Fraud and dysfunction undermine efforts to promote diversity in construction

For more than a decade, Queens-based contractor Five Star Electric won lucrative government contracts, but a dark cloud loomed overhead. 

When one of the world’s largest construction firms, Tutor Perini, was negotiating to buy Five Star parent GreenStar Services, it flagged “severe risks” related to Five Star’s work with minority- and/or women-owned (M/WBE) companies, an attorney for Greenstar wrote in a 2020 court filing. 

Government construction contracts in New York typically require a portion of the work to be done by M/WBE firms, something frequently accomplished through subcontracting. Since 2014, Five Star has cooperated with investigations into its hiring of these companies. In a separate matter, the state Dormitory Authority fined Five Star $40,000 in 2020 for failing to meet hiring requirements on one of its projects, according to documents provided through a public records request. A representative for Tutor Perini said the broader investigation has concluded with no action taken against the company.  

As the city and state have ramped up M/WBE hiring goals over the last decade, they have cracked down on fraud and other abuse. But such issues persist, occasionally involving some of the most prominent names in the construction industry. 

“I think there’s plenty of it still present, to be honest with you,” said Lina Gottesman, president and owner of Smithtown-based Altus Metal, Marble & Wood. “There are companies that do everything they can to skirt the rules.”

New York has the most ambitious M/WBE hiring goals in the country, primarily focused on the construction of government-led projects. But regulatory loopholes threaten to diminish their impact. Some legislative efforts to curb fraud have stalled, and penalties are largely seen as a cost of doing business. Moreover, administrative shortfalls and a limited number of large-scale players make it difficult even for well-intentioned contractors to meet hiring requirements.

“I think the whole system needs to be looked at,” said Lou Coletti, president and CEO of the Building Trades Employers Association. “We need to get real about what the problems are.”

Passing through

In February, state investigators said that several companies had lied about hiring M/WBE firms on the Buffalo Billion project, which provided grants and tax breaks for a Tesla plant and a biotech hub on the Buffalo Niagara Medical Campus, among other developments.

One of the most common forms of fraud involves a contractor or developer asking an M/WBE company to serve as a “pass-through,” hired on paper to do the work but in reality doing a fraction of it or none at all. These companies will add a fee onto the contract amount, allowing the true contractor to be paid the value of the work and the no-show M/WBE to be paid for lending its name.

Despite the investigation, pass-throughs and the companies that hired them for Buffalo Billion work have not been penalized for their alleged fraud, the Buffalo News reported. Others, however, have faced consequences.

In April, state Attorney General Letitia James said her office secured more than $1.3 million in penalties and damages from 10 contractors that flouted diversity requirements for work on Rochester public schools.

The state has made progress since increasing its M/WBE hiring goals to 30 percent from 20 percent in 2014. In October, Gov. Kathy Hochul announced that New York had reached a 30.6 percent utilization rate in fiscal year 2022, highest in the country for the second straight year. Nearly $3 billion worth of contracts were awarded to minority- and women-owned firms, with roughly $1.6 billion going toward construction. 

A month earlier, Mayor Eric Adams announced that New York City had surpassed its goal to award $25 billion in contracts to M/WBEs by 2025.

But the extent to which fraud contributes to those numbers has long been on the radar of lawmakers and prosecutors. A 2014 grand jury report found widespread abuse and deception by construction contractors on government projects. The report made a series of recommendations, including having both the construction manager and M/WBE firm, under penalty of perjury, certify that the latter completed the work. 

A state bill sought to implement that requirement in four of the last five legislative sessions, passing in the most recent one. The measure also creates a fund for investigations and audits to ferret out fakers. 

The grand jury recommended increasing financial penalties for M/WBE fraud, but eight years later the maximum remains $10,000 per felony — a paltry amount in the multibillion- dollar New York construction industry. 

Some of the biggest names in construction have faced misconduct allegations related to M/WBE hiring in the past, including Skanska, Lendlease and Tutor Perini. All have continued to win major government contracts.

