The whistleblower in the Paragon allegations was the CEO of MaxSent, a separate company from Paragon in the security space. Because of the relator’s cooperation, he was able to garner $9 million as a whistleblower award. The whistleblower learned of the shell companies through a joint venture and reported his findings through the filing of a qui tam lawsuit. This is one of the cases where a competitor was able to obtain a significant whistleblower reward, so the ability to bring a successful False Claims Act lawsuit is not exclusively through insiders. A qui tam lawsuit is commenced under the False Claims Act and allows private individuals to file lawsuits on behalf of the U.S. government to recover misappropriated government funds with the use of a whistleblower lawyer.

After the lawsuit is filed, the U.S. Department of Justice can decide whether or not to intervene. As a whistleblower reward for the information provided, the relator is entitled to 15-30% of the recovery if the case is successful and if the individual is the first to file, with the amount varying based on whether the government decides to intervene. A whistleblower attorney is vital in navigating the intricacies of these laws to provide the strongest case possible, but also is integral because you can not file a case pro se – that is without an attorney. If you’re aware of fraud against the government you should speak with a whistleblower law firm that focuses on protecting whistleblowers, preferably with former DOJ lawyers to understand your rights. Some of the best whistleblower law firms have a track record of success and offer free, confidential consultations.