Risk Management Concepts For Public-Private Crisis Projects

By Jordan Strauss
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Law360 (May 27, 2020, 5:27 PM EDT) --
Jordan Strauss
Jordan Strauss
As a general counsel, if you learn that your organization is pursuing a large disaster relief or recovery contract, where should your mind run?

The state of Maryland recently cancelled a $12.5 million contract for personal protective equipment with a contractor who allegedly failed to perform.[1] In April, the U.K. government was widely criticized for purchasing $20 million in antibody tests that failed to work.[2]

Who is responsible for these shortcomings — the government or the firms that made promises they allegedly could not keep?

Generationally predictable but unprecedented in our time, the COVID-19 pandemic has created the greatest ever need for public-private partnerships. Firms and people are being pressed into public service like never before and extreme sacrifices will need to be made by all.

This includes shareholders, who will need to accept a less-than-expected return and dividend; corporate leaders, who will likely need to reduce their pay; and workers, who at best will see less predictable hours and at worst layoffs and very real personal risks. These sacrifices, and the pressure to move quickly, are how the country and the world will become stronger after the pandemic and its ripple effects subside.

Societal shocks always produce avarice and fraud. But they also introduce risks for well-meaning organizations acting in haste.

The private sector's role in disaster response is exceptionally important but extraordinarily fraught. In advising the expanding list of government vendors, counsel needs to be acutely aware of the risks while aggressively creating and monitoring internal controls and risk management processes.

As traditional enterprise revenue drivers shift, the pressure to find new sources of money will become intense, as will the desire to protect existing revenue centers. As their companies navigate turbulent waters, general counsel and chief risk officers must ensure that these efforts do not create new risks by keeping certain things in mind.

Disasters are different.

Shortly after Hurricane Katrina made landfall in 2005, the Federal Emergency Management Agency found itself overwhelmed, just like the government of Louisiana. A flurry of requests for proposals flooded the government contracting market, with FEMA seeking everything from food to shelter.

Opportunistic profiteers with no proven capability of performing responded in kind, with many seeking a quick dollar. One such contractor, Lighthouse Disaster Relief, received a large contract despite a total lack of history of performance in the space. Lighthouse was to provide food and shelter for first-responders.

When the government sued under the federal False Claims Act alleging a failure to perform, Lighthouse settled and accepted a $4 million judgment.[3] The first-responders who were supposed to be sheltered had to look elsewhere, even while the recovery efforts in Louisiana continued to suffer. And the publicity surrounding the case helped amplify attacks on the federal contracting apparatus and drew additional fire to the contractor community.

In a disaster, nonperformance will have bigger implications than a simple breach of contract. It may result in death or suffering and, for the nonperforming company, it will certainly result in extremely negative publicity. It will leave you playing cleanup in the public realm, and you may never recover.

So, if your chief revenue officer identifies a potentially large contracting opportunity for disaster relief services, these are questions to ask before engaging in any agreement to provide disaster-support services:

  • What are you promising to do?
  • Have you done it before?
  • Can you document exceptions, caveats and concerns in a binding and transparent way?

If you have not worked in a disaster environment before, think carefully about whether and at what point you should jump in. In the disaster response community, the saying that "when you need a friend, it's too late to make one" holds true in this respect. Succeeding in a crisis environment requires practice, preexisting relationships and an organizational orientation towards creative problem-solving.

General counsel can help make sure the C-suite is using common sense. It may be what keeps the company off the front page and, in the worst case, its executives out of prison.

When addressing unfounded allegations of fraud, waste and abuse, the best defense is always a factual one: that people were helped, that your goods or services had real and impactful value greater than bargained for, and that you got the job done and then some.

You must ensure that your organization is honest with itself and others about what it can and cannot do.

Remember that representations concerning your capabilities may be subject to criminal false statement statutes. Also, over-representations may lead to incomplete contracting for additional disaster-recovery services, which deprive victims of much-needed aid and provoke public criticism of your actions, while endangering your business and employees.

Pricing is a risk.

In late April, the U.S. Attorney's Office for the Eastern District of New York charged two individuals with hoarding one million protective masks for the purpose of selling them at an exorbitant markup (which the indictment stated was double or triple the purchase price).[4] It is not clear whether the defendants ultimately would have been able to provide the masks, as the investor to whom they were pitching turned out to be a law enforcement agent.

If the allegations are true, then the defendants sought to profit unfairly from the largest public health crisis in generations. If they are false, the defendants' names will be permanently tarred. Imagine yourself or your client in their shoes.

