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U.S. Builder Forfeits $55M in Felony Fraud

Monday, May 5, 2014

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A New York-based construction multinational has pleaded guilty to defrauding some of the world’s largest companies of tens of millions of dollars.

Manhattan-based Structure Tone Inc. (STI) will forfeit $55 million as part of a criminal plea agreement with the New York District Attorney's Office.

STI, a $3 billion-a-year multinational whose project portfolio ranges from Saint Patrick's Cathedral in New York City to movie theaters in Hong Kong, "systematically" overbilled big-name clients millions of dollars between 2005 and 2009, according to New York District Attorney Cyrus Vance Jr.

In 1998, STI paid $10 million and pleaded guilty to felony charges related to its role in a $2 billion bid-rigging and bribery scheme involving Sony Corp. and other high-profile companies, The New York Times reported.

St. Patrick's Cathedral St. Pat's - NYC
Wikimedia Commons / Hu Totya (left) and Jean-Christophe Benoist (right)

Structure Tone Inc. is a $3 billion firm specializing in interior construction. The Manhattan-based company's global project porfolio includes St. Patrick's Cathedral in New York City.

The company said the plea and penalty would have no effect on its business. Indeed, STI was just hired by Sony to build its new Madison Avenue corporate headquarters.

Felony Plea

The current overbilling scheme was built largely on falsified and inflated invoices by STI's subcontractors. Authorities said STI required the subs to inflate their bids with unnecessary contingencies. The victims included Bank of America, Bloomberg and many other prominent banks, financial institutions, law firms and advertising agencies, Vance's office said.

The forfeiture is one of the largest ever imposed on a construction company, Vance said in a statement.

Structure Tone’s attorney, Daniel Connolly, entered a guilty plea on behalf of the company Wednesday (April 30) in Manhattan Supreme Court to one count of first-degree falsifying business records, a felony. No executives were identified in the plea agreement.

2 Types of Contracts

Founded in 1971, STI focuses on construction interiors and typically acts as either a Construction Manager (CM) or a General Contractor (GC) on its projects, authorities said.

As a CM, Structure Tone is required to act in the best interests of the client, making certain that the client receives the best value for the money spent.

"Other than its management fee for a particular subcontractor, there are no legitimate circumstances under which STI is entitled to additional profit based upon the subcontractors’ costs to the CM client," the D.A.'s office said.   

Moynihan Courthouse - NYC
Wikimedia Commons / Americasroof

Structure Tone was responsible for interior construction on the 27-story Daniel Patrick Moynihan U.S. Courthouse, which contains nearly 1 million square feet and opened in 1996.

As a GC, Structure Tone charges clients a lump sum, or fixed price. Its profit is then the difference between that price and its actual cost to complete the project.

Secret Discounts and Overbilling

The company exploited both types of contracts, authorities said.

  • STI required subcontractors on CM jobs to increase their bids by adding, in many cases, unnecessary contingencies listed in an addendum provided by STI called the Rider B. This practice was concealed from STI's clients.   
  • After the clients agreed to pay the subcontractors’ increased bids, STI obtained additional discounts from the subs that were not passed along to the clients.
  • STI then created fraudulent purchase orders containing the increased amounts (from the Rider B) and omitting discounts provided by subcontractors. The subcontractors held the overpayments for STI.
  • STI recovered these overpayment amounts by inducing these same subcontractors to provide discounts to STI on other, unrelated GC projects.

Multibillion-Dollar Industry

"Interiors construction is a multibillion-dollar industry in New York City and is vital to our city’s economy,” said  Vance.

“Structure Tone’s felony plea and forfeiture of $55 million—one of the largest forfeitures ever imposed on a construction company—sends a clear message that this type of criminal activity will not be tolerated."

Red Hat - Cork, Ireland
redhat.com

Structure Tone's global portfolio features projects in China, the UK and Ireland, including the Red Hat office in Cork, Ireland.

Vance said the plea reflects both Structure Tone’s criminal conduct and the "remedial actions the company has implemented since 2010 to end the fraud and provide better oversight of its business practices."

Construction Investigations

This case was a joint investigation by the Manhattan District Attorney’s Rackets Bureau and a detail of the Special Investigations Unit of the New York State Police assigned to the Rackets Bureau.

The case is part of a long-running investigation by New York City prosecutors into fraud and corruption in the city's construction industry.

"Over the past six years, the Manhattan DA’s Office has obtained more than 40 convictions from scores of individuals and corporations, including some of the largest general contractors in New York City, for kickbacks and bid-rigging schemes, and recovered more than $50 million through those prosecutions," the office said.

Company Responds

In a statement Thursday (May 1), STI said that it was "pleased this matter has come to a conclusion" and that it had "cooperated fully" in the investigation. It said the $55 million forfeiture payment would come "from prior years’ retained earnings".

With more than 1,600 employees, the Structure Tone organization also includes L.F. Driscoll, Structure Tone Southwest, Pavarini Construction Co., Inc., Pavarini McGovern and S&techs.

"This case has no impact on our ability to complete existing and future projects," STI said. "Long before this process began, we strengthened our compliance protocols to improve transparency."

 

   

Tagged categories: Building interiors; Commercial Construction; Design; Enforcement; Government; Laws and litigation; Residential Construction

Comment from David Cerchie, (5/5/2014, 9:13 AM)

One or more actual people had to have made the decision to engage in this fraudulent practice, so why weren't any people prosecuted for these crimes? Corporations don't make decisions, people do. This adds fuel to the negative reputations that big corporations have built for being able to take a slap on the hand, pay a fine and keep on moving along. If this operation does $3 Billion per year, $55 million is not even 2% of one year's gross revenue. Looks like another white wash.


Comment from Tony Rangus, (5/5/2014, 9:40 AM)

Felony conviction in 1998 for bribery & bid rigging. Now a 2014 felony conviction for overbilling clients to the tune of $55,000,000. One would think their clients would be on them in civil court for damage recovery, and NEVER use them again. I hope this article appears in every engineering & construction trade journal in the universe.


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