It’s happened again. For the third time in as many years, a watchdog found that con artists and ineligible companies gamed the government’s procurement system to fraudulently win small business contracts, this time in a program designed to assist economically disadvantaged individuals.
In a report released on Friday to the House Small Business Committee, the Government Accountability Office identified 14 firms that received set-aside or sole-source 8(a) contracts worth a combined $325 million through fraud or abuse. All together, these firms won an additional $1.2 billion in contracts since entering the 8(a) program, including $17 million in Recovery Act awards.
“The 8(a) program needs to strengthen its fraud prevention, detection, monitoring and investigative controls to minimize its vulnerability to fraud and abuse,” the report said.
Investigators found companies representing themselves as disadvantaged despite owning yachts, luxury automobiles and millions of dollars in ocean-front property. The maximum threshold for entering the 8(a) Business Development Program is $250,000 in annual net worth, excluding the applicant’s ownership interest of the company and primary residence. Other executives misrepresented their ethnicity or used a pass-through company to continue winning contracts long after graduating from the program, GAO found.
Fraud in the Small Business Administration’s contracting programs is nothing new. In 2008, GAO created bogus companies to win small business contracts in the Historically Underutilized Business Zone program. Last November, the watchdog reported on extensive fraud in the veteran-owned service-disabled small business contracting program.
“Fraud has been a persistent problem with all of the SBA’s contracting programs and it is clear from this report, as well as previous work done by the committee and GAO, that SBA needs to do a better job of ensuring these initiatives work as intended,” said Rep. Nydia Velazquez, D-N.Y., chairwoman of the House Small Business Committee, in a statement to Government Executive.
To participate in the 8(a) program, an applicant must be considered a small business, be unconditionally owned and controlled by a socially or economically disadvantaged individual, show the potential for success and be of “good character.” Companies must graduate from the program within nine years.
But GAO found the program is easy to manipulate. For example, a Toms River, N.J., construction company owner reported his adjusted net worth to be $217,000 when it was actually more than $800,000, according to the watchdog. Nonetheless, the firm won $11.2 million in 8(a) contracts from the Defense and Homeland Security departments. The company withdrew from the 8(a) program in September 2009 as a result of GAO’s investigation.
In another case, investigators found that a roofing and construction company in Hyattsville, Md., with $48.3 million in contracts was acting as a pass-through for a graduated firm. Both firms were actually run by a white father-and-son team; the 8(a) program is designed for minority-owned firms. The two businesses essentially were operating as one company, the report said, sharing top executives, staff, administrative offices and warehouse space.
The fraud became apparent to investigators during a visit to the business. “The white vice president disclosed much of the operational knowledge of the firm during the site visit, while the black president rarely spoke,” GAO said. “The white executives both work out of large suites while the black president sits in a small room located at the back of the building.”
The report identified several other instances in which companies established shell companies that would win the award, but not perform any of the work. Some executives hid their lavish lifestyle from SBA, including the president of an information technology firm in Bethesda, Md., who owns a $2.5 million house on a private island in Miami, a $450,000 yacht and a $200,000 Lamborghini, investigators found.
GAO brought three cases to SBA, but the agency failed to take action, allowing the companies to continue winning contracts. For instance, an IT firm in Fairfax, Va., should have been removed from the program after its president failed to disclose $4.2 million in personal property, the report found.
“We brought the unreported assets to the attention of SBA,” the report said. “However, once SBA learned that the firm was scheduled to graduate in eight months, it no longer wanted to investigate the firm’s actions. Eleven days later, the firm was awarded a $1.7 million contract.”
Even firms that voluntarily disclosed ineligibility remained in the program. The president of a human resources firm in Alexandria, Va., told SBA she had an annual salary of nearly $750,000– well above the threshold to remain in the program — yet officials allowed the company to stay in the program for another five years.
In response to the findings, SBA conceded that its fraud prevention systems needed improvement. “Although the 8(a) business development program has enjoyed numerous successes, we recognize that there are weaknesses and areas that require increased monitoring and oversight,” wrote Joseph Jordan, associate administrator for government contracting and business development.
The agency did have a measure of success in screening out bogus applications GAO submitted. In three cases, SBA discovered questionable assets and income with the fake companies. But in another instance, investigators obtained 8(a) certification for a phony firm using fabricated documents.
“Certification of GAO’s bogus firm shows vulnerabilities in the process such as the lack of any face-to-face contact that could allow ineligible individuals or pass-through companies to enter the program,” the report said.
According to SBA, in fiscal 2008, there were 9,462 firms certified to participate in the 8(a) program, and about half had at least one active sole-source or set-aside contract. Agencies awarded more than $16 billion in 8(a) contracts that year, allowing the government to exceed its goal of giving 5 percent of all contracts to small disadvantaged businesses.
In October, SBA recommended major changes to the eligibility and income requirements of the 8(a) program. The rule is expected to be finalized by June.
SBA spokesman Michael Stamler said Friday that the proposed regulatory changes would address “several of the recommendations made by the GAO, and will strengthen the program and maximize its benefits for eligible small businesses.” He added SBA is “taking further steps, in line with GAO recommendations, to prevent fraud, waste and abuse.”
