When, as expected, President Obama signs into law the National Defense Authorization Act, a new military spending bill, he probably won’t know about Section 874, which upgrades the minimum standards for surety-bond assets. The section closes a gap in federal regulations by requiring that assets are real and placed in the care and custody of the federal government. Under the existing regulations, con artists and charlatans have dominated the world of individual surety bonds. The value of their bonds was usually zero.
By using complex, opaque asset types, such as waste coal or irrevocable trust receipts, the individual sureties made certain that only the most alert federal contracting officers could see through the shroud to discover that nothing—or nothing matching the value of the bond or contract—was in place. The rogues and rascals ran free. To his credit, the surety amendment’s main sponsor, Rep. Richard Hanna (R-N.Y.), paired the bond-asset measure with an expansion of the Small Business Administration’s (SBA) ability to back surety bonds under its guarantee program, from 70% to 90% of the loss paid by a participating surety, on a contract amount up to $6.5 million. This should help small contractors grow.
Although, in recent years, prosecutors have brought charges against several individual sureties—and the biggest individual surety, Edmund C. Scarborough, declared bankruptcy, though he was never charged—the issue has refused to die. In one recent case involving work at Golden Gate Cemetery in California, an alert contracting officer at the Dept. of Veterans Affairs rejected an individual surety’s bid bond, backed by an irrevocable trust receipt, because the asset was inadequately identified. The contractor appealed the rejection. The provider of the irrevocable trust receipts, George Gowen, told ENR that “things don’t get built” and “a lot of jobs would not get done” without individual surety bonds. We’ve heard that before. Ten years ago, Gowen teamed with Scarborough as plaintiff in a lawsuit against the U.S. Army and the National Association of Surety Bond Producers. The Army and the NASBP had tried to warn people about possible fraud. Apparently, Gowen hasn’t gotten the message: The game is over, and most everyone has caught on. Broker Karen Barbour, who, in 2008, was the SBA Small Business Person of the Year in Maryland, may have gotten the message. She has reached a license-suspension agreement with the state’s insurance regulators connected to her placing bonds backed by individual sureties.
Many associations are backing the individual surety reform. They include the Surety & Fidelity Association of America, which has skirmished with the individual surety purveyors, and especially NASBP, which has devoted many hours to the decade-long legislative and legal struggle that we hope brings to an end this ethical blight on federal public works.