United States v. Strock

19-4331
United States v. Strock

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________

August Term, 2020

(Argued: September 24, 2020 Decided: December 3, 2020)

Docket No. 19-4331
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UNITED STATES OF AMERICA,

Appellant,

– v. –

LEE STROCK, CYNTHIA ANN GOLDE, STROCK CONTRACTING, INC.,

Defendants-Appellees,

KENNETH CARTER,

Defendant.
_______________

B e f o r e:

CALABRESI, KATZMANN, and CARNEY, Circuit Judges.

_______________

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 The United States of America appeals from an order of the United States
District Court for the Western District of New York (Geraci, C.J.) dismissing its
claims under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., and federal
common law against defendants-appellees Lee Strock, Cynthia Golde, and Strock
Contracting, Inc (“SCI”). In particular, the government challenges the district
court’s conclusion that the complaint failed to state a claim under the FCA because
it did not adequately allege that the purported misrepresentations—that Strock’s
business qualified as a service-disabled veteran-owned small business
(“SDVOSB”)—were material to the government’s decision to pay that business
under contracts reserved for SDVOSBs. The government also challenges the
district court’s conclusion that the complaint failed to allege defendants-appellees’
knowledge of materiality, as well as its dismissal of the common law claims.
We conclude that the district court’s finding with respect to materiality was
erroneous because it was premised on too restrictive a conception of the FCA
materiality inquiry set out in Universal Health Services, Inc. v. United States ex rel.
Escobar, 136 S. Ct. 1989 (2016). Further, we find that the district court’s conclusion
that the complaint failed to allege defendants-appellees’ knowledge was
erroneous as to Lee Strock, and potentially as to SCI, but not as to Cynthia Golde.
Finally, we conclude that the district court should not have dismissed the common
law claims on jurisdictional grounds because it had original jurisdiction over these
claims under 28 U.S.C. § 1345. Accordingly, we AFFIRM in part, REVERSE in part,
and VACATE in part the district court’s dismissal of the complaint.
_______________

CHARLES W. SCARBOROUGH, Appellate Staff Attorney, for Joseph H.
Hunt, Assistant Attorney General, James P. Kennedy, United
States Attorney for the Western District of New York, Buffalo,
NY, for Appellant.

ROBERT C. SINGER, ESQ., Singer Legal PLLC, Williamsville, NY, for
Defendants-Appellees Lee Strock and Strock Contracting, Inc.

REETUPARNA DUTTA, ESQ. (David A. Short, on the brief), Hodgson
Russ LLP, Buffalo, NY for Defendant-Appellee Cynthia Ann
Golde.
_______________

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 KATZMANN, Circuit Judge:

This case calls upon us to address the materiality inquiry under the False

Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., in light of Universal Health Services,

Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).

Veteran Enterprises Company, Inc. (“VECO”) was putatively owned by

Terry Anderson, a service-disabled veteran. VECO applied for and received

millions of dollars of federal government contracts that are reserved for small

businesses owned by service-disabled veterans (known in this context as “service-

disabled veteran-owned small businesses” or “SDVOSBs”). According to the

government, however, Anderson’s ownership was illusory, and he never

controlled or managed VECO. In fact, the government alleges, the company was

controlled by defendant-appellee Lee Strock, who set up VECO as a front to funnel

contract work to his company, defendant-appellee Strock Contracting, Inc.

(“Strock Contracting” or “SCI”). The government filed suit under the FCA and

federal common law against Strock, SCI, and Cynthia Golde, an employee of both

VECO and SCI.

The United States District Court for the Western District of New York

(Geraci, C.J.) granted defendants’ motion to dismiss the government’s amended

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complaint, concluding that the government had not adequately pleaded that the

alleged misrepresentation—that VECO qualified as an SDVOSB—was material to

the government’s decision to make payments under the awarded contracts or that

defendants knew of this materiality. Further, the district court dismissed the

common law claims on jurisdictional grounds. Because we find that the district

court’s conclusion as to materiality relied on an unduly restrictive understanding

of the FCA materiality analysis set out in Escobar, and that the complaint

adequately alleges Strock’s knowledge, we reverse in part. Additionally, we

vacate the district court’s dismissal insofar as it relied on these errors to dismiss

the claims against SCI. Finally, we vacate the dismissal of the common law claims.

BACKGROUND

Several statutory provisions authorize awarding government contracts to

SDVOSBs. 15 U.S.C. § 657f(a) and (b) permit contracts to be awarded to SDVOSBs

either on a sole-source basis or based on competition limited to SDVOSBs. 15

U.S.C. § 644(g)(1)(A)(ii) establishes a “[g]overnmentwide goal” that at least three

percent of all contracts awarded during the fiscal year go to SDVOSBs. 38 U.S.C.

§ 8127 establishes a similar program specifically for contracts issued by the

Department of Veterans Affairs (“VA”).