- By Robert Brodsky – govexec.com – April 30, 2010
On Wednesday, April 28, 2010, the American Small Business League (ASBL) filed suit against NASA in Federal District Court, Northern District of California. The case was filed under the Freedom of Information Act (FOIA) after NASA refused to release subcontracting reports for contracts awarded to General Dynamics C4 Systems Incorporated. (http://www.asbl.com/documents/complaint_GD_NASA.pdf)
The ASBL requested information from NASA on a contract awarded to General Dynamics after discovering that a contracting officer reported the award as a small business contract.
Wednesday’s suit is the second lawsuit filed by the ASBL against NASA. In February of 2007, the ASBL prevailed in its first suit against NASA, forcing the agency to provide detailed information proving the agency falsified its small business contracting statistics by including contracts to a variety of Fortune 500 firms and other large businesses.
Since 2003, over a dozen federal investigations have found billions of dollars a month in federal contracts earmarked for small businesses have been diverted to Fortune 500 firms and some of the largest companies in the world. The large recipients of federal small business contracts include: Lockheed Martin, Boeing, Raytheon, Northrop Grumman, Dell Computer, British Aerospace (BAE), Rolls-Royce, French giant Thales Communications, Ssangyong Corporation headquartered in South Korea, and the Italian firm Finmeccanica SpA. (http://www.asbl.com/documents/20090825TopSmallBusinessContractors2008.pdf)
The ASBL plans to file a series of FOIA requests to NASA as a means of uncovering more federal small business contracts that were diverted to Fortune 500 firms. Specifically, the ASBL intends to uncover contracts awarded to large corporations that were coded as small business contracts by contracting officers.
Section 16(d) of the Small Business Act states, “whoever misrepresents the status of any concern or person as a ‘small business concern’…to obtain for oneself or another,” any prime contract or subcontract with the government shall be subject to penalties of $500,000, 10 years in prison and/or debarment from federal contracting programs. (http://www.sba.gov/regulations/sbaact/sbaact.html)
Attorneys for the ASBL believe federal contracting officials, and possibly even employees of prime contractors, could be held liable for penalties prescribed under section 16(d) of the Small Business Act for fraudulently misrepresenting large firms as small businesses.
“This issue has gone on unabated for over decade. I don’t think these abuses are going to stop until people start going to prison,” ASBL President Lloyd Chapman said.
Small business designation under the U.S. Small Business Administration can be a lightning rod for success for companies owned by Alaska Native tribes and corporations, which enjoy privileges under the program not afforded to other participants. In particular, only Native-owned businesses have the ability to land sole-source, no-bid, unlimited-value contracts with the federal government — a fact that raises some ire among those who oppose the preferential structure.
Critics claim Native corporations too easily secure big money contracts without doing enough to improve life in their shareholders’ hometowns — a founding ethic of the Alaska Native Claims Settlement Act. Plus, they say, unscrupulous outside interests can use the Native corporations as “front companies” to gain access to big contracts from which they might otherwise be excluded, and further direct work to subcontractors in which they have a financial stake. The worst case scenario? Money and jobs are passed on to entities with no Native ties at all.
Supporters counter that the potential for waste or abuse is not a legitimate excuse to thwart opportunity for Natives. Yet changes are already under way in response to demands for increased public accountability. The SBA has proposed requiring Alaska Native corporations to demonstrate how their contracts benefit their communities, and the Department of Defense — the main source of contracting opportunities — is requiring its officers to justify sole-source awards in excess of $20 million, which are available only to Native-owned corporations. No-bid awards for all other 8(a) businesses are restricted to $5.5 million or less.
Alaskans are resisting the change on both fronts. Many Alaska Native corporations have urged the SBA to rethink some of its intended reforms, and U.S. Senator Lisa Murkowski intends to try to repeal the new DOD reporting requirement. Murkowski says more paperwork will cause a chilling effect on awards, and more red tape won’t necessarily improve transparency. Until she can get the regulation repealed, she’s encouraging Secretary of Defense Robert Gates to proceed cautiously and with input from tribes in implementing the DOD’s new rules. Murkowski says she’s concerned that increased reporting requirements will result in lost opportunities for Native-owned firms.
She also suspects so-called reforms are small steps in a larger, more cutthroat agenda.
“I think it is the intention of some (people) to pull the plug on the 8(a) program for American Indian, Native Alaska and Native Hawaiians because they are demonstrating a level of success as they are pursuing these contracts,” Murkowski said in a phone interview from her Washington, D.C., office. “Their shareholders are benefitting and there are others (small businesses) who are realizing they don’t have the ability to do the same, and there is competition out there.”
Murkowski also believes the preferential treatment Alaska Native corporations receive is a good thing — and equitable in its own way.
“If it was just for Alaska Natives I would say that it is not fair. But it is (open) to all Native Americans,” she said. “There is a trust responsibility that this country owes to our Native Americans. There is a unique political relationship that exists.”
Sarah Lukin, executive director of the Native American Contractors Association and a shareholder in two Alaska Native corporations, agrees.
“Native enterprises are not like an individually owned 8(a) company,” Lukin said. “Native corporations were formed in perpetuity to provide economic, social and cultural benefits to an entire community. How can an individual disadvantaged company or person have equal rights to a social enterprise that’s serving an entire community of disadvantaged people?”
For Lukin, the issue is far more complicated than trying to root out government waste. Native country as it relates to government contracting has the challenging position of colliding with 11 different congressional committees that have jurisdiction over Native participation in governments, along with falling under three major overriding national policies: federal Indian policy, small business policy and federal procurement policy, Lukin said. And within that framework, there are government “contract purists” — people who believe the only way to do contracting is via full and open competition — who “do not believe that social issues should be addressed through government procurement,” Lukin said.
