Combating construction fraud

A look at prosecutors’ widening probe into overbilling and corruption by contractors

A spate of criminal prosecutions is rocking New York’s struggling construction industry just as it’s beginning to regain its footing after the downturn.

In April, construction giant Lend Lease agreed to pay $56 million to settle high-profile charges with U.S. Attorney Loretta Lynch’s office for allegedly overbilling clients at major construction projects, including the renovation of Grand Central Station, the construction of the Time Warner Center at Columbus Circle and the construction of Citi Field, the home of the New York Mets.

Officials at the Australia-based construction giant (formerly known as Bovis Lend Lease) said they’ve made wholesale changes to ensure that this type of activity does not happen again.

However, in speaking about the settlement, a company executive claimed that billing fraud is widespread in the city’s construction industry.

“While we understand these practices were common in the industry in New York, we should always hold ourselves above the industry reflecting our strong values and high ethical standards,” Steve McCann, a group chief executive officer at Lend Lease, said at an annual investor meeting.

As part of the U.S. Attorney’s settlement, Lend Lease agreed to cooperate in prosecutors’ future investigations into other construction firms.

So it did not come as a huge surprise to the industry when, in July, radio station WNYC reported that Lynch’s office had widened its probe into the practices at Turner Construction, Plaza Construction, Skanska USA and Tishman Construction — all firms either declined or did not respond to requests for comment.

Attorney Barry LePatner, a specialist in the construction industry, noted that billing fraud is not a new issue, but said government investigators have had a difficult time, until now, gathering enough evidence to conduct such a sweeping investigation.

“Contractors have always tried to take advantage of owners on the basis that they control information on pricing. Owners [usually] have little, if any, information about the true cost of the work,” LePatner told The Real Deal.

While it’s unclear exactly what the wider probe is zeroing in on, the Lend Lease case largely involved rigged contract bids, inflated billing and no-show jobs. The firm also engaged in a scheme called Eight Plus Two, where it paid foremen for up to two hours a day on sites where they never worked. It allegedly used that tactic to overbill public agencies and private developers to the tune of $19 million over a 10-year period.

Construction experts say another common practice for contractors is underbidding the competition in order to secure a construction job.

“If you talk to insiders in the construction industry and [ask if] we underbid, they say, ‘Yeah,’ on the face of it,” said an official at a major New York development firm.

Thomas Thacher, president of construction consulting firm Thacher Associates and the former inspector general of the New York City School Construction Authority, said that type of fraud may be tied to the weak economy.

“In some instances, cheating in a bid process can increase when you have an economy that’s impacting the industry the way this one has,” he said.

Thacher led the state’s first Construction Industry Strike Force, which was created under Governor Mario Cuomo to root out organized crime and other corrupt practices in the construction industry. He said organized crime is much less of a factor now in the industry than it was in the past, but noted that today’s corruption is more centered on underpaying workers, fraudulent use of minority contractors and bid rigging.

The increased scrutiny on both corporate spending and at taxpayer-funded projects is, however, now shining a new light on corruption in the industry. And it’s prompted many to call for the implementation of more safeguards to prevent overbilling, underbidding and other fraudulent practices.

Scandals in the spotlight

While the construction giants have garnered the most attention, there have been plenty of scandals lately that have involved smaller firms, government contracts and public institutions.

An April audit by state comptroller Thomas DiNapoli uncovered fraudulent bids for construction at SUNY Downstate Medical Center in Brooklyn made by Eagle Two Construction, a Brooklyn-based contractor. The report noted the construction firm won six contracts worth $92,000, largely with the help of phony bids from front companies that made it seem like there was more competition than really existed. Those fake companies were all affiliated with Two Eagle. The contractor was paid more than $1.2 million from SUNY for construction work over a 14-year period ending in 2010. The comptroller forwarded the findings to law enforcement officials, but it’s unclear whether criminal charges will be pursued.

Eagle Two was suspended as a contractor for its biggest client, Columbia University, the Daily News reported. Eagle Two officials did not return calls for comment.

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Meanwhile, in June the city Department of Housing Preservation and Development was rocked when former assistant commissioner Wendell Waters pleaded guilty to bribery and racketeering conspiracy. Waters was originally charged in October 2011 with six developers who allegedly bribed HPD officials to get affordable housing contracts. The developers allegedly received millions in kickbacks from contractors they hired to perform the construction on these sites. Five additional arrests have been made as part of the HPD case.

Legal experts say the increased amount of fraud can be tied to the rush to complete projects, as developers often have deadlines placed on them by lenders — especially in this post-recession environment.

Many of the recent cases being pursued stem from the boom, industry experts said.

“People were throwing these buildings up with spit and cardboard and selling them out as quickly as possible,” said attorney Steven Sladkus, chairman of the real estate practice at Wolf Haldenstein.

In late July, Sladkus represented the condo board at Beacon Tower, a 79-unit luxury building at 85 Adams Street in the Dumbo section of Brooklyn, which filed a $150 million RICO lawsuit against developers Shaya Boymelgreen and Lev Leviev’s Africa Israel.

The suit alleges that the developers filed false documents to get a temporary certificate of occupancy from the city in time for a closing deadline. It also says the building’s architects and engineers submitted documents verifying there was fire-stopping material in the walls, but a later inspection showed the material had not been installed.

Aaron Abraham, a director of the construction and real estate group at the law firm Goulston & Storrs, which represents the developers at Beacon, said the allegations are nothing more than trumped up charges.

“We feel the complaint totally lacks merit,” he said, adding that many of the allegations date back to 2007 and beyond the statute of limitations.

Industry clean up

Cleaning up the construction industry may not be easy, but those who’ve been caught in the crosshairs have taken steps to make sure they never repeat these same mistakes.

McCann said the firm terminated or secured the resignation of all management and employees that were responsible for the fraudulent conduct. He also noted that the firm strengthened certain rules related to compliance, billing, safety and regulatory issues. (The firm was required to make comprehensive reforms as part of the agreement with Lynch’s office.)

Meanwhile, city officials, who asked not to be identified, told TRD that HPD has implemented more rigorous review processes to root out crooked contractors and government officials. Specifically, the agency has increased monitoring of developers and general contractors.

HPD also maintains a list of contractors that require “enhanced review” based on their history of compliance with labor laws and construction quality. HPD said it may block the closing of a project if the developer wants to use a contractor that is on that list.

Meanwhile, Thacher said his firm has worked as an “integrity monitor” at various sites, ranging from Madison Square Garden to Columbia University and the new Yankee Stadium site, to provide an increased level of oversight over construction activities.

All of these scandals come as the New York construction industry is struggling to deal with the still-tenuous economy.

Overall construction employment fell 3 percent year-over-year in the first quarter to 102,000 — the lowest level of construction employment since the first quarter of 1999.

And according to the New York Building Congress, a trade organization that promotes the construction industry, private and public institutions launched $702 million in construction projects in New York City in the first half of 2012 — a 41 percent decline from $1.2 billion in the same period of the previous year.

But there may be an improvement on the horizon: New office construction in Midtown is projected to rise to 2.1 million square feet in 2012, up from 1.7 million square feet in 2011.

And some say it’s only a few players creating the appearance of wider trouble in the industry.

“I don’t want to label the whole industry, but there are still a few bad apples out there who think it’s still the 1980s,” said Bob Viterertti, a former prosecutor and managing director at Kroll Advisory Solutions, a firm that consults on corporate security issues.