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 As relevant to this appeal, a SDVOSB must be majority-owned by, and its

management and daily operations must be controlled by, one or more service-

disabled veterans. 15 U.S.C. § 632(q)(2)(A); 38 U.S.C. § 8127(k)(3). 1 To be

“controlled” by a service-disabled veteran “means that both the long-term

decision[] making and the day-to-day management and administration of the

business operations must be conducted by one or more service-disabled veterans.”

13 C.F.R. § 125.13(a).

“At the time that a service-disabled veteran-owned small business concern

submits its offer” to perform government contracting work, “it must represent to

the contracting officer that it is a [SDVOSB].” 48 C.F.R. § 19.1403(b). Where

contracts “have been set aside for” SDVOSBs, “[o]ffers received from concerns that

are not [SDVOSBs] shall not be considered,” and “[a]ny award resulting from this

solicitation will be made to a[n] [SDVOSB].” 48 C.F.R § 52.219-27(b)(1), (c)(1)–(2);

see also 48 C.F.R. § 852.219-10(b)(1)–(2).

1 Prior to 2016, and throughout the time period during which the contracts at
issue in this case were awarded, section 8127 had its own definition of SDVOSB instead
of incorporating section 632’s. See 38 U.S.C. § 8127(l) (2016). The definitions, however,
are indistinguishable for purposes of this appeal.

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 Defendant Lee Strock is the owner of defendant Strock Contracting. 2 In 2006,

Strock met defendant Terry Anderson, a service-disabled veteran. The two formed

Veteran Enterprises Company, Inc. (“VECO”), with Anderson as president and

51% owner, Strock as vice-president and 30% owner, and Ken Carter as secretary

and 19% owner. 3 VECO subsequently applied for and received SDVOSB

recognition from the VA. Between 2008 and 2013, VECO was awarded over $21

million in SDVOSB-reserved contracts from the VA, the Army, and the Air Force.

According to the government, however, VECO’s SDVOSB status was a

sham. After another company owned by Strock lost its eligibility for a Small

Business Administration contracting program, Strock “decided to recruit a

service-disabled veteran,” Anderson, “to head a company in order that Lee Strock

and Strock Contracting could earn profits on federal contracts from the VA and

other federal agencies that were set aside for SDVOSBs.” Joint App’x 21 ¶ 30. But

Anderson’s leadership of VECO existed only on paper. Strock, not Anderson,

controlled the day-to-day operations at VECO. Strock decided which contracts

As this appeal is from a motion to dismiss, all facts are drawn from the
2

government’s Amended Complaint, which is the operative pleading.

3 Mr. Carter was initially named as a defendant, but he was dismissed from this
appeal after he passed away. See No. 19-4331, Dkt. No. 30.
6
VECO would bid on; Anderson was not involved. Anderson was not given access

to payroll records. He made no decisions about hiring or firing. He would

“occasionally” attend meetings and perform inspections, but he did little else. Id.

at 25–26 ¶¶ 63–64. Strock owned the building that VECO “leased” as office space,

and Anderson did not even have a key to the office; defendant Cynthia Golde (or

another employee) had to let him in. Nor did Anderson have access to the

company email account, which nonetheless displayed his name as the sender.

Although he was nominally the president, he was not the highest-paid employee;

and although he was purportedly the majority shareholder, he was paid less than

5% of VECO’s profits. VECO also made several “questionable” payments to Strock

Contracting, totaling several hundred thousand dollars. Id. at 31 ¶ 102. The

government claims that, had it known that VECO was not a bona fide SDVOSB, it

would either not have awarded the contracts or would have terminated them.

The government filed suit, asserting violations of the False Claims Act, as

well as common law fraud, unjust enrichment, and payment by mistake. The

district court granted the defendants’ motion to dismiss. The court concluded that

the government had not pleaded with the particularity required by Federal Rule

of Civil Procedure 9(b) that any of the individual defendants knew that VECO did

7
not qualify as an SDVOSB, or knew that such a designation would be material to

the government’s decision to pay VECO. The district court further held that the

complaint did not adequately plead that any misrepresentation was material for

FCA purposes, reasoning that “a misrepresentation is not necessarily material to

the Government’s payment decision just because the Government would not have

awarded the contract but for the misrepresentation.” Id. at 74. 4 The district court

then “decline[d] to exercise jurisdiction over the Government’s common law

claims.” Id. at 75. This appeal followed.