But carried to the extreme, that philosophy will favor the “big boys” and shut out the very people — minorities — for whom the 8(a) program is designed to assist, Lukin said.
In search of accountability
One of the loudest critics is U.S. Sen. Claire McCaskill, D-Mo. In her role on the Subcommittee on Contracting and Oversight, McCaskill has sought to close federal loopholes she believes have led to waste and abuse in government contracting, with the rules favoring Alaska Native corporations squarely in her sights. In October, her efforts paid off when she won tougher oversight of defense contracting in the 2010 National Defense Authorization Act. McCaskill claimed victory for making the process “substantially more difficult to award sole-source contracts” over $20 million, effectively closing a “loophole in government contracting” that exclusively benefitted Alaska Native Corporations.
In summer 2009, Debra Ritt, Assistant Inspector General for Auditing for the SBA, testified before McCaskill’s committee that sole-source awards do have upsides — they are quick, easy and a legal way for federal agencies to meet small business goals. But she also noted that “reports by OIG (Office if the Inspector General) and GAO (Government Accountability Office) have shown that noncompetitive contracts have been misused, resulting in wasted taxpayer resources, poor contractor performance, and inadequate accountability for results.”
A review of comments submitted to the SBA about the proposed changes shows many Native corporations support the agency’s efforts to “mitigate abuse” and “perceived abuse.” They welcome including Native Hawaiians among the Native-owned businesses with access to sole source contracts of unlimited value. They agree that mandatory audits should occur on contracts over $10 million, and they stress that the SBA will require more funding and staffing to fulfill its more strenuous oversight goals. But there are areas where suggested changes have fueled alarm bells. Limits as to how business partnerships may be formed and the length of time Native corporations may stay in the 8(a) program generated comments about “drastic” effects and “catastrophic consequences.” A proposed rule to report yearly on how benefits from 8(a) participation is reaching Native people prompted terms like “onerous” and “burdensome and unreasonable.” Many are also critical of government value judgments about whether the corporations are fulfilling their missions.
“It’s a lot more than just saying how many jobs did you provide to the Native community and how much did you pay in dividends,” Lukin explained. “All of us provide unique benefits. One may focus on cultural aspects while another may fund substance abuse while another may focus on dividends.”
There is also trepidation about offering too much information. The history of the Native community is if you start reporting on something, you are only a step away from government takeover, Lukin said. Where a corporation or tribe may think language preservation is a legitimate benefit, the government may decide job training is more paramount and direct profits to instead be spent in that way. Lukin is also concerned that corporations, villages and tribes vary so greatly in size and need that there is no measurable “benefit” that can apply to all situations. Smaller companies can’t do as much as big ones, and forcing a show of tangible benefits could dissuade reinvestment that would promote company growth, hurting companies on the rise that might one day have the ability to share more with shareholders.
Lukin is convinced the SBA changes will be implemented by year’s end. Whatever the outcome, Native entities will continue to work within the rules and to strive for accountability and transparency, she said. Still, Native corporations argue that they can weed out bad managers and corruption on their own, and question why they should be subject to more stringent performance guidelines than other American companies.
“Very frankly, Native enterprises are an easy target,” Lukin said. “If you are looking at government contracting reform, it is a lot easier to pick on Native enterprises then to deal with broader government procurement reform.”
The Project On Government Oversight (POGO) is releasing its updated Federal Contractor Misconduct Database (FCMD), with a new top 100 ranking based on the fiscal year 2009 data of USAspending.gov. POGO’s release is concurrent with the operational date for the federal government’s contractor responsibility database — the Federal Awardee Performance and Integrity Information System (FAPIIS) — which will not be publicly accessible.
For 27 of the top 100 recipients of federal contract dollars, POGO did not find any instances of misconduct. “The fact that over a quarter of the top 100 contractors have no known instances of misconduct is further evidence that we should not accept contractor misconduct as a cost of doing business,” said POGO Investigator Neil Gordon.
An additional 11 contractors in the top 100 have only one known instance, showing that more than one-third of the companies in the database do not show a pattern of misconduct.
However, 63 contractors did have multiple instances of misconduct, and once again Lockheed Martin tops the ranking with 50 instances of civil, criminal, or administrative misconduct since 1995. In FY 2009, Lockheed Martin received almost $40 billion in federal contract awards.
The top 100 contractors received over $296 billion in contracts in FY 2009, accounting for 56 percent of the $524 billion in contracts the government awarded that year. As of today, these 100 contractors have accumulated 642 misconduct instances and over $18.7 billion in monetary penalties since 1995. Counting previous years, the FCMD now includes information on 151 federal contractors and 1,049 resolved and pending misconduct instances.
Novartis and two other pharmaceutical companies new to the ranking, Schering-Plough Corporation (which merged with former top 100 contractor Merck & Co, Inc. in 2009) and Pfizer, Inc., received $3.7 billion in contracts in FY 2009 and have a combined total of $4.7 billion in penalties, or about 25 percent of the misconduct penalty total.
POGO’s analysis is not exhaustive because it cannot capture undisclosed settlements and financial settlement terms that may not be publicly available. “POGO is happy to offer its own contractor misconduct database as an open resource, but hopes that the information in the government’s own database, FAPIIS, will soon be accessible to the public,” Gordon said.
