United States of America v. Strock et al

Filing 69

DECISION & ORDER: For the reasons stated, Defendants' 51 , 52 , 53 , and 54 motions to dismiss are GRANTED and Plaintiff's claims are DISMISSED WITHOUT PREJUDICE. If Plaintiff wishes to amend, it shall seek leave to do so through a pro cedurally compliant motion filed within 30 days from the date of this order. See Local Rule 15(a). Otherwise, the case will be closed without further order and the Clerk of Court shall enter judgment in favor of Defendants. Signed by Hon. Frank P. Geraci, Jr. on 9/23/19. (GMS)-CLERK TO FOLLOW UP-

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
______________________________________________
UNITED STATES OF AMERICA,
Plaintiff,
v.

Case #15-CV-0887-FPG
DECISION AND ORDER

LEE STROCK, KENNETH CARTER,
CYNTHIA ANN GOLDE, and
STROCK CONTRACTING, INC.,
Defendants.
______________________________________________
INTRODUCTION
Plaintiff, the United States of America (“the Government”), files its amended complaint
against Defendants alleging violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.,
(Counts I, II, III), common law fraud (Count IV), unjust enrichment (Count V), and payment by
mistake (Count VI).

ECF No. 48.

The Government alleges that Defendants knowingly

misrepresented that their company, Veteran Enterprises Company, Inc., (“VECO”), qualified as a
service-disabled veteran owned small business (“SDVOSB”) in order to obtain and profit from
construction contracts that were set aside for SDVOSBs.
On January 31, 2018, this Court granted Defendants’ motions to dismiss the Government’s
initial complaint but granted leave to amend. ECF No. 39; United States v. Strock, No. 15-CV0887-FPG, 2018 U.S. Dist. LEXIS 15928, at *1 (W.D.N.Y. Jan. 31, 2018). On October 29, 2018,
the Government filed an amended complaint. ECF No. 48. On February 22, 2019, Defendants
moved to dismiss the amended complaint, and those motions are now before the Court. ECF Nos.
51, 52, 53, 54. For the reasons stated below, Defendants motions to dismiss are GRANTED.

1

BACKGROUND
I.

The Establishment of VECO
The Government alleges that, before establishing VECO, Defendant Lee Strock owned a

construction company—Defendant Strock Contracting, Inc.—that participated in and received
millions of dollars in contracts from a Small Business Administration (“SBA”) 8(a) program for
companies owned by economically and socially disadvantaged individuals. ECF No. 48 ¶ 28. But
once Strock Contracting “graduated” from this 8(a) program, Strock could no longer use it to
obtain federal contracts and began looking for other contracting opportunities. Id. ¶ 29.
He found such an opportunity in SDVOSB programs established by the Small Business
Act, the Veterans Benefits Act, and other federal laws which call for certain contracts to be set
aside for SDVOSBs only. Id. ¶¶ 16-19; see generally PDS Consultants, Inc. v. United States, 907
F.3d 1345, 1349 (Fed. Cir. 2018) (describing federal laws enacting SDVOSB programs). To
qualify as an SDVOSB, a business must, among other things, be at least 51% owned by one or
more service-disabled veteran(s) who must control the business’s day-to-day operations and make
strategic policy and long-term decisions for the company. Id. ¶ 18, 26.
Lee Strock decided to recruit a service-disabled veteran to a head a company that he could
use to obtain SDVOSB contracts, since Strock himself was not a service-disabled veteran. Id. ¶ 30.
To that end, in or around 2006, Strock met with Terry Anderson, whom he knew was a servicedisabled veteran, to discuss the formation of an SDVOSB. Id. ¶ 31. As a result, VECO was formed
with Anderson appointed as a “figurehead” President and 51% owner, Strock as Vice President
and 30% owner, and Defendant Kenneth Carter as Secretary and 19% owner. Id. ¶ 32. Defendant
Cynthia Golde, who, along with Carter also worked for Strock Contracting, was employed as
VECO’s office manager. Id. ¶¶ 2, 50.

2

Though Anderson was VECO’s president and majority owner, he played a limited role in
managing VECO’s day-to-day operations. Id. ¶¶ 44-82. Instead, Strock controlled VECO’s dayto-day and long-term business operations, and he and Carter performed other key business
functions that Anderson did not. Id. ¶¶ 69-82. The Government alleges that under Strock’s general
direction, email accounts were set up in Anderson’s name but were used by other VECO personnel
to make it appear as if Anderson was sending emails regarding VECO contracts. Id. ¶¶ 78-79. In
addition to his limited management role, Anderson received limited financial benefits from VECO:
he was paid less than 5% of VECO’s profits, and, despite his majority ownership, was not the
highest paid employee. Id. ¶¶ 96, 97.
II.

SDVOSB Certification and Submission of Bids and Claims
To obtain SDVOSB set-aside contracts, federal regulations require businesses to represent

that they qualify as an SDVOSB in their offer on a specific contract. Id. ¶¶ 20-23. Some
regulations require businesses to “self-certify” that they qualify as SDVOSBs in an online database
and update this certification annually, id. ¶¶ 20-21, while other regulations related to contracts
awarded by the Department of Veterans’ Affairs (“VA”) require the business to apply to the VA
and demonstrate their SDVOSB status to be included in an online database of eligible businesses.
Id. ¶ 22. Defendants certified that VECO was an SDVOSB. Id. ¶¶ 3, 36-39, 41.
Additionally, VECO submitted bids for, and was awarded, numerous SDVOSB contracts.
Id. ¶¶ 11-42. VECO submitted invoices for payment on these contracts. The invoices included a
certification that the contract was performed in accordance with its terms and conditions, which
included the requirement that the contract be performed by an SDVOSB. Id. ¶¶ 113, 119, 124,
129, 134, 139.