DISCUSSION

I. Standard of Review

“We review the district court’s grant of defendants’ Rule 12(b)(6) motion to

dismiss de novo, accepting all factual claims in the complaint as true and drawing

all reasonable inferences in the plaintiff’s favor.” United States v. Wells Fargo & Co.,

943 F.3d 588, 594 (2d Cir. 2019). 5

4 The district court also held that the complaint did not adequately plead a
conspiracy under the False Claims Act. The government does not challenge this aspect
of the court’s ruling on appeal.
5 Unless otherwise indicated, case quotations omit all internal quotation marks,

citations, footnotes, and alterations.
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II. The False Claims Act Counts

A. Legal Standard

The False Claims Act imposes liability, as relevant here, on a person who

either “knowingly presents, or causes to be presented, a false or fraudulent claim

for payment or approval,” or who “knowingly makes, uses, or causes to be made

or used, a false record or statement material to a false or fraudulent claim.” 31

U.S.C. § 3729(a)(1)(A)–(B). “Knowingly” means that a person “(i) has actual

knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity

of the information; or (iii) acts in reckless disregard of the truth or falsity of the

information.” Id. § 3729(b)(1)(A). It “require[s] no proof of specific intent to

defraud.” Id. § 3729(b)(1)(B). “Material” means “having a natural tendency to

influence, or be capable of influencing, the payment or receipt of money or

property.” Id. § 3729(b)(4). The government must “plead [its] claims with

plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by,

for instance, pleading facts to support allegations of materiality.” Universal Health

Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2004 n.6 (2016).

B. Materiality

We turn first to whether the government sufficiently alleges that

defendants’ misrepresentations about VECO’s SDVOSB status were material. To

9
be actionable under the FCA, “[a] misrepresentation about compliance with a

statutory, regulatory, or contractual requirement must be material to the

Government’s payment decision.” Id. at 1996. The Supreme Court recently

clarified this materiality requirement in Universal Health Services, Inc. v. United

States ex rel. Escobar, 136 S. Ct. 1989 (2016). In Escobar, the Court explained that the

FCA’s “materiality standard is demanding,” id. at 2003, and “looks to the effect on

the likely or actual behavior of the recipient of the alleged misrepresentation,” id.

at 2002, rather than superficial designations. Thus, a misrepresentation is not

necessarily material because “the Government would have the option to decline

to pay if it knew of the defendant’s noncompliance.” Id. at 2003. Nor is “the

Government’s decision to expressly identify a provision as a condition of

payment . . . automatically dispositive,” although it is “relevant.” Id. Rather,

determining materiality requires an inquiry into at least the following factors:

[P]roof of materiality can include, but is not necessarily limited to,
evidence that the defendant knows that the Government consistently
refuses to pay claims in the mine run of cases based on noncompliance
with the particular statutory, regulatory, or contractual requirement.
Conversely, if the Government pays a particular claim in full despite
its actual knowledge that certain requirements were violated, that is
very strong evidence that those requirements are not material. Or, if
the Government regularly pays a particular type of claim in full
despite actual knowledge that certain requirements were violated,

10
 and has signaled no change in position, that is strong evidence that
the requirements are not material.

Id. at 2003–04; see also Bishop v. Wells Fargo & Co., 870 F.3d 104, 107 (2d Cir. 2017)

(per curiam). In addition, we inquire into whether or not the “noncompliance is

minor or insubstantial.” Escobar, 136 S. Ct. at 2003.

Each party argues that Escobar requires resolving the question of whether

defendants’ alleged misrepresentations were “material to the Government’s

payment decision” in its favor. Escobar, 136 S. Ct. at 1996. Central to this dispute is

not, however, any disagreement over Escobar’s definition of the term “material,”

but instead its definition of the term “payment decision.” Id. at 1996. Underlying

the government’s argument is its assumption that the primarily relevant “payment

decision” was the government’s decision to award VECO contracts in the first

instance. Underlying defendants’ claim is the assumption that the only relevant

“payment decision” is the government’s decision to ultimately pay claims under

these contracts.

Because resolving this dispute over the meaning of “payment decision” is

thus essential to our materiality analysis in this case, we address this question first.

Guided by Escobar, and for the reasons that follow, we assign “payment decision”

a broader scope than either party would. In this case, the government’s “payment

11
decision” comprised both the decision to award contracts in the first instance and

the decision to ultimately pay claims under these contracts.

The government’s argument that materiality must be assessed primarily

with regard to the government’s decision to award contracts to VECO is premised

on the fact that its legal theory is one of “fraudulent inducement.” Under this

fraudulent inducement theory, FCA liability attaches not because a defendant has

submitted any claim for payment that is “literally false,” but instead because “the

contract under which payment [is] made is procured by fraud.” United States ex

rel. Longhi v. United States, 575 F.3d 458, 467–68 (5th Cir. 2009); United States ex rel.

Marcus v. Hess, 317 U.S. 537, 543–45 (1943) (finding that contractors who secured

contracts through collusive bidding were liable for claims arising under those

contracts under the FCA), abrogated in part by statute on other grounds. 6 The theory

6 See also, e.g., United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393
F.3d 1321, 1326 (D.C. Cir. 2005); Harrison v. Westinghouse Savannah River Co., 176 F.3d
776, 787–88 (4th Cir. 1999). We implicitly approved the fraudulent inducement theory in
United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 91 (2d Cir. 2012) (“If the
government made payment based on a false statement, then that is enough for liability
in an FCA case, regardless of whether that false statement comes at the beginning of a
contractual relationship or later.”). We did so even before Feldman, in United States ex rel.
Kirk v. Schindler Elevator Corp., 601 F.3d 94, 114–15 (2d Cir. 2010), rev’d on other grounds,
563 U.S. 401 (2011), when we held that the relator had stated an FCA claim by alleging
that the defendant submitted false certifications with bids and thereby won a
government contract.
12
is based on the notion that “fraud d[oes] not spend itself with the execution of the

contract,” but instead “taint[s]” every claim subsequently brought under the

contract, rendering these claims actionably false. Hess, 317 U.S. at 543; see also

