NEW YORK Buy America rules require the federal government to source domestically melted steel for use in transportation infrastructure projects, but according to numerous sources in the marketplace it appears that a handful of players may circumvent those rules in an effort to improve their margins.
"There are honest mills and dishonest mills, and theres no one doing anything to check and certify the mills," one industry source said of the alleged violations.
The source told AMM that the steel wire mill where he was once employed was one such company. "(The mill I used to work at) would say it was made with this made-in-America-melt chemistry. They would submit melted-in-America paperwork for foreign material," he said.
Evading Buy America rules is not particularly hard for a mill willing to do its research, the source said. "Heres what you do: you buy so many tons of American-made steel every year so you have the paperwork, and then you go out and buy cheap foreign. You run it through the mill and tag it with American-made (heat numbers). You pull the foreign tags out and throw them away."
A second source agreed that violations appeared to be taking place. "Purchasers are actively engaged in creative approaches to not complying with the law," he said. "Blatant, fraudulent noncompliance has been rampant in the industry."
Several other wire and wire rod industry sources agreed that a select number of companies appear to be circumventing Buy America rules, either by falsifying documents or broadly interpreting the rules to make sure their material "qualifies."
"Everyone wants to sell the cheapest possible project at the highest possible price and thats one way to do that," a third industry source said. "Is it an issue? Yes, it is."
A fourth source said some customers had even asked him to falsify paperwork. "Ive had people ask me if they can change the paper (so that it) verifies that its domestic," he said.
Sources told AMM they understand that the Office of the Inspector General at the U.S. Department of Transportation has been investigating some reports of circumvention, although they said they were not aware of any steel companies having been served with a formal criminal complaint.
However, at least one civil lawsuit has emerged as a result of the alleged practice.
Americas Products & Distribution Inc., formerly known as Oldcastle Building Products Inc., filed a civil complaint in New York Supreme Court in April 2012 against the former shareholders of Merchants Metals Holding Co. (MMHC), a company that Atlanta-based Oldcastle acquired in 2006 for $350 million.
According to the suit, one of the main reasons Oldcastle made the purchase was for the acquisition of MMHCs Ivy Steel & Wire Inc. subsidiary, once one of the largest welded wire reinforcement companies in the country. The plaintiff alleged that it was assured Ivy Steela major supplier to government contractswas in compliance with Buy America provisions.
"Defendants assurances that Ivy Steel was in compliance with the act was of critical importance and a material aspect of Oldcastles decision to acquire MMHC. Indeed, an intentional violation of the act would have the disastrous result of impairing Ivy Steels ability to conduct its business and result in its inability to continue operations," counsel for the company formerly called Oldcastle said in the lawsuit.
The plaintiff alleged that once it took control of MMHC and its subsidiaries it became clear that Ivy Steel had been using foreign steel for government-funded contracts by replacing foreign heat numbers with domestic heat numbers obtained from steel already purchased from domestic suppliers for unrelated orders.
"Accordingly, the Ivy Steel officers were able to artificially decrease Ivy Steels steel expenses used in (Department of Transportation) projects and thereby fraudulently and unlawfully increase its net operating profit and the overall value of the company," the suit alleged, contending that Ivy Steel reduced its steel costs on government-funded projects by at least 1 to 3 cents per pound, or $20 to $60 per ton, by using foreign-melted wire rod.
Although the lawsuit did not specify the volume of steel Ivy Steel shipped annually, one industry source familiar with the company estimated that Ivy Steel shipped about 100,000 tons annually, of which up to 80 percent would likely have been for projects subject to Buy America rules.
The suit, filed against Citigroup Capital Investors Ltd. and other former MMHC shareholders, claimed that the alleged misrepresentation of Ivy Steels margins was fraudulent and resulted in the companys ultimate decision to sell Ivy Steel in 2010 to Insteel Wire Products Co. "in an attempt to mitigate its losses and salvage what remains of its large investment." The deal was valued at $51.1 million (amm.com, Nov. 22, 2010).
A judge dismissed the original lawsuit without prejudice earlier this year because it was filed outside of the statute of limitations, among other reasons, but Oldcastle has since filed a notice of appeal, court documents show.
Counsel for the plaintiff claimed there was an ongoing criminal investigation by the federal government into the alleged Ivy Steel misrepresentation, according to a transcript of a March 27 oral argument before the New York Supreme Court.
"There actually have been no actual criminal proceedings filed," Scott Reynolds, counsel for Oldcastle and attorney at Riker, Danzig, Scherer, Hyland & Perretti LLP, told the judge, according to the transcript. "The investigation is ongoing. My client was contacted by federal investigators in around June of 2010. At that time, my client received a subpoena from the Department of Justice seeking information relating to compliance with the Buy America Act. It was at that time that my client learned for the first time that there was an actual fraud that had been ongoing within Ivy Steel."
A spokesman for the Office of the Inspector General at the Department of Transportation would neither confirm nor deny the investigation, while a former employee of Ivy Steel told AMM that he was not aware of any investigation, adding that he believes the company followed Buy America rules before it was sold.
An attorney representing Citigroup Capital Investors declined to comment on the case.
Meanwhile, others in the industry said there doesnt seem to be an easy solution to halting Buy America violators in their tracks.
Although companies that consistently accept low contract bids or import large quantities of foreign-made steel when much of their work is for government-funded projects may raise red flags, only extensive data and paperwork could prove a company was truly violating Buy America rules, sources said.
"The only way you can tell theyre cheating is if you do the metallurgy of the steel," the first source said. "Theres really virtually no way to catch them."