Founded in 1981, the Project On Government Oversight (POGO) is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government.
- Released April 23, 2010 by the Project On Government Oversight (POGO).
The head of the Small Business Administration today said the agency has cracked down on companies posing as if they were owned by service-disabled veterans, a scheme uncovered by a recent investigation.
The Government Accountability Office exposed fraud in several of SBA’s small-business programs, including the program that sets aside contracts for small companies owned by service-disabled veterans.
GAO said at least 10 fake service-disabled, veteran-owned small businesses had swindled roughly $100 million from SBA’s set-aside contracts. For example, one company wasn’t owned by a service-disabled veteran, and another subcontracted all of its work to a large foreign company, GAO said in November.
SBA Administrator Karen Mills today said SBA has investigated the 10 companies and is looking to prosecute them. For other imposters, Mills said SBA will be more aggressive in suspending and debarring companies from receiving federal contracts.
- by Matthew Weigelt – Apr 21, 2010 – Federal Computer Week
Small Business Administration leaders have recommended moving internal acquisition functions from the agency’s Washington headquarters to its Denver Finance Center, Administrator Karen Mills announced on Wednesday.
Mills told the House Small Business Committee that as part of a reorganization of its purchasing operations, agency contracting would move from the Office of Mergers and Acquisitions to the Office of the Chief Financial Officer. The CFO, who is based in Washington, supervises the Denver office, which currently focuses on financial management, administrative and programmatic accounting, and financial reporting.
SBA’s CFO, chief operating officer, and associate administrator for mergers and acquisitions suggested the change to Mills. A final decision on the move has not been made.
Officials announced the proposal to staff in an internal memo on Monday, according to SBA spokeswoman Hayley Matz. The American Federation of Government Employees, the labor union representing the contracting officials, has been notified of the recommendation but has yet to be briefed on the plan, she said.
“The [CFO] currently utilizes automated financial management tools and processes that will enable a comprehensive review of acquisition practices and existing contracts,” Matz said. “Such a review will result in the development of more strategic acquisition approaches to leverage buying power and achieve best value, increase use of technology to improve contract management, reengineer business processes to reduce cost to spend, build the skills of the acquisition workforce and end contracts that are no longer needed.”
The reorganization would lead to the elimination of SBA’s Office of Business Operations, Matz said. The Office of Grants Management, meanwhile, would be established to administer, award and monitor grants programs.
The transition would affect about 10 SBA contracting officers, who would be offered positions in Denver. Those unwilling to move to the Mile High City would receive help finding positions at the same grade level either at SBA or at another federal agency, Matz said. SBA does not expect the move to result in a net change in the size of its procurement staff.
SBA is the 10th agency to align its contracting functions under the CFO’s office, Mills testified.
But a Senate source raised questions on how the transition would comply with the 2003 Services Acquisition Reform Act, which mandated the creation of agency chief acquisition officers. The bill requires that agency procurement functions be managed by a non-career official whose primary duty is acquisition management. SBA did not respond to questions about the statute.
Mills told the committee she has taken a number of other steps recently to improve the operations and management of SBA’s small business contracting programs.
In response to a pair of Government Accountability Office reports finding widespread fraud in the HUBZone Business Development program, SBA increased the number of site visits from less than 100 in 2008 to more than 900 in 2009, Mills said. The agency is on track to conduct 1,000 additional visits in 2010.
“We’re working to ensure that only legitimate and eligible firms are benefiting from HUBZone,” she said.
To prevent ineligible firms from winning small business contracts, Mills said the agency has beefed up front-end oversight of the certification process. And, when companies are found to be out-of-compliance or ineligible to win small business contracts, they will have 30 days to remove themselves from the Central Contracting Registry database or SBA will do it for them, Mills said.
But, the agency’s chief watchdog testified that SBA’s contracting data often is inaccurate and unreliable.
In February, the SBA Inspector General’s Office issued an audit examining SBA’s fiscal 2008 acquisition data in the governmentwide Federal Procurement Data System. The report found SBA certified to the accuracy of its contracting data, even though 92 percent of a random sample of contract actions the IG reviewed contained one or more inaccurate or incomplete data elements.
The most common mistakes related to the size of the business, the code used to determine the size standard, the type of award, the contractor’s Data Universal Number System identifier, or the location of the contract.
“Due to the volume of errors identified in FPDS, it appears that contracting personnel did not review FPDS data inputs to ensure they reflected accurate information, as required by the Federal Acquisition Regulation,” SBA IG Peggy Gustafson said.
Mills called the audit findings “extremely disturbing and unacceptable.” But issues remain. The IG sampled SBA’s fiscal 2009 contracting data and found an error rate of 97 percent. The 2009 data indicated fewer problems with each individual data element, however.
Two other IG reports issued this month also raised concerns about SBA’s procurement functions. An April 9 memorandum found SBA’s current procurement workforce was “insufficient to effectively award, administer and oversee Recovery Act contracts as well as other SBA contracts.”
The second audit found SBA failed to report all noncompetitive stimulus contract actions to Recovery.gov and mischaracterized some of the actions it did report. SBA agreed with the findings of both reports and has begun to implement many of the IG’s staffing and oversight recommendations.
By Robert Brodsky – April 21, 2010 – (C) 2010 BY NATIONAL JOURNAL GROUP, INC. ALL RIGHTS RESERVED.