Longhi, 575 F.3d at 468. The government argues that because the falsity of the

claims in a fraudulent inducement case is imported from the falsity of statements

made to obtain the contract in the first instance, “the appropriate focus . . . is on

the likely effect of the defendant’s fraud on the government’s actions at the time it

awarded the contract, not when the government subsequently paid claims.”

Appellant’s Br. 21. In other words, on the government’s view, the primarily

relevant “payment decision” is the decision to award the contract, not the decision

to ultimately pay a claim under the contract.

Escobar, however, precludes understanding the relevant “payment

decision” in this case as so narrowly focused on the government’s decision to

award contracts. In rejecting the view that a contractual, statutory, or regulatory

provision is material only where it is “expressly designated a condition of

payment,” 136 S. Ct. at 2001, and similarly rejecting the view that a provision is

necessarily material where “the Government would be entitled to refuse payment

were it aware of the violation,” id. at 2004, Escobar eschews a materiality analysis

13
that prioritizes the government’s claims about how it would treat a requirement

over how the government actually treats a requirement upon discovering a

violation. Specifically, Escobar identifies as the primary example of such actual

treatment the government’s reaction to noncompliance when a claim for ultimate

payment is made—whether it be “refus[al] to pay claims in the mine run of cases,”

“pay[ment of] a particular claim” despite the government’s actual knowledge that

conditions of payment have been violated, or “regular[] pay[ment of] a particular

type of claim” despite the government’s knowledge of program violations. Id. at

2003. Accordingly, the government’s conduct after claims arise under a contract,

not merely at the time of contract award, is highly relevant to Escobar’s materiality

analysis. The government’s position is thus unpersuasive.

The defendants’ suggestion that the relevant “payment decision” excludes

the government’s initial decision to award a contract, however, is no better. As

noted above, this approach makes little sense in a fraudulent inducement case,

where a defendant’s alleged misrepresentations at the time the government

awarded the contract are what render any subsequent claim under that contract

fraudulent at all. This theory of fraud recognizes that the government’s decision

to enter a contract in some sense undergirds any decision to ultimately pay claims

14
arising under the contract. See Hess, 317 U.S. at 543 (finding contractors’

misrepresentation that they satisfied a non-collusive bidding requirement material

because “[t]he government’s money would never have been placed in the joint

fund for payment to respondents had its agents known the bids were collusive”).

As a result, other circuits addressing FCA fraudulent inducement claims have

assessed materiality at least partly with regard to the government’s decision to

enter a relationship with a defendant in the first instance. See, e.g., United States v.

Luce, 873 F.3d 999, 1008-09 (7th Cir. 2017) (considering as part of its materiality

analysis that a defendant’s misrepresentation concerned a “threshold eligibility

requirement that, by extension, was tied to every” claim); United States ex rel. Miller

v. Weston Educ., Inc., 840 F.3d 494, 504 (8th Cir. 2016) (focusing materiality analysis

on whether a misrepresentation “influenced the government’s decision to enter

into its relationship with” the defendant).

More importantly, Escobar itself supports understanding the government’s

“payment decision” to include the government’s initial decision to enter a contract

in fraudulent inducement cases. Escobar rejected the notion that FCA liability is

limited to instances in which a defendant violates an express condition of payment

in part because such a rule would “undercut[]” the FCA by imposing no liability

15
for “misrepresenting compliance with a condition of eligibility to even participate

in a federal program when submitting a claim.” 136 S. Ct. at 2002. This language

strongly suggests that FCA liability attaches where a defendant’s

misrepresentations impact government decisions about eligibility, and by

extension, that FCA materiality analysis can encompass a misrepresentation’s

impact on the government’s decision to do business with a defendant in the first

instance. This conclusion in no way contradicts Escobar’s focus at other points on

the government’s ultimate payment decision; Escobar taught that “materiality

cannot rest on a single fact or occurrence as always determinative” such that

consideration of both points of decision is entirely appropriate. Id. at 2001; see also

id. at 2003 (explaining that “proof of materiality can include, but is not necessarily

limited to,” the factors explicitly listed in Escobar). Accordingly, we reject the

defendants’ suggestion that the “payment decision” relevant to our materiality

analysis does not include the government’s decision to award VECO contracts in

the first instance.

In sum, we find that, at least in fraudulent inducement cases, the

government’s “payment decision” under Escobar encompasses both its decision to

award a contract and its ultimate decision to pay under that contract. We thus

16
assess whether the complaint sufficiently pleads materiality under the Escobar

factors with a view to both aspects of the government’s decision.

