Small Business Administration: 8(a) Is Vulnerable to Program and
Contractor Abuse (Letter Report, 09/07/95, GAO/OSI-95-15).
Pursuant to a congressional request, GAO reviewed the Small Business
Administration's (SBA) 8(a) program, focusing on whether: (1) ineligible
8(a) firms have received contracts through their improper participation
in the program; (2) 8(a) firms have misrepresented themselves to enter
and stay in the program; (3) firms exceeding the size standard have
inappropriately received 8(a) awards; (4) SBA has allowed ineligible
firms to remain in the program after they exceeded the size limitations;
and (5) federal contracting authorities have improperly used indefinite
delivery, indefinite quantity (IDIQ) contracts to avoid competition.
GAO found that: (1) the two firms studied were initially recommended for
nonacceptance into the 8(a) program because of eligibility questions
about who actually controlled the firms; (2) SBA justification for
accepting the firms was questionable, since the questions about the
firms' ownership were never fully answered; (3) one firm's owner
misrepresented her personal qualifications, her equity in the firm, and
ownership changes, but SBA took no action when it found out about the
misrepresentations; (4) the firm received millions of dollars worth of
8(a) contracts after it had grown too large to participate in the
program; (5) although the firm hid its size by excluding items from its
financial statements, understating its total revenue, and representing
itself as a company at financial risk, it had considerable access to
credit; (6) SBA allowed the firm to remain in the program and receive
new 8(a) contracts even after it had determined that the firm had grown
too large for continued program participation; (7) the Coast Guard
awarded a sole-source IDIQ contract to the second firm by changing the
contract's classification code to one for which the firm was eligible
and altering the contract's original minimum value below the minimum
threshold for mandatory 8(a) competitive procurements; and (8) the Coast
Guard believed that competitive 8(a) procurements hindered its mission
and viewed the contract as a graduation present to the firm.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: OSI-95-15
TITLE: Small Business Administration: 8(a) Is Vulnerable to
Program and Contractor Abuse
DATE: 09/07/95
SUBJECT: Small business set-asides
Small business assistance
Irregular procurement practices
Small business contractors
Contract administration
Disadvantaged persons
Small business contracts
Indefinite quantity contracts
Competitive procurement
Fraud
IDENTIFIER: SBA 8(a) Program
Cover
================================================================ COVER
Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on Governmental Affairs, U.S. Senate
September 1995
SMALL BUSINESS ADMINISTRATION -
8(A) IS VULNERABLE TO PROGRAM AND
CONTRACTOR ABUSE
GAO/OSI-95-15
8(a) Vulnerablility to Program and Contractor Abuse
Abbreviations
=============================================================== ABBREV
AA - Associate of Arts
COTR - Contracting Officer's Technical Representative
e-mail - electronic mail
GAO - General Accounting Office
IDIQ - Indefinite Delivery Indefinite Quantity
OIG - Office of Inspector General
OSI - Office of Special Investigations
RCED - Resources, Community, and Economic Development Division
SBA - Small Business Administration
SIC - Standard Industrial Classification
Letter
=============================================================== LETTER
B-261485
September 5, 1995
The Honorable Sam Nunn
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
Dear Senator Nunn:
On October 5, 1994, you requested that we determine whether the Small
Business Administration's (SBA) 8(a) program is being exploited by
individuals or corporations that have used illegal or improper means
to participate in and benefit from the program. SBA's 8(a) program
is designed to develop and promote businesses that are owned and
controlled by socially and economically disadvantaged individuals.
You were concerned that weaknesses in program management and
administration identified in our September 1993\1 report may make the
8(a) program vulnerable to abusive activities.
You asked us to determine, within the context of case studies,
whether abuses such as the following have occurred in the 8(a)
program.
Has the improper participation of 8(a) firms resulted in their
being awarded contracts for which they were otherwise
ineligible, and have 8(a) firms misrepresented themselves to
enter and/or stay in the program?
Have any 8(a) contracts been inappropriately awarded to firms that
were ineligible because they exceeded size standard
restrictions? Has SBA allowed firms to remain in the program
after their increased size indicated that they should be
graduated?
Have federal contracting authorities improperly used the Indefinite
Delivery Indefinite Quantity (IDIQ)\2 contracting option to
noncompetitively steer 8(a) contracts that should have been
competitive?
To develop our case studies, we reviewed SBA application,
eligibility, and participation documents of the top 25 8(a)
contractors in terms of total dollars awarded for fiscal year 1992.
(See app. II.) We looked for indicators, or red flags, of potential
regulatory violations and criminal misconduct. We initially selected
four firms for investigation based on the strength of the indicators
we found. Due to time constraints and the destruction of records
compiled for one firm as a result of the Oklahoma City bombing
tragedy, we narrowed our investigation to two firms--I-NET, Inc. of
Bethesda, Maryland, and Technical and Management Services Corporation
(TAMSCO) of Calverton, Maryland--for further investigation.
--------------------
\1 Small Business: Problems Continue With SBA's Minority Business
Development Program (GAO/RCED-93-145, Sept. 17, 1993).