3

LEGAL PRINCIPLES
I.

The FCA
“The FCA was enacted in 1863 to combat fraud by defense contractors during the Civil

War.” Bishop v. Wells Fargo & Co., 823 F.3d 35, 43 (2d Cir. 2016) (“Bishop I”) (citation omitted),
vacated on other grounds, 137 S. Ct. 1067 (2017). Though it has been amended numerous times,
the Act’s “focus remains on those who present or directly induce the submission of false or
fraudulent claims[,]” and the Act “imposes significant penalties on those who defraud the
Government.” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989,
1995-96 (2016).
II.

Federal Rule of Civil Procedure 9(b) Standard & the FCA
“It is self-evident that the FCA is an anti-fraud statute” and “claims brought under the FCA

fall within the express scope of Rule 9(b).” Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 147677 (2d Cir. 1995) (citing Fed. R. Civ. P. 9(b)). Rule 9(b) states that “[i]n alleging fraud . . . a party
must state with particularity the circumstances constituting fraud.” United States ex rel. Ladas v.
Exelis, Inc., 824 F.3d 16, 25 (2d Cir. 2016) (quoting Fed. R. Civ. P. 9(b)). “That ordinarily requires
a complaint alleging fraud to (1) specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements were made, and (4) explain why
the statements were fraudulent.” United States ex rel. Chorches for Bankr. Estate of Fabula v.
Am. Med. Response, Inc., 865 F.3d 71, 81 (2d Cir. 2017) (citations and internal quotation marks
omitted).
Ultimately, the sufficiency of a complaint under the Rule 9(b) standard “depends upon the
nature of the case, the complexity or simplicity of the transaction or occurrence, the relationship
of the parties and the determination of how much circumstantial detail is necessary to give notice

4

to the adverse party and enable him to prepare a responsive pleading.” United States v. N. Adult
Daily Health Care Ctr., 205 F. Supp. 3d 276, 285 (E.D.N.Y. 2016) (citations omitted).
III.

Federal Rule of Civil Procedure 12(b)(6) Standard
Under Federal Rule of Civil Procedure 12(b)(6), when a party moves to dismiss a complaint

for failure to state a claim upon which relief can be granted, “the Court must accept all factual
allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor.”
Kane ex rel. United States v. Healthfirst, Inc., 120 F. Supp. 3d 370, 382 (S.D.N.Y. 2015).
However, “this principle is inapplicable to legal conclusions or threadbare recitals of the elements
of a cause of action, supported by mere conclusory statements.” N. Adult Daily, 205 F. Supp. 3d
at 285 (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)) (internal quotation marks and alterations
omitted).
Ultimately, “[a] complaint must plead enough facts to state a claim to relief that is plausible
on its face.” Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)) (internal quotation
marks omitted). This requirement is met when a complaint includes “factual content sufficient to
allow a court to reasonably infer the defendant’s liability.” United States ex rel. Coyne v. Amgen,
Inc., 229 F. Supp. 3d 159, 168 (E.D.N.Y. 2017) (citing Twombly, 550 U.S. at 556).
DISCUSSION
I.

The Government’s FCA Claims: Counts I, II, and III
In Counts I, II, and III, the Government alleges that Defendants violated the FCA by:
1) presenting, or causing to be presented, false claims in violation of 31 U.S.C.
§ 3729(a)(1), and, as amended, 31 U.S.C. § 3729(a)(1)(A) (Count I);
2) making or using a false record or statement in violation of 31 U.S.C. § 3729(a)(2), and,
as amended, 31 U.S.C. § 3729(a)(1)(B) (Count II); and

5

3) conspiring to submit or cause to be submitted a false claim or to make or use a false
record or statement in violation of 31 U.S.C. § 3729(a)(3), and, as amended, 31 U.S.C.
§ 3729(a)(1)(C) (Count III).
ECF No. 48 ¶¶ 151-164. The Government alleges these violations occurred from 2008 to 2013.1
Subsection (A) imposes liability on any person who “knowingly2 presents, or causes to be
presented, a false or fraudulent claim for payment or approval[.]” 31 U.S.C. § 3729(a)(1)(A). To
state a claim under subsection (A), a plaintiff must show that the defendant “(1) made a claim, (2)
to the United States Government, (3) that is false or fraudulent, (4) knowing of its falsity, and (5)
seeking payment from the federal treasury.” United States ex rel. Kirk v. Schindler Elevator Corp.,
601 F.3d 94, 113 (2d Cir. 2010), rev’d on other grounds, 563 U.S. 401 (2011).
Additionally, an alleged “misrepresentation about compliance with a statutory, regulatory,
or contractual requirement must be material to the Government’s payment decision in order to be
actionable under the [FCA].” Bishop v. Wells Fargo & Co., 870 F.3d 104, 107 (2d Cir. 2017)
(“Bishop II”) (quoting Escobar, 136 S. Ct. at 2002). And, the defendant must know that the
requirement is material to the Government’s payment decision. Escobar, 136 S. Ct. 1996 (“What

