A contract to oversee up to $12 billion in Space Force technology funds is being held up while the nascent military service evaluates fraud findings from an obscure Texas business dispute, casting fresh scrutiny on an emerging industry of nonprofit companies that handle acquisitions on the government’s behalf.

In early December, the Space and Missile Systems Center, a Los Angeles-based unit of the Space Force, announced it had selected a nonprofit called NSTXL to oversee billions of dollars in contracts over a 10-year period. Its role managing the consortium is similar to an outsourced procurement office, carrying out work that would otherwise be handled by seasoned bureaucrats while other companies receive the contracts themselves.

Such consortium managers have largely escaped the public eye despite their increasing power in military procurement. But the fraud findings are likely to start a more serious conversation regarding their role, and the case has already complicated NSTXL’s relationship with the military.

The Space Force was not aware of the long-running litigation that uncovered the fraud when it evaluated bids, said Space and Missile Systems Center spokeswoman Capt. Caitlin Toner. The agency now plans to delay the contract award so it can “further evaluate” the litigation, Toner said.

The agency “was not made aware of the [Harris County] litigation during our source selection evaluations which were completed prior to the court ruling; however, the SMC team is further assessing the matter,” Toner said in an email.

NSTXL spokeswoman Shelley Tweedy said the organization plans to appeal. She said the ruling has no bearing on NSTXL’s work with the government.

“This preliminary ruling and any judgment that may be entered will not impact NSTXL’s ability to provide its full suite of services in support of the government, its members, and most importantly, the warfighter,” Tweedy said.

The allegations stem from a partnership NSTXL had with an events-management firm in relation to an earlier Navy contract. According to a Nov. 24 civil ruling in the district court for Harris County, Tex., NSTXL sought to sever its relationship with the events firm after the events firm allegedly failed to perform its responsibilities.

NSTXL then resorted to what judge Steven Kirkland called “illegitimate use of the corporate form” to cut the events firm out of its work with the government, a course of action he repeatedly described as fraudulent.

According to the ruling, the work that was supposed to be performed by the events company instead went to NSTXL-NC, a separate organization that had no employees and a weeks-old bank account with $250 in it. At the time, NSTXL-NC had no directors other than NSTXL President Tim Greeff, leading the court to describe it as little more than a pass-through for NSTXL itself.

Kirkland also stated in the ruling that the two organizations had “engaged in a series of activities to attempt to cover-up and hide their misdeeds,” which included submitting false statements to the court in an attempt to dismiss the litigation, according to the ruling.

Tweedy, the NSTXL spokeswoman, emphasized that the Harris County litigation “is not and has never been a fraud case,” arguing that the judge’s use of the word “fraud” to describe NSTXL’s activities “was outside the bounds of the matters presented and not germane to the ruling.” She added that the decision to “use the corporate form” for the Navy contract came at the request of the Defense Department.

The case has raised new questions about NSTXL’s fitness to manage billions of dollars in technology acquisitions for the Space Force, which the Trump administration created in 2019 to ensure U.S. military dominance in space.

It is also likely to bring new scrutiny to an emerging business ecosystem built around a common procurement loophole called Other Transaction Authority, or “OTA,” in which nonprofit consortia like NSTXL have tremendous responsibility.

Ben McMartin, a procurement expert with the market research firm Public Spend Forum, said he was “shocked” to read the Harris County ruling because NSTXL has a good reputation for its work with government customers.

He expressed concern that the actions of one organization could unfairly tarnish the OTA procurement system as a whole, noting that OTA consortia are a diverse community with distinct ways of doing business.

“The result is that the unfortunate actions of NSTXL in this case may very well cast shade on otherwise very successful firms and programs,” McMartin said.

The OTA loophole dates to the early years of the Cold War. Congress built it into the 1958 National Aeronautics and Space Act as a tool for NASA to quickly develop technology prototypes for the space race with the Soviet Union.

It allows federal agencies to bypass most procurement rules in the interest of moving faster. Typical defense contracts are governed by the Federal Acquisition Regulation, an onerous 1,992-page document that incorporates lengthy regulations designed to prevent waste, fraud and abuse of public funds. OTA contracts operate under a different, more abbreviated set of rules.

The OTA system found new life under a Trump administration bent on competing with China. Its use has exploded as the Pentagon looks to develop new hypersonic missiles, missile defense systems, next-generation radars and other defense innovations.

Such contracts are also seen as an innovative way to bring nontraditional defense contractors, such as tech start-ups, into the military’s supply chain. Technology acquisitions being handled by NSTXL include a contract to create homing seekers for hypersonic missiles and defensive flares for U.S. aircraft to confuse oncoming missiles. An earlier Navy contract calls for an elaborate system to spot intruders in U.S. ports by using lasers to measure underwater sound waves.

But there is also a concern that bypassing regulations could leave the government open to abuse, with fewer safeguards to evaluate a company’s record. A controversial $950 million OTA award to an Amazon Web Services partner became an early flash point in a contentious, long-running debate over the Pentagon’s cloud-computing efforts, for example. The contract was slashed to a fraction of its earlier value after complaints from one of Amazon’s competitors led to public uproar.

OTA contracting “is an area that is crying out for more oversight, and particularly at risk for fraud and corruption, or the government entering into agreements with companies that might not withstand scrutiny in the traditional procurement system,” said Jessica Tillipman, an expert in government contracts anti-corruption law with George Washington University.

Others cautioned against making assumptions about the system itself based on the actions of one organization.

Jerry McGinn, a longtime government official who heads the Center for Government Contracting at George Mason University, said the government would be unlikely to get involved in NSTXL’s relationship with another organization.

“NSTXL clearly was using heavy-handed tactics to get out of this agreement, but it feels more like a breach of contract than fraud,” McGinn said.

Scott Amey, general counsel with the nonprofit Project on Government Oversight, said he also thought OTA arrangements need more oversight. But he cautioned against making assumptions based on a single court opinion.

“The case against NSTXL … isn’t an indictment of the OTA procurement vehicle. It is a simple breach of contract claim for not paying a vendor money owed for services rendered,” Amey said. “The court’s opinion implies that NSTXL’s actions might have been intentional, and the court’s decision to award over $8 million and attorneys fees speaks to a serious breach of the contract.”