1. Whether the Requirement Was an Express Condition of
Payment

The first factor that Escobar identifies as relevant to materiality is whether

the government “expressly identif[ied] a provision as a condition of payment.” Id.

at 2003. The district court concluded that this factor weighed against a finding of

materiality here because the government “d[id] not allege that it expressly

conditioned payment to VECO on VECO’s compliance with SDVOSB contracting

requirements.” Joint App’x 69. While the district court was correct—as the

government concedes—that SDVOSB compliance was not an express condition of

ultimate payment under any government contract with the defendants, the district

court erred by concluding that this fact was dispositive with regard to this first

factor.

Because, as explained above, materiality must also be assessed with regard

to the government’s decision to award contracts to VECO in the first instance, the

analysis of the first Escobar factor must also include the complaint’s allegations that

the government expressly named SDVOSB compliance as a condition of any

contract award. Indeed, Escobar faults a theory of materiality that places too much

17
emphasis on whether a provision is an express condition of ultimate payment in

part because such emphasis would preclude a finding of materiality in cases where

a defendant “misrepresent[ed] compliance with a condition of eligibility to even

participate in a federal program.” 136 S. Ct. at 2002. In other words, where a

misrepresentation relates to a condition of eligibility, examining only the express

conditions of ultimate payment will obscure the true materiality of a requirement.

Because the government alleges that it expressly designated SDVOSB compliance

a condition of contract eligibility, we thus find that this factor weighs in favor of a

finding of materiality.

2. The Government’s Response to Similar Misrepresentations

The next factor concerns the government’s response to noncompliance with

the relevant contractual, statutory, or regulatory provision. Escobar directs

examination of the government’s reaction to noncompliance both “in the mine run

of cases,” as well as in the “particular” case at issue. Id. at 2003. We turn first to

the adequacy of the complaint’s allegations regarding the government’s response

to noncompliance after it has already awarded a contract (“post-award” conduct),

and then turn to examine the government’s response to noncompliance before it

has awarded a contract (“pre-award” conduct).

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 While we agree with the district court’s ultimate conclusion that the

complaint’s allegations about the government’s post-award conduct do not

strongly support a finding of materiality, our reasoning differs from that of the

district court. The complaint’s primary allegation about the government’s

generalized post-award conduct consists of its claim, based on a number of Office

of Inspector General reports, that “the Government has regularly prosecuted . . .

parties that fraudulently obtain SDVOSB set-aside contracts.” Joint App’x 46 ¶ 150.

The district court discounted these allegations because defendants “cite

evidence”—specifically, a 2009 Government Accountability Office (“GAO”)

report—suggesting that enforcement is sporadic, and because the examples of

enforcement the government identified were “not all . . . FCA cases.” Id. at 69.

Neither reason is persuasive.

First, the district court’s reliance on the GAO report to reach its conclusion

was inappropriate. In considering a motion to dismiss for failure to state a claim,

“the district court is normally required to look only to the allegations on the face

of the complaint.” Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007). While the court

may consider documents that “are attached to the complaint,” “incorporated in it

by reference,” “integral” to the complaint, or the proper subject of judicial notice,

19
id., none of these exceptions justifies the district court’s reliance on the GAO report

here. First, the GAO report was neither attached to the complaint nor incorporated

by reference. Second, the GAO report was not “integral” to the complaint. As

defendants acknowledge, a document is “integral” when the complaint “relies

heavily upon [the document’s] terms and effect.” DiFolco v. MSNBC Cable L.L.C.,

622 F.3d 104, 111 (2d Cir. 2010). Here, the complaint does not rely on the GAO

report at all, so it is not “integral.” Third, while the district court could have taken

judicial notice of the GAO report, it should only have “do[ne] so in order to

determine what statements [it] contained . . . not for the truth of the matters asserted”

therein. Roth, 489 F.3d at 509. The district court’s consideration of the GAO Report

as evidence of the government’s spotty post-award enforcement record was thus

inappropriate in ruling on the motion to dismiss.

The district court’s second justification for discounting the government’s

allegations that it “has regularly prosecuted, both criminally and civilly, parties

that fraudulently obtain SDVOSB set-aside contracts,” Joint App’x 46 ¶ 150, is

unpersuasive for a different reason. The district court suggested that this

allegation was not probative of materiality because “not all of” the cases the

government cited in support of it “appear to be FCA cases.“ Id. at 69. The district

20
court, however, provided no basis for the proposition that post hoc enforcement

efforts, to the extent they are probative of materiality at all, must be from the FCA

context. More importantly, the district court’s focus on what kinds of post hoc

enforcement actions are relevant to materiality obscures the more fundamental

question of whether post hoc enforcement actions are relevant to FCA materiality

analysis at all. This question was not directly addressed by Escobar, which focused

on whether the government “consistently refuses to pay claims,” not whether the

government later pursues damages or criminal prosecution. 136 S. Ct. at 2003.