During that time period, the provisions of the FCA underlying the Government’s claims were amended in
the Fraud Enforcement and Recovery Act of 2009 (“FERA”), and the Government’s amended complaint cites both
versions of the statute. The Government’s claims arise under FCA subsections (a)(1)(A) (pre-FERA (a)(1)), (a)(1)(B)
(pre-FERA (a)(2)), (a)(1)(C) (pre-FERA (a)(3)). FERA’s amendments to (a)(1)(A) and (a)(1)(C) were prospective
only. See Kester, 23 F. Supp. 3d at 251 (citing United States ex rel. Pervez v. Beth Israel Med. Ctr., 736 F. Supp. 2d
804, 811 n. 36 (S.D.N.Y. 2010)). Therefore, the pre-amendment subsections apply to any acts committed prior to
FERA’s effective date of May 20, 2009, and the post-amendment subsections apply to acts committed after that date.
Several of the contracts it issue here were awarded prior to May 20, 2009. However, the Court’s analysis below is not
affected by these amendments. See United States ex rel. Quartararo v. Catholic Health Sys. of Long Island, No. 12CV-4425 (MKB), 2017 U.S. Dist. LEXIS 50696, at *25 (E.D.N.Y. Mar. 31, 2017) (“Although the wording of the
sections changed slightly, there was no substantive difference between the 1994 version and the 2009 version of the
statute for these sections.”) (citing Bishop I, 823 F.3d at 43 n. 1).
1

As for subsection (a)(1)(B), the FERA amendments are applied “to all legal claims pending before a court
on or after June 7, 2008. Kester, 23 F. Supp. 3d at 251. Since this action was commenced on October 7, 2015, the
FERA amendments apply to the Plaintiff’s claims under (a)(1)(B). All references to the FCA below refer to the postFERA amended FCA subsections, unless otherwise noted.
The FCA defines “knowingly” as: (1) possessing actual knowledge; (2) acting in deliberate ignorance of
falsity; or (3) acting in reckless disregard of falsity. Id. § 3729(b)(1). The FCA explicitly states that it “require[s] no
proof of specific intent to defraud.” Id.
2

6

matters is . . . whether the defendant knowingly violated a requirement that the defendant knows
is material to the Government’s payment decision.”).
Subsection (B) imposes liability on any person who “knowingly makes, uses, or causes to
be made or used, a false record or statement material to a false or fraudulent claim.”
31 U.S.C. § 3729(a)(1)(B). To state a claim under subsection (B), “a plaintiff must show that: (1)
the defendant made (or caused to be made) a false statement, (2) the defendant knew it to be false,
and (3) the statement was material to a false claim.” United States ex rel. Hussain v. CDM Smith,
Inc., No. 14-CV-9107 (JPO), 2017 U.S. Dist. LEXIS 159538, at *23 (S.D.N.Y. Sep. 27, 2017)
(quoting United States ex rel. Kester v. Novartis Pharms. Corp., 23 F. Supp. 3d 242, 252 (S.D.N.Y.
2014)).
“Courts generally treat these two provisions together, as their elements overlap
significantly.” Hussain, 2017 U.S. Dist. LEXIS 159538, at *23 (citations omitted); see also Coyne
v. Amgen, Inc., 717 F. App’x 26, 29 n.2 (2d Cir. 2017) (summary order) (holding that subsection
(B) claims failed for the “same lack of materiality” as subsection (A) claims).
Subsection (C) imposes liability on any person who “conspires to commit a violation of
subparagraphs (A) [or] (B).” 31 U.S.C. § 3729(a)(1)(A).
The Court will first consider whether the Government has sufficiently pled a violation of
sections 3729(a)(1)(A) and (B) as to each Defendant (Counts I and II). It will then analyze whether
the Government has sufficiently alleged that any misrepresentations about VECO’s SDVOSB
status were material to the Government’s decision to pay VECO’s claims (Counts I and II).
Finally, it will consider whether the Government has adequately plead a claim for conspiracy to
violate the FCA (§ 3729(a)(1)(C), Count III).

7

A. Sufficiency of the Allegations of Counts I and II as to Each Defendant
1. Kenneth Carter
In his motion to dismiss, Carter argues that the Government fails to sufficiently allege the
elements of an FCA claim against him. He primarily contends that the Government fails to allege
that he knew that any representations as to VECO’s SDVOSB status were false. The Court agrees.
“Rule 9(b) permits scienter to be averred generally, but [the Second Circuit has] repeatedly
required plaintiffs to plead the factual basis which gives rise to a strong inference of fraudulent
intent.” United States ex rel. Tessler v. City of N.Y., 712 F. App’x 27, 29 (2d Cir. 2017) (summary
order) (citations and quotation marks omitted) (“Tessler II”). “Such an inference may be
established either (a) by alleging facts to show that defendants had both motive and opportunity to
commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious
misbehavior or recklessness.” United States ex rel. Tessler v. City of N.Y., No. 14-CV-6455 (JMF),
2016 U.S. Dist. LEXIS 174013, at *14 (S.D.N.Y. Dec. 16, 2016) (citations and quotation marks
omitted) (“Tessler I”).
Here, the Government generally alleges that “Defendants possessed actual knowledge or
acted in reckless disregard of the fact that VECO did not meet the criteria to be eligible for
SDVOSB set-aside contracts because VECO was under the control of Lee Strock,” id. ¶ 41, and
that “Defendants knowingly submitted or caused to be submitted false representations that VECO
met all of the . . . requirements to be an SDVOSB.” Id. ¶¶ 115, 121, 126, 131, 136, 141 (emphasis
added); see also id. ¶¶ 3, 27. However, these allegations against “Defendants” are insufficient to
satisfy Rule 9(b) and withstand a motion to dismiss.
Although Rule 9(b) permits knowledge to be averred generally, plaintiffs must still
plead the events which they claim give rise to an inference of knowledge. In a case
involving multiple defendants, plaintiffs must plead circumstances providing a
factual basis for scienter for each defendant; guilt by association is impermissible.
8

