By Robert O'Harrow Jr.
[ed. An extensive four-part report on Alaska Native Corporations' special SBA 8(a) contracting exemption.]
[ed. An extensive four-part report on Alaska Native Corporations' special SBA 8(a) contracting exemption.]
They came by their holdings in the Sitnasuak Native Corp. as a birthright, when Congress established more than 200 Alaska native corporations, or ANCs, 40 years ago to provide land and money for indigenous people who had long been mired in deprivation and dislocation.
Each of the 75,000 original Alaska native shareholders received a stake in one of the new corporations, which held out the promise of economic development and a better life. The corporations have received extraordinary exemptions that have enabled them to receive $29 billion in federal contracts in the past decade.
But the original promise remains largely unfulfilled.
Native shareholders have gotten relatively little of the contracting largess. In many cases, the bulk of the money and jobs has gone to nonnative executives, managers, employees and traditional federal contractors in the lower 48 states, a Washington Post examination has found.
Under pressure to spend quickly after the terrorist attacks of Sept. 11, 2001, the Pentagon and other federal agencies took unprecedented advantage of the special contracting privileges given to the ANC-owned firms, including the ability to receive contracts of any size without competition. The result was one of the largest contracting booms for a minority group in U.S. history.
The Defense Department and civilian agencies have used the Alaska corporations as a shortcut for a dizzying array of work: intelligence analysis, base security, satellite support, janitorial services, bioterrorism research, computer systems, water tanks in Iraq, support for the drug war in Colombia.
Few addressed the obvious question: How could small, inexperienced native companies handle giant government contracts? The answer was to hire nonnative executives and workers and partner with established firms, including major Pentagon contractors. ANC-owned firms won contracts and passed on much of the work and revenue to the nonnatives and major contractors, audits and other records show.
The spending surge has had little effect on problems afflicting native Alaskan people. Unemployment rates among Alaska natives remain far above those in the rest of the nation. Many still lack indoor plumbing and must get their drinking water from communal "washeterias" and carry their waste by hand to trash cans known as "honey buckets."
Last year, Sitnasuak earned after-tax profits of $14.5 million on revenue of $212 million. But the amount paid to Sitnasuak's 2,238 shareholders was just $305 apiece, a total of $682,000, according to a Post analysis of data provided by the corporation.
At the same time, millions ended up at a consulting firm based in the Bethesda home of H. James Nunes, a nonnative hired to help run the corporation's federal contracting operations, with the approval of the corporation's native president. Nunes got $6.4 million last year. His chief financial officer made $1 million. The executive vice president received $470,000. The chief operating officer was paid $403,000. All are nonnatives.
Nunes's attorneys said he earned his money by making the company profitable. But some shareholders think they should have gotten more.
"I don't know where it has gone," said Sitnasuak shareholder Paul Ongtooguk, an assistant education professor at the University of Alaska at Anchorage. "But it's not in our communities."
That feeling is shared by shareholders in other ANCs that have joined the scrum for federal contracts. The dividends, scholarships and charitable contributions flowing from the federal contracts averaged a little more than $615 a year for shareholders of 19 top ANCs between 2000 and 2008, according to congressional data.
The story of Alaska native corporations is one of good intentions gone awry - and federal authorities looking the other way because it suited their interests. Both Alaska native shareholders and American taxpayers appear to have been shortchanged by the program, according to The Post's examination.
A review of thousands of records and dozens of interviews with native shareholders, ANC executives, government officials and others in Alaska and across the nation found:
l The Washington region, not Alaska, is home to the largest concentration of ANC federal-contracting operations. More than 300 subsidiaries have been created nationwide. Of the 35,000 jobs worldwide, only about 10 percent are filled by Alaska native people.
l Uncounted millions have been paid to nonnative executives, consultants and others who sometimes benefited from inexperienced native officials and a lack of government oversight, according to government audits, legal records and interviews. Over the past decade, executive salaries at some companies have doubled or tripled, with some executives taking home more than $1 million a year, according to a Post review of proxy statements.
l Federal officials and most members of Congress have ignored audits, government investigations and other media reports that warned of higher costs and said that the Alaska firms might be used to inappropriately pass on work to established contractors. The Small Business Administration and other agencies with oversight responsibilities have failed to prevent fraud and other abuses, hampered by a lack of know-how, resources and commitment.
l Federal rules allow most of the Alaska firms to operate in financial obscurity. Only a third are required to file financial reports, which go on paper to a state office in Anchorage. Congress excluded the Securities and Exchange Commission from any oversight role because the shares cannot be sold or traded. Although the federal government keeps tabs on the gross amount of contracts, no authorities track how much goes back to Alaska native shareholders.
