The SBA’s New Presumed Loss Rule: Perspectives from the SBA, the Justice Department, and Business December 6, 2013

1. The SBA’s New Presumed Loss Rule:Perspectives from the SBA, the Justice Department, and BusinessDecember 6, 2013 Ryan Faulconer, Esq. U.S. Attorney’s Office, Eastern District of Virginia Ryan.faulconer2@usdoj.gov Kenneth Dodds, Esq. U.S. Small Business Administration Kenneth.dodds@sba.gov Al Krachman, Esq. Blank Rome LLP Krachman@BlankRome.com

2. SBA Topics • Origins of Presumed Loss Rule • Rule Overview • Regulatory Action • Role of the SBA

3. Origins of Presumed Loss Rule • July 2007 Hearings in 110th Congress • Recognized Size Standards with Loopholes Allowing “other than small” businesses to win and keep federal contracts. • Small Business Contracting Revitalization Act of 2010 (S.2989, Sen. Rpt 111–343) • Hearings Identified Fraud, Regulatory Loopholes in Small Business Contracting. • Targeted problems: large corporation advertising itself as a small business for 10 years.

4. Origins of Presumed Loss Rule • Targeted problem: difficulty in proving loss after size or status fraud in the inducement of the contract, but the fraud is not performance related. • Targeted problem: societal and programmatic loss to the federal government when large businesses improperly win or keep small business contracts. • Title IV of the Revitalization Act on Size and Status Integrity Included in Small Business Jobs Act of 2010.

5. The Small Business Jobs Act Presumption • Presumption • (1) In general. In every contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant which is set aside, reserved, or otherwise classified as intended for award to small business concerns, there shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant whenever it is established that a business concern other than a small business concern willfully sought and received the award by misrepresentation. • 15 USC 632(w)

6. Presumed Loss Rule: Overview • Liability attaches for misrepresentation of size or status + award received by misrepresentation. • But: • Liability will not attach if unintentional error, technical malfunction or similar circumstance • Damages presumed based on the total amount expended by the Government if OTS firm willfully sought and received award by misrepresentation.

7. Presumed Loss Rule: Overview • Certifications create willful representations. • Two new certifications created: • Deemed Certification • Occurs by submitting a proposal or bid on small business contract. • Express Certification • Occurs by company official signing a formal written certification on eligibility for the “exact status” applicable to the contract, like the Contracts Disputes Act Claim certification.

8. Regulatory History • SBA issued Proposed Rule on October 7, 2011 • 76 Fed. Reg. 62313 • SBA issued Final Rule on July 28, 2013, effective August 27, 2013 • 78 Fed. Reg. 38811 • Next Step – Implementation in the FAR

9. The Role of the SBA • Rulemakings in process • NDAA provision on liability limitation and advisory opinions • Prosecution Policy • Others? • Providing consultations on size or status in response to agency inquiries • Suspension and Debarment • Rendering size and status decisions

10. The Role of the DOJ • Coming to the DOJ • DOJ: Processing Claims • Aggravating circumstances • Mitigating circumstances • Sentencing / Negotiation Topics * Caveat: Not Speaking for DOJ or Offering Binding Opinions; every case will be circumstance-dependent.

11. Coming to the DOJ • How a Presumed Loss Claim may reach the DOJ: • Inspector General referral (SBA or contracting agency) • Referral from Agency General Counsel • Qui Tam / Whistleblower Complaint • Size Protest • Discovery during general contracting investigation

12. DOJ: Processing Claims • How the DOJ may process a Presumed Loss Claim: • Likely parallel proceedings • Criminal or civil may take lead • Separate or joint resolutions

13. Aggravating Circumstances • Factors in triggering enforcement action: • $ amount (both contract value and profit) • Length of time and # of contracts • Additional false statements (8(a), etc.) • Other criminal or fraudulent conduct

14. Mitigating Circumstances • Voluntary disclosure • Cooperation against others (incl. in company) • Compliance programs • Remedial measures • Administrative agreements

15. Sentencing / Negotiation Topics • Presumed Loss Rule and the sentencing guidelines • Early flexibility (pre- vs. post- charge/complaint) • Conceived in sin? Or legitimate gone bad? • Forfeiture, restitution, fines, damages (claim or loss)

16. Business Perspective Topics • Standard of care • Actions required by large and small businesses • Offense and defense uses of the Rule • Open issues

17. The New Standard of Care in Size and Status Representations • An organization proposing on a federal transaction reserved for small or a small preferenced status business must take all reasonable measures to independently verify and document their size and status eligibility for the transaction before submitting the proposal. Reasonable measures include the following: • Where size is measured by receipts or employee counts, conduct annual CFO level verification of average annual income figures, and employee counts. • Where preferenced status is required, review management, ownership, effective control, and personal and substantial participation, • In all cases, an affiliation review must be conducted to insure the employee counts, revenues, and control relationships capture the affiliated entities, if any. • The  standard of care includes a compliance system to timely detect and correct misrepresentations.

