washingtonpost.com
In deals between Alaska corporation and D.C. area contractor, a disconnect

By Robert O'Harrow Jr.
Washington Post Staff Writer
Friday, October 1, 2010; 11:46 AM

As one of the most successful Alaska native corporations, Eyak Technology occupies an entire floor of a four-story glass-and-concrete building in a bustling technology corridor minutes from Dulles International Airport.

The home base of Eyak Technology's parent in Cordova, Alaska, is not so impressive.

It is a single-story structure with faded yellow siding, weedy, gravel parking spaces and a rusting light fixture near the door. In July, the only thing showing a connection between the two companies was a faded photocopy of the Eyak Corp. emblem taped to the windows.

The two buildings embody the contradictions that have accompanied more than $29 billion in government spending over the past decade on firms known as Alaska native corporations, or ANCs. After the terrorist attacks of Sept. 11, 2001, the Pentagon and other agencies rushed to award the firms billions in contracts without competition, taking advantage of special privileges granted by Congress more than a decade earlier.

The mandate of the ANC program is to improve life for Alaska's struggling indigenous people. But much of the money has gone instead to nonnative people and companies in the lower 48 states.

The story of Eyak provides a case study of how Alaska native corporations and their subsidiaries have been used to pass on work to large Washington area firms, sometimes under circumstances that have been questioned, a Washington Post examination found.

One nonnative executive at Eyak Technology wrote to an established firm as they discussed how to split profits that they had to take care to avoid activity that might be construed as "contractual fraud," according to an internal e-mail obtained by The Post.

"We cannot put our Company at risk of being accused of [being] a front for a large company, end up on the front pages of the Washington Post," the executive wrote to a vice president at the large contractor in Fairfax County.

Eyak Corp. is one of more than 200 ANCs formed four decades ago to settle native land claims. Through a Small Business Administration program, they are able to receive federal contracts of unlimited size without competition.

In 2002, Eyak teamed with the contractor, GTSI Corp., to form Eyak Technology, better known as EyakTek. It has become one of the top 100 federal contractors, racking up about $1 billion in set-aside contracts from the Pentagon and other agencies for communications equipment, information technology, engineering and health-care services, said Paul Murphy, a senior analyst at Bloomberg Government.

All ANCs are exempt from oversight by the U.S. Securities and Exchange Commission. Eyak also does not have to file documents with Alaska state financial regulators because it has fewer than 500 native shareholders. As a result, much of the information about EyakTek's finances, including executive salaries, is not public.

The Post examination drew its picture of Eyak from interviews, visits to Cordova and Eyak's corporate office in Anchorage, an Eyak annual report, the IRS filings for Eyak's private foundation, internal Eyak and GTSI documents contained in court filings, and financial filings from GTSI, a public corporation.

On its Web site, EyakTek has touted its role in helping the native shareholders: "ANCs have the large responsibility of trying to pull their entire tribal membership up from poverty and need larger contracts to be able to do so."

Eyak and EyakTek officials have cited the benefits they say are flowing back to Alaska as examples of "fulfilling our promise to provide socio-economic benefits for our community of native shareholders." In statements, the companies said they have provided 126 scholarships, 14,500 used books and warm-up suits for a youth basketball team. Last year, EyakTek donated $266,000 to the corporation's foundation, according to IRS documents.

Last year, when EyakTek recorded $409 million in federal revenue and Eyak reported a payroll of almost $18 million for all of its operations, the native shareholders got direct dividend payments in December totaling about $109,000, according to Post analysis of data contained in a copy of the company's annual report obtained by the newspaper.

Some of Eyak's 428 shareholders said that did not seem like a lot.

"We have no idea how much they're making or who they are," said shareholder Dune Lankard, a 51-year-old native and environmental activist who lives a few miles from the yellow building in Cordova. "Our native culture has been replaced by the money culture. So where's the money?"

Officials for Eyak Corp. and EyakTek did not return repeated phone calls or e-mails over three months seeking comment. GTSI officials, briefed about The Post's reporting, declined to comment.

"After careful consideration, GTSI has decided to offer no comment," spokesman Paul Liberty said.

'Strategic relationships'

The Eyak people lived for thousands of years near Prince William Sound, hunting and fishing the sublimely beautiful Copper River Delta, a place that is home to one of the finest wild-salmon runs in the world. It is framed in the summer by snow-flecked mountains and is home to bald eagles, bears and other wildlife.

