A prominent East Grand Forks construction company accused of defrauding the government has shown its intent to fight the charges by filing a motion to dismiss the federal lawsuit.
R.J. Zavoral and Sons' attorney Ted V. Roberts made the filing on Monday.
His motion said the government's allegations "consist of little more than bald conclusions and labels, not facts."
Zavoral is accused of misleading the U.S. Army Corps of Engineers and Small Business Administration to secure a $19.1 million contract, awarded under Section 8(a) of the Small Business Act.
To obtain the 2004 contract for the Heartsville Coulee Diversion, part of East Grand Forks' flood protection system, Zavoral entered a joint venture agreement with Ed's Construction, a small firm from Cass Lake, Minn.
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SBA Section 8(a) contracts are set aside for small and disadvantaged companies owned by minorities. Ed's Construction owner Ed Morgan qualifies under the program as a member of the Leech Lake Band of Ojibwe.
Dark cloud
Three defendants are named in the complaint, initially filed March 15 in U.S. District Court in Minneapolis: President and CEO Peter Zavoral, Secretary-Treasurer John Zavoral and Craig Pietruszewski, the principal accountant for the project.
The dismissal motion argued that despite having years to prepare the case, the government failed to meet the minimum requirements to claim fraud -- "the 'who, what, when, where and how' of the alleged deceit."
That lack of specifics in claiming fraud, the motion said, has cast a dark cloud over the company, which has long played a key role in flood protection throughout the region.
"It is difficult to imagine a more serious threat to the livelihood of the defendants in this case than being the target of the federal government's public accusations of fraud and other wrong-doing," the motion said.
Allegations
The motion to dismiss breaks the allegations into four categories:
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• False statements used to establish eligibility for the contract
• Promissory fraud
• False certifications and statements about ongoing compliance
• Breach of the joint-venture contract
The motion said the complaint doesn't give any specifics about any initial false statements, when they were made or to whom they were made.
Under the terms of the joint venture, Morgan was supposed to manage the project and have control over the accounting. Ed's Construction was scheduled to do 51 percent or $2 million of the work, whichever was less.
The complaint said that Pietruszewski informed SBA's Randy Czaia by letter in 2004 of specifically what Ed's Construction would be working on, estimated to be $2,541,965 of the contract value. The complaint claims Ed's did as little as $531,831 of the work.
The motion said the government doesn't provide detail but only states it had "information and belief" promissory fraud occurred.
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In early 2006, Ed's Construction notified Czaia that Zavoral was not providing Ed's the required amount of work and was also handling most of the accounting without Morgan's oversight.
Czaia met with the members of the joint venture in February 2006, during which the defendants made false statements and withheld information to appear to be in compliance with the agreement terms, according to the complaint.
The dismissal motion said the government did not point to anything specifically that makes compliance a condition of payment, only completion of the contract.
According to the complaint, Zavoral used fraudulent, inflated invoices to divert money from the joint venture to companies in which it had a financial interest, including subcontractors.
The motion said on their own, the allegations of overbilling of the joint venture do not meet the burden for liability. There is no allegation in the complaint, it said, that Zavoral intended the government itself to pay the false claims.
Among the payments not authorized by Ed's Construction was a $252,000 salary to Pietruszewski, who was only approved to be paid $22,000. Joe Zavoral was paid $400,000, Dan Zavoral was paid $240,000 and company Vice President Robert Zavoral was paid $100,000, despite the claim in the complaint that he lived in Bemidji, Minn., at the time and did little or no work on the project.
Company histories
Zavoral and Sons was founded by R.J. "Bob" Zavoral and has been doing business in the Red River Valley since the 1951 flood, according to its website. The company was eventually taken over by sons Peter, John and Robert.
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Initially a dirt and excavation company, Zavoral continued to develop and expand. The company expanded into land development and snow removal. It created a landfill to handle flood-related debris, and for a time the company was a one-quarter partner in the River Cities Speedway.
Zavoral has been a major benefactor at Sacred Heart Catholic School, where all of the sons working in the business attended classes.
A spokesperson for Ed's Construction said the company has been doing business in Minnesota since 1995, including work for the federal government. Ed's has won contracts with both the U.S. Forest Service and the Army Corps of Engineers.
Changes to Section 8(a)
On March 14, 2011, the Small Business Administration revised regulations to the Section 8(a) program to "better ensure the benefits flow to intended recipients and help prevent waste, fraud and abuse," according to an SBA release.
"There hadn't been changes to the program in over a 10-year period," said Darryl Hairston, associate administrator for 8(a) business development.
"The program like any other initiative is evolving," he said. "Regulations that came out were an aggregation of a number of areas agencies wanted to address over a period of time. Primarily, we made some technical changes. We provided some clarification around some areas that seemed to be ambiguous."
Hairston said a $19.1 million contract would be considered among the most lucrative offered under the program, with the average contract valued at under $1 million.
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The complaint against Zavoral doesn't specify damages, but under the False Claims Act, the government is able to seek three times the amount it was damaged plus penalties. Under Financial Institutions Reform, Recovery and Enforcement Act, the U.S. is entitled to seek a penalty of up to $1.1 million or up to $5.5 for continuing violations.
Reach Bieri at (701) 780-1118; (800) 477-6572, ext. 118; or send email to cbieri@gfherald.com .