This can consist of allegations as to who possessed knowledge of the fraud, when
and how they obtained that knowledge, or even why they should have known of the
fraud.
Camlin Ltd. v. CMB Additives LLC, No. 07-CV-4364 (TCP) (GRB), 2012 U.S. Dist. LEXIS
167370, at *7 (E.D.N.Y. Nov. 19, 2012) (quoting In re DDAVP Direct Purchaser Antitrust Litig.,
585 F.3d 677, 695 (2d Cir. 2009)).
The Government does not make any such allegations with respect to Carter. In fact, in the
amended complaint, the Government deletes allegations from the initial complaint that Carter
obtained financial benefits from contracts performed by VECO—allegations that might suggest a
motive for committing fraud. See ECF No. 1 ¶¶ 90, 97.
Nor does the Government allege facts that constitute strong circumstantial evidence of
conscious misbehavior or recklessness. For instance, the Government does not allege that Carter
knew or should have known the requirements to qualify as an SDVOSB and therefore knew that
any representations that VECO qualified as an SDVOSB were in fact false. It does not allege that
Carter was personally involved in establishing VECO (other than by providing financial support),
and it does not allege that Carter was involved in the process to have VECO recognized as an
SDVOSB.
The only allegation against Carter bearing upon his knowledge is that he “knew that Lee
Strock controlled the day-to-day and long-term business operations of VECO.” Id. ¶ 81. But
without allegations establishing that Carter knew or should have known that VECO must be
controlled by a veteran, this allegation is insufficient. See United States ex rel. Schagrin v. LDR
Indus., LLC, No. 14 C 9125, 2018 U.S. Dist. LEXIS 197477, at *21 (N.D. Ill. Nov. 20, 2018)
(holding that relators’ allegation that owner-managers of company “must have known” the claims
were false because it would have been “obvious” to anyone in the industry was insufficient without

9

additional allegations regarding the owner-managers’ knowledge and experience in the industry;
“[o]therwise, all corporate owner-managers would be liable for False Claims Act violations
committed by their companies without regard to the degree of their involvement in the fraudulent
scheme.”); cf. United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 892 F.3d 822,
838 (6th Cir. 2018) (finding scienter allegations sufficient where relator alleged that, in response
to notice of potential compliance issues, defendants “repeatedly pushed their employees to ignore
problems, which they knew might trigger an audit, in a rush to get the claims submitted. In doing
so, the defendants acted with ‘reckless disregard’ as to the truth of their certification of compliance
and to whether these requirements were material to the government’s decision to pay.”); United
States ex rel. Forcier v. Comput. Scis. Corp., 183 F. Supp. 3d 510, 526 (S.D.N.Y. 2016)
(Government adequately plead scienter where it alleged that defendant knew that submitting
certain claims would result in denial and that certain practices “likely did not comply” with
Medicaid rules).
Even if the Court could infer that Carter knew that VECO did not qualify as an SDVOSB,
the Government fails to allege that he knew that VECO’s SDVOSB status was material to the
Government’s decision to pay VECO’s claims. This is fatal to the Government’s FCA claims.
See Escobar, 136 S. Ct. 1996 (“What matters is . . . whether the defendant knowingly violated a
requirement that the defendant knows is material to the Government’s payment decision.”).
Accordingly, the Government fails to sufficiently allege an FCA violation against Carter.
2. Cynthia Golde
Like Carter, Golde argues that the Government fails to allege that she knew that any
representations as to VECO’s SDVOSB status were false, and that she knew the false statements
were material to the Government’s decision to pay VECO’s claims.

10

For the same reasons set forth as to Carter, the Government’s group-pled allegations that
“Defendants” knew that VECO did not qualify as an SDVOSB are insufficient under Rule 9(b) to
state a claim against Golde.
Beyond those group-plead allegations, the Government alleges that Golde knew that Strock
controlled the day-to-day operations of VECO, ECF No. 48 ¶ 82, and that she or other employees
would admit Anderson to the VECO offices since he was not given a key. Id. ¶¶ 52-53. It also
alleges that, under Strock’s general direction, Golde or other employees were personally and
directly involved in submitting an application to have VECO recognized as an SDVOSB and in
updating online databases representing that VECO was an SDVOSB. Id. ¶¶ 26, 37-39. Allegations
against Golde or other employees are insufficient for the same reasons as are the group-plead
allegations.
Even putting that defect aside, the allegations against Golde only create an inference that
she was possibly familiar with the requirements to qualify as an SDVOSB; they do not “nudge
[the Government’s] claims across the line from conceivable to plausible.” Twombly, 550 U.S. at
570; see also United States ex rel. Alexander v. Dyncorp., Inc., 924 F. Supp. 292, 303 (D.D.C.
1996) (noting that FCA plaintiffs need to state facts from which the court can infer a knowing
violation on the part of the defendants). The problem with the amended complaint here is similar
to that in United States ex rel. Bender v. N. Am. Telecomms., Inc., 686 F. Supp. 2d 46, 51 (D.D.C.
2010), where the complaint failed to allege that the defendant acted knowingly because there were
no allegations that the defendant was aware of certain contracting requirements or that the
requirements even applied to the defendant.
Another problem with the allegations against Golde is that they fail to describe the exact
statements that were contained in the SDVOSB applications and certifications that Golde allegedly

