Responding to pleas from a Marin trade group, U.S. Sens. Barbara Boxer, D-Calif., and John Kerry, D-Mass., said they want action against large corporations that disguise their size in order to qualify for billions of dollars in federal contracts earmarked for small business.

"Politicians love to say they want to help small businesses," said Kerry, chairman of the Senate's small business committee. "But how can any politician make that claim with a straight face when contracts that should be going to these hard-working small businesses are being turned into giveaways to large multinational companies?"

Kerry, widely believed to be a contender for the Democratic presidential nomination in 2004, said the practice was "an insult to common sense and fundamental economics and it needs to end."

Boxer, in a letter to Steve Bunnell at the fraud division of the U.S. Attorney's office in Washington, asked for a review of the alleged misrepresentations.

"With small businesses in California facing a difficult business environment, it is important that government contracts set aside for small businesses be made available to small businesses," Boxer said.

The senators were responding to information assembled by Lloyd Chapman, president of the Microcomputer Industry Suppliers Association, a trade group formed in August. Chapman is general manager of Novato's GC Micro Corp., a 30-employee computer reseller in Bel Marin Keys.

The company, founded in 1986, does about $35 million annually in sales of computer hardware and software, particularly to the government and to government contractors.

"We were losing bids to some companies and I thought, 'There's no way that's a small business,' " Chapman said. He said he believes deception has helped erode the Marin and California economy and led to countless small business bankruptcies or shutdowns.

"There seems to be a correlation between the level of fraud in the small business programs and the downturn in the economy," he said.

Elissa Giambastiani, chief executive of the San Rafael Chamber of Commerce, said small firms make up the majority of the Marin business community. Of nearly 12,000 Marin businesses reported by the state Employment Development Department in 1999, almost 10,000 firms had 10 or fewer employees, Giambastiani said.

David Gray, a spokesman for the Inspector General's office of the federal Small Business Administration, said Wednesday his department was "looking into" the SBA's contracting process, but that it was not a formal investigation. The U.S. General Accounting Office also is reviewing the issue, according to Chapman.

At least one company that had been on the SBA's electronic list of eligible small businesses - GovConnection Inc. of Rockville, Md. - was removed earlier this month, according to a check of the database, called Pro-Net (www.pro-net.sba.gov).

GovConnection had been listed as a small business with 50 employees - well below the SBA definition of a small business as 500 or fewer employees. But GovConnection is a wholly owned subsidiary of PC Connection Inc. of Merrimack, N.H., which has more than 1,300 employees and $1.18 billion in 2001 sales.

In July 2001, the SBA wrote to PC Connection to inform the company that it and GovConnection were too large to be included in Pro-Net. However, until about two weeks ago, GovConnection was still on the Web site.
Chapman's firm lost a $50,000 bid to GovConnection in September.

"The SBA sent a letter to GovConnection on July 12, 2001," Chapman said. "Why is GC Micro losing bids to them in September 2002? Why did the SBA keep the company on the Web site 18 months after that letter? That's a pattern."

Gary Jackson, the SBA's assistant administrator for size and standards, said the agency was "looking into" the issue.

"I can't comment specifically on any actions, but I can tell you that if you did go on Pro Net, GovConnection is no longer on there," Jackson said. "We are aware there are questions," he added. "And we do have procedures to address those questions."

Chapman has stacks of printouts of similar examples in his office. Some companies listed on Pro Net are also identified elsewhere on Web sites of multi-billion-dollar Dutch, German and Swiss conglomerates as their subsidiaries.

"I think that's appalling," Chapman said. "I thought the SBA was supposed to help small businesses, but it appears that their primary mission is to help federal agencies hit their small business goals."

Attorney Karen D. Powell of the Washington D.C. law firm Petrillo and Powell said she believed the large corporations are not acting fraudulently, but are taking advantage of loopholes in the procurement process.

One major loophole under scrutiny, she said, is that some contracts have indefinite terms and can continue for 20 or more years. Even if the firm starts out as a small business when it gets the contract and then grows very large, it is still kept on the list, she said.

Federal agencies, who are under pressure to give at least 23 percent of their contracts to small businesses, find it easier to simply award the contracts to the firms who already have procurement orders in place.

"That's the real scandal," said Powell, who represents numerous small businesses and companies holding federal contracts. "Agencies are using awards to these contracts to count against their quotas."

The government is planning to close that loophole next year by limiting the terms of such contracts to five years, she added.

According to Powell's research, $42.7 billion in federal government contracts was awarded to small businesses in 2001 - about 20 percent of the total federal contracts assigned. SBA statistics list total awards at $219.6 billion for 2001.

Chapman insists that the issue is more serious than a loophole because of its devastating effect on the health of the economy, which needs small businesses to survive.

"This is not a loophole," he said. "These cases are intentional federal contracting fraud and should be properly investigated and prosecuted."

Contact Keri Brenner via e-mail at kbrenner@marinij.com