By Greg Moran
UT San Diego
August 24, 2012

— The owners of two defense contracting firms pleaded not guilty in federal court Thursday to charges that they bribed officials at North Island Naval Air Station in exchange for millions in government contracts.

The indictment follows one in March that charged seven people, including four Navy officials who worked at North Island, with similar bribery charges. The seven pleaded guilty and are awaiting sentencing Sept. 10.

In the indictment unsealed Thursday, Robert Ehnow, 46, of Coronado, and Joanne Loehr, 52, of La Jolla, were charged with conspiracy to commit bribery, money laundering and wire fraud. Each also faces six charges of bribery.

Ehnow owns L&N Industrial Tool and Supply, a defense contracting business in Poway that declared bankruptcy last year. Loehr is the owner and president of Centerline Industrial Inc., also a Poway defense contracting company.

The charges are the latest in the investigation into a bribery scheme at the base that investigators said went on for seven years.

The indictment alleges that Ehnow and Loehr plied Navy officials with more than $1 million in an array of benefits. Those included home remodeling services, cash, flat screen televisions and gift cards to stores.

The indictment said the scheme involved the defense contractors submitting bogus invoices to the Defense Department that claimed to be for legitimate services done under existing government contracts. But the invoices were really for the gifts, goods and bribes the contracts were handing out to the Navy officials, the indictment said.

In some cases, the bogus invoices contained a markup, prosecutors said. In return, the Navy officials steered millions of dollars in government business to the companies.

Loehr’s lawyer, Mark Adams, declined to comment. Ehnow’s lawyer could not be reached for comment.


The Case of the $100 Billion Error


The Case of the $100 Billion Error

By Justin Elliott
August 16, 2012

This story first appeared on the ProPublica website.

Anxiety is rising in Washington about the big cuts to military spending slated to go into effect in January unless Congress takes action.

Republicans, defense industry executives, and some Democrats are arguing hard against the automatic cuts, which were the result of last summer's deal to raise the debt ceiling and would also cut nondefense spending equally. Multiple members of Congress have warned that slashing defense spending by $600 billion would devastate the military, with Sen. Lindsey Graham this month predicting the cuts would deal "a death blow to our ability to defend ourselves."

There's just one problem: The number they cite is wrong.

The law triggering the cuts does not slash the military budget by $600 billion. That figure — which has also been widely cited in the media — overstates the amount of military cuts by more than $100 billion.

Signed by President Obama last August after the debt ceiling drama, the law actually requires $492 billion in military budget cuts. (The cuts are slated to take place over nine years.)

The oft-repeated higher figure of $600 billion is actually the total in projected deficit reduction that the government would get by cutting $492 billion from the military. The extra $108 billion in projected savings would come via interest payments the government wouldn't have to make. Since the government would be spending less, it could borrow less and thus save on interest.

"It is downright misleading to say that sequestration will cut defense by $600 billion," said David Berteau, senior vice president at the Center for Strategic and International Studies and a former Defense Department official. (Sequestration is the term often used in Washington to refer to the cuts.)

"This entire exercise against sequestration is tainted by the intense desire of several parties — from the members of Congress who voted for the bill to the Pentagon that wants to avoid the cuts — to make sequestration seem untenable," Berteau added.

Both a Congressional Budget Office report and the head of the Office of Management and Budget concur that the proper figure for the cuts is $492 billion, or about $55 billion annually over nine years.

In arguing against the cuts, the $600 billion figure has been cited recently by Sen. Lindsey Graham, R-S.C., Rep. Phil Gingrey, R-Ga., House Aerospace Caucus Co-Chair Rep. Pete Olson, R-Texas, and Virginia Gov. Bob McDonnell. Republican presidential candidate Mitt Romney cited the figure last year, and it is also included in a July press release on his website.

Asked about the figure, spokespeople for the politicians offered a range of responses, none offering backing for the higher number.

A spokesperson for Rep. Olson, Melissa Kelly, said that the congressman "just misspoke" and that he was not trying to inflate the figure. "It was an honest mistake," she said.

The Romney campaign declined to comment. Sen. Graham didn't respond. A spokesperson for Rep. Gingrey said the figure includes other cuts but declined to offer details.

As for Gov. McDonnell, a close ally of Romney, a spokesperson said "the governor is using widely quoted numbers" from the media and legislators.

Indeed, the inflated figure has been cited as fact in the New York Times, Washington Post, National Journal, Politico, Roll Call, and on MSNBC, CNN and Fox News, among others.

Sometimes outlets have also offered conflicting numbers. For example, a June 3 article in the Times reported that if Congress fails to act to prevent the triggered cuts, a "$600 billion, across-the-board spending cut is to hit the Pentagon." On June 22, another Times article got it right, referring to "the roughly $492 billion in planned Pentagon cuts" that will start next year, barring congressional action.

To understand the law requiring the cuts and how much money it really cuts from the military budget, let's turn to the text of the bill, called the Budget Control Act of 2011. Here is the section that governs the cuts — half from defense and half from non-defense — that will start in 2013 barring action by Congress. (OMB stands for Office of Management and Budget.)

