Photo: Couretesy of Total Impact Communicaitons

Alleged subcontracting fraud by contractor occurred on Manhattan’s South Ferry subway station rehab and other New York City jobs.

Donovan. Before entering the public sector, he was a principal at Schiavone, one of the industry’s biggest tunneling firms, and was tried and acquitted for a similar type of MBE fraud involving the company in 1987. After his acquittal, Donovan famously called out to the prosecutor, “Give me back my reputation.”

Since then, Schiavone has worked on many big New York City-area contracts, but its name has popped up in affidavits, one filed by a federal agent and another by an organized crime figure turned government witness. Both contained allegations about Schiavone and planned MBE fraud schemes, but neither were proven or prosecuted.

This time prosecutors avoided a trial. Under the “civil settlement agreement” made with Loretta E. Lynch, the U.S. Attorney in Brooklyn, N.Y., Schiavone’s new owners admitted that “some of its employees engaged in a scheme to defraud” public agencies by submitting reports between 2002 and 2007 that represented the company as using certified minority business enterprises (MBEs), women business enterprises (WBEs) and disadvantaged business enterprises (DBEs) on the projects. While the contractor was required to use such firms, contract funds were actually going to other companies or individuals, prosecutors said.

Schiavone said the activities being probed occurred before its late 2007 acquisition by Dragados Inversiones USA, the New York City-based arm of the Spanish infrastructure giant, and that the contractor has “fully cooperated” with authorities. “This settlement enables Schiavone to put this investigation behind it,” said Austin V. Campriello, the firm’s outside attorney.

Settlement talks were first reported in The New York Times on Nov. 24. Lynch said the employees, who were not named, are no longer at Schiavone.

According to the prosecutor’s office, the alleged fraud occurred on two contracts for the $2.8-billion Croton Water Filtration plant in the Bronx, N.Y., for the city Dept. of Environmental Protection, and two involving rehab work on Manhattan subways for the Metropolitan Transportation Authority. DEP has a general MBE utilization goal for construction of about 21.5% for jobs in New York City; the MTA subway projects had respective DBE goals of 20% and 7%.

Schiavone was not charged with any crime, but under its “non-prosecution agreement,” the firm also agreed to undertake several “remedial measures,” said Lynch. These include the creation of a new “ethics and compliance officer” position, which the firm did in 2008.

The contractor also created “anonymous reporting mechanisms” for employees to report fraud, new manuals for minority contracting compliance, a new code of ethics and business conduct, and mandatory compliance courses for employees. Lynch said the firm will be assisting investigators in the fraud probe for three more years and has agreed to reimburse more than $2.3 million in investigative costs. Schiavone also has agreed to retain Thacher Associates, a consulting firm led by Thomas “Toby” Thacher, to perform an independent review of the firm’s subcontracting procedures on MTA projects.

Thacher was retained by MTA and DEP to monitor compliance on the projects and report any alleged fraud by the firm to the agencies, according to agency spokespersons. A DEP spokesman said the agency had used the independent monitor since 2007 to “ensure the integrity of the project.” No other companies were named in the settlement, but federal prosecutors in Manhattan are probing similar allegations involving other area contractors.

Skanska USA, New York City, said on Nov. 24 that “it was aware” of a government probe involving Skanska Civil and one of its subcontractors on the Croton project. A spokeswoman identified the firm as Environmental Energy Associates, based in Ridgefield, N.J. A DEP spokesman also confirms that an investigation is “ongoing.”

As for reputations, one investigator said of Schiavone’s practices that “no one can explain it.” An MBE firm owner asked whether the settlement paid by Schiavone should be provided to MBE firms that were deprived of work.