Investors have a new reason to worry about buying into federal contractors

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For many entrepreneurs, private equity is one way to finance their establishment. But now we’ve learned that equity owners can wind up on the hook for false claims actions against the contractor they’ve invested in. Joining Federal Drive with Tom Temin with more on the case, federal sales and marketing consultant Larry Allen.

Interview transcript:

Tom Temin: And this is interesting, because this is coming as there’s more and more, I guess, venture capital coming into the federal market, and as the False Claims Act is becoming a more potent weapon. So tell us about the Massachusetts case.

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Larry Allen: So Tom, this case was really the first of its kind. It was a False Claims Act case, as you said, even though the Department of Justice didn’t pick up the case, the state of Massachusetts did, which gave it some gravitas and meant that there was likely something there. And what the defendant tried to argue is, look, you know, we’re gonna go, she ate the size of the fine, and whatever it is, we have to pay back. But the whistleblowers, look, you’re a small business, you’re ultimately owned by this private equity firm, we’re not interested in what you can pay, because what you can pay is relatively little. We really want the private equity firm to be on the hook for your misdeeds for providing unqualified people, because the private equity firm is the actual owner of the business. The court in this case, agreed Tom and the private equity firm had to pay out over $20 billion in fines and restitution. You can bet that on top of that there were significant lawyer fees. And now we understand that look, while you’re doing your due diligence of a company as a private equity firm, if you’re thinking of investing or buying a government contractor, your due diligence has to include things like contract compliance. So often I find that newer companies just getting into the market really may not have the best idea of contract compliance, private equity, people are justifiably thinking about what type of return they get. But the fact is your return can be greatly diminished. If you don’t do your due diligence on compliance.

Tom Temin: Or it can be wiped out, it sounds like in that case?

Larry Allen: In this case.

Tom Temin: We’re talking about South Bay mental health centers in Massachusetts, and what is it they did wrong that got them into hot water in the first place?

Larry Allen: Tom, South Bay was providing health care services in the state of Massachusetts. And the allegation was that they were providing unqualified unlicensed therapists, psychologists, mental health treatment professionals that didn’t have the right credentials, and that therefore those people were not allowed and should not have been providing services. And that because they were providing those services and overcharging for them, the state of Massachusetts and the federal government as well, were at a disadvantage. Their fraud was being committed by the company and extensive investigation. That’s exactly what the court found. I’m surprised that this actually went to trial. So many of these things don’t. But the phase that really went to trial, again, was the one that centered on this theory that the private equity owner can be held culpable for the mistakes of the company at owns. I suspect this is not the last time we’ll see this time. I think we’ll see it again. And again, we have this precedent, but it’s really only up in Massachusetts right now. However, I would imagine they’re are plenty of bar attorneys all over the country who are watching this closely.

Tom Temin: Yeah, I’m wondering just because of the pandemic, or whatever, were they offering licensed services from people out of state who are therefore not licensed in Massachusetts?

Larry Allen: Court proceedings don’t go into that degree of detail. But what the allegation is, is that there were unqualified people providing services that they shouldn’t have been qualifying and at the state and federal government were harmed as a result.

Tom Temin: The owner is HIG Capital, maybe it stands for “hand in gobs” of cash, in that case? We’re speaking with Larry Allen, president of Allen Federal Business Partners. And I wanted to also ask you about this new development, that’s starting to be something contractors really need to pay attention to as well. And that is the fact that your greenhouse gas emissions will be a ranking factor in whether you get federal contracts – regardless of what the contract is all about.

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Larry Allen: Tom, at the beginning of the Biden administration, a whole series of social mandates came out about what the administration wanted to do in terms of climate change, among other things. So the whole idea that greenhouse gas emissions could count somewhere and government acquisition was established pretty early on. What I thought was surprising about this most recent development is just how you put it possibility and probability of putting greenhouse gas emission requirements and preferences in place for the award of government contracts. And we’re talking about contracts of all types here. Most people, Tom, when they originally heard about the greenhouse gas emissions requirement, they were thinking buildings, land things that the government owns or occupies. And certainly that’s going to be part of it. But that’s not the only part of it. What’s being made clear, there are too far clauses that are making their way through the regulatory process right now. And each of them could have an impact on any type of contractor themselves to the government, I would imagine your typical services firm probably doesn’t have any idea what their carbon footprint is. They’re in leased space, typically, in buildings they may not own, they probably never asked the landlord the question, you know, what, what’s our carbon footprint here. So it’s something that contractors are potentially going to have to spend money on to get a number and have evaluated and then come up with a mitigation plan, in order to show that they are meeting the climate change mandates, of the second of these two far proposals that are making their way through, it’s an extra cost for companies. We didn’t say it wasn’t coming. We said it was coming. It’s coming much sooner now. So as we go into FY 22, this could be another regulatory burden, another requirement that contractors find themselves saddled with in order to do business with the government.

Tom Temin: You can almost imagine a whistleblower getting a hold of utility bills or looking at some activity the company does and saying, hey, they said they only use 10,000 btus a month or whatever it is, and here’s evidence showing they’re doing 12,000 btus a month or –

Larry Allen: Or their senior executives, don’t carpool. Taken to any extreme here, Tom, and you’re saying this is something that could put you at a competitive disadvantage for contract award, one evaluation factor. But look, we’ve seen contracting officers really going forward with other administration priorities and implementing them quickly. There’s no reason to think they won’t do the same with this. All of a sudden contractors are going to have to figure out what this means for them, whether you’re selling real estate, professional services or products.

Tom Temin: Now, are these rules in proposed form on the register that people can comment on? Are we just expecting the draft rules at this point?

Larry Allen: Well, there was an advanced notice of proposed rulemaking, Tom, really the initial step for the first one of these, the one that says we’re considering using your greenhouse gas emissions score, whatever that means, as a factor for award and the second one that’s a little bit further behind, but in the draft stage would actually evaluate you based on your mitigation plan. So it’s not just that you have to know what your score is. Unless it’s zero, then you have to come up with a mitigation plan on how to keep yourself more green. I would expect these clauses to come out and either proposed or interim form the first one by the end of the calendar year, Tom and maybe both.

Tom Temin: It’s hard to see how this would apply to say a professional services contractor because all they’re offering is labor hours in effect. And so what are you going to say all my people eat and breathe and therefore they are contributing to carbon.

Larry Allen: Right, or what’s with — we maintain two floors in an office building in Tyson’s Corner? What percentage of the entire buildings emissions are those two floors? And by the way, it’s not our building, what controls we really have over reducing the emission standard for that building.

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Tom Temin: Just show up to your negotiations in a cardigan sweater. The old timers will remember that reference. Larry Allen is president of Allen Federal Business Partners. Thanks so much.

Larry Allen: Thank you, and I wish your listeners happy selling.

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