D.C. insiders can reap fortunes from federal programs for small businesses
For years as a lawyer in Washington, Paralee White had helped small and disadvantaged firms break into the federal contracting market.
Then she decided to help herself.
She started a business and was soon making more than $500,000 a year through a contracting program intended to help poor Alaska natives, even though she isn’t an Alaska native.
White also helped her family. She hired her sister and brother, paying them as much as $280,000 a year. She helped her sister’s boyfriend set up his own firm in partnership with Alaska natives. He made more than $500,000 a year.
White’s story offers a look at how Washington insiders can make fortunes from government programs intended to benefit small, disadvantaged and minority entrepreneurs. It also illustrates how government officials who are supposed to keep tabs on these programs often fail to do so.
White’s native partners eventually accused her and her siblings of fraud and self-dealing, saying they were paid more than the rules allowed and hid the transactions from the government. The allegations spilled out in a civil lawsuit in Alaska, and the case was quickly settled.
Although officials at the Small Business Administration say they knew about the dispute, the U.S. government has taken no action.
Over several years, White and her associates landed more than $500 million in construction contracts for the Navy and other Pentagon departments, nearly all of them through an SBA program aimed at boosting Alaska native corporations. But less than 1 percent of that money made it back to the native-owned corporations, a Washington Post investigation found.
Government officials say they were not monitoring the contracts for compliance with the rules to ensure that the natives were doing a significant portion of the work and receiving the correct share of the revenue.
In statements, Navy and Air Force officials said that responsibility fell to the SBA. But SBA spokeswoman Hayley Meadvin said her agency long ago transferred that authority to the Pentagon and other agencies.
White, 59, declined to answer questions about the contracts. In e-mails, she said the questions involve “events several years in the past and I don’t have the files or time to research or reflect on them sufficiently to give you accurate information.”
She said that her company was “a successful participant” in the federal small-business program and that “I am proud to have contributed to that success.”
An attorney for her sister, Christine Wilson, said Wilson denied all of the allegations and said his client paid no money to settle. A lawyer speaking on behalf of White’s brother, Daniel White, said the allegations were never proven. The case was settled without Dan paying anything,” said White’s attorney, Wallace A. Christensen. “We consider those allegations to be false.”
White works at PilieroMazza law firm in Washington as a specialist in small business contracting law. Described by associates as bright, energetic and entrepreneurial, she has said on a Web site that her first business was selling snow cones and popcorn for the local swim team. She graduated from Mills College with a bachelor’s degree in 1972 and George Washington University’s law school in 1978.
By the late 1990s, she had become a familiar figure advocating for small businesses at the SBA and other agencies.
In October 1999, she set up a firm called Sentinel Industries. Her plans for Sentinel would put her at the front edge of a multibillion-dollar wave of contracts for Alaska native corporations as government agencies sought ways to award contracts after the terrorist attacks of Sept. 11, 2001.
Three decades earlier, Congress had established more than 200 Alaska native corporations to settle native land claims and boost the fortunes of impoverished indigenous people. Those corporations have unique contracting privileges, including the ability to receive federal contracts of any size without competition.
Significantly for White, the subsidiaries set up by the corporations to receive contracts did not have to operate in Alaska or even be run by natives. They just had to be 51 percent owned by Alaska natives, and they could hire nonnative subcontractors to do much of the work.
Knowing those rules, White reached out to partner with an Alaska native corporation called MTNT Ltd.
The company was named after the four native villages — McGrath, Takotna, Nikolai and Telida — that it represented in the center of the state, not far from Denali. MTNT owned and managed 300,000 acres of land on behalf of nearly 400 native shareholders.
In 2000, MTNT took on a 51 percent ownership stake in White’s firm, officially making it an Alaska native corporation subsidiary.
White was entitled to almost half of its profit. She also received $160,000 in salary, 4 percent of the gross revenue as “incentive compensation” and unlimited paid vacation “to the extent such vacations shall not interfere with the operations of Sentinel,” according to her employment agreement.
The deal ended up reaping her more than $500,000 a year by 2004, according to data obtained from MTNT.
Once White was in businesses with the Alaska natives, she needed a partner to help manage the construction work they hoped to get. Neither White nor the Alaska native corporation had the experience or resources to run the federal construction projects — virtually all of which were in the lower 48 states.
White reached out to Centennial Contractors Enterprises, a large corporation with offices in Reston.
Under federal rules, small businesses can team up with large businesses through an SBA program and create “joint ventures” to secure federal contracts. The rules allow the larger, experienced firm to take a leading role — and 49 percent of the profits. The smaller firm is still required to do a significant proportion of the work, but that proportion was not defined.
The SBA approved Centennial as Sentinel’s official business mentor, and in the coming years the two firms would be given the green light to form nine joint ventures.
“It was an opportunity for us to continue to grow our business, and it was an opportunity for us to remain competitive,” Centennial chief executive Mark Bailey said recently.
In September 2001, a Sentinel-Centennial joint venture received a deal worth up to $25 million for maintenance and minor construction work at military bases. Six months later, another Sentinel-Centennial joint venture landed a Navy contract without competition worth $175 million over seven years.