\2 IDIQ contracts are used when agencies do not know the precise
quantity of supplies or services to be provided and consequently are
able only to estimate a minimum value. For purposes of IDIQ
contracts, the guaranteed minimum value was $3 million for service
contracts and $5 million for manufacturing contracts. SBA recently
amended its 8(a) regulations to eliminate the potential abuse of IDIQ
contracts to avoid competition. 13 C.F.R. µ 124.311(a)(2) (1995)
requires agencies to competitively award any contract whose total
value exceeds $3 million for service contracts and $5 million for
manufacturing contracts. Effective August 7, 1995, the applicable
threshold amount will be applied to the agency's estimate of the
contract's total value, including all options. The minimum value of
the contract will no longer be used.
I-NET AND TAMSCO: AN OVERVIEW
------------------------------------------------------------ Letter :1
I-NET, Inc. is a high technology corporation that provides federal
agencies with computer systems and support services. For fiscal year
1992, it was the third largest recipient of 8(a) contract awards,
which totaled over $65 million. During its nearly 10-year (Sept.
20, 1984, to June 16, 1994) program participation, I-NET obtained 145
8(a) contracts totaling at least $508 million. At least 126 of the
145 contracts were awarded noncompetitively.
TAMSCO is a high technology corporation that provides computer
systems and support services to federal agencies and large Department
of Defense contractors. For fiscal year 1992, it was the ninth
largest recipient of 8(a) contract awards, totaling over $30 million.
During its program participation from May 14, 1984, until September
18, 1993, TAMSCO obtained 108 8(a) contracts totaling at least $356
million. At least 82 of the 108 contracts were awarded
noncompetitively.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
I-NET and TAMSCO were among the firms that were initially recommended
for nonacceptance into the 8(a) program because of eligibility
questions concerning who actually controlled each firm. SBA had
questions that were never fully answered about whether I-NET and
TAMSCO were owned and controlled by socially and economically
disadvantaged individuals, as defined by 8(a) program regulations.
Based on our review of SBA documentation and our interviews with SBA
officials, we questioned SBA's justification to accept I-NET and
TAMSCO into the program.
On at least two occasions after entry into the program, I-NET's owner
did not inform SBA about the true equity ownership in the firm, in
violation of SBA regulations. I-NET also misrepresented information
to SBA about its owner's personal qualifications: I-NET's owner
falsely certified on a resume submitted to SBA with her 8(a)
application that she held an Associate of Arts (AA) degree in
computer science and technology. SBA took no action when it learned
of these misrepresentations.
I-NET received 8(a) contracts totaling millions of dollars after it
had grown too large for continued 8(a) program participation. To
remain eligible for contracts, I-NET excluded items from its
financial statements, understating its total revenue; and it
represented itself as a company at financial risk, although SBA found
that I-NET's access to credit was considerable. Further, SBA allowed
I-NET to stay in the program and obtain contracts after it determined
that I-NET had achieved the program goals.
In our investigation of TAMSCO, we determined that U.S. Coast Guard
officials had directed a sole source contract to TAMSCO, thus
avoiding federal competition requirements. Coast Guard officials
changed the contract's classification code to one for which TAMSCO
qualified and altered the minimum value of the contract from the
original solicitation by lowering the total number of labor hours by
46 percent. Such changes allowed the Coast Guard to award a sole
source IDIQ contract to TAMSCO and offer the company, according to a
Coast Guard official's written notes, a "graduation present."
BACKGROUND
------------------------------------------------------------ Letter :3
PREVIOUS GAO FINDINGS
---------------------------------------------------------- Letter :3.1
In March and April 1995, as a part of our continuing work on the 8(a)
program, we testified\3 that the program has continued to experience
problems in achieving its objectives. As the value and number of
8(a) contracts continue to grow, the distribution of those contracts
remains concentrated among a very small percentage of participating
8(a) firms, while a large percentage get no awards at all. This is a
long-standing problem. For example, in fiscal year 1990, 50 firms
representing fewer than 2 percent of all program participants
obtained about 40 percent, or
$1.5 billion, of the total $4 billion awarded. Of additional concern
is that, of the approximately 8,300 8(a) contracts awarded in fiscal
1990 and 1991 combined, 67 contracts were awarded competitively. In
fiscal year 1994, the top 50 firms represented 1 percent of the
program participants and obtained 25 percent, or $1.1 billion, of the
$4.37 billion awarded, while 56 percent of the firms got no awards.
In fiscal year 1994, $383 million in contracts were awarded
competitively.
--------------------
\3 Small Business: Status of SBA's 8(a) Minority Business
Development Program (GAO/T-RCED-95-149, Apr. 4, 1995) and Small
Business: Status of SBA's 8(a) Minority Business Development Program
(GAO/T-RCED-95-122, Mar. 6, 1995).
SBA AWARD AND ELIGIBILITY
DATA FOR FISCAL YEAR 1992
---------------------------------------------------------- Letter :3.2
The eligibility and participation files for the top 25 8(a) contract
award recipients for fiscal year 1992, from which we selected I-NET
and TAMSCO, showed that approximately $816 million, or about 22
percent of the total 8(a) contract dollars awarded that year,\4 went
to the top 25 firms. These firms had obtained, as of May 1995, a
total of $4.9 billion in 8(a) contracts. Of these firms, three were
Black-owned; eight were Hispanic-owned; six were Asian-owned; and
five were Native American-owned.\5
SBA had initially recommended that 15 of these 25 firms not be
accepted into the program because the applicants did not meet
eligibility standards for one or more of the following reasons:
The ownership or control of the firms resided in individuals other
than those who were applying (8 firms).
