Legal Meets Practical

Early this month, the U.S. Government Accountability Office (GAO) issued a report that told us something we already knew: that the service-disabled veteran-owned small business program (SDVOSB) remains vulnerable to fraud and abuse. In its 59-page report, GAO concluded that this vulnerability is the result of a lack of inventory controls and the listing of potentially ineligible firms in the VetBiz Vendor Information Pages (VIP) Program (the VetBiz Program). (This recent GAO report can be accessed at:  http://www.gao.gov/assets/600/593238.pdf).

As many veteran business owners can attest, certification through the VetBiz Program is a bit like hazing. On LinkedIn discussions, I have read many laments about the intrusive nature of certification and complaints about the Center for Veterans Enterprises (CVE), the entity charged with implementing and administering the VetBiz Program. At one point, the VetBiz website was down for a significant period of time and the extensions granted for on-line re-verification insufficient.

Despite the inconveniences caused to veteran business owners, it appears that the VetBiz Program, which is relatively new, is not meeting the expectations of the Government as it relates to preventing fraud and abuse. As the GAO report found, the Department of Veterans Affairs (VA) has made inconsistent statements about its progress in verifying firms listed in VetBiz by using the more stringent process the VA implemented in response to the Veterans Small Business Verification Act (2010 Act). For example, in one communication, the VA stated that as of February 2011, all new verifications would apply the requirements of the 2010 Act. However, as of April of this year, one year after this VA-set deadline, only forty percent of the firms listed in VetBiz had been verified under this process. Of the sixty percent remaining, 134 firms received a total of $90 million in new VA SDVOSB set-asides or sole-source contract obligations from November 30, 2011 to April 1, 2012.

It may very well be that these firms are eligible to participate in the SDVOSB program. After all, they have undergone a verification process, and they have self-certified their status by holding themselves out as such. At the same time, however, the VA has not applied the standards to these firms that were found necessary in order to ensure true eligibility to receive SDVOSB set-asides and sole source contracts. Because of this, ineligible firms may have slipped through the cracks. That risk exists relating to sixty percent of all firms listed in VetBiz.

At least the VA is taking steps to address this issue of poor controls and vulnerability to fraud and abuse. In October of 2011, the GAO issued a series of recommendations to the VA to enhance its fraud prevention efforts. The VA has established processes in response to six of  the thirteen recommendations. These include conducting unannounced site visits to high-risk firms and developing procedures for referring suspicious SDVOSB applications to the VA’s Office of the Inspector General (OIG).

Only time will tell what impact the VetBiz Program will have on combating the fraud and abuse that necessitated its establishment. With the exception of Alaska Native Corporations (ANCs), the SDVOSB small business program has received perhaps the most criticism as it relates to awarding contracts to ineligible firms. Especially with the growing number of veteran-owned businesses and the need to support those veterans returning to civilian life, it is crucial that this program is able to serve the purpose for which it is intended.

If you don’t build a strong foundation for it, your house will fall down. The same goes for your business. If you don’t invest in the necessary structure at the outset, you might end up watching it crumble.

For service-disabled veterans starting a small business, it is important to know the checklist of what is necessary to show service-disabled veteran-owned small business (SDVOSB) status. The veteran must always have 51% interest, he must always be the president or CEO (ie, hold the highest position), and he must always exercise managerial authority over his business. If these provisions are not clearly set forth in corporate documents, SDVOSBs leave themselves vulnerable to protests and the loss of their SDVOSB status.

Take Benetech, LLC, for example. There, a family-owned business won a set-aside for constructing a parking garage, and its SDVOSB status was challenged by a disappointed bidder. SBA VET-225 (2011). Benetech, LLC (“Benetech”) was a father and son team, and the father was the service-disabled veteran upon whom certification as an SDVOSB was based.

To participate in the Small Business Administration’s (SBA’s) SDVOSB program, an LLC must be “unconditionally owned” by the service-disabled veteran upon whom certification is based, meaning that the veteran must own 51% of the interest. (13 CFR 125.9). The father unconditionally owned 51% of the LLC, and the son owned 49%. No problems there.

An LLC must also be “unconditionally controlled” by the service-disabled veteran, which means that the veteran must control “the management and daily operations” of the business, and he must also hold the highest position in the company (13 CFR 125.10). This is where Benetech ran into trouble. The father was in fact the president of the Company. However, in the company’s operating agreement, no managing member was named. Also, Benetech had listed the son as chief executive officer (CEO) in its proposal for the awarded contract; and the company’s Articles of Organization gave him enumerated managerial powers and authority.

Based on all of the evidence, both the Small Business Administration (SBA) Acting Director of the Office of Government Contracting (AD/GC) and the SBA Office of Hearings and Appeals agreed with the protestor that Benetech did not meet the control requirements of the SBA’s SDVOSB program. The protest was sustained, and Benetech lost the contract.