11

submitted and fail to identify when those applications and certifications were submitted. Without
knowing exactly what Golde is alleged to have represented and when, it is difficult to infer that
she knew her representations were false. This is why Rule 9(b) requires a fraud complaint to
specify the fraudulent statements, identify the speaker, state where and when the statements were
made, and explain why the statements were fraudulent. Chorches , 865 F.3d at 81.
Similarly, while the Government generally alleges that Golde submitted bids and invoices
for SDVOSB contracts, see ECF No. 48 ¶¶ 60-62, 109, it fails to identify the specific bids or
invoices that Golde submitted. The Government describes six representative contracts in the
amended complaint, and between those six contracts, VECO submitted 70 invoices for payment.
See id. ¶¶ 113, 119, 124, 129, 134, 139. But out of those 70 invoices, the Government only alleges
that Golde submitted one. See id. ¶ 113. That is insufficient to create a plausible inference that
Golde submitted false claims. See United States ex rel. Branigan v. Bassett Healthcare Network,
234 F.R.D. 41, 44 (N.D.N.Y. 2005) (“Plaintiff argues that the amended complaint contains
representative examples as to each defendant’s submission of false claims and thus satisfies Rule
9(b)’s particularity requirements. The examples . . . , however, do not identify which
defendant . . . submitted the allegedly fraudulent bill.”).
Finally, as with Carter, the amended complaint fails to allege any facts demonstrating that
Golde knew that VECO’s SDVOSB status was material to the Government’s decision to pay
VECO’s claims. See Escobar, 136 S. Ct. 1996. Accordingly, the Government fails to sufficiently
allege an FCA violation against Golde.
3. Lee Strock
The allegations against Strock are stronger. The Government casts him as the leader of the
fraudulent scheme, the one who decided to establish an SDVOSB to obtain set-aside contracts

12

after Strock Contracting’s SBA 8(a) status expired, and the one who recruited Anderson as the
“figurehead” president. As the true manager of VECO, Strock more plausibly could have caused
the submission of false certifications and false claims, and indeed, the Government alleges that
VECO employees did so under Strock’s general direction. See ECF No. 48 ¶¶ 36, 39, 62. And
the Government alleges more facts that could support an inference that Strock knew that VECO
did not qualify as an SDVOSB, such as that Strock gave Anderson a 51% share in VECO (the
minimum required for veteran ownership), set up email addresses in Anderson’s name to be
managed by other employees, and established VECO for his and Strock Contracting’s profit.
However, as with Carter and Golde, the Government does not allege that Strock knew that
VECO’s SDVOSB status was material to the Government’s decision to pay VECO’s claims. See
Escobar, 136 S. Ct. 1996 (“What matters is . . . whether the defendant knowingly violated a
requirement that the defendant knows is material to the Government’s payment decision.”). As
this Court stated in its order dismissing the initial complaint:
Plaintiff does allege several times that Defendants certified or verified that VECO
met SDVOSB contracting requirements, “with knowledge” that VECO did not
meet such requirements. But that is different than alleging that Defendants had
knowledge that Plaintiff, as a matter of course, refuses to pay SDVOSBs because
of non-compliance with SDVOSB contracting requirements.
Strock, 2018 U.S. Dist. LEXIS 15928, at *26-27. The Government fails to cure that deficiency
here. Accordingly, the Government fails to state an FCA claim as to Strock.
4. Strock Contracting
The Government includes Strock Contracting as a defendant but makes no allegations
against it that are independent from the allegations against Strock, Carter, and Golde. The
Government does not allege that Strock Contracting bid on any SDVOSB contracts or submitted

13

any claims for payment on any such contracts. Indeed, it was VECO that contracted with the
Government.
Rather, the Government ties in Strock Contracting by alleging that it “improperly profited
by siphoning money from VECO that had been paid as a result of work it did on the contracts it
obtained under false pretenses,” that VECO and Strock Contracting shared equipment and space
and subcontracted work to each other, and that VECO made “questionable” payments to Strock
Contracting. ECF No. 48 ¶¶ 2, 43, 88, 104.
While allegations of financial benefits might help establish a motive to commit fraud,
Tessler I, 2016 U.S. Dist. LEXIS 174013, at *14, alone, they are insufficient to state a claim against
Strock Contracting. See Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 792 (4th
Cir. 1999) (“[T]he language of the False Claims Act statute does not anywhere state that False
Claims Act liability depends upon a defendant’s status as a recipient or beneficiary of the
fraudulently induced contract. All that is required is the submission of a false claim.”). And while
the Government argues that Strock Contracting is vicariously liable for the actions of its employees
and agents—Strock, Carter, and Golde—because the allegations against them are insufficient to
state an FCA claim, the allegations are also insufficient to state a claim against Strock Contracting.
B. Materiality (Counts I and II)
In addition to alleging that Defendants knew that VECO’s SDVOSB status was material to
the Government’s decision to pay VECO’s claims, the Government must also allege facts showing
that it did, in fact, consider VECO’s SDVOSB status to be material to its decision to pay VECO’s
claims.
In its order dismissing the initial complaint, the Court held that the Government “assert[ed]
that the alleged false certifications or verifications of compliance with SDVOSB status

