March 22 (Bloomberg) -- Frederick Newell, a part-time minister and small-business owner, says he thought he was helping the government when he blew the whistle on the alleged misuse of job-assistance funds in St. Paul, Minnesota.
At first, the U.S. Justice Department agreed with him. Agency attorneys recommended in October 2011 that it join his false-claims complaint against St. Paul, a type of lawsuit that, if successful, also would have paid him millions of dollars as a reward for ferreting out waste and corruption.
Then, several months later, the department abruptly reversed course. It decided not to join the case as part of a negotiated settlement in an unrelated lawsuit brokered by Thomas Perez, the head of the Justice Department’s civil-rights division whom President Barack Obama has nominated to be the next secretary of labor.
“Was I surprised?” Newell, of North St. Paul, said of the agency’s decision not to join a case that his attorney thought was a cinch to win. “I’d have to say simply ‘yes.’”
The circumstances surrounding the Justice Department’s decision are emerging as a potential obstacle to Perez’s confirmation, with Republican lawmakers saying the deal he struck cost taxpayers millions of dollars.
“It was the wrong thing to do,” Senator Jeff Sessions, an Alabama Republican, said in an interview. “It was a highly important legal issue that he was afraid he would lose, so he basically created an incentive -- some might call it a bribe -- for a city not to pursue this legal case.”
Senator Pat Roberts of Kansas, a top Republican on the Senate labor committee, says the issue will be raised during the panel’s confirmation hearing on Perez. The hearing is scheduled for April 18.
“It’s of real concern to us, and it’s one thing in a long list of things where we think this person is ill-advised,” Roberts said.
Newell, 55, says he has been interviewed by investigators with the House Oversight and Government Reform Committee, which has been reviewing the Justice Department’s actions in the case since March 2012. In the agreement struck with St. Paul, the Justice Department agreed to withdraw from Newell’s lawsuit as well as another that also alleged misuse of federal housing funds.
A self-described non-denominational Christian minister, Newell owns three companies that hire low-income workers to do asbestos removal, demolition and other work at federally funded housing projects. He takes advantage of a federal program in which 10 percent of contracting dollars are supposed to go to low-income people and businesses and 30 percent of new hires should be low-income residents.
Newell says he discovered that St. Paul had failed to document its use of federal grants to create jobs for low-income workers. For example, the city told him it couldn’t provide a list of contractors who received money from the U.S. Housing and Urban Development Department, Newell said.
Newell’s complaints over the city’s management of the program led to a 2009 HUD review that found St. Paul had not submitted reports that are required by law.
That year, Newell filed a false-claims complaint, sometimes known as a whistle-blower lawsuit, in U.S. District Court. The Justice Department later said it would join the case, greatly enhancing its chances for success, according to Thomas DeVincke, Newell’s attorney.
“This case is what we call a dead-bang winner,” said DeVincke, a partner with Malkerson Gunn Martin LLP in Minneapolis.
Under the False Claims Act, when the Justice Department intervenes in cases brought by private citizens it takes the lead role in litigating the case. The department recovered a record $3.3 billion through lawsuits filed by whistle-blowers in the 2012 fiscal year, the agency said in December.
Newell said he viewed the federal involvement in his case as a “game changer to ensure that we had a shot across the bow, some authority that would ensure that the opportunities would go through to the communities.”
Then the department reversed itself when St. Paul agreed to drop an unrelated Supreme Court appeal involving discrimination in housing. Fair-lending advocates said, had the city prevailed in that case, it would have harmed a central enforcement tenet in housing discrimination law.
DeVincke said an assistant U.S. attorney notified him in a meeting on Feb. 8, 2012, that the department had changed its mind and would not be joining the case. Two days later, St. Paul asked the Supreme Court to drop the city’s appeal in the other case.
“The community has lost a lot by them trading off our false claims lawsuit,” Newell said.
The agency’s decision “allowed the private plaintiffs to continue to pursue their claims against the city,” Dena Iverson, a spokeswoman for the Justice Department, said in an e-mail.
“The resolution reached in these cases was in the best interests of the United States and consistent with the department’s broad discretion to consider policy and other factors -- including pending litigation -- in resolving False Claims Act matters,” she said.
The decision “followed an examination of the relevant facts, legal and policy considerations at issue” and made after consultation with ethics officials, she said.
St. Paul received about $60 million in HUD grants through the program in question, according to DeVincke. The federal government might have secured as much as $180 million in reimbursement and penalties, according to House Republican lawmakers probing the matter.
Newell was in line to receive as much as 30 percent of whatever was recovered as part of the law’s incentives for citizens to blow the whistle on fraud.
After the Justice Department said it would not join the lawsuit, a federal judge granted St. Paul’s motion to dismiss it. Newell has appealed.
“The city strongly believes that it was not liable to the federal government (or anyone else) regarding its applications for and spending of HUD grants,” City Attorney Sara Grewing said in a statement.
Obama nominated Perez on March 18 even as congressional investigators continued to press for more details about his role in the St. Paul deal.
If confirmed by the Senate, Perez would replace Hilda Solis, who resigned in January. Perez, 51, has led the Justice Department’s civil rights unit since 2009.
Roberts and other Republican senators say they want to examine whether Perez acted improperly in persuading St. Paul to drop its high-court appeal. Their questions follow months of scrutiny by counterparts in the House, which has no direct say in the nomination process.
In a Sept. 24 letter to U.S. Attorney General Eric Holder, four Republican lawmakers said documents they had obtained show Perez “orchestrated a deal to induce the city to drop its Supreme Court challenge.”
The letter said it was “ clear that many of the attorneys involved felt there was an inappropriate quality to the quid pro quo. If the United States had intervened in the Newell suit, taxpayers may have recovered as much as $186 million from the city.”
The letter was signed by Representatives Lamar Smith, chairman of the Judiciary Committee; Darrell Issa of California, chairman of the oversight panel; Patrick McHenry of North Carolina; and Senator Charles Grassley of Iowa, the top Republican on the Judiciary Committee.
Senator David Vitter, a Louisiana Republican, has vowed to block Perez’s nomination over separate questions related to the nominee’s work enforcing voter-registration laws.
Newell said his business has suffered as a result of his case. The complaint “was a valuable tool,” Newell said. “We could find ourselves four years down the road before even another false claims lawsuit comes about, and we don’t know what the next administration’s position will be on that.”
The case is U.S. ex rel. Newell vs. Saint Paul, 09-cv-1177, U.S. District Court, District of Minnesota (St. Paul)
To contact the reporter on this story: Jim Efstathiou Jr. in New York at email@example.com
To contact the editor responsible for this story: Jon Morgan at firstname.lastname@example.org