"It does make you wonder what the economic development benefit is," said Roger Prince, chief of Alaska's securities section. "You can't know."
In the Washington region, the benefits have been clear. Government agencies saw a way to get things done quickly. Entrepreneurs saw a chance to profit. Bob Malkowski, a former Coast Guard officer who made $563,000 in 2008 as the executive in charge of four ANC subsidiaries in Northern Virginia, witnessed the phenomenon firsthand.
"The whole ANC thing was an epidemic," he said. "I was just astounded. I couldn't believe these rules could be true."
The rules allow Alaska native-owned firms with little experience and staff to take the lead on major government contracts.
In 2000, NJVC was a new joint venture formed by two new Alaska native subsidiaries with 30 employees and little technology expertise. The next year, it received a 15-year contract worth up to $2.2 billion to help manage a Defense satellite program at what is now known as the National Geospatial-Intelligence Agency.
How could a tiny start-up help manage the government's main spy satellite program?
The ANCs immediately subcontracted much of the work to a team of major Beltway contractors, including Lockheed Martin, General Dynamics and BAE.
This was allowed under federal rules, as long as employees of the subsidiaries did 51 percent of the work. But oversight was lax, congressional investigators later found.
In the late 1990s, the SBA delegated much of the responsibility for executing the deals with the Alaska firms to the Pentagon and other federal agencies, a move intended to make procurement more efficient. That included making sure that the firms performed the required amount of work and received the proper amount of revenue.
But audits have found that many of the contracting officers in other government agencies did not know how to track those firms or enforce the rules.
"They have no idea of their responsibility," said Karen Forsland, director of the SBA district office in Anchorage.
Another Alaska native subsidiary shared the lead on a $1.1 billion contract to manage missile and weapons research in Huntsville, Ala. Two other inexperienced subsidiaries received contracts without competition worth nearly a billion dollars to provide guards to Army bases and passed on much of the work to Wackenhut Services and another security giant. The Army knowingly overpaid by 25 percent on the contracts compared with deals for the same work awarded through competitive bids, auditors later found.
Steven Schooner, a contracting law professor at George Washington University Law School, said the unique rules offer "irresistible temptation to exploit the weaknesses in the system" and play "what might be described as corporate 'shell games.' "
In an interview with The Post, the Pentagon's top procurement official, Shay Assad, said that the ANC contracts have boosted the costs to taxpayers because they have been used "for expediency," and "you pay a premium for expediency."
"It's just the nature of how it comes about. We don't have a free and open competition," Assad said. "The program has goodness at its foundation. But because of the nature of the way it is structured, it can be abused."
Even some Alaska native corporation executives now say they think the system is flawed.
"We have seen things that show some organizations have broken the law," said Aaron Schutt, chief operating officer of Doyon Limited, a native-owned company that is the largest land owner in Alaska, with more than 12 million acres in the heart of the state. "We believe reform is both necessary and good."
Sarah Lukin, director of the Native American Contractors Association, defended the Alaska native program, saying that it is fair, beneficial to natives and taxpayers, and self-regulated by the natives through corporate board elections. "These individuals represent the checks and balances of their native corporation," she said.
The Alaska companies by law are allowed to have subcontractors, she said, and assertions that ANCs have operated as fronts "is an irresponsible claim that is false at its core."
Alaska native contracting, she said, "is one of the only native economic programs that is improving the lives of thousands of people while offering the federal government an opportunity to achieve its contracting needs in an efficient, cost-effective manner."