With federal revenue virtually guaranteed, a German company, Bilfinger Berger, bought Centennial in 2003.
That meant that millions in profits from small business set-aside programs would be going to a German firm with annual revenue today of more than $10 billion.
The exact amounts earned by White, Centennial and the native corporation are not public. The Washington Post pieced together this account from federal contracting data, court records and interviews with people involved in the contracts.
‘A good opportunity’
In 2006, White approached MTNT about starting and running a second Alaska native corporation subsidiary that could land more contracts. She wanted the same terms she had at Sentinel, “namely, a 49 percent ownership interest and absolute operational control,” according to court records.
MTNT executives balked. They told White she could run but not own the second firm.
About that time, White began encouraging her sister’s boyfriend, Tom Kearney, to start his own firm in partnership with another Alaska native corporation that was a potential competitor of MTNT.
White, her sister, Christine Wilson, and Kearney together had bought a $1.2 million duplex in Los Angeles a few years earlier. It was listed as the address for a Sentinel-Centennial joint venture that had received $90 million.
Kearney had worked as a technology consultant for other small and disadvantaged companies. “I thought I might get a better deal if I started an 8(a) myself,” Kearney said. “It seemed like a good opportunity.”
His new venture would be a direct competitor to Sentinel during the time the firm still had in the program.
Kearney said that White introduced him to Louis C. Hala, the nonnative chief executive of an Alaska native corporation called NIMA. In September 2006, Kearney and NIMA registered a new ANC subsidiary called North Island, with Kearney owning 49 percent.
Kearney said White also helped arrange for him to meet with Centennial, leading to the creation of a new series of joint ventures. Hala said they needed Centennial because the native corporations did not have the skills or resources to take on government construction jobs.
“In the construction game, obviously you need a big guy on the block,” Hala said. “Our companies are still in their infancy.”
The next year, the North Island-Centennial joint venture, run by Kearney, received Navy construction and maintenance contracts for work that had previously been done by a Sentinel-Centennial joint venture. The new contracts are worth up to $200 million over five years.
Officials at NIMA said they are pleased with their partnership with North Island and Kearney, who they said loaned the company $500,000 to jump-start the venture.
“It’s been very good to us,” NIMA Chairman Wayne Don said.
NIMA officials said Kearney receives more than $500,000 a year — $130,000 in salary and almost $400,000 for his ownership stake.
The native shareholders have not made out as well.
Hala estimated that NIMA has received about 0.9 percent of the $133 million in joint-venture revenue. In 2009, NIMA’s 300-plus shareholders split about $100,000 from the deals.
Centennial did better on the deals than NIMA or MTNT. The German-owned construction company ended up making two times as much in profits as the Alaska native corporations, according to data provided by the companies.
Most of the money went to nonnative subcontractors for labor.
A subsidiary struggles
As North Island prospered, things fell apart at Sentinel Industries.
On Sept. 30, 2008, White resigned. She said MTNT had breached her contract by using an outside consultant to “second guess my decisions.” Her resignation triggered provisions in the employee agreements she had approved for her brother and sister, obligating MTNT to pay them hundreds of thousands dollars.
In a lawsuit filed in September 2009 in Anchorage superior court, MTNT accused White and her siblings of fraud, alleging they paid themselves extravagantly, hid some of their activities from MTNT and provided misleading information to the SBA.
The lawsuit said White never told the SBA about key provisions in the lucrative employment agreements for her and her siblings. MTNT also alleged that White’s agreement effectively guaranteed her more than half of the subsidiary’s earnings, which violated federal rules. Although SBA officials are aware of the case, they said they did not view it as an enforcement matter.
“As far as SBA knows, this situation was an internal management dispute between an ANC company and one of its owners,” said Meadvin, the agency spokeswoman. “At no point did anyone involved come to the SBA with allegations of fraud or general misdoings related to the ANCs participation in government contracting programs.”
The case was settled later in 2009, and the participants signed nondisclosure agreements. MTNT came away with total control of Sentinel Industries.
The firm continued to work with Centennial despite the fact that Centennial was also working with its competitor, North Island. Centennial chief executive Mark Bailey defended his company’s work with the Alaska native subsidiaries. He said the profits it has made are “a reward for the cost of mentoring and helping small business grow and develop.”
Bailey said Centennial was “in complete compliance with the SBA rules and regulations” while helping to prepare Sentinel to do business on its own.
“That’s exactly what the intent of the program is,” he said. “We’re very proud.”
But the reality for Sentinel Industries is not so clear-cut. Although it enabled MTNT to pay thousands of dollars to each of its native shareholders over the years, the subsidiary is struggling to make it on its own. After recent layoffs, it has only two employees, down from a high of 23.
Executives at MTNT said they are determined to grow the business, with new management. They said they have several promising prospects, including multimillion projects to bid on in the Northwest and Midwest.
“We were taken advantage of,” MTNT chief executive Vicki Otte said. “When we realized what was going on, we took the company back.”