Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) unanimously approved amendments to the CFTC’s Whistleblower Rules that will, among other things, strengthen the CFTC’s anti-retaliation protections for whistleblowers and enhance the process for reviewing whistleblower claims. Based on a reinterpretation of the CFTC’s anti-retaliation authority under the Commodity Exchange Act (CEA), the CFTC or the whistleblower may now bring an action against an employer for retaliation against a whistleblower. The amendments also prohibit employers from taking steps to impede a would-be whistleblower from communicating directly with CFTC staff about a possible violation of the CEA by using a confidentiality, pre-dispute arbitration or similar agreement.

The Government subsequently filed its complaint in intervention on August 19, 2011. The Government’s complaint in intervention asserts two additional causes of action against LB&B Defendants for common law negligent misrepresentation and fraud against the LB&B Defendants. Pending before the Court are the LB&B Defendants’ motions to dismiss both complaints, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.1 Having carefully considered Defendants’ motions to dismiss, the responses and replies thereto, the applicable law, and the record as a whole, Defendants’ Motion to Dismiss Relators’ complaint is DENIED and Defendants’ Motion to Dismiss the Government’s complaint in intervention is GRANTED IN PART AND DENIED IN PART.

The Government subsequently filed its complaint in intervention on August 19, 2011. The Government’s complaint in intervention asserts two additional causes of action against LB&B Defendants for common law negligent misrepresentation and fraud against the LB&B Defendants. Pending before the Court are the LB&B Defendants’ motions to dismiss both complaints, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.1 Having carefully considered Defendants’ motions to dismiss, the responses and replies thereto, the applicable law, and the record as a whole, Defendants’ Motion to Dismiss Relators’ complaint is DENIED and Defendants’ Motion to Dismiss the Government’s complaint in intervention is GRANTED IN PART AND DENIED IN PART.

DENIED IN PART. I. Background A. Statutory Framework 1. The Section 8(a) Program The SBA’s Section 8(a) program is a business development program for small businesses owned by individuals who are socially and economically disadvantaged. See 15 U.S.C. § 637(a); 13 C.F.R. § 124.1. Qualifying small businesses that are 1 Because a number of the arguments made in both motions to dismiss overlap, the Court will address the motions together. Further, because only the LB&B Defendants have responded to the complaint, this opinion refers to them throughout as “Defendants.” 2 owned or controlled by socially or economically disadvantaged individuals may apply to the SBA, and if accepted into the program, they are eligible to receive preferential treatment in the form of “set aside” contracts. They are also eligible to receive technological, financial, and practical assistance. Relators’ Compl. ¶ 15; Gov’t Compl. ¶¶ 19-21. In order for a small business to participate in the program, it must apply to and be certified by the SBA.

It must first meet certain size requirements, see 13 C.F.R. Part 21, and it must also be “disadvantaged,” which requires that at least fifty one percent of the business is owned and controlled by one or more individuals who are socially and economically disadvantaged. See 15 U.S.C. § 637(a)(4)(A)-(B); 13 C.F.R. § 124.105. The program defines socially “disadvantaged individuals” as those who have been “subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.” 13 C.F.R. § 124.103(a); see also 15 U.S.C. § 637(a)(5). “Economically disadvantaged” individuals are those socially disadvantaged individuals “whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.”

13 C.F.R. § 124.104(a); see 3 also 15 U.S.C. § 637(a)(6)(A). A company selected for the program must annually certify its continued eligibility for the Section 8(a) program and must provide financial and other information to the SBA. See 13 C.F.R. §§ 124.112(b), 124.509(c), 124.601, 124.602. A company may remain in the program for a maximum of nine years if it continues to meet the eligibility requirements throughout the period, and it may participate in the program only once. See 13 C.F.R. §§ 124.2, 124.108(b).

An individual who is not a member of one of these groups may nonetheless gain admission into the Section 8(a) program by establishing by a preponderance of the evidence 4 that he or she is socially disadvantaged under criteria set forth in 13 C.F.R. § 124.103(c). In the context of the Section 8(a) program, “control” requires that “both that disadvantaged persons have the power to control the company and that such persons actually exercise their authority to control the company.” Gov’t Compl. ¶ 26; see also 13 C.F.R. § 124.106. Although a non-disadvantaged individual may be involved in the management of a company that participates in the Section 8(a) program, that individual may not, inter alia, exercise actual control of the company or receive compensation that exceeds that of the socially or economically disadvantaged person who controls the company. See 13 C.F.R. § 124.106(e). Further, non-disadvantaged individuals who “transfer majority stock ownership or control of the firm to an immediate family member within two years prior to the application and remain involved in the firm as a stockholder, officer, director, or key employee of the firm” are subject to a rebuttable presumption that they actually control the firm. Id. § 124.106(f).

