More than a year of legal wrangling has ended between the Small Business Administration and the American Small Business League (ASBL), one of its primary antagonists, regarding the disclosure of the name of a company the SBA Inspector General’s Office had recommended for debarment.
 
Earlier this week, Eric Benderson of SBA contacted ASBL and said the company in question was GTSI, ASBL said.

According to a statement SBA gave to Federal Computer Week, the case stemmed from a 2001 Navy contract for information technology hardware that was set aside for a small business. When another company objected to GTSI winning the contract, the SBA IG reviewed the case and asked the agency to determine whether GTSI was a small business.

“SBA found that it was not,” according to the statement, and SBA’s Office of Hearings and Appeals subsequently rejected GTSI’s appeal of its size status.

Based on that decision, the IG prepared in June 2005 a recommendation that SBA permanently debar GTSI from further federal procurement “on the grounds that it had falsely misrepresented itself as a small business to secure the Navy contract,” the SBA statement reads.

ASBL filed suit against SBA in April under the Freedom of Information Act, seeking the name of the company, which had not been made public.

SBA said it declined to reveal the name at that time because “the information was still part of an investigatory proceeding.”

When SBA’s Office of General Counsel ruled that the agency did not have the authority to debar GTSI because the contract in question was not an SBA contract, the agency referred the matter to the Defense Department, which then assigned it to the Army for a decision.

The Army recently concluded its investigation of the case, SBA said. It issued a “no further action” letter, declining to debar GTSI from federal procurement. “At that time, the SBA disclosed GTSI’s name to an attorney representing the ASBL, since the investigation was no longer pending,” SBA said.

“For the inspector general to recommend that GTSI be debarred, the evidence against the company must have been very compelling,” said Lloyd Chapman, ASBL president, in a statement. “It’s time that the FBI step in and investigate SBA’s handling of these matters.”

Between 2002 and 2005, GTSI won more than $1.5 billion in small-business contract awards as reported by the Federal Procurement Data System-Next Generation, Chapman said.

Several calls to GTSI seeking comment were not returned.

The IG semiannual report to Congress acknowledges problems with governmental procurement activity intended for small business. In July the IG told the Senate Small Business and Entrepreneurship Committee that several federal reports have shown that “many contracts that are counted toward these small-business goals are actually being performed by firms that do not meet SBA’s criteria to be considered small.”

The American Small Business League declared a victory for small solution providers in its long-running battle with the Small Business Administration over what exactly constitutes a small business.

However, the battle over whether larger government solution providers such as Chantilly, Va.-based GTSI are illegally classifying themselves as small businesses in order to get a large chunk of government purchases set aside for small businesses is far from over.

For Lloyd Chapman, president of the American Small Business League (ASBL), a small-business activist and former solution provider, the case is simple. He said companies such as GTSI are defrauding the government and harming solution providers that are small businesses.

However, GTSI claims it is a small business under government rules, and the SBA has yet to take any action against the company.

This week, Chapman and the ASBL claimed a victory by getting the SBA to formally admit that the company it earlier this year recommended for debarment from future small-business contracts was indeed GTSI. The ASBL had filed a suit under the Freedom of Information Act to get the name of the company.

Eric Benderson, an attorney with the SBA, sent an e-mail to the ASBL saying: "Pursuant to our settlement of the litigation brought by the American Small Business League, I am informing you that GTSI was the subject of IG [SBA Inspector General] investigation regarding its size self-certification that was the subject of the suit. This disclosure is permitted now that the administrative action has been resolved."

Chapman said he has never seen the SBA recommend a company for debarment before. "For the SBA to recommend GTSI for debarment, a company that is a major Federal supplier, the evidence must have been irrefutable," he said.

However, Chapman said he is not optimistic about further action against GTSI. "My impression is that the government will not take any punitive action against GTSI, and won't even debar them," he said.

He could be right. In response to a CRN query, the SBA e-mailed a statement explaining that the GTSI case involved a 2001 Navy contract for IT hardware and that there was some question as to whether the contract was classified as a small business set-aside or not.

The SBA Inspector General reviewed the case and asked the SBA to examine GTSI to determine if it was a small business. The SBA ruled GTSI was not a small business, and GTSI appealed the ruling to the SBA Office of Hearings and Appeals, which upheld the ruling, the statement said.

"Based on that decision, the SBA Inspector General prepared a recommendation that the SBA permanently debar the company [GTSI] from further federal procurement on the grounds that it had falsely misrepresented itself as a small business to secure the Navy contract," the statement said.

