Railroad fraud can be one of the most expansive types of fraud in US government contracts, reaching across multiple state lines and thousands of miles of track. If you have information about railroad fraud, contact a whistleblower lawyer immediately. Reporting cut corners, financial fraud, and safety concerns can save time, money, and even lives, and can even make you eligible for a substantial financial reward and protections against retaliation from your employer. Speak to an experienced qui tam lawyer today about the specifics of your railroad fraud case.
Railroads have been important to the American way of life since the mid-1820s. During that time, they have undergone several phases of regulation, deregulation, and even temporary nationalization. For many years prior to the American Civil War, railroads were the main method of interstate travel and commerce. Before the time of interstate highways and airplane travel, crossing the length and breadth of the country was most commonly done by railroad. While the federal government helped finance and incentivize the completion of the first transcontinental railroad in 1869, for the most part railroads were private enterprises owned by individual companies.
Unfortunately, as with many powerful industries, this complete control over the market share led to corruption and greed. Railroads were, for a time, an American monopoly without competitors to help push prices down or provide realistic alternatives for those in need of speedy and efficient ground transportation. Railway companies were able to set overly high prices and effectively decide who could ride on private cars and who could not.
For example, American small farmers did not have enough purchasing power to access rebates that railroads offered to their larger shipping customers. While there was some competition for long-haul routes, short-hauls and local traffic were largely dominated by a single company. This led to rampant price discrimination between counties and localities based on which routes were most profitable for the railroad to operate. Meanwhile, railroads operated a tricky position in American society as a de facto public utility that was privately controlled and operated, with unlimited power to discriminate and set prices. Railroads were briefly nationalized during World War I, but control was returned to private companies in the aftermath.
Today, the industry has been largely deregulated, and private companies now face competition alongside highways and air travel. However, even though the industry has been deregulated financially, the federal government maintains certain safety standards that must be met. It also provides funding to modernize railways and trains, reduce emissions, and improve access. Railroads are seen as having significant potential to reduce greenhouse gas emissions across America and have been the source of increased investment in recent years under the Bipartisan Infrastructure Bill.
Railroads nowadays move approximately 1.7 billion tons of freight annually, across roughly 140,000 miles of track. They also play an important role for passenger transit and daily commutes, as well as interstate commerce. If US railroads were not operational, it would take four times more fuel than railways currently use to move the same amount of goods across the country by truck. That would equate to over 99 million additional trucks on our highways and roads.
Establishment of the Interstate Commerce Commission to Enforce Railroad Regulations
In 1877 the Interstate Commerce Commission was established in order to regulate the railroads. In 1906, the ICC’s power was increased by Congress’s passage of the Hepburn Act, which allowed the ICC to determine the maximum rate a railroad could set. Likewise, the 1910 Mann-Elkins Act also strengthened the authority of the ICC’s to regulate railroad rates and certain areas of communications.
The Sherman Anti-Trust Act
The Sherman Anti-Trust Act put a significant halt on railroad consolidation, limiting the monopoly power of the industry. In one of the very first cases under the Sherman Anti-Trust Act, the Northern Securities Company, which had been formed to run three separate railroad lines, was sued by the federal government as part of a trust-busting action. The decision to keep the lines separated was upheld by the United States Supreme Court in 1904.
The US Department of Transportation governs the Federal Railroad Administration. The Federal Railroad Administration (FRA) was established by the Department of Transportation Act of 1966. According to the FRA, the department’s “mission is to enable the safe, reliable, and efficient movement of people and goods for a strong America, now and in the future.”
What is the Purpose of the Federal Railroad Administration?
The FRA currently holds oversight which was previously held by the Interstate Commerce Commission. The Federal Railroad Safety Act, passed in 1970, gave the FRA authority over setting safety standards for today’s railroads. The Office of Railroad Safety is the largest division within the FRA and is responsible for ensuring that all American railroads comply with federal safety regulations and standards.
