HOUSTON – A federal judge has partially granted and partially denied a motion to dismiss a Texas nonprofit and public charity group’s litigation against four defendants, brought under the False Claims Act and alleging they engaged in a kickback program and submitted false statements which defrauded the U.S. government.
On July 25, U.S. District Court for the Southern District of Texas Judge Lee H. Rosenthal handed down such a ruling in BakerRipley’s action (ex. rel. United States government) versus Kids U US, Inc. (doing business as “Fueling Brains”), Cimberli Darrough, Antonio Corrales (doing business as “Sterling Evaluation and Assessment, LLC”), and Michele Peters (doing business as “MNA Evaluation and Assessment, LLC”).
“BakerRipley’s claims arise from alleged conflicts of interest between its former senior director of the Head Start division (Darrough) and three vendors for Head Start programs who provided virtual curriculum and training and who received government grants related to those programs (Corrales, Fueling Brains, and Peters). Unbeknownst to BakerRipley, Corrales and Peters had an existing relationship with Darrough. Both Corrales and Peters had served on Darrough’s dissertation committee while she pursued her Ph.D. at the University of Houston – Clear Lake. Fueling Brains, Corrales and Peters all secured grants from BakerRipley (approved by Darrough) to provide training, evaluation and material support to BakerRipley’s Head Start programs in Houston,” Rosenthal said.
“BakerRipley claims that the defendants worked together to deceive and defraud both BakerRipley and other publicly funded entities throughout the Houston area. BakerRipley claims to have paid these three vendors in excess of $800,000 in federal funds as a result of their fraud and breaches of contract. BakerRipley claims that Corrales failed to disclose that he had acted as a ‘Strategic Advisor’ to Fueling Brains and that he had received payment for referring Head Start clients who signed service contracts with Fueling Brains. Darrough also allegedly received payments from Fueling Brains, both for approving Fueling Brain’s contracts with BakerRipley and for marketing the organization to other federally-funded education providers across Houston. All three vendors allegedly engaged in this coordinated ‘kickback scheme,’ which helped the vendors obtain federal Head Start grants totaling over $3 million over the course of roughly two years.”
According to Rosenthal, BakerRipley “also alleged that the three vendors only partially fulfilled their contracts with BakerRipley, and that Fueling Brains fraudulently misrepresented its capacity and willingness to deliver on its contractual obligations.”
“BakerRipley alleges that Darrough facilitated a conspiracy to circumvent the federal grant procurement requirements, so as to evade managerial scrutiny. For contracts of $150,000 and over, BakerRipley used the Request for Proposal process, which takes approximately two to three months to complete and triggers additional managerial oversight. BakerRipley alleges that the three vendors, under Darrough’s direction, intentionally submitted multiple invoices to BakerRipley for amounts less than that threshold to avoid the Request for Proposal process and the oversight it involves,” Rosenthal stated.
BakerRipley then brought 12 total counts of action against the defendants: Four alleged violations of the False Claims Act against all defendants; fraud, fraud by nondisclosure and civil conspiracy against all defendants; breach of contract and covenant of good faith and fair dealing against Corrales and Peters; and unjust enrichment, payment by mistake, money had and received and theft, against Fueling Brains, Corrales and Peters.
The defendants then filed separate motions to dismiss the case for failure to state claims upon which relief could be granted, on March 21.
In her analysis, Rosenthal divided the False Claims Act claims into two broad categories: (i) False Claims Act violations by the defendants stemming from their contracts with BakerRipley itself; and (ii) False Claims Act violations by the defendants due to the alleged kickback scheme stemming from Fueling Brains’s contracts with other federal grantees.
“BakerRipley alleges that Fueling Brains submitted two invoices for ‘professional Development’ and ‘material kits’ that were ‘double bill[s].’ BakerRipley also alleges that Corrales submitted two double-billed invoices for ‘trauma and emotional intelligence training’ and ‘financial literacy training.’ These factual allegations are sufficiently specific to plead “reliable indicia” that Corrales and Fueling Brains possessed the requisite scienter when submitting duplicate invoices. The invoices were facially redundant or identical, suggesting that the defendants should have known they were duplicates. The timing of Corrales’s invoicing also suggests fraudulent intent. He sent the second set of bills to BakerRipley soon after it had suffered a debilitating cyber-attack, preventing it from verifying the procurements and payments to vendors in a timely manner,” Rosenthal said.