In the summer of 2005, Detroit businesswoman Sherry Washington and three partners sold Detroit Public Schools on a pilot wellness program for its employees. Their company, Associates for Learning, promised to educate roughly 3,000 employees on the benefits of a healthy lifestyle for $150,000.
By 2006, payments to Associates for Learning had ballooned to $3.32 million, DPS alleges in a lawsuit. And yet fewer than 150 workers had taken part in a health-assessment survey that was the key to the company’s proposal, DPS claims in the lawsuit, which is scheduled for trial in July. Software for the survey cost the district another $1.4 million.
According to court records, federal authorities now are investigating Washington, one of her partners and Stephen Hill, the school official who approved the payments.
DPS also is alleging that Hill, the former head of risk management for the district, accepted as much as $30,000 in kickbacks from Washington’s group.
This is not the first time Washington has been tied to questionable DPS payments. In February 2007, the Free Press reported that officials overseeing Detroit’s impoverished schools purchased $1.6 million in art from Washington’s downtown Detroit gallery.
Bank records recently obtained by the Free Press show that as Associates for Learning was collecting millions from DPS to improve the health of school employees, the company was spending money at the Somerset Collection, a BMW dealership, Comerica Park and casinos. And then there was that $16,000 stay and shopping spree in the Cayman Islands.
DPS says company did little, spent lots
The school district obtained the bank records as part of its lawsuit against Associates for Learning and its four founders: Sherry Washington, a prominent downtown art gallery owner; Dr. Gwendolyn Washington, a Southfield physician, and Detroit business consultants Sally Jo Bond and Marilyn White. Bond has worked for the City of Detroit and the Wayne County Commission, and White has taught at Marygrove College.
DPS contends the company provided few services in return for the multimillion-dollar payments it received between October 2005 and September 2006.
The company’s bank account routinely was debited for expenses ranging from the mundane (gas, groceries, a car wash, shoe repairs, dry cleaning, manicures and pedicures) to the luxurious ($1,733 at Louis Vuitton in Troy, more than $16,000 in the Caymans for unidentified travelers, $1,609 at a duty-free shop in Windsor).
The records do not show who made the purchases — they simply list dates and amounts paid.
The company also spent thousands more at Marshall Field’s and Nordstrom, jewelry stores and restaurants, including a $1,256 tab at Seldom Blues in Detroit. It paid for iTunes downloads, spent money at a BMW dealership, Comerica Park and Circuit City. It even paid $67.84 at the Build-A-Bear Workshop in Troy. And it routinely withdrew cash at casinos.
A larger pattern
The district’s claims against Associates for Learning are part of a larger lawsuit that alleges the former DPS director of risk management, Stephen Hill, and his assistant, Christina Polk-Osumah, diverted more than $57 million in improper wire transfers to a dozen vendors, including Associates for Learning. The suit claims Hill used secret offices and computer systems to hide the payments, which were made to vendors who were friends, associates or relatives of Hill and Polk-Osumah.
The FBI has opened a criminal probe of Hill, the Washingtons and others, according to court records.
In late 2007, FBI agents raided Hill’s Detroit home, where they seized a computer and two laptops, mail, paperwork and photos. They also searched the offices of Associates for Learning and Sherry Washington’s gallery, taking computer images and a dozen boxes of financial records and paperwork, according to search warrants filed in U.S. District Court.
Washington referred questions about the investigation to her lawyer, Jeffrey Collins of Detroit, who did not return repeated calls last week.
Collins, who also represents Gwendolyn Washington, said in a December court filing that a federal prosecutor has indicated the Washingtons are targets of a federal investigation.
“The government contends the evidence they have against Sherry Washington and Gwendolyn Washington is compelling,” Collins wrote. “The threat of criminal charges is real and imminent.”
Spokeswomen for the FBI and U.S. Attorney’s Office in Detroit declined to comment last week.
In a Feb. 16 deposition, Sherry Washington repeatedly invoked her Fifth Amendment right against self-incrimination when questioned by a DPS lawyer about the money paid to Associates for Learning.
Gwendolyn Washington also invoked the Fifth Amendment repeatedly.
White and Bond did not attend their scheduled depositions in December 2009, both citing the pending criminal investigation.
Bond declined to comment; Gwendolyn Washington and White could not be reached.
The company’s former lawyer, however, has said in court records the women did not commit any unlawful or improper acts, and did not orchestrate any fraudulent scheme. He said they had a deal with the district to provide services, which they delivered, and were entitled to be paid.
Robert Bobb, the district’s emergency financial manager, did not address the allegations against Sherry Washington and her partners in a recent statement to the Free Press, but said: “The level of corruption that has been allowed to flourish in Detroit Public Schools in the past simply cannot be tolerated. That is why we are quickly and aggressively working to hold accountable those who have chosen to enrich themselves at the expense of our children.”
Ida Short, a member of the Detroit Board of Education, said last week the board brought the lawsuit two years ago because “we want to get any and all money back that was illegally obtained by whoever it was obtained by.”
In the spotlight
Sherry Washington has made headlines before:
• In 2008, the IRS filed a lien against Washington for $253,006 in unpaid income taxes; as of early April, it had not been lifted.
• In 2007, the Free Press reported that DPS spent at least $1.6 million in bond money — funds that taxpayers approved to build or repair decaying schools — to buy artwork through her gallery. She told the newspaper then that she took a 20%-50% commission, depending on the artist and work. The school district’s inspector general, John Bell, said he currently is investigating the art purchases.
