Federal agencies have a goal of awarding 23 percent of contracts to small companies – potentially worth more than $70 billion annually.

The U.S. Small Business Administration helped small companies land $79.6 billion in contracts in fiscal 2005, meeting the 23 percent goal for the third consecutive year, according to a recent SBA report. Most of that – $53.8 billion – was from the Pentagon.

But Lloyd Chapman, president of the American Small Business League of Petaluma, Calif., and others disputed that number. He pointed to about a dozen studies by the U.S. Government Accountability Office, the SBA Inspector General's office and others that reported on large businesses receiving contracts that should have gone to small companies.

About 30 percent of federal defense contracts that should have gone to small companies between 1998 and 2003 went to large businesses, according to one report by the Center for Public Integrity, a Washington, D.C., research organization.

Among the large defense contractors receiving or inheriting contracts reserved for small companies during those five years were three of the largest private employers in Maryland – Northrop Grumman Corp., BAE Systems and Lockheed Martin Corp., the study reported. The list included just about every top defense contractor, including General Dynamics Corp., Halliburton Co., Honeywell International and Boeing Co.

While Karen Hontz, associate administrator for government contracting with the SBA, had not read the center's study, many such reports contain misleading information, she said.

"There is a lot of misinformation about large businesses getting small-business contracts," Hontz said. "It's more of a data issue about how contracts are recorded."

There could also be instances in which small companies grew large during the life of the contract – which can span decades – or small businesses were acquired by larger firms, she said. Federal rules – which some call "regulatory loopholes" – allow small companies that grow large or were purchased by larger corporations before December 2004 to retain their small status during the contract.

Another possibility is that some subsidiaries of large companies might not be reporting all of their affiliations, Hontz said.

Also, large businesses may sometimes obtain small-business contracts because SBA employees are unfamiliar with requirements and mistakes are made in recording contracts, SBA Inspector General Eric M. Thorson said during a recent hearing before the U.S. Senate Committee on Small Business and Entrepreneurship.

Fraud plays a role

Then there is fraud committed by companies, Thorson said. In the past five years, the office has opened 69 cases and obtained 24 fraud convictions, resulting in fines and settlements of more than $17 million, he said.

Fraud plays a large role in the situation, said Anthony W. Robinson, president of the Minority Business Enterprise Legal Defense and Education Fund in Largo. He has heard complaints for several years, especially from owners of small minority-owned companies.

"The large companies will say something like they bought a small company that had these contracts. But I think it's more than that. Many companies purposely claim to be small when they are not," Robinson said. "The SBA should be accountable for who represents themselves as being small. How do you miss a Northrop Grumman?"

Officials are working to change the rules to make companies certify they are small more often and tighten the data recording in the central contracting registry, Hontz said. "We want to ensure the accuracy of data," she said.

Employees need more training and rules on the SBA's authority to debar contractors for misrepresentations need to be clarified, Thorson said. Congress could establish an office within the SBA to monitor the integrity of contracts, he said.

For its part, Congress has only started to address the issue. The Senate small-business committee recently approved a bill that would make it harder for large companies to win small-business contracts, but it hasn't yet been introduced before the entire Senate, said Brian Clavelle, a committee staff member.

The legislation would increase federal authority to prosecute and suspend large corporations that misrepresent themselves as small businesses. It would also strengthen the SBA's authority to decide whether a company is really a small business.

The House Committee on Small Business has issued reports, such as one in July that concluded that about $12 billion in contracts that federal agencies reported as going to small businesses in fiscal 2005 actually went to large companies.

It's encouraging to see some action on the matter in Congress, Robinson said. But because the current Congress is winding up today to let members campaign for the Nov. 7 elections, it's doubtful anything will get done on the proposed Senate bill until next year, Robinson said. That leaves it for the SBA to make internal changes, he said.

At one time, Joseph Cooper's advertising and public relations company pulled down $3 million in annual sales and had 22 employees.

Then, things went south for the Rockville resident. The U.S. Immigration and Naturalization Service – which in 2003 split up into the Immigration and Customs Enforcement, and Citizenship and Immigration Services – pulled a substantial contract and gave the work to larger businesses, according to federal court documents.

That was fraudulent, Cooper said, because the contract was under a U.S. Small Business Administration program reserved for small companies. The new awardees were not small, he said, although they claimed to be, according to court documents.

After losing an almost decade-long legal battle this year, Cooper said he is in dire straits. He hasn't found regular employment, with his age – 59 – being a major hurdle. He lost his home and is living in a Rockville apartment through the generosity of friends and relatives.

He's left wondering what went wrong.

"This isn't the way it's supposed to be," Cooper said. "My parents taught me to work hard and you will gain what you need in life ... I worked hard, and to see it come to this – it's rough. It's really rough."