Nonetheless, Escobar indirectly indicates that allegations of post hoc

prosecutions or other enforcement actions do not carry the same probative weight

as allegations of nonpayment. Escobar emphasized that “[t]he materiality standard

is demanding,” and that the government may not manufacture materiality by

alleging it had an option not to pay after the fact. Id. Allowing the government to

rely on post hoc enforcement efforts to satisfy the materiality requirement would

allow the government to engage in just such materiality manufacturing, and at

relatively low cost. Unlike mid-contract refusals to pay, engaging in post hoc

enforcement does not require the government to risk delay of a project. Instead,

the government needs risk only the cost of litigation, a risk that is mitigated by an

21
opportunity to recoup the cost of a completed project. Thus, while purely post hoc

enforcement actions can carry some weight in a materiality analysis, they are less

probative than allegations that the government actually refuses to make payments

once it determines that the SDVOSB condition has been violated. The

government’s allegations that it prosecutes those who fraudulently obtain

SDVOSB set-aside contracts thus are at best only neutral with regard to a finding

of materiality, particularly in light of the complaint’s failure to allege even a single

instance in which the government actually refused to pay a claim or terminated an

existing contract based on a false SDVOSB representation.

The complaint’s allegations about the post-award actions the government

took in response to the defendants’ particular instances of alleged noncompliance

are no more indicative of materiality. Significantly, the complaint makes no

allegation that the government refused to pay VECO, suspended its contracts, or

debarred it from bidding on future contracts. Instead, the complaint alleges that

the contracting officers might have taken steps to cease payments, terminate the

contracts, or both had they learned that VECO was not a bona fide SDVOSB. Some

of these allegations amount to no more than the suggestion “that the Government

would have the option to decline to pay if it knew of the defendant’s

22
noncompliance,” and are thus not “sufficient for a finding of materiality.” Escobar,

136 S. Ct. at 2003. While other allegations are less conditional and allege what the

government “would have” done had it learned of the noncompliance, such

inherently self-serving and unverifiable claims alone cannot be sufficient to

demonstrate materiality. Thus, the complaint’s allegations about the government’s

post-award behavior provide only weak support for a finding of materiality.

The government’s allegations about its pre-award response to

noncompliance, however, add some support to its allegations of materiality.

Although the government does not specifically allege that it does not award

contracts to entities it knows not to be SDVOSBs, the complaint as a whole

supports such an inference. See Wells Fargo & Co., 943 F.3d at 594 (noting that we

must “draw[] all reasonable inferences in the plaintiff’s favor”). The complaint

outlines the numerous steps the government takes to ensure an applicant is an

SDVOSB before awarding a contract and it identifies multiple contracting officers

or specialists who allegedly would not have awarded contracts to VECO had they

been aware it was not an SDVOSB. Taken together, these allegations lead to a

reasonable inference that, in general, the government does not award contracts to

companies that it knows not to have complied with SDVOSB requirements. This

23
suggests that defendants’ misrepresentations were material to the government’s

decision to enter the contract in the first instance.

Given the government’s allegations that it was not aware of VECO’s

noncompliance, analyzing the government’s response to known noncompliance in

this particular case is not particularly enlightening. Strock nonetheless contends

that this analysis weighs against materiality because there is evidence that the

government awarded VECO contracts despite actual knowledge that VECO was

not in compliance with program requirements. The only record citation Strock

offers in support of this contention, however, is a claim made upon information

and belief in an attorney affidavit that the defendants filed in support of the

motion to dismiss. We once again decline Strock’s invitation to consider a

document that is not attached to, incorporated by, or integral to the complaint, and

find that this factor has no bearing on the materiality analysis at the motion to

dismiss stage of the proceedings.

In sum, the government’s alleged post-award conduct in response to

noncompliance provides at most weak support for materiality with regard to the

government’s decision to ultimately pay under the relevant contracts. The

government’s pre-award conduct, however, better supports materiality with

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regard to the government’s decision to award the relevant contracts. Given both

decisions are part of the government’s “payment decision,” these considerations

taken together indicate that this factor supports materiality, if weakly.

3. Whether Noncompliance Was Minor or Insubstantial

Finally, we examine whether the defendants’ alleged noncompliance was

substantial. Escobar, 136 S. Ct. at 2003. The district court held that this factor

weighed against materiality because the complaint failed to allege that

noncompliance with the SDVOSB condition was substantial as to the

government’s “payment decision,” even though it might have been substantial

with respect to the government’s decision to award the contract. As previously

established, however, this reasoning relies on an unduly narrow understanding of

the scope of the relevant “payment decision.” The complaint plausibly alleges that

defendants’ SDVOSB-status violation was substantial, whether viewed in light of

the government’s decision to award the relevant contracts or ultimately pay out

under those contracts.