14

requirements were material to Plaintiff’s decision to award the contracts” but failed to “connect
the alleged falsities to Plaintiff’s decisions to pay VECO’s claims for work performed under those
contracts.” ECF No. 39, Strock, 2018 U.S. Dist. LEXIS 15928, at *28.
Indeed, “[w]here a contractor participates in a certain government program in order to
perform the services for which payments are eventually made . . . courts are careful to distinguish
between conditions of program participation and conditions of payment.” U.S. ex rel. Conner v.
Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1220 (10th Cir. 2008) (citations omitted); see also
United States v. Dialysis Clinic, Inc., No. 5:09-CV-00710 (NAM/DEP), 2011 U.S. Dist. LEXIS
4862, at *45 (N.D.N.Y. Jan. 19, 2011) (“Conditions of participation . . . are enforced through
administrative mechanisms, and the ultimate sanction for violation of such conditions is removal
from the government program. Conditions of payment are those which, if the government knew
they were not being followed, might cause it to actually refuse payment.”) (citing Salina, 543 F.3d
at 1220) (internal citation omitted)).
Thus, here, the Government must sufficiently allege that VECO’s SDVOSB status was
material to its decision to pay VECO’s claims, not just its decision to award VECO SDVOSB
contracts. See Escobar, 136 S. Ct. 1996 (“A misrepresentation about compliance with a statutory,
regulatory, or contractual requirement must be material to the Government’s payment decision in
order to be actionable under the False Claims Act.”).
In Escobar, the Supreme Court clarified that the “materiality standard is demanding”
because the “False Claims Act is not an all-purpose antifraud statute or a vehicle for punishing
garden-variety breaches of contract or regulatory violations.” Id. at 2003 (internal citations and
quotation marks omitted). Thus, under Escobar,
[a] misrepresentation cannot be deemed material merely because the Government
designates compliance with a particular statutory, regulatory, or contractual
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requirement as a condition of payment. Nor is it sufficient for a finding of
materiality that the Government would have the option to decline to pay if it knew
of the defendant’s noncompliance. Materiality, in addition, cannot be found where
noncompliance is minor or insubstantial.
….
In sum, when evaluating materiality under the False Claims Act, the Government’s
decision to expressly identify a provision as a condition of payment is relevant, but
not automatically dispositive. Likewise, proof of materiality can include, but is not
necessarily limited to, evidence that the defendant knows that the Government
consistently refuses to pay claims in the mine run of cases based on noncompliance
with the particular statutory, regulatory, or contractual requirement. Conversely, if
the Government pays a particular claim in full despite its actual knowledge that
certain requirements were violated, that is very strong evidence that those
requirements are not material. Or, if the Government regularly pays a particular
type of claim in full despite actual knowledge that certain requirements were
violated, and has signaled no change in position, that is strong evidence that the
requirements are not material.
Id. at 2003-04; see also id. at 2003 n.5 (identifying popular definitions of materiality, including
that a misrepresentation is material if it goes to the very essence of the bargain).
Courts have thus summarized the materiality factors under Escobar as including: (1)
whether the Government expressly identified compliance with the violated provision as a condition
of payment, (2) how the Government reacted to the violation or similar violations of which it had
actual knowledge, and (3) whether the violation was minor or insubstantial, or whether it went to
the very essence of the bargain. See United States v. Brookdale Senior Living Comtys, Inc., 892
F.3d 822, 831 (6th Cir. 2018); United States ex rel. Grubea v. Rosicki, Rosicki & Assocs., P.C.,
318 F. Supp. 3d 680, 701 (S.D.N.Y. 2018); United States ex rel. Ling v. City of L.A., No. CV 11974 PSG (JCx), 2018 U.S. Dist. LEXIS 136589, at *36 (C.D. Cal. July 25, 2018). The Court will
analyze each of these factors in turn.

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1. Whether the Government Expressly Identified Compliance as a
Condition of Payment
Here, the Government does not allege that it expressly conditioned payment to VECO on
VECO’s compliance with SDVOSB contracting requirements. It does allege that the payment
applications VECO submitted contained certifications that the contracts were performed in
accordance with their terms and conditions, which included the condition that the contractor
qualified as an SDVOSB. See ECF No. 48 ¶¶113, 119, 124, 129, 134, 139, 144, 145, 149. But it
is not clear from the amended complaint whether the contract terms or the certification on the
payment applications explicitly conditioned payment upon VECO’s SDVOSB status.
Accordingly, this factor does not demonstrate materiality.
2. The Government’s Reaction to Violations
In the amended complaint, the Government alleges that it “has regularly prosecuted, both
criminally and civilly, parties that fraudulently obtain SDVOSB set-aside contracts” and cites nine
cases. ECF No. 48 ¶ 150. But not all of those cases appear to be FCA cases, and not every statutory
or contractual violation “gives rise to liability” under the FCA. Escobar, 136 S. Ct. at 1996, 2004
(“[T]he False Claims Act is not a means of imposing treble damages and other penalties for
insignificant regulatory or contractual violations.”). Additionally, Defendants cite evidence to the
contrary: a 2009 United States Government Accountability Office report on the SDVOSB
program, which found that “although ineligible firms have been identified through bid protests,
firms found ineligible do not face real consequences, can be allowed to complete the contracts
received, and are not suspended or debarred.” See GAO Report No. 10-108, Case Studies Show
Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts, (Oct. 2009),
at 2, available at: https://www.gao.gov/new.items/d10108.pdf (last accessed: September 20, 2019).
The Government’s citation to a handful of cases it prosecuted—not all under the FCA—does not
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sufficiently allege that it “consistently refuses to pay claims in the mine run of cases based on
noncompliance with the particular statutory, regulatory, or contractual requirement.” Escobar,
136 S. Ct. at 2004.
With respect to the instant case, in the amended complaint, the Government adds
allegations regarding the actions it would have taken with respect to the representative contracts
had the Government learned, after awarding them, that VECO did not actually qualify as an
SDVOSB. See ECF No. 48 ¶¶ 114, 120, 125, 130, 135, 140.
As to the first representative contract, the Government alleges that, had the contracting
officer learned that VECO did not qualify as an SDVOSB after awarding the contract, she would
have directed the accounting department to stop payments on the contract and could have
terminated the contract. ECF No. 48 ¶ 114.
As to the second contract, the Government alleges that, had the contracting officer learned
that VECO did not qualify as an SDVOSB after awarding the contract, he would have “suspended
the contract, notified the SBA, and requested their assistance, and he would have also sought
guidance from WVA Contracting’s Legal Office, regarding things such as stopping payment
and/or terminating the contracts.” Id. ¶ 120.
As to the third contract, the Government alleges that the contracting officer would have
“worked with his legal office and the DFAS to stop payments or reject invoices if warranted.
Additionally, if the Government learned after making the award that VECO was not controlled by
a service disabled veteran during the bidding process the government could have terminated the
contract.” Id. ¶ 125.

