Special Investigative Report Individual surety has had plenty of shady dealings. One of the regulars in the field, Robert Joe Hanson, has received cease-and-desist orders for insurance-related violations in at least 10 states in as many years. His latest scrape with the law came last year in Montana, where state regulators accused him of selling bogus surety bonds to Native American contractors under a new alias, Chief Joe Blue Eyes.

Created by federal regulations for small contractors as an alternative to more risk-averse corporate sureties, individual sureties are people willing to provide payment and performance bonds—guarantees made in exchange for a premium based on a small percentage of the contract—to small firms that would otherwise fail to qualify for public-works projects.

The website of Scarborough's Charlottesville, Va.-based company, IBCS Fidelity, boasts of being capable of providing bonds as high as $50 million, "far surpassing most other sureties."

Unlike individual sureties who have stayed in the shadows, Edmund C. Scarborough is the founder and chairman of the U.S. Individual Surety Association. The website of Scarborough's Charlottesville, Va.-based company, IBCS Fidelity, boasts of being capable of providing bonds as high as $50 million, "far surpassing most other sureties."

"If you or your clients have been told NO by traditional sureties, try one of our many services," the website proclaims.

A burly former Florida contractor who claims to have written 6,000 to 7,000 bonds for small federal, state and local contractors, Scarborough says he has developed a business with revenue from bond premiums of $5 million to $6 million a year. He says he backs his bonds with about 15 million tons of Kentucky and West Virginia usable coal waste. He also says the bonds are as solid as those provided by A.M. Best-rated insurance companies, such as Travelers and Liberty Mutual.

Scarborough has a gift for hitting the corporate surety world, deploying a narrative in which he plays a noble, unbending David struggling valiantly against corporate surety's imposing Goliath—all for the benefit of small and minority contractors.

"We've had hundreds of bonds accepted by the federal government—and hundreds also rejected—and the only common denominator among the rejected bonds is that they were all minority contractors," he says. If Congress adopts the proposed asset rule changes, eliminating coal products and requiring a federal Treasury bond or something similar, corporate sureties would have "won their battle at the expense of the overwhelming majority of small, up-and-coming or independent contractors, who would no longer exist."

In Scarborough's view, the surety playing field tilts steeply to the corporate side. Everything works against the individual surety providers and their clients. For one thing, corporate sureties can leverage the assets backing their bonds, while an individual surety must back them on a dollar-for-dollar basis.

"The surety world is the only entity that [generally accepted accounting principles] say you don't have to report the liability on your books because it's a third-party guarantee," says Scarborough. "And they call me a crook."

Scarborough's adversaries may agree with that quote but keep quiet because they fear what they call his litigious streak. Scarborough has kept several lawyers skilled in the art of litigation quite busy.

Does Scarborough deserve a place in a small-business Hall of Fame or in a rogues' gallery with figures such as Robert Joe Hanson? The answer may depend on the value of Scarborough's hard-to-verify coal holdings and his opponents' will to outlast him in court battles.

For eight years, Scarborough has engaged the U.S. government and the corporate surety industry in the judicial equivalent of trench warfare. In 2005, he sued the U.S. Army and the National Association of Surety Bond Producers (NASBP) over their disclosure of information about an Army investigation of individual sureties and possible fraud. Although he and NASBP settled long ago, on Jan. 15 Scarborough filed an amended complaint in his claim against the U.S. Army. The complaint alleges the Army violated the federal Privacy Act in divulging details of Scarborough's business publicly.

A separate matter carried the bond battle from federal court to Capitol Hill. In 2011, surety bond brokers, insurers and major contracting associations threw their support behind H.R. 3534, the Security in Bonding Act, which passed the House of Representatives last year but died in the Senate. It would have tightened asset rules, requiring U.S. Treasury bonds or related debt securities to be placed in escrow and held by the obligee. Rep. Richard Hanna (R-N.Y.) reintroduced the measure this year on Feb. 15. It included an expansion of the Small Business Administration's surety loan guarantees.

Data Lacking at Federal Agencies

In an effort to gauge the impact of individual sureties, ENR sent Freedom of Information Act requests to eight federal agencies to determine how many are in use on federal projects. Most had no data about how often individual surety bonds have been accepted.

Scarborough has never been charged or convicted of a surety-related criminal offense. But state regulators have ordered him not to do business in Iowa and Virginia, and he has been embroiled in numerous lawsuits. Civil court and state regulatory records provide a glimpse into the controversies that have flared over Scarborough's business dealings. As part of its investigation, ENR reviewed thousands of pages of court pleadings, evidence and cease-and-desist orders and interviewed a number of Scarborough's business associates, clients and adversaries.