In a statement, a spokesperson for Empire State Development said its Division of Minority and Women’s Business Development “takes fraud very seriously.”

“The certification process is intended to ensure that businesses that receive the benefits of the M/WBE Program are owned, controlled and operated independently by minority group members or women,” the spokesperson said. 

​Cheryl McKissack, CEO of McKissack & McKissack, a construction and design firm working on multibillion-dollar infrastructure projects in New York City, told the Philadelphia Tribune last year that she has been approached by developers asking her to serve as a pass-through, including on a major New York project in 2019. During a March interview with The Real Deal, she said the state needs to step up its vetting and that there are still cases of white women owning a company on paper when their husband or father is actually in charge. 

“I have really good associates who are white females who legitimately run their business, and they are more offended than I am,” she said. 

“Good” faith efforts

In a 2019 report, the Black Institute criticized the city and state for a lack of true M/WBE mandates. Contractors are required to show that they made a “good faith effort” to meet the hiring thresholds, but state and city agencies have different requirements for what constitutes good faith.

“Good faith effort could mean they can fax you something, email you something, have someone hand you a flyer, and if they can prove that they made a good faith effort in trying to locate you, they can then go out and hire a white company,” Joseph Coello Sr., president and CEO of Brookman Construction, stated in the report. 

State data show that since fiscal year 2011-2012, more than 10,000 waivers were submitted to be exempted from hiring thresholds, and the state granted more than 85 percent of them. Companies were fined $6.6 million for failing to meet the “good faith” standard in 282 instances, according to data self-reported by state agencies. Those numbers include non-construction contracts, but construction makes up a majority of M/WBE contracts awarded in the state. 

“It is important to note that waivers are granted for cause,” said the Empire State Development spokesperson. “In previous years, the scarcity of NYS M/WBE-certified firms meant that only a limited number of contracts would include or meet M/WBE utilization goals.”

In 2020, the state Dormitory Authority hit two Tutor Perini subsidiaries, Five Star and WDF, with fines for failing to make good faith efforts. Last year the agency fined elevator engineering firm Kone nearly $114,000 and construction management firm Savarino Companies $75,000, according to documents provided through a public records request. 

Savarino’s percentage of M/WBE firms fell short after a state audit resulted in one of the companies it hired being removed from the Dormitory Authority’s approved list of contractors. That happened after the state approved its utilization plan for a project, CEO Samuel Savarino said. 

Coletti said the issue is not a willful desire to avoid hiring minority- and women-owned companies, but that few firms have the experience and resources to take on complex infrastructure projects. The goals set by government agencies are unrealistic, he said. 

“There has to be a recognition by government that the capacity to meet many of the M/WBE goals does not exist,” Coletti said. 

Some state lawmakers disagree and have introduced a bill that seeks to block certain avenues for cheating the system. The measure would require companies to submit a document that lists the M/WBE firms expected to work on a project when bidding, rather than once they have been awarded the contract. It also requires the agencies awarding the contracts to call the M/WBE firms and make sure they are aware that they are listed in the plans. 

The bill was introduced in 2020 and again last year, but has stalled in committee.

“The good faith effort needs to have a little more teeth,” said Assembly member Rodneyse Bichotte Hermelyn, one of the bill’s sponsors. “We need to have a more transparent process.”

Database woes 

Contractors seeking electrical subcontractors may come across Litespeed Electric, a Midtown-based company created in 2008. The city’s Small Business Services database of certified M/WBE companies lists Litespeed as a woman-owned firm that performed $23 million of work for Bloomberg in 2012 and $17 million for Turner Construction in 2011. Its certification, according to the website, does not expire until next August.  

What is not listed is the fact that the company’s executives were indicted in 2018, in part for allegedly lying about Litespeed’s status as a woman-owned firm. On paper, Donna Fleming was the company’s owner, while in reality, her husband and others maintained majority control of the firm, according to transcriptions of grand jury testimony viewed by TRD.     

