A new small business advocacy group has filed suit seeking to compel SBA to release a report that it says documents fraud and abuse in federal contracting.

The California-based American Small Business League, headed by longtime SBA critic Lloyd Chapman, sued in San Francisco federal court under the Freedom of Information Act for access to a report that it says was prepared by a contractor for SBA's Office of Advocacy. "We believe (the) report confirms wide-spread fraud in federal contracts, and that the SBA is covering up the problem by keeping the report under wraps," Chapman said.

An SBA spokesman said he could not comment on the suit or the report.

Chapman contends that many large companies are fraudulently posing as small to qualify for set-aside contracts. His complaints sparked a General Accounting Office investigation last year that found many large companies were classified as small on some contracts, but GAO blamed loopholes in laws and regulations rather than fraud. (SAA, 5/16/03)

This month a private watchdog group, the Center for Public Integrity, found that 30% of Defense Department contract dollars reported as going to small businesses actually went to large ones. The Center examined all DOD contracts over the past six years. (SAA, 10/ 8)

Federal procurement officials point to loopholes, such as one provision that counts a small business as small throughout the life of any contract, even if the company outgrows size standards.

But Chapman says he has found many instances where large corporations deliberately misrepresented themselves or their subsidiaries as small businesses. He says the SBA report he is seeking will show that.

In testimony last year before the House Small Business Committee, he said his examination of SBA's Pro-Net database of small companies had found "dozens of examples where firms had blatantly misrepresented their number of employees, NAICS codes and their affiliation with large businesses."

At that same hearing, SBA said it had removed more than 600 companies from the Pro-Net listings.

Chapman said SBA had refused his request to make public the names of companies that were removed, so contracting officers would know the firms no longer qualified as small. The SBA inspector general made the same recommendation in a 1995 report, but the agency never complied.

The lawsuit, filed by Gutierrez-Ruiz LLP, alleges that SBA's report "contains statistical and other factual information about the allocation of contracts which is not subject to any exemption under the Freedom of Information Act, and must be disclosed."

This motion seeks a court order compelling the SBA to provide a detailed description of the contents of a controversial report concerning fraud and abuse in government contracting. The ASBL also requests the SBA provide specific justification for previous claims that the report is exempt from the Freedom of Information Act (FOIA).

The SBA has referred to the widespread abuses as "miscoding," but the ASBL believes the report holds statistical data that will uncover blatant fraud and abuse in the SBA's mishandling of more than $67 billion annually in government small business contracts.

"I find it curious that the SBA has gone to court to avoid disclosing a document that they have consistently characterized as a routine report," said Robert Belshaw of Gutierrez-Ruiz, the firm who represents ASBL. "The justifications offered by the SBA for withholding this document are inapplicable and not supported by law."

"SBA's handling of this matter has been suspicious," said Lloyd Chapman, president and founder of the ASBL. "When I first requested this report, the SBA denied its existence. Once they admitted it existed, they claimed it was privileged communication between agency executives and was, therefore, exempt from the Freedom of Information Act. Next, they claimed it was a 'trade secret,' and now, they are telling the media it's just a routine report. If this is just a routine report, why has the SBA tried to keep it secret for nine months, and why are they willing to go to federal court during an election to withhold it?"

Case History

The motion follows a complaint filed October 6 (Case No.C044250SI) demanding the disclosure and release of the aforementioned documents. The original lawsuit was filed after the SBA twice refused requests made by ASBL for copies of "the original draft" of the report by Eagle Eye Publishing on abuses in small business contracting and submitted to the SBA in January 2004. The SBA is withholding the entire report based on specific exemptions in the FOIA; the ASBL's lawsuit counters that there is no legal basis for the denial of access to the original report.

The SBA's most recent refusal to release the report on small business contracting abuse comes just days after the Center for Public Integrity released its own report, which found the Defense Department had awarded more than $47 billion of small business contracts to some of the largest firms in the United States and Europe with the full knowledge and approval of the SBA.

Please see attached backgrounder for more information on the ASBL, its founder Lloyd Chapman, and the history of this case.

Contract Abuse Uncovered by Multiple Reports, Sources

"I believe the original report the SBA received back in January contains statistical and factual information that is in no way exempt from the Freedom of Information Act," said Lloyd Chapman, President and Founder of the ASBL. "The SBA is attempting to whitewash this report before it's released to the public because it will shed light on the SBA's role in allowing the staggering level of fraud and abuse in small business contracting uncovered by the Center for Public Integrity. This is in addition to the General Accounting Office (GAO) report published in 2003 that identified abuse within the SBA contracting program."

The SBA Had to Know

After acquiring another company in February 1998, GTSI Corp. disclosed in its annual report that it had grown too large to win small-business contracts from the federal government.

Yet a recent study found that between 1998 and 2003, the reseller of computers, software and other technology products was classified as a small business while winning Department of Defense contracts worth nearly $1.2 billion.

GTSI, a reseller of computers, software and other technology products, is hardly alone.

The Center for the Public Integrity, a non-profit, non-partisan organization that investigates public policy issues, found that in the past six years more than $47 billion in Department of Defense contracts designated as small-business awards have gone to large companies.

The center is a nonprofit, nonpartisan organization that investigates public policy issues.

In total, 30 percent of defense-contract dollars reported as going to small firms went to large companies, the center said in a report.

