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United States v. Crummy

United States District Court, District of Columbia

April 20, 2017



          KETANJI BROWN JACKSON United States District Judge

         The loss calculation that is required in Section 2B1.1(b)(1) of the Guidelines Manual is often vigorously disputed, and this is so even in cases in which the parties agree upon the ultimate sentence recommendation. See U.S. Sentencing Guidelines (“U.S.S.G.”) §2B1.1(b)(1); id. §2B1.1 cmt. n.3. In the instant case, for example, both the prosecution and the defense maintained that a probationary sentence was appropriate for Defendant Walter Crummy, who illegally conspired with others to obtain access to government contracts that his company was not entitled to receive because the contracts were subject to certain “contracting preferences” that the Small Business Administration administers. (Statement of Offense (“SOF”), ECF No. 6, at 6 (admitting to the fraudulent procurement of contracts that had been set aside for small, disadvantaged businesses); see Gov't's Mem. in Aid of Sentencing (“Gov't's Mem.”), ECF No. 15, at 33 (recommending probation); Def.'s Mem. in Aid of Sentencing (“Def.'s Mem.”), ECF No. 14, at 1 (same).)[1] But the parties had radically different positions as to the proper method of calculating the relevant loss in a case involving the fraudulent procurement of set-aside contracts. (Compare Gov't's Mem. at 17 (“[L]oss [is] $1, 631, 377, which is the total price of the contracts misappropriated[.]”), with Def.'s Mem. at 4 (“The loss amount in the PSR should be reduced by the value of the services provided to the Government, which results in a loss amount of zero” because both “contracts resulted in an actual loss to [Crummy's company]”).)

         On April 11, 2017, this Court sentenced Crummy to twelve months of probation, following its resolution of the loss dispute, and in particular, its determination that the credits-against-loss provision in section 2B1.1 Application Note 3(E)(i) applied to both of the contracts at issue, and that the resulting total loss amount was zero under the circumstances presented in this case. This Memorandum Opinion explains the basis for that conclusion.

         I. BACKGROUND

         On August 23, 2016, Walter Crummy pled guilty to conspiracy to commit wire fraud, in violation of Sections 371 and 1343 of Title 18 of the United States Code. (See Plea Agreement, ECF No. 5, at 1.) According to the statement of offense filed in connection with Crummy's guilty plea, Crummy and others conspired to perpetrate a fraud that benefitted a company that Crummy partly owned-MCC Construction Corporation (“MCC”)-by improperly procuring certain restricted contracts from a number of government agencies, including the Small Business Administration (“SBA”) and the United States Coast Guard. (See SOF at 4-6.) In essence, Crummy knowingly and voluntarily joined a pre-existing scheme in which false representations were made so that MCC could obtain certain federal contracts that had been set aside for small, disadvantaged businesses under the SBA's Section 8(a) program. (See Id. at 1, 5-6.)

         A. The Basics Of The SBA's Section 8(a) Program

         The Section 8(a) program is a business development program designed to help small, disadvantaged businesses compete in the American economy and access the federal procurement market. See Rothe Dev., Inc. v. DOD, 107 F.Supp.3d 183, 188 (D.D.C. 2015), aff'd, 836 F.3d 57 (D.C. Cir. 2016), petition for cert. filed, (U.S. April 13, 2017) (No. 16-1239). “Under the program, the SBA contracts to provide goods or services to other government agencies and then subcontracts performance of these contracts to eligible firms.” Minority Bus. Legal Def & Educ. Fund, Inc. v. SBA, 557 F.Supp. 37, 38 (D.D.C. 1982). Businesses that qualify for the Section 8(a) program are eligible for an award of both set-aside contracts (i.e., contracts awarded following competitive bidding among similarly eligible firms) or sole-source contracts (i.e., contracts awarded without competitive bidding) from participating government agencies. See 13 C.F.R. § 124.501(b).

         In order to qualify for the Section 8(a) program, a business must, inter alia, be “a small business[, ]” 13 C.F.R. § 124.101, and “must be at least 51 percent unconditionally and directly owned by one or more socially and economically disadvantaged individuals who are citizens of the United States, ” 13 C.F.R. § 124.105. In addition, an applicant must demonstrate both its ability “to perform contracts which may be awarded” pursuant to the program, and also its “reasonable prospects for success in competing in the private sector.” 15 U.S.C. § 637(a)(7)(A). An applicant is deemed to possess reasonable prospects for success competing in the private sector if it has been “in business in its primary industry classification for at least two full years immediately prior to the dates of its 8(a) BD application[, ]” 13 C.F.R. § 124.107, or must seek a waiver of this requirement by establishing, inter alia, “demonstrated technical experience to carry out its business plan with substantial likelihood for success[, ]” “adequate capital to sustain its operations and carry out its business plan[, ]” and the fact that the individual “upon whom eligibility is based ha[s] substantial business management experience[.]” 13 C.F.R. § 124.107(b)(1).

         Significantly for present purposes, participants in the Section 8(a) program are subject to strict regulatory limits on subcontracting the work that Section 8(a) set-aside contracts require. See 13 C.F.R. § 125.6(a). Among other things, pursuant to SBA regulations, a Section 8(a) participant must agree that it will use its own employees to perform at least 15 percent of the cost of an awarded construction contract. See 13 C.F.R. § 125.6(a)(3).

