Risks Associated with Fraudulent Surety Bonds

by Anthony W. Vaughn, Jr. on May 28, 2015

in Design Professionals

Fraudulent Surety BondsIn February, 2015, Darius Johnson was arrested for allegedly selling fraudulent surety bonds to Pennsylvania-based American Architectural Inc., a subcontractor working on the World Trade Center PATH transportation hub (“WTC Hub”).

The complaint against Johnson states that he and a co-conspirator sold fake insurance bonds to contractors working on large construction projects, several which were in the range of $2 million to $7 million.  The fraudulent surety bonds Johnson sold to American Architectural were also accepted by other big construction managers, including one working on a projects for the New-York Historical Society Museum & Library.

The value of American Architecture’s subcontract on the WTC Hub project was $6.2 million, but American Architectural paid one of the companies affiliated with Johnson, Diamond Indemnity Trust, a premium of $178,589.00 for surety bonds.  Johnson gave American Architecture false information to give the appearance that Diamond Indemnity Trust bonds were backed by assets that could be used if a subcontractor defaulted on the project.  In 2011, after American Architecture paid its premium for the sham bonds, Johnson allegedly wired a large portion of the premium payment to himself and a co-conspirator.  In 2012, American Architectural defaulted on the WTC Hub project and filed for bankruptcy.  Johnson and Diamond Indemnity Trust purportedly did not honor the bonds.

Surety bonds on capital construction projects help insure that projects are completed within projected costs, in a timely manner, and that the subcontractors and suppliers are properly paid.  Phony surety bonds create enormous risk for the construction projects, project owners and workers.  In this project, the WTC Hub general contractor was forced to pay an additional $2 million to finish the project.

Unfortunately, surety bond fraud is quite common in the construction industry.  To avoid becoming a victim of surety bond fraud, design professionals and other contractors should research all the public information available on sureties and have an attorney review any available documents.  At a minimum, all contractors and subcontractors should confirm that the surety is what it appears to be and is authorized to write surety insurance in the applicable jurisdiction.  Performing due diligence and checking with industry professionals can avoid the disaster of relying on a bond only to find later that the surety does not exist and is unable to satisfy its obligations.

PIB Law represents design professionals, national banks, retailers, reinsurers, insurers, mortgage lenders and financial services companies from its offices in California, New Jersey, New York City, Philadelphia, Boston, San Antonio, and Chicago.  Our Design Professionals team recognizes the legal issues confronting design professionals and takes a proactive approach toward mitigating risks.  We are experienced in representing and defending architects, engineers, and design professional firms in all aspects of litigation.  For more information, contact PIB Law at 908-725-9700.

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