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Feds file suit against East Grand Forks firm over flood contracts

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news Bemidji, 56619
Bemidji Pioneer
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Bemidji Minnesota P.O. Box 455 56619

Firm accused of misleading feds at expense of Cass Lake company

EAST GRAND FORKS - A longtime East Grand Forks contractor allegedly misled two federal agencies to earn a $19.1 million contract for work on the city's flood-protection system, according to a news release the U.S. Department of Justice issued Thursday.

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The U.S. Attorney's Office in Minnesota filed suit on March 15 against R.J. Zavoral and Sons, accusing the firm of "repeatedly and knowingly" misleading the U.S. Army Corps of Engineers and the U.S. Small Business Administration.

The company formed a joint-venture with Ed's Construction, a smaller firm from Cass Lake, Minn., that qualified for the contract, and allegedly promised that the smaller firm would get a significant share of the work on the Hartsville Coulee Diversion in East Grand Forks.

That did not happen, according to the complaint.

The contract was awarded in August 2004 and ran until 2008.

President and CEO Peter Zavoral, Secretary-Treasurer John Zavoral and Craig Pietruszewski, a principal accountant for the project, are named as defendants in the suit.

Messages left by the Herald at Zavoral and Sons were not returned.

The company has been doing business in the Red River Valley since the flood of 1951, according to its website.

$2 million

The complaint said the Corps of Engineers had set aside the contract for a business that qualifies under the SBA's Section 8(a) program, which promotes small businesses owned by economically disadvantaged people to help them compete.

To access the program, Zavoral and Sons, entered a joint venture with Ed's Construction, a qualified business owned by Edward Morgan. Ed's Construction would be the managing partner and perform 51 percent or $2 million of the contract work, whichever was less.

But once the contract was awarded, the complaint said, Zavoral and Sons started to undercut the program by refusing to the terms of the joint venture and the Section 8(a) agreement.

Specifically, the complaint said Ed's Construction was not given the opportunity to work; much of the work was done by Zavoral and Sons and other subcontractors. The defendants had "substantial financial or other interests" in at least three of these subcontractors.

Morgan contacted John Zavoral multiple times about work details and was allegedly told there was no work to do.

The complaint said Ed's Construction did as little as $531,831.65 of the more than $19.1 million contract, receiving approximately $1.7 million less than initially reported to the SBA.

Ed's Construction qualified as a minority-owned firm because Ed Morgan is a member of the Leech Lake Tribe of Chippewas, said his wife and office manager for the company, Lethia Morgan.

She emphasized that Ed's Construction is not the target of the federal lawsuit and that they agree with the allegations in the lawsuit.

"We did everything we were supposed to do," she said Thursday. "We contacted the SBA over and over. We have cooperated with them fully. It's clear we are not at fault."

Other payments

A final accounting of the project shows Pietruszewski was paid $252,000, Joe Zavoral was paid $400,000, Dan Zavoral was paid $240,000 and Vice President Robert Zavoral was paid $100,000 even though he allegedly lived in Bemidji at the time and did little or no work on the project.

Dan Zavoral, Peter Zavoral's son, is listed as a contact person for Clay Products, a subcontractor in the project.

The complaint said Ed's Construction, supposedly the managing party in the joint venture, never authorized the payments.

"Collectively, defendants illegally obtained millions of dollars from the joint venture as a direct result of these payments, and were wrongly and unjustly enriched at the expense of both the United States and Ed's Construction," the complaint said.

It doesn't specify damages, but under the False Claims Act, the U.S. is able to seek three times the amount it was damaged plus penalties. Under Financial Institutions Reform, Recovery and Enforcement Act, the U.S. is entitled to seek a penalty of up to $1.1 million or up to $5.5 for continuing violations.

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Pioneer staff reports
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