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UNITED STATES EX REL. MARCUS v. HESS

August 12, 1941

UNITED STATES ex rel. MARCUS et al.
v.
HESS et al.



The opinion of the court was delivered by: SCHOONMAKER

This is an informer's action based on Section 5438 and Sections 3490 to 3494, inclusive, of Revised Statutes, 18 U.S.C.A. § 80, 31 U.S.C.A. §§ 231-235, in relation to false claims against the United States. The case, on trial from December 2, 1940, to March 22, 1941, resulted in a verdict in favor of plaintiff and against all the defendants -- except the defendant Carmack -- in the sum of $315,100.91. All the defendants, except Carmack, have moved for judgment in their favor, non obstante veredicto, or, in lieu thereof, for a new trial.

The suit charges the Electrical Contractors Association of Pittsburgh, Inc., its officers, general manager, and members, with a conspiracy to defraud the United States, a department or officer thereof, in the matter of electrical works on PWA projects, by obtaining or aiding to obtain the payment or allowance of false or fraudulent claims for such electrical work against the United States. That is made an offense by Section 5438, R.S. Section 3490, R.S., provides that any person who shall do or commit any of the acts prohibited by the provisions of Section 5438, shall forfeit and pay to the United States the sum of $2,000; and in addition, double the amount of damages which the United States may have sustained by reason of doing or committing such acts, together with the costs of suit.This section further provides that such forfeiture and damages shall be sued for in the same suit.

 Section 3491 of Revised Statutes gives jurisdiction to United States District Courts to hear and determine such suits; and provides that they may be brought and carried on by any person, as well for himself as for the United States.

 An informer's action under Sections 3490-3494 of the Revised Statutes must rest on violations of Section 5438 as that section read at the time of the enactment of Section 3490. That seems to be conceded by both parties to this suit; and it has been so ruled by this court, and others. See Olson v. Mellon, D.C., 4 F.Supp. 947, affirmed, United States ex rel. Knight v. Mellon, 3 Cir., 71 F.2d 1021; United States ex rel. Kessler v. Mercur Corporation, D.C., 13 F.Supp. 742, affirmed, 2 Cir., 83 F.2d 178; United States ex rel. v. Salant & Salant, Inc., D.C., 41 F.Supp. 196, decision by District Judge Patterson, July 1, 1938.

 Section 5438 of the Revised Statutes, as it stood when it was incorporated in Section 3490, R.S., reads as follows: "Every person who makes or causes to be made, or presents, or causes to be presented, for payment or approval, to or by any person or officer in the civil, military, or naval service of the United States, any claim upon or against the Government of the United States, or any department or officer thereof, knowing such claim to be false, fictitious or fraudulent, or who, for the purpose of obtaining or aiding to obtain the payment or approval of such claim, makes, uses, or causes to be made or used, any false bill, receipt, voucher, roll, account, claim, certificate, affidavit, or deposition, knowing the same to contain any fraudulent or fictitious statement or entry, or who enters into any agreement, combination, or conspiracy to defraud the Government of the United States, or any department or officer thereof, by obtaining or aiding to obtain the payment or allowance of any false or fraudulent claim, or who, having charge, possession, custody, or control of any money or other public property used or to be used in the military or naval service, who, with intent to defraud the United States, or wilfully to conceal such money or other property, delivers, or causes to be delivered, to any other person having authority to receive the same, amount of such money or other property less than that for which he received a certificate or took a receipt, and every person authorized to make or deliver any certificate, voucher, receipt, or other paper certifying the receipt of arms, ammunition, provisions, clothing, or other property so used or to be used, who makes or delivers the same to any other person without a full knowledge of the truth of the facts stated therein, and with intent to defraud the United States, and every person who knowingly purchases or receives in pledge for any obligation or indebtedness from any soldier, officer, sailor, or other person called into or employed in the military or naval sercice, any arms, equipments, ammunition, clothes, military stores, or other public property, such soldier, sailor, officer, or other person not having the lawful right to pledge or sell the same, every person so offending in any of the matters set forth in this section shall be imprisoned at hard labor for not less than one nor more than five years, or fined not less than one thousand nor more than five thousand dollars."