18. Meeting the Standard of Care • Find current NAICs Code and Size Standard • www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf • Run the SBA’s Size Calculator • www.sba.gov/tools/size-standards-tool?ms=nid4070 • Check Affiliation • www.sba.gov/sites/default/files/affiliation_ver_03.pdf • Affiliation Test tool • www.smallbusinessstatus.org/component/sbs?function=qv&tid=1&sid=1

19. Actions Required by Small and Large Businesses • Robust internal management procedures governing size representation or certification. • Documented Annual size and status self audit. • System to detect unclear or ambiguous representations or certification requirement. • Use of Q&A process in gray areas. • Insist on teaming partner and counter-party compliance. • Aggressive defense of size or status protests.

20. Offensive and Defensive Uses of the Rule • Leverage a timely or untimely size protest. • Increase the potential for early termination of an improperly awarded contract. • “Deemed Certification” provision could create or restrict opportunities on long term contracts. • Defensive disclosure under FAR Mandatory Disclosure Rule if serious violations are identified.

21. Open Questions • Does every losing size or status protest create risk of presumed loss exposure? • Can the rule be used by a competitor? • Does the rule change how a should a Contracting Officer should react to a size or status challenge? • Others?

22. Questions Al Krachman, Esq. Blank Rome LLP 202.772.5812 Krachman@BlankRome.com Ryan Faulconer, Esq. U.S. Attorney’s Office, Eastern District of Virginia 703.299.3804 Ryan.faulconer2@usdoj.gov Kenneth Dodds, Esq. U.S. SBA 202.619.1766 Kenneth.dodds@sba.gov

23. APPENDIX

24. Deemed Certification • The following actions shall be deemed affirmative, willful, and intentional certifications of small business size and status: • (A) Submission of a bid or proposal for a Federal grant, contract, subcontract, cooperative agreement, or cooperative research and development agreement reserved, set aside, or otherwise classified as intended for award to small business concerns. • (B) Submission of a bid or proposal for a Federal grant, contract, subcontract, cooperative agreement, or cooperative research and development agreement which in any way encourages a Federal agency to classify the bid or proposal, if awarded, as an award to a small business concern. • (C) Registration on any Federal electronic database for the purpose of being considered for award of a Federal grant, contract, subcontract, cooperative agreement, or cooperative research agreement, as a small business concern. • 15 USC 632(w)(2)

25. Express Certification • Certification by signature of a responsible official. • (A) In general. Each solicitation, bid, or application for a Federal contract, subcontract, or grant shall contain a certification concerning the small business size and status of a business concern seeking the Federal contract, subcontract, or grant. • (B) Content of certifications. A certification that a business concern qualifies as a small business concern of the exact size and status claimed by the business concern for purposes of bidding on a Federal contract or subcontract, or applying for a Federal grant, shall contain the signature of an authorized official on the same page on which the certification is contained. • 15 USC 632(w)(3)

26. Annual Certification • Annual Certification: • In general. Each business certified as a small business concern under this Act shall annually certify its small business size and, if appropriate, its small business status, by means of a confirming entry on the Online Representations and Certifications Application database of the Administration, or any successor thereto. • 15 USC 632(x)

27. Prosecution Policy • Policy on prosecutions of small business size and status fraud. Not later than 1 year after the date of enactment of this subsection [enacted Sept. 27, 2010], the Administrator, in consultation with the Attorney General, shall issue a Government-wide policy on prosecution of small business size and status fraud, which shall direct Federal agencies to appropriately publicize the policy. • 15 USC 632(y)

28. Limitation of Liability • Limitation of Liability. • Paragraphs (a) through (c) of this section may be determined not to apply in the case of unintentional errors, technical malfunctions, and other similar situations that demonstrate that a misrepresentation of size was not affirmative, intentional, willful or actionable under the False Claims Act, 31 U.S.C. §§ 3729, et seq. • 13 CFR 121.108(d)

29. Subcontractor Representation • A prime contractor acting in good faith should not be held liable for misrepresentations made by its subcontractors regarding the subcontractors' size. • 13 CFR 121.108(d)

30. Suspension and Debarment • Penalties for Misrepresentation. • (1) Suspension or debarment. The SBA suspension and debarment official or the agency suspension and debarment official may suspend or debar a person or concern for misrepresenting a firm's size status pursuant to the procedures set forth in 48 CFR subpart 9.4. • 13 CFR 121.108(e)