2. Mentor Protégé Program In addition to the Section 8(a) program, the SBA also administers a Mentor-Protégé program, which allows a non-Section 8(a) company to form a joint venture with a Section 8(a) eligible company. The program is designed to encourage an 5 approved mentor, that is not a Section 8(a) concern, to provide managerial, financial, and technical assistance in order to improve a protégé’s ability to bid on and compete for government contracts. See 13 C.F.R. § 124.520(a)-(b). The protégé must be in the development stage of participation in the Section 8(a) program, have never received an 8(a) contract, or have a size that is half the size of the corresponding NAICS code. Id. § 124.520(c).

n order to participate in the program, a mentor and protégé must submit their joint venture agreement to the SBA for approval. Id. § 124.513(a)(1). The Section 8(a) participant must be the “managing venturer” of the joint venture, and an employee of the Section 8(a) concern must be designated as the project manager responsible for overall contract performance. Id. § 124.513(c)(2). Where the “8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture agreement.” Id. § 124.513(a)(2). The applicable regulations specifically provide that “[n]o determination of affiliation or control may be found between a protégé firm and its mentor based on the mentor/protégé agreement or any assistance provided pursuant to the agreement.” Id. § 124.520(d)(4).

B. Factual Background 6  LB&B is a North Carolina company that has its principal place of business in Columbia, Maryland. It was certified by the SBA as a Section 8(a) concern on April 6, 1995. This certification was based on the status of President Lily Brandon, who is an Asian Pacific American. Relators’ Compl. ¶¶ 7, 29; Gov’t Compl. ¶ 12. Both Relators were employed at LB&B -- Steven O. Sansbury was employed as an Operations and Maintenance Institutional Planner from 2000 until his separation from the company in 2003, Relators’ Compl. ¶ 4; James Buechler was employed as an Assistant Project Manager at the FDA from July 2003 until August 2005, Id. ¶ 5.

1. Allegations in the Government’s Complaint in Intervention2 LB&B was incorporated in 1992. Govt. Compl. ¶ 28. Initially, the Board of Directors of the company had six members, only two of whom were socially and economically disadvantaged: Ms. Brandon and her son, F. Edward Brandon Jr. Relators and the Government allege that neither possessed sufficient skills or experience to run a company engaged in LB&B’s main lines of business -- government contracts, manufacturing, facilities management, and government services. Id. ¶¶ 29-30. Three of the other directors, including Defendant 2 These allegations relate to claims made in both the Relators’ complaint as well as in the United States’ complaint in intervention.

F. Edward Brandon, Ms. Brandon’s husband, had extensive experience in government contracting and the other lines of business. Id. ¶ 31. Despite her alleged lack of experience, Ms. Brandon was selected as the president of the company. Moreover, though she contributed substantially the same amount as the other directors, Ms. Brandon’s financial contribution was treated as equity and she was given 51 percent of the company’s stock. Id. ¶¶ 33-34. In 1994, prior to applying for Section 8(a) certification, all of the directors of the company except for Ms. Brandon officially resigned, though they stayed on as employees with the same titles and salaries as before their resignations. Id. ¶¶ 35-37. The Government alleges that two of the original directors sold their stock to Ms. Brandon at this time at the share price set at the time of the company’s formation despite the fact that the company had grown in the interim. As a result of this sale, Ms. Brandon acquired an 81 percent interest in the company. Id. ¶ 39.

