NY contractors pay $1.3M to settle supplier diversity allegations

Dive Brief:

The New York attorney general called out 10 construction companies for an alleged supplier diversity pass-through scheme and settled with one of the largest of them for $125,000 to conclude a yearslong investigation that netted $1.3 million in penalties.
Letitia James, New York's AG (above), announced the final settlement with the Rochester, New York-based Pike Co., a top 400 contractor whose business was founded in 1873. The AG's office alleged Pike skirted New York State diversity requirements in the contract for the $1.2 billion Rochester Schools Modernization Program.
In a statement, Pike contested the AG's allegations. "The Pike Company does not agree with the attorney general’s findings regarding construction that was performed and completed over a decade ago," the firm said in a statement emailed to Construction Dive. "Further our belief is that our actions fall squarely in the confines of what was required in the RSMP diversity plan." The firm said it settled "solely to avoid costs and distractions associated with protracted litigation."

Dive Insight:

The settlement is the latest in a string of high-profile cases scrutinizing compliance with minority and women-owned business enterprise participation targets on construction projects. Last week, the U.S. District Attorney's Office in St. Louis indicted a contractor in a separate alleged pass-through scheme.

In the New York case, the Rochester schools project required good faith efforts for prime contractors to subcontract 15% of their work to minority-owned businesses, and another 5% to women-owned firms. But the AG alleged the 10 companies named in its release engaged in pass-throughs, where they used non-MWBE firms to perform work, but ran the money and paperwork through MWBE companies to give the appearance of compliance.

For example, in the settlement, the AG alleged Pike submitted paperwork to give the appearance that a MWBE firm, Scott Construction, provided $846,000 worth of doors, frames and other hardware on the schools project.

But Pike actually got $754,786 of materials from Rochester Colonial, a non-MWBE firm, the AG alleged, via a purchase order that ran through Scott Construction. Scott Construction didn't immediately return a call seeking comment.

"Including minority and women-owned businesses in public projects is meant to give opportunities to communities that have been historically left out, not for contractors to work around them," said James in a press release. "It's a shame that the Pike Company and other contractors took the easy way out to minimize work with minority businesses."

Other firms

Nine other New York-based firms were named in the New York AG's release for allegedly violating the school project's diversity requirements. Their names and the previous settlement amounts paid since 2016 are:

Concord Electric Corp. ($350,000)
Bell Mechanical ($200,000)
Manning Squires Hennig ($200,000)
Hewitt Young Electric LLC ($160,000)
Landry Mechanical Contractors ($117,000)
Kaplan Schmidt Electric ($100,000)
Michael A. Ferrauilo Plumbing & Heating ($90,000)
Mark Cerrone Inc. ($25,000)
Nairy Mechanical LLC ($12,000)

Construction Dive reached out to each of these firms; none immediately provided comment.

Paula L. Finch, an attorney at St. Louis-based Greensfelder, Hemker & Gale, P.C. who focuses on supplier diversity in construction projects, said in an interview with Construction Dive that it's not unusual for firms to overstate diverse supplier numbers to win bids.

"If there's one frustration that I've not been able to overcome in my career, it's the folks that are willing to cross the lines from an ethical standpoint, because it better positions them to get the contract," Finch said prior to the announcement of the New York settlement. "That's why lawyers have jobs. That's why the compliance people have jobs."

Started in 2012

The alleged pass-through schemes took place between 2012 and 2014 during the first phase of the Rochester schools project, with a whistleblower — who will receive $25,000 of Pike's settlement payment, according to the release — coming forward in 2013. Former New York Attorney General Eric Schneiderman first pursued the case, with James's office continuing it.

Pike said the contracts highlighted by the AG's office overlooked its other work for the schools.

"These are two contracts out of more than 100+ subcontracts and $220 million worth of construction completed many years ago," Pike said in its statement. "The company highly values diversity and [emerging business enterprise] compliance and has spearheaded multiple EBE programs in addition to training and compliance efforts, which was a regular course of action for the Pike Company before this dispute."

The settlement also calls for Pike and the other contractors to undergo training, remediation and compliance reviews. The attorney general's Civil Rights Bureau will actively monitor the contractors’ adherence to these requirements.

But while the release from the AG's office highlighted the firms it settled with, it didn't say whether any of the MWBE firms allegedly involved in the scheme faced repercussions as well.

For example, a 2016 release from former Attorney General Schneiderman's office outlined how MBWEs received a fee for allowing checks and contracts to pass through their firms.

A spokesperson for James couldn't immediately say whether any MWBEs that served as pass-throughs faced repercussions for their roles in the scheme.

Sebastian Obando contributed to this report.