The owners were not economically disadvantaged (2 firms).
The firm was acting as a broker/dealer in violation of the
Walsh-Healy Act (1 firm).
The firms lacked the financial capability to perform on the
contracts they wished to bid on (5 firms).
SBA could not provide adequate contract support for the firms to
succeed (3 firms).\6
These recommendations were overruled, in some cases by high-level SBA
officials, despite the fact that some of the firms had not been
recommended for acceptance up to three times previously for the same
reasons. As of May 1995, 18 of these 25 firms had exited from the
program; yet at least 17 are still performing on contracts awarded
while they were in the program. According to SBA, the total dollar
value of contracts awarded to the firms initially not recommended for
participation in the program is at least $2.9 billion.
An SBA Office of Inspector General (OIG) audit report (Sept. 1994)
also questioned the continued eligibility of large 8(a) firms in the
program and identified some of the same causes. In its report, it
cited findings wherein
individuals in the program had overcome their economic disadvantage
but remained in the program by understating their net worth;
SBA officials had miscalculated the net worth;
high personal income was also not considered in the evaluation of
net worth; and
individuals remained in the program because either the firm's
equity, the owner's personal residence, and/or the spouse's net
worth were not considered factors in determining the owners' net
worth. Consequently, individuals could remove equity from the
firms and use it to purchase expensive personal residences
exempt from net worth evaluations.
--------------------
\4 These data, the most current available when we initiated our
investigation, were compiled from the Federal Procurement Database
System, operated by the General Services Administration. We did not
attempt to verify the data.
\5 SBA could not provide the eligibility files for 3 of the 25 firms.
\6 The cited numbers exceed 15 because some firms were not
recommended for acceptance for multiple reasons.
SBA ADMITTED I-NET AND TAMSCO
TO THE 8(A) PROGRAM ALTHOUGH IT
QUESTIONED THE FIRMS' NEGATIVE
CONTROL
------------------------------------------------------------ Letter :4
According to SBA 8(a) regulations, negative control is the lack of
power by a program participant to control a firm's operations. For
the 8(a) program, SBA regulations state that a program applicant must
unconditionally own at least 51 percent of the firm and control its
operations.\7 Control is further defined as a condition that would
not allow a noneligible person to benefit from the program or
subjugate the control of the firm's operations. SBA had concerns
about negative control issues at both I-NET and TAMSCO, but it
ultimately admitted both firms to the 8(a) program.
--------------------
\7 SBA regulations provide that the program applicant shall control
the 8(a) firm's board of directors either in actual numbers of voting
directors or through weighted voting. 13 C.F.R. 124.104 (1995).
I-NET--NEGATIVE CONTROL
ISSUES
---------------------------------------------------------- Letter :4.1
SBA officials recommended denying I-NET acceptance into the program
in four separate instances, but other SBA officials overruled these
recommendations. SBA officials had determined that I-NET's owner and
president, Mrs. Kavelle Bajaj, lacked the technical and managerial
experience to run a high technology computer firm. They also
determined that, rather than Mrs. Bajaj, Mr. Bajaj, a recognized
expert in the field, would actually control and run the firm's
operations.
A former I-NET Vice President for Marketing and Operations told us
that Mrs. Bajaj lacked the technical and managerial skills needed to
run a computer company and that he was hired by Mr. Bajaj in January
1985 to help start and run the firm and to "teach" Mrs. Bajaj how to
run a business. For this, Mrs. Bajaj gave the former vice president
24.5 percent of the company. Shortly after leaving the company in
1988, this individual was replaced by Mr. Bajaj, who was appointed
Executive Vice President. Mr. Bajaj formally became I-NET's
president after I-NET exited from the 8(a) program in 1994. On the
resume he submitted to SBA-OIG during its 1992 audit, Mr. Bajaj
stated that he was "responsible for day-to-day operations" of I-NET.
Mrs. Bajaj was adamant with us that she unconditionally owned and
controlled the firm. However, Mrs. Bajaj provided no explanation
when we asked her how she maintained control over I-NET while, at the
same time, her husband represented that he had the day-to-day
responsibilities for I-NET operations.
Further, a senior SBA official told us that the memorandum prepared
by an SBA regional staff member recommending acceptance into the
program used "circular reasoning" in overruling the District Office's
objections to this firm. Other SBA officials who relied on the first
official's analysis agreed that it was "double talk" that
inadequately addressed the reason to overrule the recommended
refusal. One stated that I-NET's admission to the 8(a) program was
"questionable." Nevertheless, these officials stood by their decision
to recommend accepting I-NET.
TAMSCO--NEGATIVE CONTROL
ISSUES
---------------------------------------------------------- Letter :4.2
From the outset, SBA questioned the control that TAMSCO's
nondisadvantaged (Caucasian) owner exercised over the disadvantaged
(Hispanic) owner due to the structure of the board of directors, the
owners' prior relationship, and their compensation. However, SBA
allowed TAMSCO to participate fully in the 8(a) program.