However, the SBA's Office of General Counsel reviewed the recommendation and concluded it did not have the authority to disbar GTSI since the contract actually was not a small-business contract, the SBA said in the statement. The matter was referred to the Department of Defense, which then referred it to the Army, which issued a "no further action" letter. Whether or not GTSI is a small business depends on how the SBA classifies it. The company currently has about 730 employees, down from a high of about 940 employees, a number that fluctuates according to open contracts, a GTSI spokesperson told CRN.

Chapman said that GTSI in 2002 certified itself on the government's ProNet listing as a reseller of IT products, and according to the SBA a small business in the IT reseller space includes companies of up 500 employees. However, said Chapman, in that listing, GTSI also calls itself a 100-percent manufacturer, which could have up to 1,000 employees and still be a small business under SBA rules.

"In 2002, GTSI recertified itself as a small business by claiming to be a manufacturer," Chapman said. "The SBA and the Pentagon let them get away with that. Then, two or three years ago, it claimed it was a telecom company."

A telecom company can be considered a small business with up to 1,500 people, according to the SBA.

The GTSI spokesperson said having multiple classifications is very common in the industry, and which classification is in force in a particular case depends on which government agency is doing the purchasing for a specific contract.

The spokesperson said that GTSI is indeed a manufacturer. The company does light manufacturing of classified equipment for communications and satellite work in a 140,000-square-foot facility.

Chapman, who has been fighting to open government contracts to more small businesses, which he said are the backbone of the U.S. economy, said that despite the SBA's recommendation to debar GTSI from future contracts, he has little hope that the SBA will do much against what he called are large integrators who misrepresent themselves as small businesses.

"The SBA will not tell the truth," he said. "They will spin that as no problem."

Chapman hopes that the new Congress will take up the issue. "With the new Congress, and with pressure from my organization, the government will be forced to change the way they purchase," he said.

Yet even if the government decides to take action, Chapman said not to expect much. He referenced a case where the Department of Justice investigated Comark Government & Education Services, which was found to have misrepresented its size status on 1996. The government fined Insight Public Sector, which acquired Comark Government & Education Services in 2002, $1 million early this year.

"Insight Public Sector has $50 million to $100 million in small business contracts, but got only a $1 million fine," Chapman said. "Can you imagine if bank robbers paid a 1 percent fine in this country? I'd become a bank robber. That actually would encourage them. If the government doesn't fine and debar GTSI, it shows there are no laws."

After pressure from small businesses and advocate organizations, the Small Business Administration (SBA) has acknowledged that, in June 2005, its Inspector General recommended GTSI be debarred from government contracting for misrepresenting itself as a small business, according to an e-mail obtained by GovernmentVAR. The admission came amid a lawsuit filed against SBA by the American Small Business League (ASBL) under the Freedom of Information Act.

As stated in the company's 10-k filed in March 2000, GTSI's acquisition of BTG and two of its subsidiaries two years prior meant it no longer qualified as a small business. Nevertheless, GTSI continues to win awards as a federal small business that added up to a reported $1.5 billion between 2002 and 2005 alone.

How is that possible? The Chantilly, Va.-based company lists an average number of 850 employees on the Central Contractor Registration Web site, which is too large to be considered a small-business VAR. But by defining itself as an electronic computer manufacturer and wired telecommunications carrier and reseller, which have thresholds of 1,000 and 1,500 employees, respectively, GTSI was able to certify itself as small.

The SBA Inspector General first recommended "a firm" be debarred from government contracting for misrepresenting its size as a small business in June 2005, but did not release the name of that firm. However, an e-mail sent to the ASBL from SBA chief counsel Eric Benderson this week and obtained by GovernmentVAR stated, "GTSI was the subject of the IG investigation regarding its size self-certification that was the subject of the suit. This disclosure is permitted now that the administrative action has been resolved."

The e-mail came with a request for a notice of dismissal of ASBL's lawsuit against the SBA.

According to the SBA, the specific incident that was investigated involved a Navy contract in 2001 for IT hardware.

"The contract was classified as a small-business set-aside, although there is some question as to whether that classification was proper," an SBA spokesperson says.

But Paul Liberty, area vice president for corporate affairs and investor relations at GTSI, says the contract is within the parameters set by the federal small-business program.

"The contract in question expires in March 2007 and is not subject to review when a company crossed the size standard threshold," he says. "GTSI takes playing by the rules seriously."