Cooper's plight highlights what some small-business advocates say is a pervasive problem: Large companies using loopholes to win billions of dollars in contracts that should go to small companies such as Cooper's.

SBA officials say they are making changes to fix the situation, and Congress is also trying to address it.

Cooper gets no satisfaction

Cooper had a strong case, said Anthony W. Robinson, president of the Minority Business Enterprise Legal Defense and Education Fund in Largo, who helped with the proceedings.

Many companies, especially minority-owned ones, have to deal with similar situations in which large businesses use smaller companies to get small-business contracts or misrepresent themselves to get the contracts, Robinson said. He was surprised that Cooper's lawsuit was dismissed on a "technical issue."

In a Washington, D.C., federal court in March, District Judge Ricardo M. Urbina threw out the suit and awarded the defendants attorneys' fees due to a "lack of subject-matter jurisdiction," because Cooper's claims were "based on publicly disclosed information" of which he was not the original source.

Under a claim under the False Claims Act, Cooper would have had to show he was "the original source of either the information concerning the alleged misrepresentations or the information indicating that the defendants are all large businesses," Urbina wrote.

The judge cited media reports that documented that the defendant companies were not small. But he wrote that the court did not have jurisdiction to hear the case because "information revealing the true state of facts already exists in the public domain in another form."

Cooper and his attorney, Cyrus E. Phillips IV of Washington, are still scratching their heads over the ruling.

Phillips, who said he believed in the case's merits so strongly that he took it on a contingency basis, has represented other small-business owners in similar instances who saw their cases settled in their favor.

"It was an unexpected ruling," he said.

Contract first won in 1995

Cooper, a Brooklyn, N.Y., native, said he started J. Cooper and Associates in 1987 in the District after holding advertising and other positions with the U.S. Postal Service, Commerce Department and Labor Department. He steadily built his business and joined the SBA's 8(a) program that's designed to help small minority-owned companies.

In 1995, Cooper won a contract from the immigration service that he said would have been worth $8 million over five years to conduct an advertising campaign to recruit Border Patrol agents and other employees. An immigration contracting employee said the contract allowed the agency to use multiple vendors, and officials did so because they "were not happy" with the performance of Cooper's company, according to a 1997 U.S. Justice Department report.

However, Cooper said a senior contracting officer with the immigration agency later gave a sworn deposition in which he said Cooper's company did nothing wrong.

"They had to follow proper procedures to terminate the contract with us, and they didn't do that," Cooper said. "We had taken all the steps to qualify as an 8(a) firm and had signed government documents stating we were a small business ... The companies they gave the same contract to were not small businesses."

The immigration employee told the Justice Department investigator that procedures allowed "verbal verification" over the phone of a company's small-business status for certain contracts. At the time, the cap was $5 million in annual revenues. The new vendors, which included Bernard Hodes Group and J. Walter Thompson Co., verbally verified their status.

In 1985, Hodes agreed to merge with a business with "$20 million in billings," while Thompson had "worldwide billings of nearly $1.5 billion in 1978," according to media reports cited by the judge. Both companies are now part of multibillion-dollar global corporations, according to their Internet sites.

The immigration employee "believed each company was truthful in claiming their status as such and had no reason to doubt their certifications," according to the Justice Department report.

In his ruling, Urbina wrote that "the evidence in this case shows that the [immigration service] was aware that the defendants were not small and?or disadvantaged businesses and offered them advertising and public relations contacts anyway."

Immigration service purchase orders filed in the case showed that immigration officials classified the Thompson and Cass companies as "disadvantaged." The businesses' statements to the immigration employee that they were small or disadvantaged and the designation of the defendants as "disadvantaged" on the immigration agency's orders were "admittedly curious," Urbina wrote.

Kenneth Lee Blalack II, an attorney representing the defendant businesses, could not be reached for comment. Officials with the companies also could not be reached for comment.

In 1997, Cooper filed a lawsuit in the U.S. Court of Federal Claims against the immigration service. The court dismissed the action "without prejudice to allow the plaintiff to exhaust administrative remedies," Urbina wrote.

By 2000, Cooper's business folded, as he said he was not able to recover from losing the big contract and spent much time waging what he called a "David vs. Goliath" battle. He filed another complaint that the court threw out, this time with prejudice.

Cooper appealed to a federal appeals court, which affirmed the lower court's decision. In 2003, he filed the federal lawsuit against Hodes, Thompson and Cass Communications Inc. that was dismissed by Urbina.

Legal fees added up

Phillips said he lacked a basis to appeal. Costs were also a factor. Phillips and a law firm that formerly represented Cooper without being paid upfront spent more than $1 million on the case since 1997, Cooper said.