• In 2006, the Free Press reported that DPS was paying $200,000 to BWW Group of Detroit, a company formed by Washington, White and Bond, to teach entrepreneurs how, among other things, to get contracts from the district. At that time, DPS said it intended to spend another $180,000 with BWW in 2007. Critics said the money could have been used to hire teachers and that local business associations offered similar training.
• In 2004, the Detroit News reported that Cobo Center officials spent $500,000 to buy artwork from her gallery — at a time when the conference center was expected to lose millions.
A presence downtown
Washington, 53, is a prominent presence downtown. She has sold contemporary and African-American inspired art since 1989; was on the board of the Downtown Development Authority from 2002-08, and has been a member of the Detroit Library Commission since 2005.
In addition to her DPS contracts, Washington has helped the Wayne County Community College District develop a cultural arts program, according to WCCCD Chancellor Curtis Ivery. In 2009, the district paid her gallery $92,880, up from $77,500 in 2008 and $67,250 in 2007. Her services include setting up art exhibits at galleries on its campuses, coordinating fund-raising events to support cultural activities, writing news releases and coaching students in overseas programs.
Ivery wrote glowingly of Washington in a March 18 letter to the Free Press.
“Ms. Washington has a tremendous following throughout Wayne County and, therefore, has been a great asset in our community outreach initiatives,” Ivery wrote.
Associates for Learning had yet to be incorporated when it first approached Hill, then-head of risk management for the school district, about launching a wellness initiative in August 2005.
The company proposed a voluntary program to motivate and educate school district employees on the benefits of healthy lifestyles through education, special events and promotions.
It began as a pilot project with a $150,000 budget and plans to reach about 3,000 employees between November 2005 and March 2006. The company’s proposal called for the district to make three payments between September 2005 and May 2006, totaling $150,000.
Instead, by March 2006, the company had received more than $1 million, then billed the district for another $2.2 million in May for what it called additional phases.
Questionable approval
Records show that Hill approved those payments that summer even though he was no longer a district employee.
At that time, Hill was working for a large risk-management company, Marsh & McLellan of New York, which allegedly had loaned him back to DPS. Marsh is also named in the lawsuit. The district accuses the company of billing the district for services at inflated rates or commissions, and for services DPS didn’t need.
The district’s lawsuit, filed in Wayne County in June 2008 and scheduled for trial this July, claims Associates for Learning billed the district for services it didn’t intend to perform, and never performed. It also contends Associates for Learning paid Hill as much as $30,000 in kickbacks.
The suit said Hill chose Associates for Learning without competitive bidding and without a written contract detailing the complete scope of the project, and that both Hill and Associates for Learning “knew that making the selection this way would conceal their fraudulent, unlawful or otherwise improper scheme to get unauthorized, excessive or illegitimate claims paid.”
- BY JENNIFER DIXON – DETROIT FREE PRESS STAFF WRITER – APRIL 11, 2010
Chicago – Daniel Arce has a prescription for success. He runs his family’s eyeglass business, Tropical Optical. He also heads the Mexican American Political Action Committee. Together, his business and his political fund have given more than $590,000 in campaign contributions in the past decade to a host of elected officials, including former Gov. Rod Blagojevich and key Hispanic legislators.
During that time, Tropical Optical has seen a dramatic rise in its government business.
Since 2000, Arce’s company has gotten more than $13 million in taxpayer money to provide eye exams and glasses for more than 60,000 uninsured students from Chicago’s public schools, as well as providing vision tests for his rapidly growing Medicaid business, which has become one of the biggest in the state. Arce makes the glasses for the uninsured students, though not for the Medicaid recipients, whose glasses are made by Illinois prisoners.
Arce’s business pulled in more than half of the $13 million in the past four years, after a new state law began requiring the Chicago Board of Education to provide vision tests and glasses for uninsured students.
The legislation’s lead sponsor was state Rep. Edward Acevedo (D-Chicago), who has gotten more than $65,000 in campaign contributions from Tropical Optical and Arce’s PAC.
Once the law was passed, Blagojevich and Illinois legislators gave Chicago’s school system a grant of $3 million a year to pay for those exams and glasses in 2006, 2007 and 2009. (The program was suspended in 2008, after Blagojevich vetoed the grant during a political battle with Illinois House Speaker Michael J. Madigan.)
To handle the tests and glasses for students, Chicago school officials picked Arce, whose company submitted the lowest bid for the job in 2006. Since then, no one bid against Arce.
To negotiate his three contracts with the Chicago Board of Education, Arce hired the Chicago law firm Chico & Nunes, headed by Gery Chico, a former chief of staff to Mayor Daley and former Chicago school board president who is now chairman of the City Colleges of Chicago.
Arce’s current contract — a three-year deal — doesn’t expire until next year, but he stopped providing the exams and glasses last June, when state funding ran out.
Chico — whose father owns Kopico Printing, a subcontractor on Tropical Optical’s school contracts — says his law firm has lobbied state officials on Arce’s behalf, hoping to get money to restart the vision program. But that’s unlikely, since the state is struggling with a record budget deficit of $13 billion.
Under the state grants, the Chicago Board of Education was required to audit Arce’s contracts — but it never did. Now, after the Sun-Times inquired, all three years will be audited, schools spokeswoman Monique Bond says.