The Office of General Counsel concluded it did not have the authority to debar GTSI since it was not an SBA contract. The SBA referred the matter to the Department of Defense, says the SBA spokesperson, which assigned it to the Department of the Army. The Army recently concluded its investigation of the case and issued a "no further action" letter, declining to debar the company from federal procurement.

That's unacceptable to Lloyd Chapman, president of the ASBL, given that false misrepresentation of a firm's size to receive a federal small-business contract is a felony carrying a penalty of up to 10 years in prison, a $500,000 fine and permanent debarment from government contracting.

In a similar case, Insight Public Sector recently settled allegations of misrepresentation as a small business for $1 million and no admission of guilt -- a slap on the wrist as far as Chapman is concerned.

"For the Inspector General to recommend debarment, the evidence must have been irrefutable and overwhelming," he says. "And yet my impression ... is that they don't intend to take any action at all. I'm going to try to go after these firms [that misrepresent themselves] civilly, because clearly we can't rely on the government to prevent this kind of activity."

A new Small Business Administration rule that purports to secure more government contracts for small firms falls short, according to Sen. John Kerry and Rep. Nydia Velazquez, who will be heading the small business committees of their respective congressional houses next year.

"The agency's rule fails to address the vast majority of this problem," said Velazquez (D-New York). "Eighty percent of the contracts miscoded were due to other factors than small businesses simply growing too large, which is all this regulation focuses on." Kerry (D-Massachusetts) has similarly said the rule does not get to the heart of the matter.

For years, the problem has been that large companies are getting a piece of the 23 percent pie of contracts mandated to go to small businesses. In fact, according to a report put together by Velazquez's staff earlier this year, small businesses made up only 21.57 percent of federal government contracts in 2005.

Asserting that small firms lost out on a record $4.5 billion in contracting opportunities last year, the report's authors noted that those contracts were awarded to Fortune 500 companies, large universities, and government agencies.

Some of those larger entities and nonprofits have been "miscoded" as small businesses because of acquisitions or business growth hasn't been acknowledged over the life of a multi-year contract. The fix, according to the SBA, is to require small businesses to re-certify their status on long-term contracts. For contracts lasting longer than five years, the small-sized vendor will have to re-certify before the fifth year ends.

“This regulation will go a long way toward ensuring that contract awards get in the hands of small business owners, federal agencies get the proper credit toward their small business contracting goals, and small business contract awards are fairly and accurately reported,” said SBA Administrator Steven Preston.

Andrew Langer, manager of regulatory policy at the National Federation of Independent Business, told CFO.com that the rule is a good first step toward change. "It doesn't solve the problem entirely, but it certainly helps legitimate small businesses gain access to federal contracts," he says. The U.S. Chamber of Commerce also supports the rule.

But critics believe having small business recertify annually would be more effective. "Annual recertification would clean the government's [procurement] database immediately," Lloyd Chapman, president of the American Small Business League, told CFO.com.

In 2003, the SBA first asked for public comment on annual re-certification. Of 636 comments received--including those from contractors, trade groups, and federal agencies--some small-business representatives said they would need more time than once a year to re-certify and plan their transition from small-company status, according to the SBA. But Chapman says annual re-certification isn't hard and small businesses would be able to comply if an annual mandate was put in place.

To be sure, the topic isn't likely to go away any time soon, since there's plenty of money to be had for businesses wanting to provide services to the 24 federal agencies. According to Velazquez's report, $314 billion was spent on government contracts in 2005.

Along with the potential for profit for small enterprises, the deals could lead to expansion: government contracts often help small businesses with specialized services grow, Langer says. Still, it's not easy for small businesses to cut through the federal agencies' red tape, keep a handle on when contracts are up for bid, and gain personal access to the people who are making the procurement decisions, according to the report.

When Kerry was named chairman of the Senate Committee on Small Business and Entrepreneurship last month, he pledged to make Washington "a friend of small business once again," and noted that small firms aren't getting their share of government contract awards. "While 80 percent of America's businesses are small firms, they aren't even getting the 23 percent of federal contracts they're entitled to under the law—but somehow Washington has been so upside- down that big businesses have obtained nearly $2 billion in federal contracts that should have gone to small firms," he said.

The SBA has also announced that the federal agencies will have a procurement scorecard that will grade each agency on meeting its small-business goals. "The agency's initiative will only be effective if there are real measurements and criteria in place," said Velazquez, who is slated to chair the House Small Business Committee. "If not, it will be just one more attempt by this administration to hide a growing problem."