         B. MCC's Fraudulent Procurement Of Section 8(a) Contracts

         MCC Construction Company is a construction management company and general contractor that provides a variety of building and renovation services. (See SOF at 4.) MCC is not a Section 8(a) program participant, and thus, is ineligible for the aforementioned SBA contracting preferences. (See Id. at 6.) Nevertheless, in 2008, MCC developed a business relationship with Company 1 (hereinafter referred to as “C1”)-a business that was “certified to participate in the 8(a) program” and that purported to specialize in “design build services of energy and renewable programs” as well as “general contracting and construction staffing services[.]” (Id. at 4.) It was through this relationship that MCC was able to obtain government contracts that the SBA intended to award to Section 8(a) program participants. (See Id. at 6.)

         The scheme to defraud was relatively straightforward. MCC and C1 entered into “teaming agreements]” in connection with a number of government contracts, pursuant to which C1 would (nominally) serve as the prime contractor, while MCC would act as the subcontractor. (Id. at 7.) Although the MCC/C1 teaming agreements were crafted on paper to comply with SBA rules and regulations (see id.), the two companies in fact implemented various “operating procedures that made [C1] nothing more than a pass through for the contracts [C1] subcontracted to MCC” (id. at 8). Indeed, Crummy and others acting on behalf of MCC exerted impermissible actual control over C1, concealed this control from the SBA, and facilitated the misrepresentation that C1 was in compliance with SBA regulations when it fact it was not. (See Id. at 6.)

         For example, Crummy “set up a bank account in the name of [C1]”-an account over which both MCC and C1 had joint signatory authority-and this account was used “to receive all payments from [C1's] government” contracts and to distribute any profits. (Id. at 8.) Moreover, on January 19, 2010, Crummy drafted an addendum to the profit-and-cost-reimbursement agreement that MCC and C1 had entered into; the addendum provided that C1 would award MCC a full 97 percent of the contract amount of any task order, and in exchange, MCC would provide all of the labor, equipment, and supervision needed to perform the task order. (See Id. at 12-13.) Crummy took this action notwithstanding his knowledge that C1 would be violating the SBA's requirement that C1 perform at least 15 percent of the cost of the contract with its own employees. (See Id. at 12, 13.) In addition, when interacting with the government on behalf of C1, Crummy used an email account that had C1's name in the address, and that contained a signature block identifying Crummy as a C1 employee, despite the fact that Crummy was an officer and partial-owner of MCC. (See Id. at 13-14.)

         As relevant here, once Crummy knowingly and voluntarily joined the MCC/C1 contracting scheme, MCC obtained two government contracts through its improper control over C1: (1) the Coast Guard North contract, valued at $842, 482; and (2) the Coast Guard South contract, valued at $788, 895. (See Id. at 14.) Consequently, Crummy's false and misleading conduct contributed to a total award of approximately $1, 631, 377 in Section 8(a) program contract funds to a non-Section 8(a) program participant. (See Id. at 14.) MCC anticipated a 10-percent profit margin on these two contracts (i.e., $163, 137); however, notably, MCC's anticipated profit never materialized, because ultimately “both contracts resulted in an actual loss to MCC.” (Id. at 15.)

         C. Procedural History

         Crummy was charged by information with one count of conspiracy to commit wire fraud wire on July 22, 2016 (see Information, ECF No. 1, at 1); he pled guilty to this one count on August 23, 2016 (see Plea Agreement at 1; Min. Entry of Aug. 23, 2016). Following the entry of Crummy's guilty plea, the parties submitted sentencing memoranda addressing the appropriate Guidelines range and sentence in this matter. (See generally Gov't's Mem.; Def's Mem.; Gov't's Reply Mem. in Aid of Sentencing (“Gov't's Reply”), ECF No. 16; Def's Resp. to Gov't's Mem. (“Def's Reply”), ECF No. 17.) The parties agreed that section 2B 1.1(a)(2) of the Guidelines Manual provided a base offense level of six, but disagreed about the application of the loss table in section 2B 1.1 (b)(1), which provides for escalating offense-level increases depending on the amount of pecuniary harm, in dollars, that resulted from the defendant's offense. (See Gov't's Mem. at 17-32; Def's Mem. at 3-10.) See also U.S.S.G. §2B 1.1(b)(1); id. §2B1.1 cmt. n.3(A)(i)-(ii) (defining actual or intended loss in relation to “pecuniary harm”).

         The crux of the parties' dispute centered on the question of whether the loss amount under section 2B 1.1(b)(1) should reflect the total value of the two Coast Guard contracts at issue, or whether this amount should be reduced by the value of the services MCC provided to the government. (See Gov't's Mem. at 17 (arguing that the loss “is the total price of the contracts misappropriated”); Def's Mem. at 4 (maintaining that “[t]he loss amount in the PSR should be reduced by the value of the services provided to the Government”).) This disagreement potentially implicated various application notes in the Guidelines Manual and, in essence, raised two questions: (1) which Guidelines rule provides the appropriate baseline from which to measure loss in the first instance? and (2) does the ...

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