So Cooper wrote to people such as Rep. Christopher Van Hollen Jr. (D-Dist. 8) of Kensington. In a recent letter to Van Hollen, Luz A. Hopewell, associate administrator for business development for the SBA, wrote that the immigration service was only required to place orders of at least $250,000 with Cooper's company under the 1995 contract and had paid the business more than $280,000.

A member of Van Hollen's staff said she was looking into whether he can do anything more about Cooper's situation.

According to testimony given in connection with Mr. Cooper's lawsuit, [the immigration service] soon became dissatisfied with the quality of [Cooper's company's] work and began placing orders under the contract with other concerns," Hopewell said.

The SBA tried to mediate the matter without success, Hopewell added.

A member of Van Hollen's staff said his office was referring the case to the House Committee on Government Reform for further review.

Cooper said he should have received more help from the SBA, which he thought was trying to "pass the buck" to the immigration service, which was also pointing the finger elsewhere. His case was hamstrung because he "had to exhaust all administrative remedies" in the claims court, which did not have jurisdiction to hear the fraud allegation that he said was at the heart of his case.

Cooper noted that Urbina confirmed his allegations that the immigration service knew the other companies were not small, but that seemed little consolation with his options running out.

"I don't think I received a fair deal," Cooper said. "I have been made to feel like I'm someone to avoid. I followed the laws, and I have worked within the system to try and resolve this matter.

Virtually every American private employer is a small business, according to data released Thursday by the U.S. Small Business Administration.

In 2005, small businesses accounted for 99.7 percent of all employer businesses, according to an SBA statement. They employed 57.4 million workers, or 50.6 percent of the nonfarm private sector.

Congressional overseers questioned the effectiveness of the Small Business Administration's guaranteed loan program at a hearing Thursday, but panelists stopped short of proposing elimination of the agency, as advocacy groups had suggested they might.

Controversy over the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management hearing erupted last week, with a small business advocacy group upset by the scheduled appearance of Veronique de Rugy, a resident fellow at the right-leaning American Enterprise Institute who has advocated for elimination of the SBA and small business set-asides. Sen. Tom Coburn, R-Okla., chairman of the subcommittee, in turn accused the group of circulating misleading information and SBA officials of inappropriately lobbying against the hearing.

In her oral testimony, however, De Rugy stopped short of recommending that SBA or its main lending program be scrapped, though she argued that the program is not helping small businesses and might be harming them. She cited statistics showing that only about 3 percent of small businesses obtain credit through the program, arguing that the success of the other 97 percent in meeting their credit needs in other ways shows that the federal program is unnecessary.

De Rugy's written testimony, submitted for the record, pursued this argument to conclude that the SBA loan guarantee programs should be terminated. Reached by phone, De Rugy said she had not completed formal research on whether the agency itself should be eliminated, but suspected that when she fully researched the question, she would arrive at that conclusion.

Coburn questioned whether entities other than small businesses benefit from the program. He asked David Bartram, chairman of the National Association of Government Guaranteed Lenders, how profitable the loans are for the private banks that finance them, and was told they are comparable to conventional loans. "It is important that SBA be about helping small businesses, not about helping the people who help small businesses," Coburn said.

He also questioned SBA Administrator Hector Barreto about small business set-asides in government contracting, noting that Northrop Grumman, Hewlett-Packard, General Dynamics and Oracle were among the large businesses that received millions in set-aside contracts in 2002.

Barreto said small companies often win contracts and then outgrow their size status or get purchased by large firms, and that he believed circumstances like those mostly explained the large companies on the record.

But Coburn criticized this arrangement, saying when a large company buys a small one, "they're buying an advantaged position in government contracting."

Hell hath no fury like a Congressman scorned.

Sen. Tom Coburn, R-Okla., still smarting over the way small business groups ambushed his recent hearing into the Small Business Administration, has accused unnamed SBA employees of setting him up, and he's demanding an investigation.

Federal agencies and their employees are prohibited from using tax dollars to lobby Congress, either directly or indirectly, and can face fines up to $100,000 if convicted.

The controversy began when Lloyd Chapman, president of the American Small Business League (ASBL), issued a statement about the hearing before Coburn announced it. Chapman characterized it as an attempt to abolish the SBA; Coburn called the claim distorted and unethical.

The situation escalated yesterday when Coburn charged that SBA employees sent e-mails to special interest groups to rouse opposition to the hearing. He says he has seen at least one such e-mail. The Associated Press also reported that it had reviewed one e-mail that an SBA employee had forwarded to others.

In a separate statement, Chapman acknowledged today that Coburn was "infuriated" by the ASBL's press release but said his organization was "on the mark" with its concerns.