"It's almost as if the whole idea of small business is a convenient fiction that's promoted by both political parties," said Larry Makinson, a senior fellow who worked on the study. "A lot of the money that you would think is going to truly small businesses isn't."

The federal government has a goal of spending 23 percent of its contract dollars annually with small businesses. Government officials often say they reach that goal, though the center's study raises questions about their calculations.

Government figures show 23.6 percent of prime contracts, or $65.5 billion, went to small firms in fiscal 2003. Of that total, $42.8 billion was from Defense Department contracts.

Yet the center's study questions whether many of those contracts truly were won by small firms.

For example, the center found 737 firms that won at least $100 million in defense contracts between 1998 and 2003. Of those, 189 had at least half of their contracts designated as small-business awards.

The center assumed that companies large enough to handle such a volume of business would be large businesses.

Defining a small business is not as easy as it sounds. Businesses fit into hundreds of different classifications, each with its own standard of what is small. As a general rule, the Small Business Administration defines small businesses as having less than 500 employees or less than $6 million in annual sales.

Makinson said some of the companies on the center's list might fit that definition, though GTSI was highlighted as a large company reaping small-business awards.

Last year, sales at Chantilly, Va.-based GTSI were nearly $1 billion, and it employed 685 people as of March.

Two other companies identified in the study as having received a large number of small-business contracts supply ready-to-eat meals for the military. Ameriqual Group, based in Evansville, Ind., won $440.1 million in government contracts that were classified as small-business awards during the six-year period, while Wornick Co. in Cincinnati won $561.4 million in small-business awards during that period.

Officials from the three companies did not return calls for comment.

Some large companies, Makinson noted, appear to have a strategy of acquiring small businesses that have won government contracts. Other small firms grow so much they should no longer be counted as small businesses, but they are considered small by the government.

The SBA proposed a rule last year that would require firms registered as small businesses to regularly recertify their status. The agency expects the rule will be adopted soon.

Lloyd Chapman, president of the American Small Business League, charges government officials regularly ignore large firms that improperly classify themselves as small.

"What I've discovered here is a pattern of the SBA not taking big companies off the list and not prosecuting them," said Chapman, whose organization focuses on small-business contract issues.

CHICAGO -- After acquiring another company in February 1998, GTSI Corp. disclosed in its annual report that it had grown too large to win small-business contracts from the federal government.

Yet a recent study found that between 1998 and 2003, the reseller of computers, software and other technology products was classified as a small business in winning U.S. Department of Defense contracts worth nearly $1.2 billion.

GTSI is hardly alone.

The Center for the Public Integrity, a non-profit, non-partisan organization that investigates public policy issues, found that in the past six years more than $47 billion in Defense Department contracts designated as small business awards have gone to large companies.

In total, 30% of all defense contract dollars reported as going to small firms went to large companies, the center said in a report.

"It's almost as if the whole idea of small business is a convenient fiction that's promoted by both political parties," said Larry Makinson, a senior fellow who worked on the study. "A lot of the money that you would think is going to truly small businesses isn't."

The federal government has a goal of spending 23 percent of its contract dollars annually with small businesses. Government officials often say they reach that goal, though the center's study raises questions about their calculations.

Government figures show 23.6 percent of prime contracts, or $65.5 billion, went to small firms in fiscal 2003. Of that total, $42.8 billion was from Defense Department contracts.

Yet the center's study questions whether many of those contracts truly were won by small firms.

For example, the center found 737 firms that won at least $100 million in defense contracts between 1998 and 2003. Of those, 189 had at least half of their contracts designated as small business awards.

The center assumed that companies large enough to handle such a volume of business would be large businesses.

Defining a small business is not as easy as it sounds. Businesses fit into hundreds of different classifications, each with its own standard of what is small. As a general rule, the Small Business Administration defines small businesses as having less than 500 employees or less than $6 million in annual sales.

Makinson said some of the companies on the center's list might fit that definition, though GTSI was highlighted as a large company reaping small-business awards.

Last year, sales at Chantilly, Va.-based GTSI were nearly $1 billion, and it employed 685 people as of March.

Two other companies identified in the study as having received a large number of small-business contracts supply ready-to-eat meals for the military. Ameriqual Group, based in Evansville, Ind., won $440.1 million in government contracts that were classified as small-business awards during the six-year period, while Wornick Co. in Cincinnati won $561.4 million in small-business awards during that period.

Officials from the three companies did not return calls for comment.

Some large companies, Makinson noted, appear to have a strategy of acquiring small businesses that have won government contracts. Other small firms grow so much they should no longer be counted as small businesses, but they are considered small by the government.

The SBA proposed a rule last year that would require firms registered as small businesses to regularly recertify their status. The agency expects the rule will be adopted soon.

Lloyd Chapman, president of the American Small Business League, charges government officials regularly ignore large firms that improperly classify themselves as small.

"What I've discovered here is a pattern of the SBA not taking big companies off the list and not prosecuting them," said Chapman, whose organization focuses on small-business contract issues.

His group recently filed a lawsuit against the SBA to release a report by an outside consulting firm that looked into small business contracting.

Eric Benderson, the SBA's associate general counsel for litigation, said the report will be released after a standard review.

SBA officials also said they investigate firms that may improperly be classifying themselves as small, though they couldn't say how many of those cases ended up being prosecuted.

"If you are knowingly not a small business, and you certify you're small, that's fraud," Benderson said.