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Veterans preference fraud widespread but government prosecutes few cases

By Mark Flatten
Washington Examiner
August 8, 2013

Part four of a five-part series. To see the complete series, along with video, interactive graphics and documents, click here.

Billions of federal dollars were flowing to small businesses owned by service-disabled veterans, and a pair of construction contractors in St. Louis wanted a piece of it.

But Michael Woodling and Joseph Madlinger were not disabled veterans, so they couldn't qualify for the bidding preferences being offered by the federal government under the Service-Disabled, Veteran-Owned Small Business program.

To get around the restriction, they hatched a "rent-a-vet" scheme, according to federal court records. They convinced an acquaintance, who was a disabled veteran, James Browdy, to put his name on new shell corporation, which would bid on the contracts. The work, and most of the profits, would be passed on to Woodling's firm, Gateway Contractors.

As an added lock on the lucrative construction contracts, Woodling and Madlinger bribed another acquaintance, Russell Todd, who at the time was director of projects for the Department of Veterans Affairs Medical Center in St. Louis.

The pair loaned Todd thousands of dollars, interest free, and bought him tickets to luxury seats at Cardinals baseball games. They also courted him with free lunches and frequent visits to a "gentleman's club" in nearby Sauget, Ill.

Todd ultimately steered more than $3.4 million in VA contracts to Browdy's business between 2007 and 2010, which were passed on to Gateway.

Todd, Woodling and Madlinger pleaded guilty to fraud and bribery-related charges last year. Browdy was not prosecuted.

The case illustrates many of the weaknesses in the SDVOSB program that have been identified in numerous investigations by the Government Accountability Office and the VA inspector general.

Veterans preference fraud potentially costs taxpayers billions of dollars every year, but federal prosecutions are rare. Investigations by the VA IG, which has been the most aggressive in policing the program, have led to 16 convictions in recent years.

Investigations by the IG at the Small Business Administration, which checks complaints for non-VA agencies, have resulted in 10 convictions since 2006.

All but one of the SBA cases are also on the VA IG list, meaning both agencies were involved in the investigation. It's not known how many cases, if any, have been brought by other agencies.

VA alone has more than 4,500 certified SDVOSBs in its database. There is no government-wide registry, but GAO estimates there could be more than 13,000 firms likely to bid on set-aside and sole-source contracts in the near future using the preference.

Most federal agencies do not even check the credentials of those seeking SDVOSB status. They operate on a "self-certification" system that relies on those applying for the preference to tell the truth about themselves and their businesses.

"Clearly in the absence of any verification, even of the fact that a person is truly a service-disabled veteran, you are just asking for it," said James O'Neill, assistant inspector general for investigations at VA. "If you don't have to prove it, you are going to have more of that kind of fraud."

VA is the only agency that verifies service disability and corporate control for those seeking SDVOSB status, a requirement of a law passed in 2010.

But the heightened standards only apply to VA. Other federal agencies remain vulnerable to fraud because they still rely on self-certification, according to GAO.

Common scams are "pass-through" and "rent-a-vet " schemes, according to a 2011 report from the VA- G.

Rules governing SDVOSBs require the disabled veteran own and control the company doing the work, and restrict how much of the job can be subcontracted.

In a pass-through scheme, a larger company like Gateway conspires with a separate SDVOSB that exists solely to qualify for the federal preference. The real beneficiary is the larger firm that does most of the work and keeps most of the profits.

A 2009 GAO report found one California SDVOSB was used to secure more than $5 million in pass-through contracts for a company headquartered in Europe with almost $12 billion in annual revenue.

Gateway is not the only company caught using a rent-a-vet. In 2007, Arthur Singleton, who owned a Georgia construction company, duped a Vietnam veteran who was bedridden because of surgeries related to his combat injuries into creating an SDVOSB solely for the purpose of securing federal contracts.

Singleton used the scheme to get about $2.8 million in work from four federal agencies, including VA. He pleaded guilty to federal charges and was sentenced to two years in prison in June.

Help from insiders also has been identified in several cases cited by federal investigators.

Patricia Gheen, a top business officer at the VA Health Administration Center in Denver, was forced to retire last year after the VA IG determined she steered $2.9 million in contracts to a SDVOSB that employed her former boss at the agency. No charges were filed.

Another VA IG report issued last year noted that three agency officials had been identified in separate investigations as having provided "improper sole-source contracting" to former VA employees who formed or worked for SDVOSBs.

In the past, federal investigators had to aggressively "market" fraud cases to Justice Department prosecutors, O'Neill said. The attitude was that as long as the work got done, there was no loss to the government, even though the company that profited from the contracts did not qualify as a SDVOSB.

But in 2010 the law was changed to create a presumption that money paid under a SDVOSB contract to an unqualified firm represents a loss to the government.

Since then, it has been easier to convince federal prosecutors to pursue cases, said O'Neill, adding the VA IG currently has more than 100 open criminal investigations involving potential SDVOSB fraud.