Pricing is a challenge in normal times. Large-dollar contracts, especially those made immediately following a crisis, will always receive unfavorable public scrutiny. If prices must be higher due to legitimate risk factors or performance challenges, consider whether the company's involvement in the endeavor is worth the negative publicity and potential damage to goodwill.

Public understanding of the challenges of disaster aid delivery (and the incumbent costs) is not sophisticated, and there is no public or government appetite for perceived price gouging.

The risk of pricing being misunderstood is real, and poses potentially existential risks that must be weighed before entering into a contract. If you are having trouble convincing your leadership or business developers of the business risk of crisis pricing, consider asking your communications professionals (or an outside PR firm) to conduct an analysis of the damage to your brand's goodwill should your prices be criticized.

Nontraditional risk factors must be considered.

Do you or your board members have any political connections? If so, they may be publicized to your detriment regardless of whether such connections lead to a contract.

Will performance of the contract place low-paid employees or contractors at increased health and safety risks? Are you about to issue an annual report showing a multimillion dollar compensation package for your CEO?

Are you able to source all materials from an appropriate supplier if your contract has a country-of-origin requirement? Are there critical-failure possibilities arising from elements beyond your direct control — like a supplier failing to deliver on time?

All these factors can contribute to major risks that, though difficult to quantify, must be considered at the outset.

The law is the law until it changes.

Remember that the law may not include a good-intentions exception in the way that you might hope. What may begin as a well-meaning attempt to coordinate aid delivery with other suppliers in an emergency could potentially lead to allegations of — or actual  — price fixing or market tampering.

An attempt to rush invoicing to ensure you make payroll and keep workers delivering relief could lead to False Claims Act allegations.

Although buying an overworked federal employee a meal or covering a hotel room might seem like common decency, it may violate the law.

While there are some statutory exceptions to federal antitrust laws for extraordinary emergencies, these exceptions require a specific set of government actions first. If they do not happen, you should not expect implied immunity from inappropriate, even if well-intentioned, coordination.

Honesty, transparency and training will save the day.

When the time comes to ask for payment, make sure the process by which any invoice or request for payment is made, even when the claim is being passed through a third party or upstream contractor, is scrupulously honest and transparent.

Any material misrepresentation by government contractors or entities in privity with government contractors can cause liability under the False Claims Act — including state analogues and criminal statutes — carrying with it punitive fees and treble damages, if not criminal penalties.

Develop and implement a comprehensive compliance and training program to educate your professionals about the need for honesty, transparency and careful dealing, particularly when communicating with government representatives.

This compliance program is not just good practice, it will also be important evidence should your organization be wrongly accused of fraud in the future. The same advice applies to your due diligence program for upstream and downstream vendors.

For public companies, the mere allegation of fraud can lead to a stock drop and class-action lawsuits. Appropriately documenting the work done, while it is still in progress, is critical.

A picture speaks a thousand words. An unfounded allegation of waste, fraud or abuse will need to be defended in both legal and reputational forums.

Careful risk management is not a luxury and need not be a serious burden on operations, even in extreme times. The country and world will emerge from the current crisis, but organizations that do not think now about risk management face greater risks than mere insolvency.

Although it is likely that the pandemic will slow the work of many traditional enforcement organizations — if for no other reason than their employees cannot investigate with the normal freedom of motion during periods of lockdown — the False Claims Act, the Anti-Kickback Statute, antitrust laws, and the normal panoply of criminal and regulatory regimes are merely on sick leave.

They will return, in force, and on the other side of the crisis, those who find themselves in the regulatory crosshairs will be judged harshly.

Correction: An earlier version of this article misidentified the U.S. Attorney's Office for the Eastern District of New York. The error has been corrected.

Jordan L. Strauss is a managing director in the business intelligence and investigations practice at Kroll Inc., a division of Duff & Phelps Corp.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.inquirer.com/health/coronavirus/coronavirus-covid19-maryland-cancels-ppe-supply-contract-republican-firm-toomey-fundraiser-20200503.html

[2] https://www.nytimes.com/2020/04/16/world/europe/coronavirus-antibody-test-uk.html

[3] https://www.justice.gov/opa/pr/hurricane-katrina-contractor-accepts-4-million-judgment-under-false-claims-act

[4] https://www.justice.gov/usao-edny/pr/two-individuals-arrested-conspiring-violate-defense-production-act

For a reprint of this article, please contact reprints@law360.com.

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