Lukin, an Alaska native, said the corporations have played a crucial role in helping natives move from poverty to self-reliance, providing $171 million in dividends to shareholders in 2008, 66 percent of the profits that year. The dividends vary substantially among the corporations. An additional $35 million that year went to natives through 3,200 scholarships, educational endowments and charitable contributions, she said. And the corporations have built up their equity rapidly in recent years.
"Overcoming generational poverty is not going to happen in 10 years," she said. "You will continue to see improvements in those conditions. But that will not happen overnight."
'A long way to go'
The poverty among Alaska natives stands in stark contrast to the richness of their culture and the raw, stunning beauty of their ancestral lands. Communities across the vast state, from Prince William Sound to the Arctic Circle and the Bering Sea coast, show few signs of the money flowing out of Washington to ANCs.
The village of Buckland, not far from the Arctic Circle, is one example. It is on the banks of the Buckland River in the area of the NANA Regional Corp., subsidiaries of which have received billions in federal contracts in recent years. Most of the weather-worn houses have no indoor plumbing. Some are surrounded by caribou antlers, rusting oil drums, old tires and bulky cargo containers that are used for storage.
Buckland has a post office, a few small stores and a modern school building that serves as an anchor of village social life. Thanks to a small power plant, the homes have electricity, satellite dishes on their roofs and, in some, flat-screen televisions, computers, coffee makers and the like, small luxuries sometimes paid for by the dividends that shareholders receive.
Many native people in the village and across the state still pursue a subsistence lifestyle, hunting for caribou and seal, fishing for salmon, collecting berries off the rolling tundra, gathering driftwood. They supplement the old ways with ramen noodles, soda, ketchup and other items brought in by small planes to the town's gravel airstrip.
Floyd "Herman" Ticket's family keeps water for drinking and washing dishes in a large gray trash can that is refilled by hand. A bright blue plastic "honey bucket" for human waste stands a few paces from the front door.
Buckland is in the process of installing modern plumbing. Ticket, a 50-year-old Inupiaq who served with the National Guard in Iraq and has raised nine kids, said the family is used to carting water and waste. For all of the struggles, he said, "it's good to live in small villages."
NANA has provided assistance to villages across the region, and its dividends have been rising. It has also lobbied state and federal agencies to improve infrastructure, work that is beyond the mandate of ANCs. But NANA spokeswoman Robin Kornfield said there is still much to do.
"I don't believe ourselves to be successful yet," she said. "We've got a long way to go."
One success story is Lucy Boyd, a 24-year-old who went from Buckland to an accounting degree at the University of Alaska at Fairbanks and on to a career in land development with NANA in Colorado. NANA provided $20,000 in scholarship money and care packages along the way.
"Buckland is struggling," she said. But with NANA's support, "we're leaps and bounds ahead of where we would be otherwise."
The Alaska natives, in Nome and elsewhere in the state, continue to lag far behind the rest of the country in measurements of their overall health. Growing numbers suffer from heart problems, obesity and diabetes. They commit suicide at almost four times the national rate, and one study found that alcohol played a role in two-thirds of those deaths.
Last year, researchers at the University of Alaska's Institute of Social and Economic Research found that rapid improvements in the 1970s were fueled by oil exploration and federal spending. The number of natives in poverty dropped from one-half to one-quarter. But things have plateaued, with household incomes remaining flat. Although far more homes have indoor plumbing than two decades ago, the proportion of Alaska natives without toilets as of 2007 is 32 times greater than in the rest of the nation.
Unemployment has hovered officially at three times the national average in recent years, but it's actually "closer to 60 percent," said Stephanie Martin, one of the authors of the study.
"They keep waiting for the jobs," she said. "But the jobs never seem to come."
Unique privileges
The corporations were created under the Alaska Native Claims Settlement Act of 1971. The idea was to help Alaska natives begin "walking in two worlds," as one traditional saying goes, enabling them to create businesses in Alaska while preserving their autonomy and culture.
The law, shaped with input from Republican Sen. Ted Stevens, formally settled native land claims not long after oil was discovered on the state's North Slope.
