On September 7, the Ninth Circuit affirmed that Chabad of California was liable for federal grant fraud under the False Claims Act for its noncompliance with financial management standards imposed as a condition of participation in the Urban Areas Security Initiative: Nonprofit Security Grant Program run by the Department of Homeland Security. See United States ex rel. Kozak v. Chabad of California, No. 15-17246 (9th Cir. Sept. 7, 2017).
In 2008, Chabad of California applied for, and received, Nonprofit Security Grant Program (“NSG Program”) funding to upgrade security equipment at its facilities in Running Springs and Los Angeles, California. The NSG Program supports nonprofits which are at particularly high risk of terrorist attack in upgrading their facilities to enhance security. Grant recipients under the Program may access funds either as a reimbursement for monies paid to vendors, or as a lump sum advance (in which case recipients are required to return any excess funds at the end of the grant period).
Recipients who choose the lump sum option are required to comply with strict financial management standards pursuant to 28 C.F.R. §§ 21 and 22, including procedural and timing requirements and the segregation of grant funds. The district court found that Chabad—which had chosen the lump sum option—did not segregate grant funds appropriately. Further, Chabad did not use these funds for security purposes—the proposed security improvements were either not made, vendors were not paid for security improvement work, or both. Chabad drew down the grant funds in several separate lump sums, falsely certifying each time its compliance with the required financial management standards. In fact, the Chabad rabbi responsible for these grant funds admitted that he never intended to segregate the funds, planning only to put the federal money in the “general pot” and then pay security vendors later with funds from a different source to be determined. In 2010, relators Aria and Donna Kozak initiated this action; the federal government later intervened in the case.
The Ninth Circuit decision, though not precedential, is notable for two reasons. First, it affirms the district court’s reasoning on the scienter element with respect to expert advice: not only did the responsible Chabad rabbi testify that he never intended to use the funds appropriately, but Chabad also blatantly ignored the advice of an expert consultant it retained specifically for the purpose of remaining in compliance with grant financial management standards. Both behaviors seem to have been of equal weight in the district court’s finding, and the Court of Appeals’ affirmation, of scienter. Second, the Ninth Circuit opinion endorses the district court’s calculation of damages through gross, rather than net, trebling (in addition to statutory penalties), following United States v. Eghbal, 548 F.3d 1281, 1285 (9th Cir. 2008) and United States v. Bornstein, 423 U.S. 303, 314–17 (1976). In all, Chabad was liable for $821,610 in actual, punitive, and statutory damages.
For the district court opinion, see United States ex rel. Kozak v. Chabad–Lubavitch, Inc., No. 2:10-cv-01056-MCE-EFB, 2015 WL 2235389 (E.D. Cal. May 8, 2015).
If you are aware of fraud against the government, whether with respect to federal security grants or in another sector, you may be eligible to blow the whistle in a False Claims Act lawsuit and may be entitled to a portion of the recovery. To find out more, contact Goldberg Kohn for a confidential consultation.