According to prosecutors, the company was involved in a wide-ranging bribery and bid-rigging scheme at Bloomberg LP’s 731 Lexington Avenue headquarters that ultimately landed four executives from Turner Construction and Bloomberg in prison on tax evasion charges. Both Donna and husband Robert Fleming reached plea deals that dropped the M/WBE-related charges. 

A spokesperson for the city’s Department of Small Business Services noted that Litespeed was certified before the indictment, and the company has not been not awarded any city contracts in the past five years. 

“SBS has no record of an official complaint against this firm that would have triggered an investigation,” the spokesperson said. “However, any firm that is awarded a city contract undergoes a rigorous vetting process that would reveal criminal indictments or convictions.”  

The spokesperson said SBS has launched an internal inquiry into the matter. 

Litespeed’s continued presence on the city’s M/WBE registry is perhaps symptomatic of larger problems with the databases contractors rely on to meet hiring goals. A cursory review of the state’s registry shows missing contact information for companies, and, in many cases, a sole generic email that begins with “info@.” 

Small businesses field hundreds of emails from construction managers, and must distinguish serious job offers from the perfunctory chaff. In July, NJ Transit contacted Andrew Simmons, founder of Lashay’s Construction & Development and A&S Rebar, to see whether a bidder on a contract had reached out to him. It turned out that the company had, but the solicitation ended up in his spam folder. 

“Everybody is using email, but you have to give a call,” he said. 

Lorraine D’Angelo of Bronx-based LDA Compliance Consulting said the solicitation system does not reflect the fact that construction is a relationship-based business. M/WBE directories aren’t helpful because the descriptions of the types of work companies perform is too broad, she said. 

“I don’t know how else to say it: It is not effective. It is not getting people any work,” she said.  

Allison Pfister, who owns Poolbrook Contracting in Otsego County, has been trying unsuccessfully to get the state to revise the description of her firm. The directory lists it as doing “project management” but does not include any information about her experience with heavy civil work and machinery. 

“You can’t find my company through the directory for what I really do,” she said.  “As somebody making those calls, it wastes your time. So you lose faith in the system.” 

On the horizon 

Last month, dozens of contractors told the Minority & Women Contractors Association that the state’s process for certifying M/WBEs is laborious and can take months, sometimes years, to complete. In testimonials provided to Empire State Development and reviewed by TRD, the organization said that women-owned companies seemed to have a particularly difficult time getting certified “because of instances of fraud.”

According to the Buffalo News, state officials denied or revoked certification of woman-owned businesses 500 times in the past three years, twice the rate of minority-owned firms. Officials said the numbers do not reflect a specific effort to curb fraud.

Whatever the cause, contractors agree that the certification process is too slow. D’Angelo said she filed an application with the state to renew her five-year WBE certification in June, and three months later received an email saying the application had been opened. It was approved within 45 minutes.  

New York City Deputy Mayor Maria Torres-Springer confirmed that the city and state hope to introduce a common application sometime next year, which could help streamline the process.

She said it is important to be vigilant in ensuring that real M/WBEs are winning work but noted that the city has certified 11,000 M/WBE firms, triple the number seen in 2011.  

“You don’t get that number if you try to bury everyone in paperwork,” she said. 

Hypervigilance can have drawbacks. Site visits by state agencies can put contractors in the position of needing to prove their ethnicity, said Bichotte Hermelyn. Simmons said he’s felt “over-scrutinized” on some bids.

This year the state legislature approved a bill sponsored by Bichotte Hermelyn that raises the upper limit for noncompetitive contracts that can be awarded to M/WBEs to $1 million from $500,000. She also wants to do away with restrictions on the personal net worth of owners of such companies. For companies to be certified as M/WBEs, owners cannot have a personal net worth of more than $15 million. Until 2017, the cap was $3.5 million. Bichotte Hermelyn said this penalizes companies for success. 

“We understand that there are people in construction industries that need more capital on their balance sheets to even be considered viable,” she said. “[The] state has been challenged a number of times because people are greedy. They just feel it is not fair, it is reverse racism, and all that nonsense.”