 The plaintiff contends the facts of this case bring it within the purview of these statutes. The defendants contend it does not.

 The complaint charges, and the evidence in this case establishes, that the United States, in pursuance of the Emergency-Relief-and-Construction Acts of Congress, made certain grants of Federal funds to be expended in public-work projects undertaken by local municipalities and school districts in Allegheny County, Pennsylvania, under the supervision of the Federal Public Works Administrator, who is an official of the United States Government.See 40 U.S.C.A. Section 401(a). An application was made in each case to the Federal Government for a grant of Federal money to be used in the construction of these projects. Plans and specifications for each project were prepared by the local municipality or school district, submitted to the Public Works Administrator of the Federal Government for approval, and were approved by him. Bids were asked for, and received, for doing the electrical work thereon. Such bids were submitted to the Administrator for approval, and were approved by him. The money the Government agreed to contribute to these projects was paid out in the course of the carrying out of these projects only on sworn estimates submitted by the contractor to the Administrator, and approved by him on Federal Form (I 23). The Federal funds allotted to each project were placed in a bank approved by the Administrator, which bank account contained also the funds of the local authority. This special fund was from time to time checked by a representative of the Administrator; and no payments could be made therefrom to the contractor doing the work, except with the approval of the Administrator, which approval was noted on Form I 23 above mentioned.

 There was a conspiracy among the defendants, whereby they would agreed among themselves as to which defendant was to submit the low bid for a particular project, and which of the other defendants would submit other and higher bids for the same project, thereby intending to control, and actually controlling the low bid to be submitted, the preventing any competitors bidding on any of the projects involved in this suit; thus compelling the Government to contribute and pay for doing the electrical work on the projects more than the Government would have been required to pay, had there been open and free competition in the open market for doing the electrical work.

 In this connection it will be noted that the defendant-contractors, in submitting their bids which were approved by the PWA Administrator, submitted signed statements substantially as follows: "The undersigned hereby certifies that this Proposal is genuine and not sham or collusive, or mode in the interest or in behalf of any person, firm or corporation not herein named, and that the undersigned has not, directly or indirectly, induced or solicited any other bidder to submit a sham bid, or any other person, firm or corporation to refrain from bidding, and that the undersigned has not in any manner sought by collusion to secure for himself an advantage over any other bidder." And further it will be noted that payments were made out of the joint construction account in banks approved by the Administrator and containing funds furnished by the United States and the local municipality or district on Forms I 23, of estimates furnished by contractor-defendants and approved by the Administrator. Therefore, in each transaction there was not an absolute gift of money to the local municipality or district, but a grant of money by the Government for payment to the contractor for a portion of the work, which was disbursed only on vouchers submitted by the contractor to the Administrator, and approved by him.

 In our opinion, the facts of the case bring it squarely within the provisions of Section 5438, Revised Statutes, which is applicable to "Every person who makes or causes to be made, or presents, or causes to be presented, for payment or approval, to or by any person in the civil, military, or naval service of the United States, any claim upon or against the Government of the United States, or any department, or officer thereof, * * *." It requires no strained or forced construction of this Act to bring the facts of this case within the purview of Section 5438, Revised Statutes. A fair construction of this statute makes it apply to the facts of this case, because the claim on which the Government money was paid to defendant contractors was made directly to an officer of the Government; and, upon the allowance of this claim, the Government contribution to the PWA project was paid to them, out of the special construction account, in accordance with the terms and conditions under which these grants were made, i.e. PWA Form 230. This form provides in Part II, Paragraph 6, on page 5: "6. Disbursement of moneys in Construction Account. -- Moneys in the Construction Account will be expended only for such purposes as shall have been previously specified in a signed certificate of purposes filed with and accepted by the Government. * * *"