Areas governed by the Office of Railroad Safety include:
- Track construction and maintenance
- Signal and train control
- Motive power and equipment
- Operating practices
- Transportation of hazardous materials
- Highway-rail grade crossing
One of the ways in which the FRA helps maintain safety standards is by awarding grants. FRA grants are taxpayer funded and subject to anti-fraud reporting laws. FRA grant funding ensures that infrastructure development has a focus on safety and equitable expansion. FRA inspectors are available for grantees to consult with and can provide technical know-how, in addition to monitoring the progress of projects underway.
Currently, more than $13.5 billion in government funding is available for capital projects that address any of the following goals:
- Reducing repair backlogs
- Making railway performance improvements
- Expanding and/or establishing new intercity passenger rail services
- Expanding or establishing privately operated intercity passenger rail services (subject to eligibility)
Unfortunately, with government funding often comes opportunities for fraud, waste, and abuse of taxpayer dollars. Railroads may no longer be in total control as they were before the Civil War, but this does not stop some companies from attempting to take advantage of public funding. Both grants as well as federal and state contracts may be subject to railroad fraud.
Companies may misreport or misappropriate funds in the following ways:
- Bid rigging: There are many examples of bid rigging in the railroad industry, some of which involve insular players and a history of monopolies. With bid rigging, two or more companies collude to reduce competition and offer a mutually beneficial rate. Competitors may offer unrealistically high or low bids in order to obscure that collusion is taking place. One company may sit out the bidding to ensure that another company is awarded the contract, or they may take turns in being the lowest bidder. In other instances, one company will seemingly “win” the contract, only to subcontract the job to the other company. Whatever form bid rigging takes, two supposedly rival companies have agreed ahead of time on who will be the winner. This kind of behavior reduces genuine competition in the market and is another form of illegal price fixing. It can be investigated by the FBI and can be subject to civil and criminal prosecution.
- Underbidding: Underbidding is another form of misreporting costs and timeline in a contract. When companies underbid, they knowingly offer an amount that is too low in order to secure the job. They then increase the cost by adding in fees, delays, and other seemingly unexpected issues. Underbidding may be a part of a larger bid rigging scheme, or it can be an attempt by a single railroad company to undercut the competition by creating a standard that no one can deliver on.
- Submitting inflated invoices: Falsely reporting on invoices to a government entity is illegal under the False Claims Act. Government contractors have an obligation to report their costs accurately.
- Improper cost allocation: Improper cost allocation is an attempt to draw down more of the government’s funds than what was initially agreed upon. Companies that allocate costs toward their overhead or general upkeep instead of the specific project may be committing fraud. Cross-charging and improper cost allocation are common fraud attempts in fixed price and cost-plus contracts with the federal government.
- Failing to meet contractual requirements and standards: Failing to deliver on the specified project or cutting corners on the job constitutes government contract fraud.
- Making false statements in an attempt to secure contracts: Making any kind of false statements in order to receive funds from the government is illegal under the False Claims Act. Making false claims in order to secure a contract is no exception, due to the exchange of taxpayer money as payment.
With the passage of Biden’s infrastructure bill, also known as the Bipartisan Infrastructure Law, $1.2 trillion has been allocated for public spending on roads, bridges, infrastructure, energy, and the environment. A substantial part of the infrastructure bill is set aside for investments in railroads, which can serve dual purposes in both moving goods more efficiently and reducing the carbon footprint of conventional trucking and transport. Amtrak specifically is set to receive $66 billion for safety upgrades, improvements to existing train lines, and expansion and strengthening of service outside the Northeast corridor. Another $11 billion has been set aside for transportation safety, as well as $39 billion for modernizing public transit networks and options nationwide.
With these increased investments comes an increased risk of fraud. Private companies often seek to take advantage of government priorities and public funds, hoping to enrich their own businesses at the taxpayers’ expense. Each dollar set aside for public transit expansion projects represents an heightened risk of fraud, and the railroad industry is no exception. Whistleblowers in every area of the United States should be on high alert and ready to report employers or policies that do not deliver on government transportation contract terms, or which cut corners with supplies, materials, or labor ordered for the job.