After Europeans and other settlers arrived, natives fell prey to disease, alcohol and other problems. By the time the Alaska Native Claims Settlement Act of 1971 opened the way for the 13 regional and more than 200 village native corporations, there were only a few score Eyak natives left, making them the state's smallest native group.

The Eyak Corp., formed as a village corporation one year after the settlement act, is based in Cordova, a fishing community of fewer than 2,500 on the sound. Its main features are fish-processing plants, a struggling main street and a modern cultural center near the wharves. At one end of the street is a lively independent bookstore with espresso and WiFi; at the other are a dilapidated hotel and bar.

For its first three decades, Eyak struggled with timber and other operations. By the early 2000s, it had about 40 employees and 92,000 acres remaining from the 149,000 in the original government claim settlement.

The company's fortunes began to change when native officials linked up with GTSI, a publicly traded company in Chantilly.

Founded in the early 1980s, GTSI was a growing contractor that sold equipment and technology services to federal agencies. It also underscored its government know-how and connections, including "a database that contains an extensive list of agency procurement and contracting officers."

By 2002, GTSI had 700 employees and more than $900 million in annual revenue. It was still considered a "small business" in some circumstances under government contracting rules, giving it access to some set-aside contracts. But GTSI executives expected they would soon lose that advantage.

GTSI sought to team up in "strategic relationships" with small businesses to help offset "the loss of our small-business status," the company wrote in a filing with the SEC.

On Jan. 2, 2002, GTSI and Eyak Corp. formed EyakTek. Eyak Corp. received 51 percent ownership of the new subsidiary, ensuring it had the status and benefits of an Alaska native corporation. For $370,000, GTSI received 37 percent ownership and another doorway to contracts expected to flow after 9/11.

At least 10 GTSI employees would go on to serve as EyakTek executives or on the company's board.

EyakTek was accepted into the SBA's 8(a) business development program, which allowed it to get contracts of any size without competition as long as the native subsidiary did 51 percent of the work.

Several months later, the new venture received another perk when SBA officials approved an arrangement that would allow GTSI to play a large role in its operations. The "mentor/protege" program was intended to enable small businesses to learn from large, established ones.

The program allowed EyakTek and GTSI to team up and work on contracts together. EyakTek was required only to do "a significant amount" of the work, a phrase that is not defined in federal rules.

Providing benefits

In the early days of what the Bush administration called the global war on terrorism, contracting officials at the Pentagon and other agencies were learning that Alaska native corporations could be a shortcut to getting jobs done fast.

Almost from the moment EyakTek opened for business, revenue poured in.

In 2003, EyakTek doubled its workforce from 15 to 33 and brought in $31 million in revenue, guided by the first of several former GTSI executives who moved over to EyakTek, according to a news release.

"Our positive results in 2003 reflect the solid relationships we have built with our customers and partners," said EyakTek's chief operating officer, Jim Dunn, a nonnative who had been a vice president at GTSI.

Things only got better. In 2004, revenue more than doubled to $65 million, hitting $72 million the next year and $92 million the year after that.

EyakTek said on its Web page in 2004 that it operated according to "the true spirit of the program."

"We don't 'front' for large businesses," the company said.

Despite the revenue growth, EyakTek would not be profitable until 2007, GTSI spokesman Paul Liberty said. But GTSI made money as a key supplier to EyakTek of equipment and other products that were resold to government customers. Between 2004 and 2006, GTSI recorded sales of almost $75 million to EyakTek, making almost $6 million in fees, according to SEC filings.

Shareholders in Alaska apparently did not fare as well.

Because Eyak's financial reports are not publicly available, it is unclear how much the corporation paid directly to shareholders. Several shareholders interviewed by The Post said they recalled receiving about $300 or less in some years.

Between 2004 and 2006, the years that EyakTek had total revenue of $229 million, the Eyak Corp. and EyakTek donated about $30,300 to the village corporation's foundation. About $16,000 was given away as student scholarships, IRS records show. On its Web site, EyakTek said it had held golf-and-networking events in Northern Virginia two years running that raised "over $15,000" for the scholarships.

The company said that one executive had "teamed up alongside area businessmen to provide fly-fishing training for healing and rehabilitating soldiers at Fort Sam Houston."

Another effort collected thousands of books from people in the Washington region. "Many of the books were sent to the public library in Cordova, from where the Eyak people originate," EyakTek's Web site said.