SBA identified the ownership and negative control issue at TAMSCO
during the application process and twice recommended that the firm's
application be denied. SBA determined that the firm was owned by two
persons, with the Hispanic owner having 51 percent and the Caucasian
owner, 49 percent. SBA compared their resumes and other
documentation in the 8(a) application and found that the Caucasian
owner had previously held supervisory positions over the Hispanic
owner and that the two-man board of directors, on which both served,
allowed the Caucasian owner to have negative control over the
Hispanic owner. SBA officials concluded that the firm should be
rejected because the Caucasian owner would improperly benefit from
the program.
We also found that the personal financial statements and other
documentation showed that the Caucasian owner had a higher salary
than the Hispanic owner and that the firm was located at the
Caucasian owner's residence. A former official of the firm told us
that the two owners were "co-dependent" and functioned as equals.
TAMSCO's president (the Hispanic owner) told us that (1) despite his
previous relationship with the Caucasian owner, ownership was
structured so that TAMSCO would be eligible for Small and
Disadvantaged Business contracts and (2) it was agreed that he would
maintain total control over the firm's operations.
The SBA official who overturned the two recommendations for denial
had no answers or explanations as to why he had accepted TAMSCO into
the 8(a) program over the prior objections of SBA officials
concerning negative control. He also denied meeting or discussing
the matter with TAMSCO's owners. However, the TAMSCO owners told us
that they had had substantive discussions and meetings with him on
the issue of negative control.
SBA MISLED BY I-NET
MISREPRESENTATIONS AND TOOK NO
ACTION TO REMOVE IT FROM THE
PROGRAM
------------------------------------------------------------ Letter :5
I-NET provided false and misleading information to SBA regarding its
equity ownership in the firm, the owner's educational credentials,
and the owner's citizenship status. Despite these
misrepresentations, SBA did not terminate I-NET from the program or
suspend its contracts.
I-NET SUBMITTED FALSE
STATEMENTS ABOUT EQUITY
OWNERSHIP
---------------------------------------------------------- Letter :5.1
I-NET submitted false statements to SBA about its equity ownership.
Documents, interviews, and a federal court case revealed that I-NET
had entered into partnership agreements with two individuals in
January 1985 for a total of 49-percent ownership interest (each with
a 24.5-percent share) without disclosing these transactions to SBA,
as required by SBA regulations.\8
One of the 24.5-percent equity owners also owned another computer
services company. At the time, SBA regulations prohibited a business
concern in a related field from owning any equity in an 8(a) firm.\9
Although I-NET repurchased this ownership interest within a year of
its issuance, Mrs. Bajaj never informed SBA about this transaction.
Mrs. Bajaj submitted a false statement about I-NET's ownership
status to SBA in January 1986, when I-NET notified SBA that 49
percent of the company's stock was unissued. However, 24.5 percent
was still outstanding with the one remaining partner. Believing that
SBA would approve only a 15-percent transfer of ownership, Mrs.
Bajaj attempted to reduce the remaining partner's interest to 15
percent and privately negotiate away the remaining difference.
In 1988, Mrs. Bajaj submitted a second document to SBA, stating that
49 percent of the stock was "unissued," despite the outstanding
24.5-percent equity ownership by the remaining partner. She told us
that she considered the stock unissued until a dispute with this
partner over his ownership was resolved.
In August 1994, 2 weeks after agreeing to withdraw from the program,
I-NET notified SBA that it intended to sell 20 to 25 percent of the
firm's stock through a private placement offered through a large
investment company. When SBA officials learned of the impending
sale, SBA attorneys recommended against approving it because its
terms would have relinquished control of the firm to the outside
private investors.\10 The terms of the transactions, according to the
SBA attorneys who reviewed the documents, enabled the investors to
have negative control over the firm's operations. SBA has not issued
a decision, but I-NET completed the sale without a waiver from SBA,
thus potentially jeopardizing its current 8(a) program contracts.
The SBA Associate Administrator for Minority and Enterprise
Development told us that the matter was being handled immediately;
but, as of August 14, 1995, no final decision had been rendered.
--------------------
\8 At the time, 13 C.F.R. µ 124.1-1(e)(vii) (1985) stated that
withholding information about changes in ownership could result in
termination from the program. Mrs. Bajaj had also signed a program
participation agreement in which she had agreed to notify SBA within
30 days of any changes in ownership. Current regulation 13 C.F.R. µ
124.103(i) (1995) requires written approval from SBA to change
ownership equity interests exceeding 10 percent.
\9 SBA SOP 80-05 ch. 2, « 7(b)(5)(1982) and revised at SOP 80-05 ch.
2, « 7(b)(4). Current regulation 13 C.F.R. µ 124.103(h) (1995)
prohibits more than 10-percent ownership in an 8(a) firm by a related
concern.
\10 13 C.F.R. µ 124.317 (1995) requires that firms no longer in the
program but still performing on 8(a) contracts immediately notify SBA
upon entering into an agreement to transfer any ownership to another
party. If SBA determines that the transfer would relinquish the
ownership or control from the person upon whom program eligibility is
based, a waiver from the SBA Administrator is required. Absent a
waiver, the firm's contracts can be terminated.
