Under payment and performance surety guarantees, the surety promises to finish work or make payments on behalf of the contractor if the contractor defaults. Scarborough presents a real alternative to corporate sureties that stick to rigorous underwriting designed to avert losses. "I respect the man," says Wayne Frazier, president of the Maryland-Washington Minority Contractors Association. "He is a maverick and tough to deal with, and most successful business people are that way."

 

What is less clear is the way Scarborough appears to have evaded the risks typically undertaken by a surety by transferring the risk to owners and contractors via contract terms or artful phrases in bond agreements.

For example, Scarborough's bond agreements previously stated that the premium or fee was "fully earned" on execution of his bond agreement. However, in several instances in which the project was canceled or the bond rejected, he refused to give back the six-figure premiums. He says he has since changed his policy, and now will give the money back or provide a credit. When faced with a claim, Scarborough also appears at times to rely on contractual terms in the small print of the bond agreements. That and the now-changed fee policy has led to litigation (see related story, Edmund C. Scarborough's Federal Surety Cases).

Steven Golia, president of Scarborough's IBCS Fidelity, says lawsuits aren't necessarily a sign that anything is wrong. "When wrongly accused and taken advantage of, we stand up. We fight the good fight."

Another way Scarborough reduces his risk, his critics claim, has been by apparently inflating the value of the assets backing some of his bonds. To fully understand the issue, one needs to review the bond-related documents, visit coal country, the hills and impoundment ponds of places such as Nicholas County, W.Va., and learn a bit more about Scarborough.

Early Career and Starting an Individual Surety

A 1980 graduate of Hillsborough High School in Tampa, Fla., Scarborough started as a rod man on a survey crew, loading equipment and laying out stakes, according to his 2007 sworn deposition testimony given in his lawsuit against NASBP. Scarborough says he was trying to start his own business in Tampa in the mid-1980s when, while only 20 years old, he inadvertently wrote numerous worthless checks, most of which were for small amounts. He eventually served part of a one-year jail sentence for fraud.

The total amount owed was $330,000. "I paid everybody every penny," Scarborough said in the NASBP deposition. In 2008, former Florida Gov. Charlie Crist issued Scarborough a pardon, helping to wipe a grand theft conviction from his record.

Scarborough returned to construction and worked for a New Jersey-based contractor, Megan Group, reaching the position of executive vice president, according to Scarborough's deposition. Late in 2003, he says he left Megan Group, but by this time he was also operating his own company, Scarborough Civil Corp.

A disaster struck in July 2000, when an unsupported trench caved in and killed two Scarborough Civil employees. Federal safety officials proposed a penalty against the firm. While Scarborough says he was devastated by the loss of the two employees, the families of the two workers sought additional restitution beyond what was covered by insurance. Scarborough sold his company, and the year after the accident he and his wife and business partner, Yvonne, filed for Chapter 13 bankruptcy protection in federal court.

A turn of fortune was not far off. Scarborough set himself up in a new individual surety business in late 2003. In April 2004, he signed a memorandum of understanding under which bonds he wrote would be backed with collateral or reinsured by Larry J. Wright, whom a Baltimore jury had convicted of surety fraud in 1992. As it turned out, Wright also backed bonds for Hanson, who sold them to Montana contractors, according to orders filed by the Montana state auditor in 2007 banning Hanson from insurance activity.

For those Montana bonds, Wright's company, Underwriters Reinsurance, stated that it had a balance sheet rich with cash and equivalents worth half a billion dollars and another half billion in gold and precious metals, according to the Montana state auditor.

Scarborough said in the 2007 NASBP deposition that he didn't have reasons to question the asset pledged by Wright and relied on Underwriters Reinsurance's balance sheet.

The same year that Scarborough started as an individual surety, Special Agent Christopher Hamblen of the Army's Criminal Investigation Division began looking into fraudulent surety bonds on federal projects. The investigation centered on Hanson but also encompassed Scarborough, Wright and George Gowen, who provided trust receipts that appeared to back Scarborough's bond assets. Hanson could not be reached for comment.

Hamblen created and issued a so-called criminal alert notice, a government document whose aim was to advise [Dept. of Defense] officials of possible fraudulent activity and collect information for the investigation. NASBP, in the April-May 2005 issue of its newsletter, the Pipeline, reproduced the text of the criminal alert notice. The results were far-reaching and costly, fouling up potentially profitable bond placements with important construction contractors, Scarborough said in the deposition.

Scarborough, Wright and Gowen retaliated by suing the Army and the association. The three plaintiffs alleged that the criminal alert notice contained "personal and confidential information about them" and implicated them in "the alleged fraudulent and criminal activities of Hanson." Much of the information was inaccurate and misleading, the plaintiffs argued, and "in no way relates to their current businesses or Scarborough's issuance of bonds."

Despite the blow from the criminal alert notice, Scarborough's surety business had gross receipts of $5.8 million in 2006, from which Scarborough and his wife paid themselves $448,000 in salary, according to discussions of his tax returns in the deposition. Around this time, Scarborough also was looking to expand his influence, hiring Washington, D.C., lobbyist Gilbert Genn and, with others, pushing for new laws to open the doors to individual surety in Florida, New York and other states. A 2006 law in Maryland partly opened that state's public works to individual surety guarantees for public projects.

"I wrote it," Scarborough in the deposition said of the Maryland law.