 It is our view that the Federal funds in these special construction accounts continued to be Federal funds until paid out to the contractors. This view find support in Madden v. United States, 1 Cir., 80 F.2d 672, in which there was a grant of Federal funds by the Federal Emergency Relief Administration to the Emergency Finance Board, a Massachusetts State Agency, which transferred part of its funds to the City of Boston for payment of Boston Public Library employees. In that case, Judge Morris, delivering the opinion of the Circuit Court of Appeals, said on page 676 of 80 F.2d: "* * * Any diversion of such funds from the project to which they were assigned was a diversion of government money. As hereinbefore stated, all funds allotted by the federal government for the relief of unemployment even though disbursed by state agencies were earmaked as federal funds, and if diverted from the use for which they were granted it constituted a fraud upon the government. Langer v. United States [8 Cir.] 76 F.2d 817. See, also, United States v. Walter, 263 U.S. 15, 44 S. Ct. 10, 68 L. Ed. 137; United States v. Clallam County (D.C.) 283 F. 645." In the case of Langer v. United States, 8 Cir., 76 F.2d 817, cited above, one of the questions involved was whether money loaned or granted to a state by the Reconstruction Finance Corporation, or by the Federal Emergency Relief Administration, ceased to be Federal funds. The contention was made in that case that the fund could be used in any manner the state saw fit. But the Circuit Court of Appeals held otherwise, saying on page 824 of 76 F.2d: "On the strength of these authorities, appellants contend that the money could be used in any manner they saw fit. In our view, the authorities do not sustain this contention. Congress can inquire into the manner of the execution of this duty by the state. An agreement in the nature of a conspiracy to defeat the application of the funds to their statutory purpose is within the rule of Haas v. Henkel, supra [216 U.S. 462, 30 S. Ct. 249, 54 L. Ed. 569, 17 Ann.Cas. 1112], and, as before observed, pecuniary loss is not essential. * * *"

 Other Federal authorities support the view that the False Claims Statutes apply to frauds, even though there be an independent agency through which the money was handled.

 In the case of United States v. Carlin, D.C.E.D.Pa., 259 F. 904, the court said, on page 907:

 "The funds deposited by the United States Shipping Board Emergency Fleet Corporation under the construction contract for the payment, inter alia, of workmen's wages, were the funds of the United States which had been appropriated by Congress and authorized to be expended by the President through the agency determined by him. Through the authority delegated by him to the United States Shipping Board Emergency Fleet Corporation, under which it employed the American International Corporation as its agent, and under which the latter corporation employed the American International Shipbuilding Corporation as its agent, so much of the funds deposited as were used for payment of wages of workmen employed under the construction contract were a part of the funds of the United States and were expended by the corporation carrying out the contract only as agent for the United States.

 "Under the circumstances, a fraud, the effect of which was to fictitiously increase the total amount of the pay roll and therefore the contract actual cost of the shipyard at Hog Island or the vessels being constructed there, would by so much diminish the funds of the United States. * * *"

 In Belvin v. United States, 4 Cir., 260 F. 455, the United States had a contract with Porter Brothers for the construction of buildings and other government work. The contract provided that the United States was to pay the full costs of the work done, and that Porter Brothers were to be paid a certain percentage of such costs. Porter Brothers employed Belvin as a fireman and Hoffman as a timekeeper. The rate of pay for the position of fireman was less than that for engineers. Belvin and Hoffman agreed that Belvin should be falsely and fraudulently carried on the pay rolls of the Porter Brothers as an engineer, which was done in accordance with the agreement. The defendants were indicted and convicted for conspiracy to defraud the United States. One of the arguments of counsel for the defendants was that the indictment set out a conspiracy to defraud the Porter Brothers, and not the United States. The court held that there was sufficient evidence to warrant the finding of a conspiracy to defraud the United States, Judge Pritchard saying, on page 457 of 260 F.:

 "Any amounts paid out by Porter Bros. in excess of its 'net expenditures in the performance of said work,' in the absence of any knowledge on the part of the government, would have necessarily resulted in a loss to that extent to the United States. * * *

 "The defendants sought by this conspiracy to do that which would necessarily result in defrauding the government. Porter Bros. could not in any view of the case lose a cent by virtue of this transaction. Their pay rolls were only used as a means by which the defendants could make a false charge, the burden of which would fall, not upon Porter Bros., but upon the government."