If a private company accepts government funding, it is obligated to comply with certain standards. A government contract comes with additional responsibility, as false claims submitted to the federal government are subject to substantial civil penalties under the False Claims Act. This law specifies that each false claim made to the government is punishable by a fine, as well as up to treble damages that the government incurs, per claim. The rates of these fines are linked to inflation.
Neglecting to comply with FRA safety safety standards for materials used as well as maintenance performed on construction projects may be considered a form of fraud under the False Claims Act. Companies with government contracts can be held liable under the False Claims Act if they fail to deliver or misreport on the process. If railroad labor is part of a government contract, then cutting corners on safety standards and maintenance can also constitute fraud.
Other kinds of railroad fraud that are reportable under the False Claims Act include:
- Overbilling for contract work
- Underbidding
- Submitting false reports or statements, including false safety certifications
- Failing to refund money owed after a job
- Billing for substandard goods or services
This list is not exhaustive – many other kinds of fraud are also possible. If you have suspicions, speak to a railroad fraud qui tam attorney.
Reporting any of the above situations involving government transport contracts may qualify you for an award under the False Claims Acts of anywhere from 15 to 30 percent of the amount recovered by the government from the fraudulent company.
Because of the national importance of railroads, railway workers enjoy a number of whistleblower protections beyond just the False Claims Act. The Federal Railroad Safety Act (FRSA) guarantees that no employee, contractor, or subcontractor of a railroad can be discriminated against by their employer for reporting safety and security violations.
The 2007 Implementing Recommendations of the 9/11 Commission Act (Public Law 110-53) transferred authority for railroad worker whistleblower protections to OSHA. This shift expanded the list of protected actions to include even being perceived of:
- Providing information to regulators
- Filing a complaint or participating in an investigation
- Reporting hazardous safety conditions
- Reporting waste, fraud, or abuse of government funds
- Reporting work-related injuries or illnesses
- Refusing to work under hazardous conditions
- Refusing to violate or assist in the violation of federal laws, rules, or regulations regarding railway safety.
Additionally, OSHA prohibits the following forms of discrimination or retaliation in response to a whistleblower’s protected disclosure:
- Firing
- Intimidation or blacklisting
- Demoting
- Denying overtime pay, promotion, or benefits
- Disciplinary actions
- Refusing to hire or rehire for railroad work
- Reassignment that will negatively affect your career
- Reduction of pay or hours
- Denying, delaying, or interfering with medical treatment of an injured employee
The following are notable railroad fraud cases throughout the years. These cases have helped recover funds and inform the future of anti-fraud decisions, whistleblower rights, and legislation.
Crédit Mobilier Bribing Congress
The Crédit Mobilier scandal shaped not only the future of American business, but also political elections. Union Pacific executive Thomas Durant saw that the railroad construction business, because of government contracting, was much more lucrative than actually running and managing a completed railroad. For this reason, he chartered a company and restructured it after French investment law, naming it Crédit Mobilier. American law at the time held that investors were liable for the extent of their holdings. Crédit Mobilier’s structure only held investors liable for the extent of their investment.
The different structure of Crédit Mobilier was not Durant’s only work-around to the law. He also paid off a friend, Herbert M. Hoxie, to submit a bid for construction of a new railroad to his own company, Union Pacific. When the bid was the only one received, Durant essentially hired himself through Hoxie (who soon signed over the rights to the job to Crédit Mobilier) to construct his own project. The new construction was paid for with government bonds, while subcontractors did all the work of building the rails.
The Crédit Mobilier scandal circumvented any real accountability for building the railroad, as well as any true investment in how it would work once it was completed. Additionally, unnecessarily snaked miles were added onto the track to inflate the overall cost. Meanwhile, history books refer to the building materials with disdain, saying “the vilest trash which could be dignified by the name of iron went universally by the name of the American rail.” These substandard materials would eventually cause fatal accidents and delays. Durant, as well as the other Crédit Mobilier investors, would escape liability for their shoddy construction because they used this shadow company to bid for and contract out the work of actually building the railroad. Their profit already secured, Crédit Mobilier’s worth soared even as construction on the tracks stalled or faltered.
