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Fraud in Small Business Innovation Research Program Yields Settlement

May 13, 2015

Recently, the U.S. Attorney’s Office for the Western District of Washington announced a False Claims Act settlement involving fraud in the Small Business Innovation Research (“SBIR”) program. The defendant, nLight Photonics, Inc. (nLight), is a privately-held company based in Vancouver, Washington. nLight manufactures high performance diode and fiber lasers.

The company paid $420,000 to resolve allegations that, between 2004 and 2013, it received SBIR grants and contracts for which it did not qualify.

The SBIR Program

For the purposes of the SBIR program, “small business” is defined as a for-profit business with fewer than 500 employees. The business must be owned by persons who are citizens of, or permanent resident aliens in, the United States. Specifically, during the period relevant to this case, the SBIR program required a company seeking funding to be at least 51 percent controlled by individuals (or by another business that was itself controlled at least 51 percent by individuals).

Congress established the SBIR program in 1982. Since then, it has been modified several times. Currently, eleven federal agencies participate in the program, awarding millions of dollars of grants and contracts each year. It is a highly competitive program that encourages domestic small businesses to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The government makes funding available because many early-stage innovations are too risky for private investors, including venture capital firms.

nLight’s Fraud

A contracting officer at the Department of Energy (DOE) first discovered the fraud. DOE was one of the government agencies from which nLight obtained SBIR funding. The officer was overseeing an nLight SBIR grant and an SBIR grant awarded to a company that nLight had acquired. Information that the contracting officer requested from nLight revealed its ineligibility under the SBIR program.

Investigators discovered that, despite numerous certifications that it was eligible for the SBIR program, multiple businesses – not individuals or qualifying businesses – owned over 51 percent of nLight. Those businesses included several venture capital firms. According to one news report, by 2011, nLight had secured $110 million in equity financing from Silicon Valley investors. Reportedly, it was on a steady growth trajectory with speculation that it would initiate a public stock offering.

Inter-Agency Cooperation in Fighting Fraud in Small Business Program

In addition to DOE, nLight had received funding from the Army, Navy, Air Force, and NASA to further develop its laser technology. Investigators for each of these entities contributed to the case, along with those for the Small Business administration and others.

It is encouraging to see a False Claims Act case made the “old-fashioned” way. A contracting officer doing due diligence asked questions and discovered a potential problem. Multiple agencies then conducted a coordinated investigation working together with DOJ. It reminds us all that, even without a whistleblower, there are plenty of FCA cases the government can and does bring (although a whistleblower might have exposed this problem sooner had one come forward). In addition, while many FCA cases involve health care fraud, the federal government spends many billions of dollars each year procuring other goods and services. Inevitably, bad actors will commit fraud in these contexts as well. Fortunately, vigilant government investigators and courageous whistleblowers will help expose wrongdoing.

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