White entrepreneurs, by setting up captive firms and installing blacks in phony executive positions, have reaped millions in non-competitive federal contracts that were intended to help struggling minority businesses become self-sufficient.
How these "front" corporations systematically siphoned lucrative contracts from a $1.5 billion program to assist the "economically and socially disadvantaged" is outlined in internal government documents made available to The Washington Post.
The documents also contain evidence that some officials of the Nixon administration encouraged the links between white and minority firms and allowed them to continue ever after it became clear that the white businesses were getting more of the advantage.
Beginning Wednesday, these documents will be the subject of hearings by the Senate Federal Spending subcommittee. Headed by Lawton M. Chiles Jr. (D-Fla), it is probing allegations that the program's aims have often been circumvented to benefit people who aren't disadvantaged.
At issue is the 8 (a) program named for a provision in federal law authorizing the Small Business Administration to act as a middleman in arranging for federal agencies to reserve part of their contracting work for small businesses.
Since the early 1970s, this authority has been used primarily as a government policy tool to help firms owned by blacks and other minorities become established in the business world.
Roughly $300 million a year in federal contracting for construction, services and goods is taken out of the competitives bidding process. The contracts are then awarded to firms selected at the discretion of the SBA, as described in an article yesterday.
However, the documents reveal a number of cases where the evidence suggests strongly that 8(a) contracts went to firms whose "disadvantaged" officers and stockholders were thinly disguised front men for white backers.
Although these "front" arrangements took various forms, most appear to have involved the use of "sponsorships." That's a system under which an experienced white firm is recruited to take a miniority enterprise under its wing and provide technical assistance for contracts and help obtain financing and lbonding.
The arrangement is supposed to continue until the sponsored firm is ready to be "graduated" - brought to a level of experience and competence where the SBA considers it able to compete in business without special government help. But, according to the documents, many of these arrangements were manipulated to give the sponsor complete control over the minority firms and an inordinately large share of the profits from their contracts.
As far back as 1972, for example, an SBA official. Ray Harshman, assembled evidence showing that in just one field - food and labor services at military bases - 23 minority firms with 8(a) contracts totalling $50 million were actually controlled by one or another of five white holdong groups.
The tacties used by one of these white organizations, the so-called Dunn Group, headquartered in Dunn, N.C., were put on the public record during Chiles hearings this year. Among other things, the hearings revealed that one of the seven minority firms controlled by Dunn had a secretary-treasurer who actually was an illiterate janitor and who admitted that his real job was "to clean up around the office."
The operations of another of these holding organizations, known as the Rice Group, are described in a secret report by the congressional General Accounting Office in late 1975. The report identifies the organization's principal figure as James E. Rice, president of Worldwide Services, Inc., of Smithville, Tenn.
According to the GAO, Rice, "a successful entrepreneur and prominent figure in the government service contracting industry," founded and sponsored four minority firms that, between 1971 and 1974, received about $12.1 million in payment for 8(a) service contracting at military installations.
The report said Rice maintained control over the four companies by keeping himself the biggest single stockholder in each - holding as much as 49 per cent interest in some - and by handpicking all the other stockholders. It noted that 11 of the 15 disavantage stockholders whose joint holding theoretically represented majority ownership of the four firms, were employees of Rice's Worldwide.
"None of the disadvantaged stockholders had taken the initiative to form 8(a) firms: that was done hy Worldwide," the GAO report said. "Rice enjoyed a high degree of influence over the operations of the 8(a) firms' operations by selecting disadvantaged owners who would not participate in the firms day-to-day operations and by placing himself, his officers, key employees and associates as officers, directors and key employees of the 8(a) firms."
In addition, the report said. rice kept the four firms' financial and corporate records at his Worldwide office, kept their funds in non-interest-bearing checking accounts at a Smithville bank under his control, had almost all checks issued by the 8(a) firms written by his employees in Smithville and, on one occasion, borrowed $146,000 from one of the minority firms without obtaining prior approval from its officers.
During the period from April 16, 1977, to June 30, 1974, the GAO said, "a total of about $2.87 million or about 24 per cent of the combined gross income of the these firms was paid to the sponsor or his associates for general and administrative services, labor management services, leased equipment sale of stock ownership and other items."
It added: "Rice or Worldwide, received about $2.15 million of that amount, either from the four 8(a) firms, or directly from the disadvantaged stockholders. The remaining $710,000 was paid to individuals or businesses who were in some day associated with Rice, such as employees and officers of Worldwide."
At the outset of 1974, Rice, one of his white associates. Eddie P. Draughon, and six of the disadvantaged stock-holders in the four firms sold their stock back to the firms or to other disadvantaged stockholders, the report said.
These sales, the GAO said, gave Rice, who originally paid $4.08 for his stock, a profit by $597,520. Draughon realized a profit of $193,200 on an original investment of $1,800. By contrast, the six disadvantaged stock holders came out of the stock sale with a joint profit of $309,690.
"We believe," the report said, "that the withdrawal of such large amounts of funds is inconsistent with the objectives of the 8 (a) program to develop viable businesses."