I-NET MISREPRESENTED
CREDENTIALS TO THE SBA
---------------------------------------------------------- Letter :5.2
Mrs. Bajaj provided false information about her educational
credentials, which SBA relied upon, in part, for admittance to the
8(a) program. She certified on the resume accompanying her 8(a)
application to SBA in January 1983 that she had obtained an AA degree
in Computer Science and Technology from Montgomery College in
Rockville, Maryland. Transcripts from Montgomery College show that
she never earned the stated degree. SBA denied I-NET's application
for the 8(a) program in October 1983 because of lack of technical and
managerial experience. Mrs. Bajaj again submitted a resume with the
same false information in a reconsideration appeal application later
that month. According to a former I-NET senior executive, Mrs.
Bajaj attached a resume that contained the same false information to
contract proposals submitted to agencies. In 1992, when the SBA-OIG
audited I-NET, I-NET provided the OIG another resume claiming she
held the same nonexistent AA degree. Mrs. Bajaj admitted to us not
having the degree and stated that she "naively" thought that the
credits she had earned to obtain her Bachelor of Science degree in
Home Economics from the University of Delhi, India, counted toward an
AA degree in computer science and technology.
SBA documents show that SBA relied in part on Mrs. Bajaj's false
information about the AA degree at the time when it was certifying
I-NET for program participation. In an October 1993 document, the
SBA Regional Counsel stated that the "original recommendation for
I-NET's approval was based, at least in part, on false information
submitted by the applicant regarding Mrs. Bajaj's degree." Although
SBA officials acknowledged this fact in October 1993, I-NET remained
in the program for another 9 months and obtained additional contract
awards totaling at least $13.5 million. When asked about this
document, the Regional Counsel stated that the falsification was not
itself sufficient to terminate the firm, despite SBA regulations that
providing false information to SBA is grounds for termination from
the program.\11
Mrs. Bajaj also misrepresented her citizenship on her first
application on January 11, 1983. She said that she was a U.S.
citizen, but she did not obtain her citizenship until May 13, 1983.
(U.S. citizenship is a requirement for acceptance into the 8(a)
program.) She told us that she thought she would be a citizen by the
time the application was processed. She also said that although SBA
had told her that she need not be a citizen at the time of
application, she was concerned that her pending citizenship status
would have held up her 8(a) application. I-NET was accepted into the
program on September 20, 1984.
--------------------
\11 13 C.F.R. µ 124.209(a)(19) (1995).
SBA FAILED TO RECOGNIZE IN A
TIMELY MANNER THAT I-NET HAD
EXCEEDED SIZE STANDARDS
------------------------------------------------------------ Letter :6
SBA did not recognize that I-NET had provided misleading financial
statements concerning its total revenues. Furthermore, I-NET
misstated its financial condition as being at risk in efforts to
continue 8(a) program contracts.
I-NET submitted financial statements to SBA that misrepresented its
size by excluding certain revenues from the total sales, which
allowed it to meet size standards for contracts in 1991 and 1992.
I-NET explained the exclusion of this revenue in footnotes to its
audited 1988 through 1990 financial statements, claiming that it was
entitled to exclude these revenues because I-NET had earned no income
on the revenues. SBA did not recognize or react to the information
in the 1988 through 1990 financial statement footnotes until 1992.\12
These exclusions permitted I-NET to obtain at least 11 contracts for
which it was not eligible.
However, I-NET included these revenues in its yearly total sales
figures in submissions to an outside investment firm when it was
seeking private outside investment. Our review of I-NET's 1989 and
1990 corporate tax returns, submitted to SBA, shows that I-NET's
gross receipts as reported to the Internal Revenue Service were also
substantially greater than those reported to SBA. In 1992, SBA found
that the excluded revenue should have been counted for 8(a) size
purposes.
Therefore, in early 1993, SBA considered terminating certain
contracts on the grounds that I-NET was not eligible because it had
exceeded its size standards. In response, I-NET submitted an Impact
Analysis Statement to SBA in April 1993. The statement said, in
part, ". . . (t)he banking industry continues to label I-NET and
Kavelle [Bajaj] in a negative way . . . and maintaining adequate
capital and credit are a constant challenge which leaves the company
at risk."\13 However, in reviewing the matter and determining if
I-NET met early graduation criteria, SBA found that I-NET had a
$25-million line of credit with its bank, had obtained loans and
financings exceeding $2 million, and had sales approaching $100
million per year. Based on its review, SBA did not find that I-NET
was at risk. When asked about this apparent contradiction, Mrs.
Bajaj told us that it was her view that $25 million was not
sufficient credit.
During this same time period, however, I-NET did not portray itself
as a company at risk when it sought outside investors. A written
private placement memorandum about I-NET states that as of June 1993,
I-NET had a backlog of over $580 million in contracts and projected
revenues through 1997 of about $1.3 billion. Subsequent to our
interview of Mrs. Bajaj, I-NET provided us a written response to the
risk issue. It stated that, at the time the memorandum was written,
I-NET ". . . had severe cash flow problems and was having
difficulty securing credit."
Furthermore, in December 1993, SBA determined that I-NET again had
claimed erroneously that it lacked access to credit when it was
appealing SBA's October 1993 proposed early graduation action. In
its review, SBA also determined that I-NET appeared to be misleading
SBA by using inappropriate time periods to calculate earnings.