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As to the fourth contract, the Government alleges that the contracting officer would have
“conduct[ed] an investigation, and in consultation with the VA Office of General Counsel, would
proceed to terminate the contract.” Id. ¶ 130.
As to the fifth contract, the Government alleges that the contracting officer would have
“referred the matter to the VA Office of Inspector General and determined whether the contract
should be terminated.” Id. ¶ 135.
Finally, as to the sixth contract, the Government alleges that the contracting officer would
have “contacted the SBA Office of Inspector General and his supervisor, and . . . if it was
determined that the company was not eligible at the time of award and he was given approval to
terminate the contract he would have proceeded with the termination action.” Id. ¶ 140.
Defendants argue that these allegations are insufficient because they fail to unequivocally
plead that the Government would not have paid VECO had it known that it was not an SDVOSB.
See Escobar, 136 S. Ct. 2003 (“Nor is it sufficient for a finding of materiality that the Government
would have the option to decline to pay if it knew of the defendant’s noncompliance.”) (emphasis
added).
Some courts have required unequivocal allegations that the Government would not have
paid the claims had it known of the violations. See United States ex rel. Kelly v. Serco, Inc., 846
F.3d 325, 334 (9th Cir. 2017) (“[T]he possibility that the government would be entitled to refuse
payment if it were aware of [the] alleged violations is insufficient by itself to support a finding of
materiality”); United States v. Somnia, Inc., No. 1:15-cv-00433-DAD-EPG, 2018 U.S. Dist.
LEXIS 17667, at *25-26 (E.D. Cal. Feb. 2, 2018) (“Thus, the question is not whether the
government could have withheld payment due to the alleged violation. Instead, in order to
sufficiently allege materiality, a plaintiff must plausibly allege that ‘in the mine run of cases,’ the

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government ‘would not have paid these claims had it known of these violations.’”) (quoting
Escobar, 136 S. Ct. at 2004); United States v. Scan Health Plan, No. CV 09-5013-JFW (JEMx),
2017 U.S. Dist. LEXIS 174308, at *18-19 (C.D. Cal. Oct. 5, 2017) (To show materiality, “the
complaint must allege that the violations at issue ‘are so central . . . that the [Government] would
not have paid these claims had it known of these violations.’”) (quoting Escobar, 136 S. Ct. at
2004); United States ex rel. Ferris v. Afognak Native Corp., No. 3:15-CV-0150-HRH, 2016 U.S.
Dist. LEXIS 188709, at *9 (D. Alaska Sept. 28, 2016) (“Thus, post-Escobar, is it not sufficient for
a relator to simply allege that a violation of a statutory requirement is material because that
violation may influence the government’s decision to pay a claim. The relator must allege some
facts that show that the government actually does not pay claims if they involve the statutory
violations in question.”);
Other courts, however, have held that under Escobar, “the misrepresentation does not have
to be so grievous that the government would have completely denied payment upon discovering
the truth—it is enough that the omission would have affected the government’s payment decision.”
Hussain, 2017 U.S. Dist. LEXIS 159538, at *22. See also Grubea, 318 F. Supp. 3d at 701 (“Under
the natural tendency test, the complaints need only allege that “a reasonable man would attach
importance to [the misrepresented information] in determining his choice of action in the
transaction.”) (quoting Escobar, 136 S. Ct. at 2002); United States ex rel. Hedley v. Abhe &
Svoboda, Inc., 199 F. Supp. 3d 945, 956 (D. Md. 2016) (“[T]he False Claims Act commands only
that the false statements be ‘capable’ of influencing government action.”); United States ex rel.
Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 916-17 (4th Cir. 2003) (concluding
that the materiality analysis focuses on whether a false statement has a “natural tendency” or
capability to influence the government’s payment decision rather than the actual effect of the false

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statement; observing that there could be “instances in which a government entity might choose to
continue funding the contract despite earlier wrongdoing by the contractor” because the benefits
of doing so would outweigh the costs); Ling, 2018 U.S. Dist. LEXIS 136589, at *56-67 (“It is
possible to demonstrate materiality even if the Government continued to provide funding despite
its knowledge of false certifications, as the First Circuit concluded after Escobar was remanded to
it. . . . That must be the correct interpretation of Escobar; if it were not, then materiality would be
impossible to demonstrate in cases, like this one, where the Government continues to provide
funding when it knows of false certifications because completely withholding the money would
have an overwhelmingly deleterious and counterproductive effect.”).
The Court finds the latter group of cases more persuasive and “agrees with the proposition
that other factors might well influence the Government to continue to provide funding despite
knowledge of false claims, such as when the service provided is essential, and that Escobar does
not completely foreclose a viable FCA claim in such cases.” United States ex rel. Ling v. City of
L.A., No. CV 11-974 PSG (JCx), 2019 U.S. Dist. LEXIS 121882, at *59 (C.D. Cal. July 15, 2019).
Here, however, the amended complaint does not reference any factors that the Government
might have considered to determine whether to pay VECO had it discovered that it was not an
SDVOSB, nor does it allege that the Government would have attached importance to VECO’s
status. See United States ex rel. Dresser v. Qualium Corp., No. 5:12-cv-01745-BLF, 2016 U.S.
Dist. LEXIS 93248, at *20 (N.D. Cal. July 18, 2016) (dismissing FCA complaint that “allege[d]
in several places that the government would not have paid Defendants’ claims if they had known
of the fraudulent conduct” but did not “explain why”).
demonstrate materiality.

