United States v. Strock
982 F.3d 51
| 2d Cir. | 2020Background
- VECO was nominally majority‑owned by Terry Anderson (a service‑disabled veteran) but the government alleges Lee Strock controlled VECO and used it as a front to win SDVOSB‑set‑aside federal contracts.
- VECO received over $21 million in SDVOSB‑reserved contracts (VA, Army, Air Force) between 2008–2013. Government alleges Anderson had no meaningful control, received minimal profits, and VECO made large payments to Strock entities.
- The United States sued under the False Claims Act (FCA) and federal common law (fraud, unjust enrichment, payment by mistake); district court dismissed for failure to plead materiality and scienter and declined supplemental jurisdiction over common‑law claims.
- On appeal, the Second Circuit held the district court applied too narrow a materiality inquiry under Universal Health Servs. v. Escobar and that the government sufficiently pleaded materiality and scienter as to Lee Strock (but not Cynthia Golde).
- The court affirmed dismissal as to Golde, reversed dismissal as to Strock, vacated dismissal as to Strock Contracting, Inc., and vacated the dismissal of common‑law claims (remanding for further proceedings).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of the FCA "payment decision" for materiality | "Payment decision" includes the government’s decision to award contracts (fraudulent inducement) | Materiality focuses only on the government’s later decision to pay claims | Court: In fraudulent‑inducement cases, "payment decision" encompasses both award and ultimate payment decisions under Escobar |
| Whether SDVOSB misrepresentations were material | SDVOSB eligibility was an express eligibility condition and defendants’ sham deprived veterans of intended benefits, so material | Government failed to allege the gov’t actually refuses payment or routinely withholds payment post‑award | Court: Materiality plausibly alleged—express eligibility condition and substantiality of noncompliance weigh in favor; post‑award payment evidence weaker but not dispositive |
| Scienter as to Lee Strock | Strock recruited Anderson, orchestrated sham, had motive/opportunity and created false impressions—supports reckless disregard/knowledge | Allegations lacked Rule 9(b) particularity for knowledge | Court: Allegations suffice to plead at least reckless disregard/knowledge as to Strock; dismissal reversed |
| Scienter as to Cynthia Golde | Golde submitted bids/requests for payment and worked for related entities—may have known of scheme | Complaint lacks specifics tying Golde to particular false statements or showing motive/opportunity | Court: Allegations are too general under Rule 9(b); dismissal as to Golde affirmed |
| FCA vicarious liability and common‑law claims | Government seeks vicarious liability for Strock Contracting and asserts independent common‑law claims | District court dismissed vicarious claim (relying on dismissal of individuals) and declined jurisdiction over common‑law claims | Court: Vacated dismissal of vicarious claim (because claim against Strock stands) and vacated dismissal of common‑law claims (district court had original jurisdiction under 28 U.S.C. § 1345); remand for further consideration |
Key Cases Cited
- Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) (articulates demanding FCA materiality standard and relevant evidentiary factors)
- United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943) (establishes fraudulent‑inducement theory that a fraudulently obtained contract taints later claims)
- United States v. Longhi, 575 F.3d 458 (5th Cir. 2009) (applies fraudulent‑inducement theory to FCA claims)
- United States v. Wells Fargo & Co., 943 F.3d 588 (2d Cir. 2019) (standard of review for Rule 12(b)(6) dismissal and pleading inferences)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (Rule 9(b) scienter pleading: motive/opportunity or strong circumstantial evidence)