Despite the large contracts they received from the government, the report concluded, "the four firms sponsored by Rice had made little progress toward becoming competitive, independent and viable businesses," by the time he sold his stock. As of 1975, the GAO said, one of the firms was being liquidated and the other three were considered by the SBA too weak to stand on their own and were still tied to sponsorship arrangements with Rice.
Rice told The Washington Post he had never seen the GAO report and couldn't comment on it. He also said he no longer had any connections with the four 8 (a) firms, but he refused to answer any other questions about them unless submitted in writing.
The GAO report, however, quoted Rice as saying he got into the business of sponsoring 8 (a) firms after he and other white service contractors visited Washington in 1970 and complained to White House officials that taking contracts out of competitive bidding and reserving them for minority firms would seriously injure their businesses.
Rice said he and the others were advised by their White House contacts to become participants in the 8 (a) program and were put in touch with SBA officials who offered to help them sponsor minority firms.
The GAO report does not identify these officials. But SBA sources say some of the contacts between the SBA and white contractors who later become 8 (a) sponsors were arranged by Harry S. Dent, a political strategist on the Nixon White House staff. After leaving the government, Dent became legal counsel for the National Association of Services Contractors a post he held until last year.
What Rice told the GAO is echoed by Happy Franklin, whose Texas-based ABC Ford Services is also a big contractor at military bases. In a telephone interview, Franklin said he went to Washington in 1971 to complain that he was being hurt by contracts "being taken off the street" for the 8 (a) program.
Franklin said, "When I talked to people at the SBA, they told me. 'Happy, the 8 (a) program is the wave of the future. Don't fight it. Get yourself a black man or some other minority and join up.' So that's what I did. It was either that or lose so many contracts that I'd be out of a business I'd worked in for 25 years."
Before long, Franklin was involved in a number of sponsorship deals, including one that garnered him $90,000 for helping administer a food services contract at a California Marine base. One of the two partners in the 8 (a) firm holding that contract was Robert J. Brown, a black former member of the Nixon White House staff who managed to be certified as "disadvantaged" despite a government salary of $37.00 a year.
Another 8 (a) firm sponsored by Franklin was Triple S Enterprise, Inc., which in 1972 and 1973 got contracts of $1.8 million and $1.5 million respectively for food services at Ft. Sill, Okla. Triple S was owned by Foxie Bluford, an American Indian who had been a fulltime employee of Franklin's ABC and who borrowed $10,000 from ABC to found his firm.
When the SBA's Dallas office complained that Bluford's costs and management fees to ABC were excessive. Franklin, by his own admission, protested to Donald F. Dunlap, than director of the SBA's Office of Business Development. Internal SBA records quote several officials in the Dallas office as saying Dunlap then demanded repeatedly that they stop bothering Franklin.
Franklin said that was the only instance in which he sought Dunlap's intercession. However, SBA documents reveal other dealings between Dunlap and persons involved in sponsorship arrangements that seem out of the ordinary.
In 1972, while still in the SBA, Dunlap came under investigation for seeking to obtain a 48 per cent interest in Expedient Services, Inc., one of the 8 (a) firms controlled by the Dunn Group in North Carolina. He allegedly was to receive the stock free in exchange for helping get business for Expedient.
Although Dunlap insisted he had done nothing improper, the SBA's personnel director, Carl E. Grant, concluded in a Sept. 13, 1973, memo that Dunlap's actions warranted removal from his job. However, no formal action was taken, and Dunlap resigned from the SBA shortly afterward.
Also in the SBA files is a memo by Ray Harshman, the official who put together the evidence about white control of 8 (a) firms recounting a Dec. 15, 1972, conversation with Dunlap, Harshman's notes say that Dunlap asked him to check the status of three planned federal office building construction projects with a combined value of $12.5 million.
"Dunlap said the reasons he wanted these was that Mr. Bob Brown from the White House was leafing the President's staff and had, or was joining, a company that he owned 60 per cent, and Dunlap wanted these under 8 (a) for Brown," Harshman's notes said.
When Harshman asked if this wouldn't involve a conflict of interest on Brown's part. Dunlap replied "that Mr. Brown was leaving government and would be a private consultant to the President, as would Harry Dent, and would probably be even more influential than if he were to stay."
There is no record that any of these building contracts went to Brown or any other 8 (a) firm. But both of the White House officials mentioned in the memo did ultimately obtain financial benefits from the program - Brown through his food service contract at the Marine base. Dent through his fees from the service contractors' association.
Dunlap still seems to be earning income from the 8 (a) program. In April of this year, the SBA audited California Golden Oak Products, Inc., a Vernon, Calif., company involved in allegations that it misused SBA funds. The SBA found Dunlap listed as a paid consultant to the firm.
As for the 25 firms identified by Harshman in 1972 as under white control, most are still in the 8 (a) program and hold contracts whose total value has swelled from the original $50 million to almost $135 million.
The white sponsors apparently no longer own stock in any of them. But SBA surveillance reports indicate that, as of early this year, most of them were still making sizable payments to their original sponsors for management, consulting and equipment-leasing.