 In United States v. Harding, 65 App.D.C. 161, 81 F.2d 563, the Texas irrigation district was incorporated for the purpose of constructing an irrigation project. The work was begun, but was discontinued for lack of funds, and the district applied to the United States, through the Public Works Administrator, for a loan and grant with which to complete the project, submitting plans and specifications which received the approval of the Administrator. The defendants then entered into a plan to secure a change in the method of completing the project by the substitution of a pipe system requiring the use of redwood material for an open canal system, and so to close the bidding for the contract for the construction of the project to all bidders except bidders on redwood. Some of the conspirators were to obtain control of the redwood lumber market so that no one else would be in a position to bid successfully on the project. The conspirators were to secure to themselves the exclusive right to bid for the work on the project, and thus to secure the making of the award to them; and were arbitrarily and corruptly to fix a bid for the project at a price which would allow the defendants a profit of 30% of the actual cost of its performance.One of the defendants, a representative of the administrator, was to use his influence by way of recommendations to his superior on the approval of the grant and loan to the district for the construction of the project under the plans and specifications substituted by the conspirators, as a result of which the conspirators would be awarded the contract; the provisions for competitive bidding would be rendered of no effect; and the government grant of money would be increased. The defendants were indicted for conspiracy to defraud the United States. The district court sustained the defendants' demurrers to the indictment. The Court of Appeals, in reversing the district court, said on pages 566 and 568 of 81 F.2d:

 "* * * In this manner the conspirators were to defeat and nullify the provisions of the act of Congress with relation to grants and loans for irrigation projects and to cause the project to cost a very much larger sum -- and thus to cause the United States to pay out sums of money under its agreement for the loan and for the grant which it would not otherwise have paid out. * * *

 "* * * The ultimate object was the securing of the money of the United States. * * *

 Then, in United States v. Kapp, 302 U.S. 214, 58 S. Ct. 182, 82 L. Ed. 205, the defendants were indicted for conspiracy to defraud the United States by furnishing false information and making false statements to the Secretary of Agriculture in order to secure benefit payments under the Agricultural Adjustment Act, 7 U.S.C.A. § 601 et seq. The defendants sold hogs to the Government at premium prices through misrepresentation as to the identity of the producers of the hogs sold and the continued ownership by such producers, when in fact the hogs belonged to one or more of the defendants. The defendants demurred upon the ground that the provisions of the statute and the regulations of the Secretary of Agriculture were void, and that the acts alleged in the indictment did not constitute of offense against the laws of the United States. The court, in reversing the lower court, and remanding it for further proceedings, said, on page 217 of 302 U.S., on page 184 of 58 S. Ct.: "Such a construction is inadmissible. It might as well be said that one could embezzle moneys in the United States Treasury with impunity if it turns out that they were collected in the course of invalid transactions. See Madden v. United States [1 Cir.], 80 F.2d 672, 674. Appellees were not indicted for a conspiracy to violate the Agricultural Adjustment Act but for a conspiracy to violate the statute protecting the United States against frauds. It is cheating the Government at which the statute aims and Congress was entitled to protect the Government against those who would swindle it regardless of questions of constitutional authority as to the operations that the Government is conducting. Such questions cannot be raised by those who make false claims against the Government. See Langer v. United States [8 Cir.], 76 F.2d 817, 824, 825; Madden v. United States, supra; United States v. Harding, 65 App.D.C. 161; 81 F.2d 563, 568; United States v. MacDonald (D.C.), 10 F.Supp. 948."

