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Bush Admin Faces Lawsuit For Secret Contract Fraud Study

By Rebecca Christie
Dow Jones Newswires Washington
October 6, 2004

A small-business trade group plans to sue the Bush administration in federal court on Wednesday, asking for release of a secret study on small-business contract fraud.

The American Small Business League says the Small Business Administration, a federal agency, has been sitting for months on a study that shows frequent abuse of federal contracting regulations. The group wants the study's data in the public domain.

"The report shows that there's fraud and abuse," Lloyd Chapman, president of the trade group, told Dow Jones Newswires Tuesday. "Someone needs to be held accountable for that."

The trade group said the SBA hired an Eagle Eye Publishers, an outside
research firm, to investigate whether and why large businesses were listed as small companies in federal records. Chapman says the study found a number of reasons behind coding errors, including deliberate fraud.

On Tuesday, the SBA acknowledged the study and said it isn't finished yet.
Spokesman Evan Keefer said he expected that it would eventually be released. "I was told that it was not ready," he said.

Trade group officials say they already have exhausted other avenues under the Freedom of Information Act. Lawyer Robert Belshaw said the SBA has offered legal reasons for withholding the study that he does not think will stand up in court.

"They have failed to disclose some documents which we feel we're entitled to. If not everything, then at least in part," said Belshaw, referring to the
statistics at the heart of the trade group's request.

The lawsuit will be filed in U.S. District Court for the Northern District of
California. The trade group is based in Sonoma County outside San Francisco.

Before adopting its current name, the group was known as the Microcomputer Industry Suppliers Organization.

Lack Of Enforcement History For Firms In Wrong Category

The SBA does not have much history of punishing big firms that are listed as small ones for the purpose of winning federal contracts. The American Small Business League says the agency has never pressed charges against a firm that was posing as a small business.

The SBA says it hasn't prosecuted any firms because it hasn't needed to. When companies are disqualified from winning small-business set-asides, they typically drop out of the running and there is no need to punish them further, Keefer said.

"We spend a lot of time verifying that these folks are indeed small
businesses," he said.

The trade group says the SBA doesn't go far enough to root out offenders. It says firms should be punished if they represent themselves as small businesses for any reason, not just for set-aside contracts. Otherwise, the government can't tell if it's meeting Congress-imposed quotas.

Chapman says the Small Business Administration has faced these kinds of
problems for many years. But he blames the Bush administration for not acting to fix them after the General Accounting Office, now the Government Accountability Office, found flaws in a recent review.

"They did not try to stop it," Chapman said.

Large businesses can legally receive small-business contracts in some cases.

For example, once a small business wins a contract, it often can retain its
status for the life of the contract, even if the business grows or is bought by
a big company.

"The government has created so many benefits for small businesses that
companies have an incentive to try to claim that status as a way of getting
business or returns that otherwise would be beyond their reach," said defense expert Loren Thompson of the Lexington Institute, a Washington think tank.

Analysts said changes in contracting practices may have exacerbated firms' tendency to hang onto their status as long as possible.

Government contracts used to have a top shelf life of only five years, but now some contracts can last decades, said Larry Makinson of the Washington-based Center for Public Integrity, which released a study on defense contracting last week. "People just assume businesses are reviewed on a regular basis" when that is often not the case, he said.



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