The scandal echoed through the halls of Congress as well as the Presidency – but not before many lawmakers became a part of the financial scheme. Senators and House Representatives clamored to hold stock in Crédit Mobilier, which offered steady returns with no risk of liability. Bribes were offered throughout the Capitol, and many legislators who were not shareholders themselves were paid off with Crédit Mobilier dividends. Overall, the Crédit Mobilier financiers escaped mostly scot-free (although with some public condemnation) with an estimated $180,000,000 of railroad stock.
The Crédit Mobilier scandal lives in infamy today as an example of how relaxed regulation, bribery, and insider influence can lead to disaster. When government projects and funds are involved, the results can be especially deadly. Bribing members of Congress can lead to relaxed regulatory standards, shoddy construction work, and cronyism. All of these developments can lead to otherwise preventable accidents, such as the recent Ohio train derailment in East Palestine, and the concerning risk of long-term effects.
Amtrak Fraud
Amtrak contractors have been involved in recent bid rigging cases and bribery schemes. The Delaware company First State Manufacturing (FSM) allegedly paid Timothy Miller, a former Amtrak procurement official, with cash, paid vacations, and other kickbacks in order to secure Amtrak contracts for railroad expansion. These bribery-secured contracts were then completed with substandard materials and saw inflated costs, all billed to the taxpayer over the course of their construction. Miller was allegedly paid as a “consultant” in order to obscure the bribery involving himself and two other FSM executives. The judgment included a payment of $393,000 to the United States on charges of fraud and corruption.
Additionally, the rail corridor between New Haven and Boston saw three different contractors knowingly inflating claims made to the federal government in railway maintenance and construction. The settlement for these instances of overbilling and collusion comes to $24.75 million. The whistleblower in the case is set to receive a share of $4 million for his information and cooperation in bringing the fraud to light.
BNSF Railway: Whistleblower Retaliation
BNSF Railway was accused of retaliating against an employee who attempted to blow the whistle on numerous safety and signal violations. The employee reported both internally to the company and to the Federal Railroad Administration. The FRA found 245 track, switch, and turnout defects, as well as 112 signal system defects, thanks to the whistleblower’s report.
After reporting BNSF Railway’s violations, the whistleblower employee was followed to his car, harassed, and terminated from the company on a technicality. He was even arrested for alleged assault of his supervisor after the parking lot incident, although he was acquitted at trial. Luckily, the employee was able to sue for damages under whistleblower protection law. He received a judgement against his former employer for $1.25 million from a jury, as well as the maximum punitive damages amount of $250,000 under the FRSA.
Dulles Metrorail Project Subcontractor
Even public transportation railways can be reported for fraud and waste of taxpayer funds. In a 2019 case, Universal Concrete Products Corporation (UCP) and the company’s president and co-owner, Donald Faust, Jr., were ordered to pay $1 million to resolve civil allegations that UCP submitted false test results for its products used along the Silver Line of the Dulles Metrorail project. Quality control inspectors alleged that the concrete’s air content was within the correct range, even though the materials should have been rejected by the contractor.
Let Our Whistleblower Lawyers Help You Report Railroad Fraud
If you are concerned about safety or construction violations you are witnessing at work regarding our nation’s railways, let our qui tam attorneys help you understand what steps are available to you. Reporting collusion or bribery in government contracts up for bid, poor work or overbilling in current government construction contracts, and/or safety concerns and violations in the finished product can help protect American taxpayers, travelers, and the economy.
What’s more, coming forward as a railroad fraud whistleblower can protect your own interests in the event that you are harassed or discriminated against by your employer. It can even win you a part of the settlement award and even qualify you for additional damages if your job suffers as a result of your disclosure as a whistleblower.
Tycko & Zavareei LLP is considered to be among some of the top whistleblower law firms in the country. Let our expert False Claims Act attorneys help you report fraud and protect your own best interests. Contact us today for a complimentary and confidential consultation.