With the Blagojevich administration more than tripling what the state pays for vision exams starting in 2007, Arce’s business began taking more Medicaid patients. The state passed a law in 2008 requiring all children to get eye exams before beginning school.
Last year, Tropical Optical was paid more than $1.4 million by the state for seeing 21,918 Medicaid patients — nearly four times as much money as it collected in 2006, when it had 13,552 Medicaid patients, state records show.
Arce has other government customers, too. Employees who work for Chicago City Hall, the city’s schools and Cook County government can get their glasses at Tropical Optical under their health insurance plans.
Though Tropical Optical’s list of government customers is growing, Arce says that has nothing to do with his campaign contributions.
“Frankly, we are insulted by your insinuation,” Arce says in an e-mail in response to questions from the Sun-Times. “I and my family make decisions to support those candidates that we believe have a proven track record of accomplishment and promise for our community. We expect nothing in return but their honest and best service.”
Arce and Acevedo, along with other Hispanic legislators, are all on the board of the Illinois Legislative Latino Caucus Foundation, a not-for-profit group run by state legislators, lobbyists and businessmen to develop “a comprehensive Latino agenda” to increase state funding for housing, education and health care. They also give scholarships to students.
Tropical Optical was started in 1971. That’s when Arce’s late father, Eusebio, an optician, opened his first store on 26th Street in Chicago’s Little Village neighborhood. He went on to open four more stores in other largely Hispanic neighborhoods before he died in 1994. His widow, Guadalupe, and their children now own the business.
In 1999, Tropical Optical had a small share of the state’s welfare business — it collected $141,123 from Medicaid — when Paul Vallas, then the Chicago schools chief executive officer, and Chico, then school board president, decided to expand the vision-screening program to include eye exams and glasses for uninsured kids, paid for by the school system.
Tropical Optical was hired, along with a second company, Mobile Vision Services. But most of the school work went to Arce’s company, which was paid nearly $1.2 million between 2001 and 2003, when the program ended, records show. Chico resigned from the school board in May 2001.
In December 1999, Chico abstained from voting when the school board agreed to negotiate a contract with Tropical Optical. At the time, city records show Tropical Optical was a lobbying client of the Chicago law firm Altheimer & Gray, whose lobbying business was run then by Chico, though Chico disputes the accuracy of those records.
“I can find no record of Tropical being a client of Altheimer & Gray in 1999-2000, city records notwithstanding,” says Chico, responding to questions via e-mail. “We operate under an abundance of care and may have simply shown the company for some reason despite the fact that we did no work for them.
“The likely reason I abstained was that I did not want there to be the appearance of favoritism or impropriety because of my relationship with the Arce family. I often came down on the side of caution when these matters came before our board.”
Two years after leaving the school board, Chico ran in the Democratic primary for a U.S. Senate seat ultimately won by now-President Obama. During that campaign, Tropical Optical’s owners contributed $24,000 to Chico’s campaign.
“The owners of Tropical Optical have been friends of our family going across several generations,” says Chico. “I welcomed their contributions.”
- BY TIM NOVAK Staff Reporter, WITH THE BETTER GOVERNMENT ASSOCIATION – Chicago Sun Times – 4/12/2010
The boss of a former San Antonio Army major sent to prison for a multimillion-dollar bribery scheme is under investigation herself, along with her husband, over allegations of bribery and contract fraud.
Velma “Bebe” Salinas-Nix and Kenneth H. Nix are suspected of accepting $270,000 from a Chicago contractor to help him land $45 million in government contracts, according to federal court documents.
Investigators with the Army’s Criminal Investigations Command and the FBI allege the Nixes awarded contracts to Vistas Construction of Illinois Inc., owned by Samuel Zepeda Jr., and other firms owned by his relatives or associates.
Bank records probed
As part of their probe, agents have been examining bank records and looking at six years’ worth of contracts awarded to Vistas and related companies in a case authorities believe could result in wire fraud, bribery and contract fraud charges. The Nixes and Zepeda deny any wrongdoing.
Salinas-Nix, 55, is a high-ranking civilian manager with the Army Contracting Agency at Fort Sam Houston that handles contracts in Central and South America and the Caribbean. A deputy director, she oversaw contracting officers, including then-Army Maj.
John Cockerham, but was suspended with pay last fall following raids in October at Vistas headquarters in Chicago and the Nixes’ posh, 6,850-square-foot, $1.8-million home in north Bexar County.
‘Revolving door’
Nix, a retired Army captain, is alleged to have gone from key civilian contracting jobs within the Army to working in the private sector on the same contracts and back to jobs with the government that gave him influence on other contracts. His case highlights criticism from some public interest groups that this “revolving door” can lead to corruption.
Investigators learned Nix worked twice directly for Zepeda as his company vied for contracts that Nix might have helped handle while with the government or that his wife might have wielded influence over, according to a recently unsealed court affidavit.
Neither the Nixes nor Zepeda have been charged, although witnesses have been called to testify before a federal grand jury in San Antonio, the San Antonio Express-News found.
- By GUILLEMO CONTRERAS – SAN ANTONIO EXPRESS-NEWS – 4/11/2010
Seven years of war in Iraq and nine years of conflict in Afghanistan have taken its toll on the men and women who have served there, with the number of disabled veterans jumping by 25 percent, or 2.9 million people nationwide, since 2001.