--------------------
\12 SBA regulations require that an 8(a) firm certify that it is a
small business for each contract that it receives. SBA is
responsible for verifying the certification. 13 C.F.R. µ 124.102(d)
(1995) and 13 C.F.R. µ 121.1102(a)(2) (1995).
\13 Even if it were true that I-NET was a "company at risk," this is
not relevant to the issue of whether I-NET was a small business and
therefore eligible to receive 8(a) contracts under SBA regulations.
SBA ALLOWED I-NET TO REMAIN IN
THE 8(A) PROGRAM AFTER IT
EXCEEDED SIZE LIMITS
------------------------------------------------------------ Letter :7
Although SBA officials responsible for monitoring I-NET's progress
had become aware that I-NET had grown too large for continued program
participation, SBA allowed the company to remain enrolled for almost
2 additional years. During this time, I-NET continued to obtain
large contract awards.
In fact, 6 days prior to I-NET's initially being recommended for
early graduation in September 1992, it was awarded a $134-million
contract. The SBA official who approved the contract award was also
responsible for initially recommending I-NET's early graduation.
When we interviewed him, he explained that, under SBA regulations,
until a firm is officially out of the program, it can still obtain
contract awards for which it is eligible. Although he wanted I-NET
out of the program, he felt he could not deny contract awards until
I-NET had either graduated or been terminated.
However, SBA regulations\14 and a 1982 federal court decision,\15 in
conjunction with a Comptroller General decision\16 on the same issue,
concluded differently. Both the court and the Comptroller General
determined that an 8(a) firm that has exceeded size limitations must
have its 8(a) contracts suspended. The regulations also state that
contracts can be suspended pending a termination action by SBA. When
asked about this contradiction, responsible SBA officials responded
by stating that SBA lacked the proof required to terminate I-NET,
despite regulations regarding actionable offenses for termination,
which include providing false information to SBA--something that SBA
concedes occurred.
In January 1993, the SBA-OIG provided a draft audit report to the SBA
office responsible for I-NET, recommending that no further contracts
be awarded to I-NET because it had exceeded its size standards and
had provided incorrect information to SBA for its annual
size-standard determinations. However, until I-NET left the program
in June 1994, SBA awarded I-NET additional contracts totaling at
least $62 million.
--------------------
\14 13 C.F.R. µ 124.211(a) (1995).
\15 Systems and Applied Sciences Corp. v. Sanders, 544 F. Supp.
576 (D.D.C. 1982).
\16 Matter of Computer Data Systems, Inc. 61 Comp. Gen. 545
(1982).
U.S. COAST GUARD OFFICIALS
DIRECTED A NONCOMPETITIVE IDIQ
CONTRACT TO TAMSCO
------------------------------------------------------------ Letter :8
In 1993, the U.S. Coast Guard directed a noncompetitive IDIQ
contract with a maximum value of $14 million to TAMSCO. During the
preaward phase of the contract, Coast Guard contracting officials,
who told us that it was always their intention to award the contract
to TAMSCO, met with TAMSCO representatives and discussed the
contract, competition thresholds, and Standard Industrial
Classification (SIC) codes.\17 The Coast Guard changed the original
SIC code so that TAMSCO would be eligible for the award; used the
IDIQ contracting option; and lowered the labor hours to avoid
competition. Further, one Coast Guard official's notes referred to
this IDIQ contract to TAMSCO as a "graduation present" from the 8(a)
program.
--------------------
\17 SBA has established size standards for industries, which are
defined in the classification categories of the Standard Industrial
Classification (SIC) Manual.
COAST GUARD OFFICIALS
CHANGED SIC CODE, CONTRACT
TYPE, AND LABOR HOURS TO
AVOID COMPETITION
REQUIREMENTS
---------------------------------------------------------- Letter :8.1
Coast Guard officials changed the SIC code assignment and minimum
contract value. Following these changes, TAMSCO was awarded a large
noncompetitive IDIQ contract 1 day before its term was to expire in
the 8(a) program in September 1993. Had the Coast Guard contracting
officer's originally assigned SIC code been used, TAMSCO would not
have been eligible for the contract because the company had exceeded
the size standard for the originally assigned SIC code.
Based on notes that the Contracting Officer's Technical
Representative (COTR) wrote during meetings between Coast Guard
officials and TAMSCO, it appears that the Coast Guard officials and
TAMSCO had concerns about the competition thresholds. In essence, we
believe that they wished to avoid the $3-million threshold required
for competitive 8(a) service contracts. The Coast Guard lowered the
labor hours, thus being able to award an IDIQ noncompetitive
contract.
Our analysis of labor costs determined that Coast Guard officials
lowered the total number of labor hours in the contract by 46 percent
from what was specified in the contract solicitation. Thus, the
minimum contract value dropped below the $3-million competition
threshold, from $4.6 million to $2.1 million. We interviewed a Coast
Guard officer involved in the contract award who also developed the
original minimum contract value. When we asked him about a Coast
Guard finding that if fully loaded labor rates had been used in the
contract, the minimum value of the contract would have exceeded
competitive thresholds, he had no answer. However, he stated that
the Coast Guard officials had done everything possible to get TAMSCO
the contract, including changing the SIC codes and using the IDIQ
contracting option.