Eyak shareholder LaRue Barnes, director of the cultural center in Cordova, said she likes hearing about such initiatives. She said she also enjoys the shareholder benefit of being able to use Eyak-controlled land to pick berries and mushrooms.

But she said she couldn't recall receiving a "significant" amount of money herself and didn't know anyone who had.

"They really don't do a whole lot where they're visible," she said of Eyak, but, she added, "I'm glad it's there."

Dune Lankard's sister, Pamela Smith, 52, said her family has been hoping for years to receive more money from Eyak. She said that her husband is a fisherman and that they pursue a traditional native "subsistence lifestyle" in which they live substantially off hunting and fishing. But little has come their way from Eyak.

"The amount is so small, I don't usually remember what it is," Smith said.

When told of EyakTek's billion-plus in contracts, Smith said, "That just kind of blows my mind."

High hopes

As it continued to rise through the small-business ranks, EyakTek received praise from its government customers.

The SBA, the Treasury Department and others described it as a model firm that delivered services in a timely fashion. Within a few years, EyakTek also was ranked No. 5 in the Top 25 SBA 8(a) contractors listed by Washington Technology, a trade magazine.

Its work included designing an "Operations Center" for the U.S. 5th Army and providing cutting-edge security software to a federal law enforcement agency.

In January 2006, EyakTek and GTSI formed another subsidiary, called EG Solutions. The executives had high hopes that EG Solutions would give them entree to receive work under a $3 billion IT contract for the Department of Homeland Security known as First Source. It was a set-aside deal for businesses that certified themselves as having fewer than 150 employees.

This time, EyakTek got 51 percent ownership of the new venture, and GTSI got the rest. EG Solutions would be run by some of the executives who ran EyakTek, including some former GTSI personnel. EG Solutions executives did not respond to repeated interview requests in the spring and summer.

In February 2007, EG Solutions and 10 other businesses were approved for First Source. They became eligible to provide equipment and services to DHS through online catalogues aimed at government purchasing officials.

Nothing was guaranteed to any one of the companies, which had to compete among themselves to win business. But the potential revenue was huge.

Things seemed to go well. In 2007, EG Solutions began recording what would eventually become more than 450 set-aside awards worth $166 million from First Source, according to DHS. But GTSI soon wanted more from EG Solutions.

Although EG Solutions was getting the contracts, GTSI was doing a large proportion of the work, at least according to an e-mail from a GTSI executive.

GTSI executives thought their company should get 75 percent of the profits. But that was a potential problem. Under federal small-business rules, EG Solutions could be required to do "a significant proportion" of the work and receive at least 51 percent of the profits.

In June 2007, EyakTek's chief financial officer, Quang Le, wrote to GTSI senior vice president Scott Friedlander that the 75 percent proposal would not fly with government officials or the media.

"We can not put our Company at risk of being accused of [being] a front for a large Company, end up on the front pages of the Washington Post, [accused of] contractual fraud or worst [sic]," Le wrote in an e-mail contained in legal papers filed later in a lawsuit relating to First Source.

The companies continued negotiating. In August 2007, Le and Friedlander signed a confidential agreement that, under certain circumstances, gave GTSI the 75 percent of the "gross margin."

But the relationship would be different, because GTSI would be getting paid as a subcontractor, not a partner. About the same time, GTSI sold its share of EG Solutions back to EyakTek for about $700,000.

Still, it apparently was not enough for GTSI.

In 2008, GTSI entered into another confidential subcontractor arrangement with another business approved for First Source contracts, MultimaxArray FirstSource. That company was not an Alaska native firm, but GTSI's relationship with it sheds light on how big firms can use little ones to get at money set aside for small businesses.

The arrangement with MultimaxArray was extraordinary. It called for GTSI to lead the work and receive 99.5 percent of the revenue, even though it was a subcontractor and MultimaxArray was the "prime," according to a copy of the agreement included in legal filings.

In an internal company e-mail, GTSI executives were explicit about how the deal would work.

"Overall, they were very open to the concept of GTSI doing ALL of the work (just as with [sic] do with EGS), and they had little issues with giving us the control to do so," GTSI Vice President Tom Kennedy wrote to Friedlander and another executive Feb. 20, 2008.

But the government was not.

"It has been brought to our attention that GTSI may be submitting quotes, and otherwise conducting FirstSource business on behalf of Multimax Array," Michael Smith, a DHS program manager for First Source, wrote to MultimaxArray executive on July 22, 2008. "I want to assure you that if this is the case, this is an unacceptable business practice, and must cease immediately."