The law requires deficit reduction of $984 billion – half from defense and half from nondefense.

Here's the formula in the bill that gets to that number. It starts with a baseline of $1.2 trillion. That's the minimum amount in deficit reduction that last year's so-called congressional supercommittee had to achieve to avoid the triggered cuts. (They did not achieve any deficit reduction.) This is the figure that the incorrect references seem to be based on. But the formula doesn't end there. 

The formula then reduces the $1.2 trillion by 18 percent to account for projected savings because of interest payments the government would avoid. $1.2 trillion minus 18 percent is $984 billion. Half of $984 billion — the military portion of the cuts — is $492 billion.

As it turns out, the inflated $600 billion figure may not be correct even as the amount that the government would save. That's because those projected savings on interest payments from the defense cut could be a bit smaller than originally estimated. 

The Congressional Budget Office released a report in January, several months after the Budget Control Act passed, projecting that the savings from debt service would be just $142 billion. Add that to the $984 billion in required cuts, and the law would save the government $1.13 trillion, not the much-touted $1.2 trillion figure. Since half of the cuts come from the military, the total savings attributed to defense cuts would be about $560 billion. None of this would affect the amount of required military budget cuts. 

There's one other wrinkle here. (Sorry.) House Armed Services Committee Chairman Buck McKeon, R-Calif., a fierce opponent of the impending cuts, has referred to "$500 billion to $600 billion" in cuts. When we asked committee spokesman Claude Chafin where McKeon's figures came from, Chafin offered an argument separate from the debt service issue.

"[T]o achieve that [$492 billon in] savings, cuts will need to be much deeper to accommodate a variety of additional costs," Chafin said in an email. "These include, but certainly are not limited to the costs of contract renegotiation, contract cancellation penalties, terminating civilian positions and involuntarily separating members of the military."

In other words, this argument goes, by cutting the military budget the government will incur extra costs that will require still further cuts to achieve the required $492 billion in deficit reduction. Another House Armed Services Committee aide said that there are no specific calculations that led to McKeon's claim of "$500 billion to $600 billion" in cuts because it's not yet clear which programs will be cut. 

Several military budget experts interviewed by ProPublica were skeptical that any "additional costs" -- such as a contract termination fee-- could push the total figure up to $600 billion.

Russell Rumbaugh, director of the Budgeting for Foreign Affairs and Defense program at the Stimson Center and a former defense analyst on the Senate Budget Committee, says that cuts will likely be structured to avoid penalties or other costs. 

"The armed services committee argument is straight spurious," Rumbaugh said. "It assumes dumb decisions throughout."

McKeon's own committee also cites the correct $492 billion figure in a fact sheet on its own website.


.Obama administration helps large companies compete with small business


.Obama administration helps large companies compete with small business

By Steven Johnson
August 1, 2012

Small Business owners now find themselves fighting not only large US corporations, but also large foreign corporations, when contracting with the federal government.

In 2008 The American Small Business League (ASBL) endorsed candidate Barack Obama. Now, according to a July 31 statement released by (ASBL) President Lloyd Chapman, “It’s unconscionable that the Obama administration would propose giving more small business contracts to corporate giants at a time when our middle class economy is suffering one of the worst economic recessions in history.”

A proposed rule from the U.S. Small Business Administration (SBA) will allow federal agencies to divert billions of dollars in federal small business funds to large businesses every year. The current target for contracts to small businesses is 23%. Based on fiscal year 2011 data, large firms received 77.55% of funding. However, based on Inspector General reports going back to 2005, the actual funding to large businesses is grossly understated.

Two Federal reports highlighted the problems facing small businesses. The first report, 10-108, from the Government Accountability Office concluded: "By failing to hold firms accountable, SBA and contracting agencies send a message to the contracting community that there is no punishment or consequences for committing fraud."

The SBA's Inspector General, in a second report, found that large corporations received small business contracts fraudulently through "false certifications" and "improper certifications." That report, number 5-16, quotes the SBA's Office of Advocacy findings that large corporations receive small business contracts because of "vendor deception."

In 2008, President Obama promised to end these abuses when he stated, “It is time to end the diversion of federal small business contracts to corporate giants.” Instead, the administration closed out comments on proposed rule changes on July 17, 2012 without addressing the understatement, fraud, and false certifications.

Information found in the 2011 Federal Procurement Data System indicates that a Brazilian company, J&F Participacoes S.A (J&F)., received over $87M dollars in funds through the Small Business Administration. The company announced last month that they are seeking to acquire four additional companies and become “. . . a Brazilian Berkshire Hathaway, with a business model created in such a way that J&F itself can become a publicly traded company” according to CEO Joesley Batista.

J&F is a beef processing and marketing company based in Sao Paulo, Brazil. The company, according to CEO Batista, was built through more than 50 acquisitions in the last few years.

The Brazilian company was listed in reports that included Cargill, Tyson, Cal Western Packaging and Archer-Daniel-Midland as the top five recipients of Agriculture contracts. They were part of an investigation based on the latest data from the Obama administration which shows that, of the top 100 recipients of federal small business contracts during fiscal year (FY) 2011, 72 were large companies, including Lockheed Martin, General Dynamics, BAE and the Italian firm Finmeccanica.