 In United States v. Mellon et al., 2 Cir., 96 F.2d 462, it was held that false statements in an application for a loan insured under the National Housing Act, 12 U.S.C.A. § 1701 et seq., were within the statute making it an offense to make false statements in any matter within the jurisdiction of any department of the United States, notwithstanding the application was made only to a bank and notwithstanding the bank might not have complied strictly with the rules of the Federal Housing Administrator regarding the insurance of loans. To the same effect, see Kay v. United States, 303 U.S. 1, 58 S. Ct. 468, 82 L. Ed. 607.

 The defendants have quoted certain cases in support of their views that the funds involved in the instant suit were not Federal funds within the meaning of Section 5438, Revised Statutes. But we are of the opinion that they do not support the defendants' position.

 For instance, in the case of United States ex rel. Meyer Salzman v. Salant & Salant, Inc., D.C.S.D.N.Y., 41 F.Supp. 196, Judge Patterson held that the False Claims Statute did not cover the funds that were given to the Red Cross. Judge Patterson said: "The Red Cross is not a part of the government, nor is it a department or officer of the government. It is an incorporated association created by Act of Congress, for the purposes mentioned in the act. In no sense are its funds the property of the government. In acting under the Joint Resolution of February 11, 1933, 47 Stat. 799, the Red Cross did not become part of the government or a department or officer of the government. Under the terms of the Joint Resolution, it merely received a donation from the government and administered it for the purpose specified." In this case it may be noted also that the Government retained no control over the disbursement of the fund given to the Red Cross, where in the case at bar the grant to the Public Works Administration was controlled all the way through by the PWA Administrator.

 Defendants further contend that they cannot be subject to penalties and double damages in the instant case, because they have already been punished for the same offense by fines in criminal proceedings in this court at No. 10462 Criminal. The indictment in the criminal case charged the defendants in the instant case with a conspiracy under section 37 of the Criminal Code, 18 U.S.C.A. § 88; it reads as follows:

 "* * * throughout a period of time beginning on or about the first day of January, in the year of our Lord one thousand nine hundred and thirty-five and continuing each and every day thereafter until the return of this Indictment into this court, at Pittsburgh, in the County of Allegheny, in the Western District of Pennsylvania, and within the jurisdiction of this court, did knowingly, willfully, unlawfully, and feloniously conspire, combine, confederate, agree and have a tacit understanding together and with each other and with diverse other persons unknown to your Grand Jurors to defraud the United States, that is to say;

 "9. That, while keeping up an appearance of competition and conveying to awarding authorities the idea and belief that said Defendant Electrical Contractors were rival bidders, the Defendants agreed that they would abate honest rivalry, avoid and prevent competition, deceive the awarding authorities, prevent transmission to awarding authorities of bids, and, in effect, secure in advance the awarding of contracts to one of the Defendant Electrical Contractors selected by them; and so defeat the plain intent and purposes of said Acts and Resolutions and defraud the United States, all to the mutual profit of the Defendants, the injury and damage of the United States, the selfish destruction of the public interest and the impairment of governmental furnctions and the discredit of public officials;"

 To this indictment the defendants in the instant case pleaded "Nolo Contendere," and were fined by this court.

 It will be noted that this indictment made no reference to the presentation of a false claim against the Government for payment or approval, such as would be required in charging an offense under Section 5438, Revised Statutes. We cannot find that the offense charged in the indictment is the same as charged in the complaint in this instant case; therefore, there is no double jeopardy here.

 In addition, the case at bar is not a criminal action. It is a civil action under the provisions of Section 3490, Revised Statutes, to recover civil sanctions for the acts committed in violation of Section 5438, Revised Statutes, which is not barred by the criminal proceedings, against defendants. See Helvering v. Mitchell, 303 U.S. 391, 58 S. Ct. 630, 82 L. Ed. 917. In this case, Mr. Justice Brandeis said, 303 U.S. at pages 399, 400, 58 S. Ct. at page 633:

 "Congress may impose both a criminal and a civil sanction in respect to the same act or omission; for the double jeopardy clause prohibits merely punishing twice, or attempting a second time to punish criminally, for the same offense. The question for decision is thus whether section 293(b) [26 U.S.C.A.Int.Rev.Code, § 293(b)] imposes a criminal sanction. That question is one of statutory construction. Compare Murphy v. United States, 272 U.S. 630, 632, 47 S. Ct. 218, 71 L. Ed. 446.

