By Robert O'Harrow Jr.
Washington Post Staff Writer
Saturday, October 2, 2010; A1
Federal officials on Friday suspended one of the nation's largest government contractors from receiving new work, alleging that the Northern Virginia company inappropriately went through other firms to gain access to contracts set aside for small companies.
The U.S. Small Business Administration's action imperils hundreds of millions of dollars in revenue for GTSI Corp., a top-50 contractor that has relied on the Pentagon and the rest of the federal government for more than 90 percent of its sales in recent years.
At issue is work GTSI did as a subcontractor for small businesses serving as the prime contractors on government contracts.
"There is evidence that GTSI's prime contractors had little to no involvement in the performance of contracts, in direct contravention of all applicable laws and regulations regarding the award of small business contracts," an SBA official wrote in a letter to GTSI's chief executive, Scott W. Friedlander. "The evidence shows that GTSI was an active participant in a scheme that resulted in contracts set-aside for small businesses being awarded to ineligible contractors."
In an "open letter" to employees, customers, partners and investors Friday night, Friedlander said, "Until tonight, no government agency had made an allegation that GTSI had violated any law or regulations regarding this matter." He said that the company looks forward "to providing you with a report on our activities as the situation warrants" and that "we appreciate your support during this time." He added: "Please be assured that we will fight to restore our good name."
The temporary suspension is one of the strongest contracting enforcement steps taken by the government in recent memory. GTSI can challenge the action, which could lead to a longer-lasting ban from government work, contracting specialists said.
"It's the first time in decades that the government has completely suspended a significant player, a legitimate top-tier contractor," said Steven Schooner, a contracting law professor at George Washington University. "It puts everybody on notice."
The move follows an internal SBA examination of GTSI activity over the past few years. It comes after a Washington Post investigation that detailed the relationship between GTSI and three small businesses, two of them entities known as Alaska native corporations.
The Post story cited an internal GTSI e-mail in which a company vice president said one of its small-business partners was "very open to the concept of GTSI doing ALL the work" on a contract. Another document cited in the story called for GTSI to receive 99.5 percent of the revenue, even though it was a subcontractor to a small business.
The SBA suspension is based in part on those documents and The Post's findings, officials said.
"The Small Business Administration has no tolerance for fraud, waste and abuse in any of our programs," said SBA Administrator Karen G. Mills in a statement. "This action is based on information the agency has compiled regarding GTSI's business practices."
Among other allegations, the SBA said that GTSI used e-mail addresses of small businesses "so that employees of GTSI could appear to be employees" of those companies while doing government work.
Behind the SBA's inquiry are long-simmering suspicions that large businesses have been able to gain access to billions in deals that were meant to provide a boost to the nation's small companies. Officials have worried that increasingly large contracts awarded in recent years through small-business programs - oftentimes without competition - are paradoxically crowding out actual small businesses from federal work.
The Pentagon and a wide array of federal agencies have used such deals because they save time and enable the agencies to meet government policy targets for small-business contracts.
GTSI was founded in 1983. Operating in Herndon, it has experienced substantial growth largely as a result of federal contracts. It reported revenue of $762 million last year from the sale of a variety of information technology products and a variety of services. The company said it had 615 employees, according to its most recent annual report.
GTSI was ranked 49th on trade magazine Washington Technology's list of Top 100 government contractors last year.
Despite its growth, GTSI has for years maintained a small-business status on some older contracts under federal rules. But the company anticipated losing direct access to set-aside deals as a consequence of its growth. Several years ago, the company disclosed a plan to "mitigate any potential adverse affect on our sales from the loss of our small business status" by developing "strategic relationships with small businesses that benefit from the small business benefits," according to a filing with the SEC.
One relationship was with EyakTek, an Alaska native corporation. EyakTek's parent, Eyak Corp., and GTSI founded the company in 2002. Eyak received 51 percent ownership, while GTSI received 37 percent. As an Alaska native corporation, EyakTek has special contracting privileges, including the right to receive contracts of any size without competition.
In 2006, EyakTek and GTSI formed another subsidiary called EG Solutions, which was among 11 companies chosen to provide equipment and services to the Department of Homeland Security through a $3 billion contracting program called First Source. GTSI also worked as a subcontractor for MultimaxArray FirstSource, another small business in the program. The department First Source's contracts are cited in the SBA notice of suspension letter.