Of those, 181,000 are veterans of the two wars in in Iraq and the current conflict in Afghanistan, while nearly one million are veterans of the Vietnam War. Once they left the service, many of these disabled veterans wanted nothing more than to get on with their lives, and the government, in many ways, has stepped up to help them. But there are still roadblocks and bureaucratic shortcomings that haven’t given our vets the support they need to thrive post-service.
For instance, Congress enacted The Veterans Benefits Act of 2003 which established a program, administered primarily by the Small Business Administration, that awards set aside and sole-source government contracts to small businesses controlled by one or more service-disabled veterans.
For all of its noble efforts, the program, and many like it has fallen short of its promises, and in some case have become victim to scandal. Late last year, the Government Accountability Office released a scathing report that found the program vulnerable to widespread fraud and abuse.
Millions of dollars in taxpayer money that should have gone to honest disabled veteran-entrepreneurs were instead pocketed by imposters, who broke the rules and gamed the system to get contracts, according to House Small Business Committee Chairwoman Nydia M. Velazquez, D-NY.
“When you consider the sacrifices our service-disabled veteran entrepreneurs have made, the findings of this report are nothing short of appalling,” she said when the report was released last November.
The 10 firms indentified in the GAO investigation had received roughly $100 million in contracts earmarked for disabled veterans through fraud or abuse of the program (or sometimes both). In most cases, disabled veterans were used as fronts for large and even multi-national companies, yet in one instance, the firm’s owner was not even a service-disabled veteran.
Widespread fraud in the program was only half the problem. The GAO investigation also found that the SBA and other agencies involved in the procurement process had few or zero safeguards in place to prevent fraud and abuse. In one of the bitter legacies of the Bush administration, the SBA’s fraud prevention efforts had been decimated by budget and staffing cuts.
In a separate hearing last month before a subcommittee of the House Veterans Affairs Committee, Scott Denniston testified on behalf of the National Veteran-Owned Business Association (NaVOBA), which represents more than 2,000 small business owners across the country, who are veterans.
Denniston, who is NaVOBA’s director of programs, noted that the 2003 law set aside 3 percent of all federal contract awards for disabled-veteran small businesses, but the statute never provided guidance or mechanisms to achieve the goal. To address that shortcoming, the Veterans Administration, on its own, established the Center for Veteran’s Enterprise to bring together veteran-owned small businesses, federal agencies, and prime contracting communities.
But the VA has never embraced the program from an “institutional” standpoint and hasn’t provided the resources to expand the program despite demand for its services growing from the influx of Iraq and Afghanistan veterans, Denniston said.
In another festering problem, the VA was tasked with setting up a computer program to certify disabled-veteran-owned firms as well as veteran-owned firms. The process is supposed to curb the fraud and abuse uncovered by the GAO report.
But getting verified “is burdensome, overbearing and so untimely as to cause serious financial strain on [the firms it’s supposed to serve],” Denniston testified. “Some of our members share stories and frustrations of the process taking over six months to complete, with the veteran applicant never being told where his/her application is in the process,” he explained.
The drastic recession has made the program’s problems even more acute. In the most recent hearing before the House Small Business Committee this week, Justin Brown, a lobbyist for the Veterans of Foreign Wars (VFW) highlighted the seriousness of the problems veterans face in the current economy.
As of February 2010, more than 1.1 million veterans are unemployed. The jobless rate among the youngest veterans is a staggering 21 percent, he said. More veterans are unemployed than are currently serving in both Iraq and Afghanistan.
For returning veterans, the prospect of starting a business is appealing. An SBA survey found that 22 percent of veterans were either purchasing or starting a business, or considering doing so. “However, for a veteran interested in entrepreneurship, the reality is quality resources are scarce, disjointed, and available to few,” Brown said.
Like any budding entrepreneur, access to capital is the biggest problem. The SBA has two loan programs targeted at veterans: the Patriot Loan Express and the microloan program.
The Patriot program makes up to $500,000 available for most uses, features low interest rates and qualifies for up to an 85 percent guarantee from the SBA. So you would think veterans would be flocking to the program. But since its inception, only 155 loans have been made nationwide, he said. One would speculate the lack of participation is most likely due to layers of red tape and low demand.
Microloans up to $35,000 are available to any small business that qualifies according to size guidelines, but since last October, only 53, or 5.32 percent, of the 997 loans have been made to veterans. Even more alarming is the fact that only three loans have gone to disabled veterans, according to Brown.
What’s more, although the 2003 law required the government to award 3 percent of all contracts to firms owned by disabled veterans, it has yet to meet that goal. Ironically, the Defense Department is one of the biggest laggards, Brown noted.
To their credit, lawmakers have attempted to address these problems. Two years ago it passed a law ordering the SBA to create an interagency taskforce to coordinate veteran small business programs. But the agency has yet to follow through.
In some case, however, Congress itself is the problem. The House recently passed the Job Creation through Entrepreneurship Act of 2009. Among its provisions, it would increase the number of veterans’ business centers around the country. But the bill has been stalled in the Senate by political infighting that is clogging the legislative agenda.
For veterans to succeed not only with federal contracts, but as small business owners, they need: training, capital, compliance, and interagency cooperation, Brown said. But today, despite their sacrifices, their options are limited. Federal agencies continue to ignore their public mandates and programs are still starved for funds. Surely, those who have given so much to their country deserve better.