The government alleges that performance by an SDVOSB is at the very heart

of the SDVOSB statutory and regulatory regime: “increas[ing] contracting

opportunities for small business concerns owned and controlled by . . . veterans

with service connected disabilities.” Joint App’x 17 ¶ 17 (quoting 38 U.S.C. §
25
8127(a)(1)). Further it alleges that defendants, by misrepresenting their SDVOSB

status, “undercut th[is] express congressional purpose” “[b]y diverting contracts

and benefits . . . intended for service-disabled veterans towards an ineligible

company.” Id. at 13 ¶ 3. These allegations, accepted as true, indicate that VECO’s

noncompliance was substantial from the very inception of its contracts with the

government through their completion.

The defendants’ attempt to minimize their alleged noncompliance by

recasting the relevant contracts as aimed at the construction of government

buildings alone is unpersuasive. First, the defendants’ characterizations cannot, at

the motion to dismiss stage, displace the government’s well-pleaded allegations

about the contracts’ purpose or the allegations that the defendants’ noncompliance

deprived the government of “the intended benefits of a SDVOSB receiving and

performing federal contracts.” Id. Second, the complaint’s characterizations of the

contracts’ purpose are eminently plausible in light of Congress’s own statements

about the purpose of the SDVOSB statutory and regulatory regime. See 38 U.S.C.

§ 8127(a)(1). The substantiality factor thus weighs strongly in favor of materiality.

In sum, we find that two factors—the express nature of the eligibility

condition and the substantiality of the defendants’ alleged noncompliance—weigh

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firmly in favor of materiality, while the third—the government’s response to

noncompliance in this and other cases—only weakly supports materiality. This is

enough to find that the government has plausibly alleged materiality.

C. Knowledge

To find FCA liability, it is not enough for the defendants to have presented

a materially false claim; they must have done so “knowingly,” see 31 U.S.C.

§ 3729(a)(1)(A)–(B), meaning with “actual knowledge of the information, “in

deliberate ignorance of the truth or falsity of the information,” or “in reckless

disregard of the truth or falsity of the information” Id. § 3729(b)(1)(A). In other

words, the government must allege that the defendants “knowingly violated a

requirement that the defendant[s] know[] is material to the Government’s

payment decision.” Escobar, 136 S. Ct. at 1996.

Claims under the FCA are subject to the particularity requirement of Federal

Rule of Civil Procedure 9(b). Id. at 2004 n.6. 7 “Rule 9(b) permits knowledge to be

averred generally,” but plaintiffs, including the government, still must “plead the

7 Strock argues that the complaint’s general failure to comply with Rule 9(b)
offers an independent ground for dismissal. But none of the purported deficiencies
cited by Strock was sufficient to deprive him of the requisite “fair notice” of the
government’s claim, and they thus do not warrant dismissal. United States ex rel.
Chorches v. Am. Med. Response, Inc., 865 F.3d 71, 86 (2d Cir. 2017).

27
factual basis which gives rise to a strong inference of fraudulent intent.” O’Brien v.

Nat’l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). “The requisite strong

inference of fraud may be established either (a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud, or (b) by alleging

facts that constitute strong circumstantial evidence of conscious misbehavior or

recklessness.” Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290–91 (2d Cir. 2006). The

complaint must plead facts supporting scienter as to each defendant. In re DDAVP

Direct Purchaser Antitrust Litig., 585 F.3d 677, 695 (2d Cir. 2009). We address each

defendant in turn.

1. Lee Strock

The district court acknowledged that the complaint alleges that Strock

“decided to establish an SDVOSB to obtain set-aside contracts,” “recruited

Anderson as the ‘figurehead’ president,” and “direct[ed]” VECO employees to

submit false certifications and false claims. Joint App’x 64–65. And the court

further acknowledged that facts alleged by the government “could support an

inference that Strock knew that VECO did not qualify as an SDVOSB, such as that

Strock gave Anderson a 51% share in VECO (the minimum required for veteran

ownership), set up email addresses in Anderson’s name to be managed by other

employees, and established VECO for his and Strock Contracting’s profit.” Id. at
28
65. But the court concluded that the complaint nevertheless failed to adequately

allege that Strock knew that VECO’s SDVOSB status was material to the

government.

We respectfully disagree. At a minimum, the complaint adequately alleges

that Strock acted in reckless disregard of whether the SDVOSB-status requirement

was material. First, the complaint alleges “strong circumstantial evidence of . . .

recklessness” as to materiality. Lerner, 459 F.3d at 291. The complaint alleges that

all the contract solicitations at issue prominently advised that only bids from

SDVOSBs would be considered and that firms wishing to bid on such contracts

must certify their SDVOSB status. Moreover, the complaint alleges that Strock

undertook elaborate steps to make it appear that VECO was in fact in compliance

with SDVOSB requirements, such as recruiting Terry Anderson, giving Anderson

the minimum share required for veteran ownership, and setting up email

addresses in Anderson’s name to be managed by other employees. This is strong

circumstantial evidence that Strock acted in reckless disregard of whether VECO’s

SDVOSB status was material to the government’s decision to both award and pay

out under SDVOSB contracts.