“Darrough approved the duplicate invoices promptly after Corrales referred Darrough to the University of Houston College of Education Director of Student Relations for the purpose of furthering Darrough’s career and networking contacts. Finally, BakerRipley alleges that Fueling Brains and Corrales attempted to circumvent the automatic managerial review of contracts for $150,000 and over. Both defendants allegedly submitted multiple invoice ‘installments’ for amounts just under that threshold, including a $149,000 invoice from Corrales, in order to evade scrutiny of the invoices they submitted. This allegation, taken together with the alleged submission of duplicative invoices, sufficiently alleges fraud to meet Rule 9(b).”
As for the False Claims Act counts against Fueling Brains, Corrales and Darrough for participating in a kickback scheme with other school systems, Rosenthal preserved them but dismissed the counts against Peters.
“Affidavits attached to the complaint discuss the alleged kickback scheme in detail. Two former Fueling Brains employees, Dr. Nici Esch and Vinicius Ozorio, detailed a scheme by Corrales and Fueling Brains to sell Fueling Brains’ services to educational entities receiving federal funding. Dr. Esch states in his affidavit that Corrales’s ‘job was to get districts to sign up with Fueling Brains, for which he received 20% commissions.’ BakerRipley also alleged that Corrales emailed Fueling Brains that he expected to receive ‘cuts’ from nine identified contracts with eight different school districts, allegedly in return for his ‘marketing services.’ Fueling Brains and Corrales both allegedly paid ‘referral sources’ – individuals who ‘exercise discretion in connection with Federal Government contracts, purchases, payments, claims, or other financial transactions’ – when potential clients coming through those sources accepted Fueling Brains’ service proposals,” Rosenthal said.
“BakerRipley alleges that Darrough also marketed Fueling Brains to other school districts, using both her BakerRipley email and her personal email. Despite her knowledge of Fueling Brains’s alleged failure to fulfill most of its contractual obligations with BakerRipley within the contractual timelines, Darrough appears to have worked with Corrales to sell Fueling Brains’s services to other school districts. In one email, Darrough provided. Corrales with a list of local Head Start providers, noting, ‘This is everyone in the Houston Metropolitan Area that has any impact on Early Childhood Education…YOU OWE ME!’ BakerRipley also alleged that Darrough sent emails through her BakerRipley email account to the Bryan Independent School District and Fort Bend Independent School District trying to sell Fueling Brains’s services. BakerRipley has pleaded that Fueling Brains, Corrales, and Darrough participated in the alleged kickback scheme, with other federal grantors, with sufficient particularity to meet Rule 9(b). BakerRipley’s False Claims Act allegations for false claims and false statements under Section 3729(a)(1)(A)-(B), against Fueling Brains, Corrales and Darrough may proceed; the False Claims Act claims against Peters are dismissed.”
Moreover, Rosenthal dismissed the Reverse False Claims count as to all defendants and dismissed the conspiracy to violate the False Claims Act counts against Peters, but preserved them against Fueling Brains, Corrales, and Darrough.
Finally, Rosenthal preserved the counts of unjust enrichment, payment by mistake and breach of contract and covenant of good faith and fair dealing, breach of contract, and money had and received – while dismissing the fraud, fraud by non-disclosure and civil conspiracy counts only against Peters, and dismissing the theft count in full against all defendants.
As the complaint was already amended on two prior occasions, Rosenthal ordered the dismissal with prejudice, since in her view, further amendment would be futile.
The plaintiff is represented by Joseph E. Hoffer of Schulman Lopez Hoffer & Adelstein in San Antonio, Marion M. Reilly of Martinez Reilly in Corpus Christi, plus Jill Ondrejko Venezia of the U.S. Attorney’s Office, in Houston.
The defendants are represented by Allisa Pollard, Christian David Sheehan, Meghan Pieper and Randy Miller of Arnold & Porter Kaye Scholer in Houston, Washington, D.C. and Denver, Colo., Dinesh H. Singhal of Singhal Law Firm and Jesse Gardner Potts of Brown Sims, both in Houston, plus Andres Omar Soto and Fred D. Raschke of Mills Shirley and Andrew J. Mytelka and Jordan Raschke Elton of Greer Herz Adams, all in Galveston.
U.S. District Court for the Southern District of Texas case 4:23-cv-01124
From the Southeast Texas Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com