COAST GUARD OFFICIALS VIEWED
COMPETITION AS HINDRANCE TO
MISSION
---------------------------------------------------------- Letter :8.2
The COTR also told us that the SIC code was intentionally changed to
meet TAMSCO's eligibility and that the Coast Guard viewed competition
of contract awards as a hindrance to furthering the mission. A draft
of an internal Coast Guard memorandum, written to justify the
contract award to TAMSCO, sheds light on Coast Guard attitudes about
the use of competition and 8(a) sole source contracts. The COTR sent
the memorandum--in electronic mail (e-mail) format--to another Coast
Guard official for comment. The commenting Coast Guard official
responded to the COTR's memorandum-- also by e-mail--by interspersing
his remarks in all capital letters. (See fig. 1.)
Figure 1: Draft E-mail
Memorandum Between the COTR and
a Coast Guard Official
(See figure in printed
edition.)
According to two former TAMSCO officials involved in the award, the
COTR had provided them with a later draft of the internal memorandum
to review before he submitted it to higher-level Coast Guard
officials. One of the TAMSCO officials told us that providing TAMSCO
the memorandum to review was inappropriate; the other felt
uncomfortable with receiving the document because the Coast Guard was
always careful not to release internal documents.
According to these two former TAMSCO officials and TAMSCO's
president, while they did not think it improper for TAMSCO to provide
information on the 8(a) program and other contracting procedures to
the Coast Guard, they agreed that the Coast Guard should have been
using its own contracting officials to obtain the information.
IDIQ CONTRACT TO TAMSCO WAS
REFERRED TO AS A "GRADUATION
PRESENT"
---------------------------------------------------------- Letter :8.3
Notes that the COTR took during Coast Guard/TAMSCO discussions also
referred to suggestions that the contract be awarded to TAMSCO as a
"graduation present" before the end of TAMSCO's 8(a) program
participation. For example, one note stated, in part, "IDIQ:
Grad[uation] P[resen]t. - eligible until grad from program Sept 18,
'93." In other words, TAMSCO could get a sole source IDIQ contract as
a graduation present until its graduation date of September 18, 1993.
(See fig. 2.)
Figure 2: Excerpt From the
COTR's Notes
(See figure in printed
edition.)
In addition to the Coast Guard contract, TAMSCO obtained at least 22
other 8(a) awards within 2 weeks of its "graduation"\18 from the
program totaling at least $63 million. Thirteen of the awards were
IDIQ contracts from a number of government agencies, including the
Coast Guard award.
--------------------
\18 TAMSCO completed its program term on Sept. 18, 1993.
METHODOLOGY
------------------------------------------------------------ Letter :9
We began our investigation by reviewing the application, eligibility,
and participation files for the top 25 8(a) contract award recipients
for fiscal year 1992, as compiled in our 1993 report. These records
were located in 10 SBA District Offices nationwide. The files for
two firms were unavailable for review. A third file did not contain
eligibility documents. We looked for indicators of potential
regulatory violations and criminal misconduct.
We initially selected four of the firms for further investigation.
However, the records we compiled for one firm were destroyed in the
Oklahoma City bombing tragedy on April 19, 1995, and our
investigation of another firm was not complete at the time of this
publication. We then narrowed our investigation to two firms--I-NET,
Inc. of Bethesda, Maryland, and Technical and Management Services
Corporation (TAMSCO) of Calverton, Maryland.
We interviewed officials and reviewed documents from the SBA, Office
of Inspector General; various SBA district and regional offices;
SBA's Central Office; U.S. Department of Transportation, Office of
Inspector General; U.S. Coast Guard; Resolution Trust Corporation,
Office of Inspector General; Defense Contract Audit Agency;
Department of Justice; and the Federal Bureau of Investigation. We
also interviewed current and former employees of the firms,
subcontractors, representatives of financial institutions, and
others.
---------------------------------------------------------- Letter :9.1
As requested, we plan no further distribution of this report until 30
days from the date of this letter. At that time, we will send copies
of this report to the Administrator of SBA and to others upon
request. If you have any questions concerning this report, please
call me at (202) 512-6722 or Robert H. Hast, Assistant Director for
Investigations, New York Regional Office, at (212) 264-0982. Major
contributors to this report are listed in appendix III.
Sincerely yours,
Richard C. Stiener
Director
THE 8(A) PROGRAM
=========================================================== Appendix I
Section 8(a) of the Small Business Act, as amended, established the
Minority Small Business and Capital Ownership Development Program, or
8(a) program, to promote the development of small businesses owned by
socially and economically disadvantaged individuals so that they
could develop into viable competitors in the commercial marketplace.
To be eligible for the program, a small business must be 51 percent
unconditionally owned and controlled by one or more socially and
economically disadvantaged individuals. The company must also meet
the small business size standards established by SBA for the firm's
industry as defined in the classification categories prescribed by
the Standard Industrial Classification (SIC) Manual.\19 SBA approves
applicable SIC codes for participating firms. Participating 8(a)
firms may have one or more SICs assigned to them by SBA. To be
considered a small business and remain eligible for the program,
participating firms must not have outgrown all their SBA-approved SIC
codes. Size standards for each SIC code are generally defined by the
firm's number of employees or its average annual gross sales.\20
Under the program, SBA acts as a prime contractor, entering into
contracts with other federal agencies and then subcontracting work to
firms in the 8(a) program. Firms in the program are also eligible
for financial, technical, and management assistance from SBA to aid
their development. Participating firms can stay in the program for
up to 9 years.