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 Moreover, the complaint adequately alleges that Strock had “motive and

opportunity to commit fraud.” Lerner, 459 F.3d at 290. As to motive, the complaint

alleges that Strock set up VECO as an SDVOSB to replace the federal contracting

opportunities he lost after Strock Contracting graduated out of the Small Business

Administration contracting program. As to opportunity, the government alleges

that Strock owned the building that VECO “leased” as office space and VECO

made several “questionable” payments to Strock Contracting, totaling several

hundred thousand dollars. In other words, Strock stood to benefit directly from

VECO’s success, and had the wherewithal to do so. Thus, the government has

plausibly alleged at least that Strock acted in reckless disregard of the materiality

of the SDVOSB compliance. The government has therefore met its burden with

regard to Strock’s knowledge.

2. Cynthia Golde

We agree with the district court, however, that the complaint does not

sufficiently allege that Golde individually knew that VECO did not qualify as an

SDVOSB. Some of the allegations against Golde are not indicative of such

knowledge because they do not specify whether Golde was actually involved.

Other allegations relate to behavior too mundane to support an inference of

knowing falsity.
30
 Further, while the complaint alleges that Golde presented bids for SDVOSB

set-aside contracts and made requests for payment under such contracts, the

complaint does not specify which bids were made by Golde or which

representations were contained in those bids. We thus cannot infer from these

allegations that Golde knowingly submitted false bids. This point is illustrated by

the only invoice that the complaint specifically alleges that Golde submitted. That

invoice appears to have simply included a certification that “the contract was

performed in accordance with the specifications, terms and conditions of the

contract.” Joint App’x 34 ¶ 113. Such a boilerplate certification, which may not

have even mentioned the SDVOSB requirement, is not likely to have alerted Golde

to any noncompliance. Without any allegations about whether other documents

submitted by Golde contained more explicit misrepresentations, the complaint’s

general allegations that Golde submitted bids or requests for payment are

insufficient to allege knowledge.

A few of the allegations against Golde are slightly more suggestive of

knowledge. For example, Golde was allegedly employed simultaneously by

VECO and Strock Enterprises (a company related to SCI and VECO), and she

discussed moving employees between the two. This could be taken as evidence

31
that Golde was aware that VECO was just a front aimed to provide Strock access

to SDVOSB contracts. But absent more specific allegations of what Golde knew of

Strock’s plans, this is too speculative to support a claim for fraud under Rule 9(b).

Similarly, the allegation that Golde “knew that Lee Strock controlled the day-to-

day and long-term business operations of VECO,” Joint App’x 28 ¶ 82, might

support the inference that Golde knew VECO was not a bona fide SDVOSB. That

inference, however, relies on the assumption—not supported elsewhere in the

complaint—that Golde knew that SDVOSB certification requires that the veteran

not only own but also control the business in question.

Absent more information about which bids Golde submitted, or the content

of those bids, the complaint does not adequately plead knowledge as to Golde

with the particularity required under Rule 9(b). And, unlike Strock, none of the

allegations establish either “motive and opportunity to commit fraud” or “strong

circumstantial evidence of conscious misbehavior or recklessness.” Lerner, 459

F.3d at 290–91. We therefore affirm the district court’s dismissal of the claims

against Golde.

D. Remaining Claims

In addition to the FCA claims against Strock and Golde, the district court

also dismissed the complaint’s FCA claim against Strock Contracting as well as its
32
common law claims against all defendants. The district court’s reasons for doing

so were erroneous. First, the district court dismissed the FCA claim against Strock

Contracting, which was based on a theory of vicarious liability, because it found

that the complaint did not state a claim against the individual defendants. As

explained, however, the complaint adequately states a claim against Strock. 8

Second, the district court dismissed the government’s common law claims

on the ground that it could decline to exercise supplemental jurisdiction over

them. However, as the government argues, and as the defendants apparently

concede, the district court had original jurisdiction over these claims under 28

U.S.C. § 1345 (“[T]he district courts shall have original jurisdiction of all civil

actions, suits or proceedings commenced by the United States . . . .”).

The defendants urge that there are nonetheless alternative grounds upon

which to affirm the district court’s judgment as to these claims. However, “this

Court generally will not review an issue the district court did not decide,” Macey

v. Carolina Cas. Ins. Co., 674 F.3d 125, 131 (2d Cir. 2012), and we find that there is

no reason to do so here. Accordingly, we vacate the district court’s dismissal of

these claims and leave it to the district court on remand to determine in the first

8 We express no view about the potential merit of a theory of vicarious liability,
which is not a theory that has yet been adopted in our circuit.
33
instance whether dismissal is appropriate on any of the defendants’ proposed

alternative grounds.

CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s dismissal of the

FCA counts against Golde and REVERSE the dismissal of the FCA counts against

Strock. Further, we VACATE the dismissal of the FCA counts against Strock

Contracting, Inc. and the federal common law claims against all defendants. We

REMAND the case for the district court to consider the adequacy of the latter

claims in the first instance and to conduct additional proceedings consistent with

this opinion.

34