31. Penalties • Penalties for Misrepresentation. • (2) Civil Penalties. Persons or concerns are subject to severe penalties under the False Claims Act, 31 U.S.C. 3729-3733, and under the Program Fraud Civil Remedies Act, 331 U.S.C. 3801-3812, and any other applicable laws. • 13 CFR 121.108(e)

32. Penalties • Penalties for Misrepresentation. • (3) Criminal Penalties. Persons or concerns are subject to severe criminal penalties for knowingly misrepresenting the small business size status of a concern in connection with procurement programs pursuant to section 16(d) of the Small Business Act, 15 U.S.C. 645(d), as amended, 18 U.S.C. 1001,18 U.S.C. 287, and any other applicable laws. Persons or concerns are subject to criminal penalties for knowingly making false statements or misrepresentations to SBA for the purpose of influencing any actions of SBA pursuant to section 16(a) of the Small Business Act, 15 U.S.C. 645(a), as amended, including failure to correct "continuing representations" that are no longer true. • 13 CFR 121.108(e)

33. Rule Summary • Subcontracting 13 CFR 121.411(d)-(h) • 8(a) 13 CFR 124.521 • Small Disadvantaged Business 124.1015, 124.1016 • Service Disabled Veteran Owned 125.29, 125.30 • HUBZone 13 CFR 126.900 • Women Owned Small Business 13 CFR 127.700, 127.701

34. Limitation of Liability • Relevant factors to consider in making this determination may include the firm's internal management procedures governing size representation or certification, the clarity or ambiguity of the representation or certification requirement, and the efforts made to correct an incorrect or invalid representation or certification in a timely manner. • 13 CFR 121.108(d)

35. Limitation of Liability • An individual or firm may not be held liable where government personnel have erroneously identified a concern as small without any representation or certification having been made by the concern and where such identification is made without the knowledge of the individual or firm. • 13 CFR 121.108(d)

36. OUR SPEAKERS

37. Albert B. Krachman, Esq. Blank Rome LLP 600 New Hampshire Ave, NW Washington, DC 20037 Tel: 202.772.5812 Krachman@BlankRome.com Mr. Krachman has 30 years of experience providing legal counsel to companies that conduct business with, or desire to do business with governments on all aspects of government contracting and government grants. He counsels on winning government contracts and grants, solicitation and proposal issues, and strategies to increase contract profitability. Mr. Krachman counsels on a broad range of compliance and enforcement issues arising from mergers and acquisitions of government contractors, including organizational conflicts of interests, problems under the Small Business Act, international contracting, and security clearance matters. Mr. Krachman’s litigation practice covers internal investigations, defenses of suspensions, debarments or other ethics investigations, whistleblower, contract fraud and False Claims Act litigation, as well as contract disputes, service and supply contracts, construction contracting claims, equitable adjustments, terminations and the like. Mr. Krachman's government practice spans the civilian and defense agencies and the key vertical sectors within those agencies, such as contracting for energy supplies and services, telecommunications, information technology, IT and guard security services, construction, and health care services and supplies. From a financial assistance perspective, he advises on federal grant compliance, the SBIR program, defense of grant audits and government repayment claims under grants and non-procurement debarments and suspensions. He also advises on GSA Schedule and Homeland Security contracting. Mr. Krachman has authored various articles on a wide span of subjects, including Small Business Certification Fraud, Information Security and Military Utility Privatization. He is the co-author of the Homeland Security Law Handbook, and has served as a contributing editor on several publications, including Pricing of Claims, Cases and Materials on Federal Labor Standards, and Contracting for Services.

38. Kenneth Dodds • Kenneth Doddsis the Director of Procurement Policy and Liaison at the Small Business Administration (“SBA”). His office is responsible for implementing legislation and drafting regulations pertaining to small business federal government contracting programs and size standards. Previously, he served as the Director, Office of Government Contracting and as a Senior Attorney in the SBA's Office of General Counsel. He is a graduate of James Madison University and received his law degree from the College of William & Mary.

39. Ryan Faulconer • Ryan Faulconer is an Assistant U.S. Attorney in the Financial Crimes and Public Corruption Unit of the U.S. Attorney’s Office for the Eastern District of Virginia in Alexandria, Virginia. His cases include a recent eight-defendant prosecution of a scheme to defraud the U.S. government through the use of a shell entity purporting to be a disadvantaged small business. The defendants obtained more than $100 million in contracts, $30 million in payments, and $6 million in profits. He previously served as a Trial Attorney in the Fraud Section of the Criminal Division at the U.S. Department of Justice. He is a graduate of the University of Kansas and received his law degree from the University of Virginia.