On December 28, 1994, LB&B initially applied for Section 8(a) certification. The Government alleges that there were a number of misrepresentations on the initial application. For instance, Ms. Brandon’s salary was listed as $64,000 and Mr. Brandon’s total compensation was listed at $42,500. According to the Government, Ms. Brandon’s salary was actually $13,692.16 8 while Mr. Brandon’s total compensation was $18,126.60. Because Mr. Brandon’s salary allegedly exceeded that of Ms. Brandon, LB&B would have been ineligible to participate in the Section 8(a) program. Id. ¶¶ 43-47

Further, on its application, LB&B represented that Ms. Brandon would be responsible for the day-to-day operation of the company and described Mr. Brandon’s role as limited to assisting the president. Id. ¶¶ 48-49. However, the Government alleges that Ms. Brandon had “no meaningful substantive role” in the daily operations of the company, and did not: (i) make specific decisions regarding bidding on new business; (ii) oversee [LB&B’s] performance of its government contracts . . . ; (iii) play any substantive role in the negotiation and formulation of [LB&B’s] government contracts; (iv) set and enforce expectations for the company’s general managers; (v) formulate specific company practices regarding collective bargaining and interactions with unions; or (vi) oversee the financial performance of [LB&B] on its government contracts. Id. ¶ 50. Those functions were instead overseen by Mr. Brandon and others. Id. ¶ 51. Thus, the Government alleges that Ms. Brandon’s actual role at the company “failed to satisfy the statutory and regulatory requirements of control sufficient to participate in the Section 8(a) business development program.” Id. ¶ 52.

After receiving LB&B’s initial application for certification, the SBA requested additional materials from the 9 company. The SBA specifically noted that Ms. Brandon’s résumé did not appear to indicate that she had the necessary skills to manage and operate the company. The SBA asked LB&B to provide a fuller explanation of who had such skills at the company. Id. ¶ 54. The Government alleges that in responding to this request for information, Defendants further misrepresented Ms. Brandon’s skills and role by stating that she had prior management experience in the manufacturing industry, that she had direct control over daily operations, that only she could sign company commitments and checks, and that she controlled the finances of the company. Id. ¶¶ 56-60.

The Government alleges that on the basis of these misrepresentations, the SBA certified LB&B as a Section 8(a) concern on April 6, 1995 for a period of nine years to conclude in April 2004. Id. ¶ 61. On the basis of this certification, LB&B was able to market itself as a Section 8(a) program participant and bid on “set-aside” contracts, which the Government contends it began to actively and aggressively do after February 1, 1997. Id. ¶¶ 62-67; 82-84. Moreover, on the yearly certifications that it submitted after April 1995, the Government alleges that LB&B continued to falsely certify, as it had on its original application, that Ms. Brandon controlled the company and that she was the only person at the company who could commit monies and sign company checks. Id. ¶¶ 68-81.

2. Allegations in Relators’ Complaint In addition to the allegations above, Relators also allege that Defendants engaged in fraud in two joint ventures that LB&B entered into with Section 8(a) concerns under the SBA Mentor Protégé program. Relators allege that in late 2003 and early 2004, prior to its “graduation” from the Section 8(a) program, LB&B began to search for protégé companies “so that it could continue to illegally benefit from the 8(a) programs’ [sic] advantages on bids on government contracts.” Relators’ Compl. ¶ 50. To that end, Relators claim that LB&B entered into discussions with Bering Straits Aki, LLC (hereinafter “BSA”), an Alaskan, Inuit company owned by Defendant Gail Schuber, regarding a proposed mentor-protégé relationship. Id. ¶¶ 50- 52. On August 16, 2004, a little over four months after LB&B exited the Section 8(a) program, the SBA approved a joint venture agreement between LB&B and BSA, pursuant to which the joint venture was able to secure several government contracts, including contracts with the Centers for Medicare & Medicaid Services, the General Services Administration Public Buildings Services, the Federal Emergency Management Agency, and the United States Air Force. Id. ¶¶ 52-53. Relators allege that the project managers for these contracts were LB&B employees until January 2005, which was after the joint venture was approved by the SBA. Id. ¶ 55. These project managers purportedly did not switch their employment to BSA until January 2005, when they were instructed to do so by a senior vice president.

LB&B also entered into a mentor-protégé relationship with Ckilkat Services, an Alaskan corporation, at some point in 2006. Id. ¶ 64. Also in 2006, LB&B hired Sheldon L. Jahn as a senior vice president. Relators allege that Mr. Jahn’s employment was transferred from LB&B to Chilkat in late 2006 or early 2007, after the SBA had already approved the joint venture, so that he could serve as the general manager of the joint venture. Id. C. Procedural History 12  On or about December 27, 2004, Relators filed an action alleging similar claims relating to Defendants’ participation in the Section 8(a) program in the United States District Court for the District of Maryland. See United States ex rel. Sansbury v. LB&B Associates, Inc., No. 04-4018.

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