This article is produced using information from NBC Bay Area Investigative Team (Stephen Stock, Liz Wagner and Felipe Escamilla), Business Wire, and American Small Business League.


House Votes to Stop Future Funding of Rosoboronexport


House Votes to Stop Future Funding of Rosoboronexport

Project on Government Oversight
August 1, 2012

The House of Representatives voted to cut off future government deals with a Russian government-owned arms contractor that has provided more than $1 billion in arms to the Syrian government. The contractor, Rosoboronexport, has supplied weapons to a brutal Syrian regime led by Bashar Al-Assad and currently has a contract with the Department of Defense (DoD) worth nearly $1 billion to supply helicopters to Afghanistan.

Representative Jim Moran (D-Va.) offered an amendment to the FY 2013 defense appropriations bill (H.R. 5856) which directs that no funding may “be used to enter into a contract, memorandum of understanding, or cooperative agreement with, make a grant to, or provide a loan or loan guarantee to Rosoboronexport.” The amendment passed with a resounding 407-5 vote. POGO hopes the Senate passes a similar measure.

Last month, POGO documented our concerns with the Rosoboronexport contract, under which the U.S. Army originally procured 21 Mi-17 helicopters for $377 million and later exercised an option worth $550 million to procure an additional 12 helicopters. While Representative Moran’s amendment does not affect the remainder of the current contract, it bars all future Pentagon business dealings with Rosoboronexport.

In addition to the contractor’s business with Syria, POGO also pointed out how Rosoboronexport’s business activities—including its ties to Iran’s nuclear program, which earned the company U.S. sanctions in 2006—may violate the Federal Acquisition Regulation’s (FAR) provision requiring the government to only award contracts to responsible companies. Although sanctions were lifted in 2010, Rosoboronexport has sold billions of dollars worth of weapons to Syria, which the government may have used to attack innocent civilians.

Further, Rosoboronexport’s contract with the Army was a sole-source contract that didn’t go through a rigorous bidding process. POGO has long warned about the dangers of sole-source contracts. Such contracts do not necessarily get the best product for the best price, and in this case, POGO has reason to believe that there were cheaper, domestic alternatives.

POGO also has concerns about Rosoboronexport’s classification as a small, minority-owned business at the time its contract was awarded (its classification as a small business has since been changed). According to the American Small Business League (ASBL), about 40 percent of the value of Rosoboronexport’s Army contract counted toward the government’s small business contracting goal. Rosoboronexport is responsible for roughly 80 to 90 percent of Russia’s foreign arms sales, and, according to the ASBL, has 2,500 employees and annual revenue of $424 million (both of which exceed federal small business standards).

In March, a group of 17 senators sent a bipartisan letter to Secretary of Defense Leon Panetta urging him to cut off funding to Rosoboronexport. Senator John Cornyn (R-Texas) put additional pressure on Obama, blocking the appointment of the Army Assistant Secretary for Acquisition, Technology and Logistics and sending letters to high-ranking DoD officials.

The Obama Administration and the Senate need to officially act, but the House approval of Moran’s amendment is a good step in holding Rosoboronexport responsible.

Andrew Wyner is a research associate for the Project On Government Oversight.


SBA Denies Fraud in NBC Investigation

Press Release

SBA Denies Fraud in NBC Investigation

American Small Business League
July 24, 2012

NBC Bay Area’s Investigative Unit released a story on July 20th about the diversion of federal small business contracts to large corporations.
The investigation found 24 large companies with headquarters or major offices in the Bay Area that received 299 contracts labeled as “small business” awards since 2009. These contracts totaled to $77 million in federal small business funds going to some of the largest companies on the planet, including Apple, IBM, Microsoft and Oracle.
The latest data from the Obama administration also shows that of the top 100 recipients of federal small business contractors for fiscal year 2011, 72 were large companies, including Lockheed Martin, General Dynamics, BAE, and Finmeccanica.
The SBA’s response to NBC was that large corporations receive federal small business contracts accidentally referred to the errors as “anomalies.”
But the SBA’s excuses contradict several federal investigations. The SBA’s own Inspector General; in Report 5-16, found that large corporations receive small business contracts through “false certifications” and “improper certifications.” The SBA’s Office of Advocacy also found that large corporations receive federal small business contracts because of “vendor deception.”
Moreover, the SBA has never been able to explain why these “anomalies” overwhelmingly result in the diversion of federal small business contracts to large businesses and not the other way around.
Report 10-108 from the Government Accountability Office concluded, "By failing to hold firms accountable, SBA and contracting agencies send a message to the contracting community that there is no punishment or consequences for committing fraud."
In the NBC piece, ASBL President Lloyd Chapman stated, “it’s not random occurrences when every day for a decade, millions of dollars a day in federal contracts that should by law be going to small businesses, are not only ending up in the hands of the largest corporations in America, but also Europe and Asia.”

According to Chapman, “The truth is, the SBA has facilitated the diversion of federal small business contracts to large corporations for a decade. What they like to call miscoding is willful, intentional felony contracting fraud that must be prosecuted.”