The Small Business Act, as amended, and federal regulations define
"socially disadvantaged" as those persons who have been subjected to
racial, ethnic, or cultural bias because of their identities as
members of groups, without regard to their individual qualities.
Certain racial and ethnic groups such as Black Americans, Hispanic
Americans, Subcontinental Asian Americans, and Native Americans are
presumed to be socially disadvantaged. However, individuals in
groups not cited in the act, who can demonstrate that they are
socially disadvantaged, may also be eligible. SBA regulations define
"economically disadvantaged" as socially disadvantaged individuals
who are unable to compete in the free enterprise system because their
opportunities to obtain credit and capital have been more limited
than those of others in similar businesses. Further, program
applicants must demonstrate a personal net worth that does not exceed
certain limits so as to meet and maintain the criteria for an
economic disadvantage.
Each 8(a) firm under SBA's regulations is subject to a program term
of 9 years.\21 However, SBA may also, under its regulations,
"graduate" an 8(a) firm prior to the expiration of its 9-year program
term if that 8(a) firm substantially achieves the target objectives
and goals set forth in its business plan. To date, according to SBA,
no 8(a) firm has graduated.
--------------------
\19 This manual is published by the Office of Management and Budget
and assigns a numerical identifier for each industry.
\20 13 C.F.R. µ 121.601 (1995).
\21 The 1988 Amendments to the act created this limit. 13 C.F.R. µ
124.303(b) (1995) grandfathered firms that participated prior to 1988
so that firms with fewer than 5 years' participation would obtain 5
more years.
TOP 25 8(A) FIRMS MATRIX
========================================================== Appendix II
Total Value
of
8(a)
Fiscal Year Contracts
Rank Company Name 92 Awarded
------ ------------------------ ------------ ------------
1 Colsa Inc. $91,593,712 $497,821,732
2 Yancy Minerals Inc 81,931,200 210,750,390
3 I-NET Inc 65,338,088 508,284,206
4 Metters Industries Inc 43,921,758 156,314,914
5 Weeminuche Construction 39,611,263 65,706,219
Authority
6 NYMA Inc 37,526,951 234,569,348
7 Systems Engineering & 35,182,607 185,816,251
Management Co
8 R J O Enterprise Inc 30,532,192 385,034,793
9 TAMSCO 30,369,392 356,439,719
10 National Systems and 29,175,097 291,198,853
Research Corp
11 Sherikon Inc 29,166,605 77,431,185
12 Advance Sciences Inc\a 28,279,092 54,479,536
13 Turtle Mountain 27,894,845 200,786,724
Manufacturing Co
14 Systematic Management 25,669,502 145,241,079
Services Inc
15 Modern Technologies Corp 24,146,726 225,118,715
16 Tresp Associates Inc\b 23,555,918 93,907,403
17 Frontier Engineering Inc 20,989,268 275,253,836
18 Maden Tech Consulting 20,775,446 78,951,336
19 Piquniq Management Corp 19,775,820 128,934,788
20 Galaxy Scientific Corp 18,876,444 118,071,790
21 Metrica Inc 18,826,263 82,476,450
22 Shadrock Petroleum 18,502,664 48,405,291
Products
23 Hernandez Engineering 18,265,616 106,104,461
Inc
24 Washington Consulting 17,972,076 140,839,773
Group\a
25 Applied Technology 17,901,795 278,756,205
Associates Inc
============================================================
TOTAL 8(a) AWARDS $815,780,340 $4,946,694,9
97
------------------------------------------------------------
\a SBA was unable to provide the files for these firms.
\b The eligibility documents were missing from this firm's file.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
OFFICE OF SPECIAL INVESTIGATIONS,
WASHINGTON, D.C.
Donald J. Wheeler, Deputy Director for Investigations
M. Jane Hunt, Senior Communications Analyst
Barbara W. Alsip, Communications Analyst
BOSTON/NEW YORK FIELD OFFICE
Robert H. Hast, Assistant Director for Investigations
William D. Hamel, Special Agent
Anne Kornblum, Senior Evaluator
DALLAS REGIONAL OFFICE
Jeannie B. Davis, Senior Evaluator
DENVER REGIONAL OFFICE
Jennifer L. Duncan, Senior Evaluator
ATLANTA REGIONAL OFFICE
Octavia Parks, Senior Evaluator
Johnnie E. Barnes, Senior Evaluator
SAN FRANCISCO REGIONAL OFFICE
Steve Myerson, Assistant Director for Investigations
KANSAS CITY REGIONAL OFFICE
Richard Clough, Senior Evaluator
Steve Pruitt, Evaluator
CINCINNATI REGIONAL OFFICE
Daniel L. McCafferty, Senior Evaluator
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Barry L. Shillito, Senior Attorney
Leslie Krasner, Attorney Adviser
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