The note caused a storm of activity among the contractors.

In an internal e-mail to other executives, Kennedy played down the episode and gave advice on how to respond to Smith. "I would keep it short and sweet and minimize," he wrote. "Yes, Multimax/Array is partnering with GTSI in some cases, but NO they are not allowed to conduct First Source business without Array involvement . . . this is a very isolated case of a junior inside rep making a bad mistake, and it won't happen again."

Kennedy also wrote to GTSI employees that "it is ABSOLUTELY CRITICAL that we continue to represent ourselves to DHS as the MultimaxArray JV, not GTSI. We are subcontractors to MultimaxArray, and as such we are legally entitled to do this."

GTSI program manager Pat Berg told employees in an e-mail: "Do NOT identify yourselves as GTSI in phone conversations with customers."

'Mere facades'

Questions about GTSI's use of other firms to get at small-business contracts broke out in a court fight between GTSI and another contractor, New Mexico-based Wildflower International.

The legal battle that ensued underscored the high stakes involved in small-business contracting as well as the complex rules at play. It also unearthed reams of internal e-mail and documents that provided rare insight into an Alaska native contractor's relationship with its large-business partner.

In 2008, GTSI accused Wildflower of obtaining proprietary business information and using it as part of the successful protest of a contract awarded to MultimaxArray. In response, Wildflower unleashed allegations that EG Solutions and MultimaxArray were "mere facades" for GTSI.

"GTSI used MultimaxArray and EG Solutions as fronts to directly bid on, perform, and realize the vast majority of profits on hundreds of First Source contracts," lawyers for Wildflower said in legal papers filed in federal court in Alexandria.

Among other things, the documents show that GTSI employees had used EG Solutions e-mail accounts and answered phones as though they were employees of EG Solutions, just as they did with MultimaxArray. A GTSI official later said that was not an attempt to mislead anyone but merely to avoid confusion.

GTSI also denied the broader allegations and said in court filings that DHS had been informed that GTSI would be "team lead" in the partnership with MultimaxArray and that GTSI would "provide overall task management."

In one legal filing, GTSI said that SBA rules requiring that EG Solutions get 51 percent of the profits did not apply because the First Source contracts were not awarded under the SBA 8(a) program for small and disadvantaged businesses. Instead, GTSI argued, they were simply small-business set-aside contracts with different rules.

The disputes among the companies were no secret to contracting officials at DHS.

But in February, with the 11 First Source companies up for annual renewal, DHS chose not to pursue the allegations and granted EG Solutions and MultimaxArray continued access to the program. DHS spokesman Larry Orluskie said officials concluded that the matter was essentially a dispute between contractors.

"The department did a comprehensive review of joint-venture prime contractors prior to exercising options in February," he said. "We ensured that all prime contractors were properly performing their role on the contracts."

The department declined to provide any details of that review.

A federal grand jury in Alexandria is examining the matter, according to a subpoena obtained by The Post.

Wildflower settled its legal dispute with GTSI this year. Kimberly DeCastro, Wildflower's president, declined to comment.

'Proud and firm'

With help from EG Solutions, EyakTek's revenue reached new heights last year, pushing Eyak Corp.'s profit to $8.7 million on total revenue of $424 million. "The after-tax income increased by 81 percent from 2008 to 2009!" said a note in the annual report from Eyak President Nancy Cecile Barnes and chief executive Rod Worl.

An Aug. 3 news release said the success was largely due to the work of EyakTek and its relationship with GTSI.

"The Eyak family of companies stands proud and firm in their commitment to invest in its youth and to ensure the future of the Alaska Native culture and community," the news release said.

Eyak said that the successes in recent years had "made it possible for 126 Alaska Natives to pursue higher education and specialized training through the award of scholarships to The Eyak Corporation's shareholders and their descendants." The scholarships were worth $1,000 to $3,500, according to IRS documents.

The annual report showed that Eyak spent $464,000 for "travel, meals and entertainment," more than four times the $109,000 paid to shareholders as dividends in December.

This year, because of its success, EyakTek voluntarily graduated from the SBA program for small businesses one year early. Eyak Corp. recently won approval for two other subsidiaries to receive contracts under the small-business program.

In August, EyakTek launched an effort to acquire GTSI, offering its co-owner $7 a share.

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