 "Remedial sanctions may be of varying types. One which is characteristically free of the punitive criminal element is revocation of a privilege voluntarily granted. Forfeiture of goods or their value and the payment of fixed or variable sums of money are other sanctions which have been recognized as enforcible by civil proceedings since the original revenue law of 1789. Act of July 31, 1789, c. 5, § 36, 1 Stat. 29, 47. In spite of their comparative severity, such sanctions have been upheld against the contention that they are essentially criminal and subject to the procedural rules governing criminal prosecutions. Passavant v. United States, 148 U.S. 214, 13 S. Ct. 572, 37 L. Ed. 426; United States v. Zucker, 161 U.S. 475, 16 S. Ct. 641, 40 L. Ed. 777; Hepner v. United States, 213 U.S. 103, 29 S. Ct. 474, 53 L. Ed. 720, 27 L.R.A., N.S., 739, 16 Ann.Cas. 960; Oceanic Steam Navigation Co. v. Stranahan, 214 U.S. 320, 29 S. Ct. 671, 53 L. Ed. 1013; Chicago, B. & Q. Ry. Co. v. United States, 220 U.S. 559, 578, 31 S. Ct. 612, 55 L. Ed. 582; United States v. Regan, 232 U.S. 37, 34 S. Ct. 213, 58 L. Ed. 494; Grant Bros. Construction Co. v. United States, 232 U.S. 647, 660, 34 S. Ct. 452, 58 L. Ed. 776; Murphy v. United States, 727 U.S. 630, 47 S. Ct. 218, 71 L. Ed. 446; Various Items v. United States, 282 U.S. 577, 51 S. Ct. 282, 75 L. Ed. 558; Lloyd Sabaudo Societa v. Elting, 287 U.S. 329, 334, 53 S. Ct. 167, 170, 77 L. Ed. 341."

 We therefore conclude that the plea of double jeopardy is of no avail to the defendants.

 Defendants further contend that this suit will not lie, because it has not been authorized by the Commissioner of Internal Revenue and the Attorney General, as provided for by Section 3214, Revised Statutes, 26 U.S.C.A.Int.Rev.Code, §§ 3740, 3745(d), which reads as follows: "Sec. 3214. No suit for the recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Commissioner of Internal Revenue authorizes or sanctions the proceedings: Provided, That in case of any suit for penalties or forfeitures brought upon information received from any person, other than a collector or deputy collector, the United States shall not be subject to any costs of suit."

 In our opinion, that statute does not apply to the instant case. It relates to taxes, fines, and penalties relating to taxes.This suit is directly authorized by 3491, R.S., which provides, inter alia: "Suit may be brought and carried on by any person, as well for himself as for the United States; * * *." We therefore conclude that this objection to the instant suit was not well taken.

 "As to defendants' contention that Marcus is not an informer within the Act, because he furnished no information to the Government as to the facts upon which this suit is based before filing his suit, in our opinion that is not a necessary prerequisite to a suit under Section 3491, R.S., which expressly authorized "any person" to bring and carry on suit, with no requirement of previous notice to the United States. We therefore conclude this objection is without merit.

 Defendants contend that there has been a misjoinder of parties-defendants, in that all the parties-defendants are charged to have participated in a joint conspiracy; and that there has been no suficient proof to bind some of them. If that were so, the effect would be not to defeat the entire action, but would prevent recovery only against the defendants as to whom there was insufficient evidence.

 The general rule is that in a civil action for conspiracy to defraud, the liability of the individual defendants, as well as the existence of the conspiracy, is for the jury.A verdict may be against those whom the evidence shows are guilty, and in favor of ...


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