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Accordingly, this factor does not

3. Whether the Violation Was Minor or Insubstantial, or Went to the
Essence of the Bargain
The Government does not make any allegations regarding the substantiality of the
SDVOSB-status violation or whether it went to the essence of the bargain. On the one hand, the
purpose of the SDVOSB programs is to encourage contract awards to SDVOSBs, and this purpose
is undermined if the contractor is not, in fact, an SDVOSB. On the other hand, as this Court held
in its prior order granting Defendants’ motions to dismiss, a misrepresentation is not necessarily
material to the Government’s payment decision just because the Government would not have
awarded the contract but for the misrepresentation. Strock, 2018 U.S. Dist. LEXIS 15928, at *28.
Without more, this factor does not establish materiality. See United States ex rel. Mateski v.
Raytheon Co., No. 2:06-cv-03614-ODW(KSx), 2017 U.S. Dist. LEXIS 122685, at *21 (C.D. Cal.
Aug. 3, 2017) (holding allegation that United States would not have paid defendant if it knew that
defendant had not complied with contractual specifications was “insufficient” because “it does not
show how [defendant’s] misrepresentations were material”).
Because the Government fails to sufficiently allege the elements of an FCA violation
against each defendant and fails to sufficiently allege materiality, Counts I and II are DISMISSED.
C. Conspiracy Allegations (Count III)
A defendant is liable under Section 3729(a)(1)(C) if he “conspires to commit a violation of
subparagraph (A) [or] (B).” 31 U.S.C. § 3729(a)(1)(C).
Here, as with the initial complaint, the Government fails to allege that Defendants entered
into an unlawful agreement. This fails to satisfy Rule 9(b)’s particularity standard and is fatal to
Plaintiff’s FCA conspiracy claim. See Ladas, 824 F.3d at 27 (affirming dismissal of FCA
conspiracy cause of action where plaintiff’s complaint “fail[ed] to identify a specific statement
where [defendants] agreed to defraud the government.”) (citation omitted); see also United States
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ex rel. Scharff v. Camelot Counseling, 13-cv-3791 (PKC), 2016 U.S. Dist. LEXIS 133292, at *28
(S.D.N.Y. Sept. 28, 2016) (finding plaintiff’s FCA conspiracy claim “[fell] far short of the
pleading requirements of Rule 9(b)” where the “[c]omplaint [made] no allegations as to the
existence of any agreement to violate the FCA.”). Count III is therefore DISMISSED.
Since Plaintiff’s FCA claims under Counts I, II, and III are dismissed in their entirety for
all the reasons stated above, the Court need not reach Defendants’ other arguments with respect to
Plaintiff’s FCA claims.
II.

Common Law Fraud, Unjust Enrichment, and Payment by Mistake (Counts IV, V,
and VI)
The Government’s common law claims fall within the Court’s supplemental jurisdiction

under 28 U.S.C. § 1367(a), and “the decision whether to decline to exercise supplemental
jurisdiction is purely discretionary.” Oneida Indian Nation v. Madison County, 665 F.3d 408, 437
(2d Cir. 2011) (quoting Carlsbad Tech., Inc. v. HIF Bio, Inc., 556 U.S. 635, 129 S. Ct. 1862, 1866
(2009)). Because the Court has dismissed the FCA claims over which it had original jurisdiction,
the balance of several factors, including judicial economy, convenience, fairness, and comity
weigh against this Court’s continued exercise of jurisdiction over these claims. See CarnegieMellon Univ. v. Cohil, 484 U.S. 343, 350 (1988) (“[Where] the federal-law claims have dropped
out of the lawsuit in its early stages and only state-law claims remain, the federal court should
decline the exercise of jurisdiction by dismissing the case without prejudice.”). Therefore, the
Court declines to exercise jurisdiction over the Government’s common law claims and Counts IV,
V, and VI are DISMISSED.

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III.

Leave to Amend
Defendants argue that the Government’s amended complaint should be dismissed with

prejudice, citing its failure to sufficiently plead FCA allegations against the Defendants even
though it investigated Defendants for years.
However, courts “should freely give leave to amend a complaint when justice so requires.”
Williams v. Citigroup Inc., 659 F.3d 208, 212 (2d Cir. 2011) (citing Fed. R. Civ. P. 15(a)(2))
(internal quotation marks omitted). This is a “permissive standard” because of a “strong preference
for resolving disputes on the merits.” Id. at 212-13 (citing N.Y. v. Green, 420 F.3d 99, 104 (2d
Cir. 2005)). Here, the Court has only granted leave to amend once and it is not yet clear that further
amendment would be futile. Accordingly, the amended complaint is DISMISSED WITHOUT
PREJUDICE.
CONCLUSION
For the foregoing reasons, Defendants’ motions to dismiss (ECF Nos. 51, 52, 53, 54) are
GRANTED and all of Plaintiff’s claims are DISMISSED WITHOUT PREJUDICE. If the
Government wishes to amend, it shall seek leave to do so through a procedurally-compliant motion
filed within 30 days from the date of this order. See Local Rule 15(a). Otherwise, this case will
be closed without further order.
IT IS SO ORDERED.
Dated: September 23, 2019
Rochester, New York
______________________________________
HON. FRANK P. GERACI, JR.
Chief Judge
United States District Court

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