By Sean Reilly
October 24, 2010
It took just 2½ weeks for the Small Business Administration to lift its suspension of GTSI Corp. But the aftershocks may last a lot longer.
The Herndon, Va.-based information technology vendor is now the subject of a SBA inspector general's investigation that could expand to include some of its corporate partners. Procurement experts said they expect stepped-up enforcement of small-business procurement rules, both because of higher priority from the Obama administration and because of a new law making it easier to prove a company is misrepresenting itself as a small business.
"This is very healthy for the industry," said Lars Anderson, a government contracts attorney at Venable who represented a GTSI rival in a lawsuit settled earlier this year.
"If they know the rules are going to be enforced, a lot of other companies will be careful not to cross the lines," he said.
In an 18-page settlement announced Oct. 19, SBA officials lifted the governmentwide suspension imposed Oct. 1. The deal came with the stipulation that two of GTSI's top leaders — including President and CEO Scott Friedlander — voluntarily step down, three other executives accept indefinite suspension and the company immediately cease working with small businesses serving as prime contractors on government jobs.
GTSI must also submit to oversight by an SBA-approved monitor, draft an ethics code that every employee must sign and turn over a lengthy list of records to the government that could become part of the inspector general's investigation.
To Robert Meunier, a former Environmental Protection Agency suspension and debarment official, the terms signaled the strength of the government's case.
"They took pretty dramatic action," he said.
By Friedlander's account, however, the settlement reflected the company's desire to survive, not an admission of guilt.
Even though GTSI believed that it was abiding by small-business procurement rules, the suspension was costing almost $2 million a day, he said in an Oct. 21 interview. By the second week, alarm over the possible repercussions had spread from the firm's work force to its banks and corporate partners, he said.
"We had to lift it [the suspension] to save the company or the company would have gone into financial ruin," he said, throwing some 530 people out of work. "I just think leaders have to lead and I had to do what I had to do." SBA officials never gave the company a chance to make its case, Friedlander said.
"As Americans and as companies, you require due process and I don't think we were given a fair due process," he said.
In response, SBA spokeswoman Hayley Meadvin said the agency followed all suspension and debarment requirements spelled out in the Federal Acquisition Regulation.
As part of the settlement, Friedlander, who became CEO eight months ago, and general counsel Charles DeLeon are resigning effective Oct. 26. The three other executives are on suspension with pay for as long as three years, although that period could be cut short if GTSI is debarred or the IG's investigation ends before then.
Imposed Oct. 1, the suspension appears to have arisen out of a protest filed two years ago by Wildflower International, a New Mexico-based small business that had lost its bid for a Homeland Security Department information technology contract, called FirstSource, intended as a small business set-aside.
In the protest, which ultimately succeeded, Wildflower charged that GTSI was part of a "sham" arrangement under which it stood to reap hundreds of millions of dollars by serving as a subcontractor to another company, called MultimaxArray, which Wildflower alleged acted as a small-business front for GTSI.
With the settlement, GTSI is giving up its other FirstSource work and will also abandon a recently announced venture with Brown Technology Group, a small business.
In all, the new limits will cost the company about 15 percent of sales, Friedlander said. Asked whether layoffs are expected, Friedlander said the company's future steps will be decided by the board and the company's new leadership.
GTSI has used a number of partners over the years.
The company joined with Eyak Corp. to create Eyak Technology LLC, an Alaska native corporation that is eligible for special treatment under government procurement rules. Three of the company's top four executives are former GTSI executives.
Representatives for Eyak Technology did not return phone messages last week asking whether they have been contacted as part of any federal inquiry. Citing the IG probe, Meadvin declined to comment on whether it will expand its inquiry or punish other companies besides GTSI.
Anderson, who represented Wildflower in its battle with GTSI, said he had no knowledge of where investigators were heading, "but one would assume that they would be looking at the companies that GTSI was allegedly using as fronts."
As a rule, 23 percent of federal prime contract awards are supposed to go to small businesses each year. Over time, critics say, a wink-and-a-nod system has evolved under which larger companies game the system with the help of federal officials who use small-business set-asides to sidestep competition requirements.
Federal procurement staffs often avoid the time-intensive process of conducting vendor competitions for contract awards by awarding sole-source contract awards under the SBA's 8(a) business development program, according to a July report by the Government Accountability Office. Another GAO report this year found that SBA needs better methods for ensuring companies receiving 8(a) contracting set-asides are eligible.
"There are multiple investigations that show that different companies are misrepresenting themselves," said Lloyd Chapman, president of the American Small Business League. "The public needs to be outraged by this."
A provision buried deep in the Small Business Jobs and Credit Act signed into law last month may add more teeth to small-business contracting rules. When a company incorrectly portrays itself as a small business — such as by registering on a government database — that misrepresentation will be considered "willful," the law says. As a result, any contract awarded can more easily be considered fraudulently obtained.
"I think it's very significant," said Elizabeth Newsom, a government contracts attorney at Crowell & Moring not involved in GTSI's case.
"Until this provision was in place, it was very hard for the government to prove that a company intentionally misrepresented its size status," Newsom said. "This clearly makes it a lot easier to prove that element, and that is an essential element for criminal fraud and for civil as well."
Like Anderson, Newsom viewed the new law and the GTSI suspension as portents of a tougher enforcement environment.
"I think certainly the Obama administration is increasing the government's oversight of fraud, waste and abuse across the board," she said. "This is not unique to small business."