In my perspective, the heart of Benetech’s problem was bad drafting. Benetech was ineligible for the SDVOSB program likely only in a paper sense – its corporate documents and other records were not up to snuff under SDVOSB program standards. While the purpose of the SDVOSB program, which is to provide contracting opportunities to service-disabled veteran-owned businesses, may not have been undermined by awarding the contract to Benetech, the decision to sustain the protect was technically correct.

In this example, if better corporate documents had been drafted for the company, and it had been adequately informed of how to demonstrate SDVOSB status, it likely would not have endured legal fees for two levels of administrative decisions and, in the end, lost its set-aside contract. This is a lesson learned for all SDVOSBS: make sure your corporate documents are airtight, or suffer the consequences later. It’s not enough to be an SDVOSB in practice. To play the game, you have to be one on paper, too.

For further reading, the Benetech case may be accessed here.

My father is one of the reasons I chose veterans law as a practice. Several years ago, I became his advocate in his VA disability compensation claim; and yesterday, a decision was rendered. It was granted. Because this particular client is my father, he has given me permission to candidly share his story. It sheds light on two basic elements of successful VA claims: to refuse to give up (within reason), and to know common VA errors.

My father is a veteran of the Vietnam era. He served in Bad Kissingen, Germany at the tail end of the war, and it was a wonder he was drafted. Even as a kid, my father had trouble with his hips and knees – to such an extent that he was exempt from high school physical education. When he was asked to undergo a medical examination prior to officially being drafted, he expected to be immediately dismissed. Instead, he received a cursory glance and was told to board the bus for basic training at Fort Leonardwood, Missouri. Basic training was so difficult for him that he received a waiver from its activities, but he was still somehow found fit to be shipped overseas to Germany. Once there, he assumed the duty of distributing the mail. Sure, that doesn’t sound particularly arduous, but carrying a 70-pound sack up and down steps and around the base isn’t good for someone with bad knees and hips.

As a young lawyer living and working in Washington, D.C. I learned about the VA disability compensation claims process. I’d heard Dad’s stories about serving in the Army, and I asked him whether he had considered applying for disability compensation. He relayed that he had completed an application immediately after his service in 1972 and was denied. “Well,” I told him, “You’re going to apply again, because I think you’re entitled.” I believed that he was entitled to service connection for an aggravation of injury – Dad’s knees and hips were made worse by what he was required to do in service.

Because I was ambitious, and because my father’s interests were at stake, I pulled out all the stops in his application. I put together a 23-tabbed binder with the new and material evidence required to reopen his claim. I hunted down old war buddies to take their statements, gathered new medical evidence, and wrote a legal argument. Basically anything that could be done, I did.

So what happened? Eight months later we received a denial. And here was the kicker – the VA treated Dad’s claim as an appeal, not as a reopening. An appeal is when the veteran challenges a VA decision based on the evidence that the VA had at the time of the decision. A reopening is when a veteran presents what is called “new and material” evidence to reopen a claim. I would say that in the materials we submitted, the terms “reopen” and “new and material” were mentioned forty times each (and “appeal” zero times), but somehow the claim was still treated improperly.

I filed a notice of disagreement, and again the VA came back with a denial. This time it took a little longer, and this time the VA stated that Dad’s conditions were “congenital,” meaning that he was born with them, when he clearly wasn’t. It also discounted without justification a medical opinion from a private physician who had opined that Dad’s conditions were “more likely than not” service-connected.

Eventually Dad was afforded a VA medical examination. This took place in May of 2012, and this decision was reached in August. Interestingly, I as the advocate have no idea what that doctor concluded, other than that he must have found service-connection given the decision. I do not know what the doctor concluded because I have not received a copy of the examination report – reports are not automatically sent to veterans or their advocates. But, after all this time, this is a victory, and I must admit that I am far less interested in that report than I would have been if the decision had been another denial.

Dad’s claim, from beginning to end, has taught me a lot about veterans law. More than anything, it has taught me not to give up. The process is confusing and cumbersome, and we could have given up during any of the many roadblocks we encountered. We refused to do so, and Dad now has his compensation. At the same, however, this lesson saddens me, because it illuminates how many veterans do in fact give up. It takes time, legal wherewithal, and resources to fight the VA. Also, many conclude that because the VA has denied them once, that must mean that they are in fact not entitled.

This experience has also taught me how important it is to know what constitutes a VA error. What if we hadn’t known that Dad’s claim should have been treated as a reopening instead of an appeal? Or that Dad’s conditions aren’t congenital? Or that he was entitled to a medical exam? Or what constitutes an “adequate” medical examination under VA standards? All of these issues came up during the pendency of Dad’s claim, and without knowing the answers, the claim could have failed.

At the end of the day, while I’m absolutely thrilled and proud that Dad’s claim was granted, I can’t help but think of the alternative. Most other veterans don’t have an advocate, or know the legal ropes to applying for VA compensation. If Dad had been one of those veterans, he would have either never filed or given up after the first denial. He wouldn’t have known that when it comes to the VA, a “no” is not the end of the road. For many it is just the beginning.