Instead of setting aside land for reservations as in the lower 48 states, the law launched 13 regional corporations and more than 200 village corporations, giving them almost $1â??billion in cash and claim to 44 million acres of land in Alaska. The corporations were given responsibility for using their share of the cash to build business. Corporations on land blessed with more natural resources had to share some of their revenue with the others.
Things went wrong almost immediately. Some of the fledgling corporations fell prey to inexperience, outsiders and mismanagement. They made bad investments in tourism, paid too much for consultants and went through vast stands of timber and other natural resources, putting some near financial ruin.
After those corporations had lost hundreds of millions, Stevens stepped in again.
In the late 1980s, he pressed for rules allowing ANC subsidiary firms to participate in the SBA's long-standing 8(a) program, through which the government offers "set-aside" federal contracting work for small, disadvantaged and minority businesses.
About the same time, Stevens used his considerable seniority and power in Congress to go even further for the subsidiaries, winning them privileges unique in the federal procurement system.
Congress exempted them from caps - now up to $5.5 million on individual contracts - that other small, minority and disadvantaged businesses have on the size of contracts they could obtain without competition. ANCs could receive contracts of any size, even into the billions. They also are not bound by the $100 million limit on the total amount they can make.
They were also exempted from federal rules requiring "disadvantaged" businesses to be run by executives from the disadvantaged groups. The Alaska subsidiaries do not have to be run by natives or operate in Alaska. They could be run by anybody, anywhere.
Under the new rules, the native corporations could also create an unlimited number of subsidiaries to get government business, as long as the ANCs retained ultimate control, effectively exempting them from rules that restrict small businesses from getting set-aside contracts for more than nine years.
"There is little doubt that we would not have been able to compete if not for some of these provisions," Chris E. McNeil Jr., chief executive officer of Sealaska, a regional corporation in southeastern Alaska, recently told a trade publication.
The emergence of ANCs took place amid sweeping changes that loosened oversight of federal contracts across the government. Clinton-era reforms cut the Pentagon contracting workforce in half, from 461,000 to 231,000, with the idea of saving money and streamlining operations after the Cold War. Then, in the flood of spending after the Sept. 11, 2001, attacks, the Bush administration also pushed a policy to outsource functions to the private sector.
"The government has cut the number of trained, experienced contracting personnel," said Charles Tiefer, a procurement specialist at the University of Baltimore School of Law. "It has lost their expertise at setting up rigorous competitions and checking the fairness of prices."
Over the past decade, as total government spending on contracts rose almost threefold, to more than $550 billion, spending on the Alaska contracts soared tenfold, reaching $5.5 billion last year. The number of subsidiaries grew from 26 to more than 300. Government contracting now provides almost half of the revenue for Alaska native corporations, according to a congressional survey.
At great expense
The drumbeat of warnings began early in the rise of ANCs.
In 2004, the Los Angeles Times and The Washington Post published stories raising questions about multi-hundred-million-dollar contracts given without competition to Alaska native corporations.
In 2006, the Government Accountability Office found "almost no evidence" that agencies were tracking whether ANCs were following the rules and doing the required amount of work. "In effect, the contracts become a convenient vehicle for circumventing open competition requirements at great expense to the taxpayer," Rep. Henry A. Waxman (D-Calif.) said at the time.
Despite the questions about oversight, Stevens and the rest of the Alaska delegation remained steadfast supporters: "I do argue with the interpretation that because that oversight didn't exist, that I was wrong in the first place, or that it was a fiasco on my part," Stevens said. Rep. Don Young (R) called the criticism a "thinly disguised attack on Native Alaskan people" by jealous competitors.
As chairman of the appropriations committee, Stevens had enormous power to punish those who disagreed with him. "No one was willing to speak up and expose the abuses," Sen. Claire McCaskill (D-Mo.) told The Post this year.
In 2008, Stevens successfully fought off an attempt to restrict the program in the Pentagon budget bill. "I am relieved we have once again been successful in defending it," Stevens said at the time. He died in the crash of a small plane Aug. 9 during a fishing excursion and was not interviewed for this story.
In July 2009, the SBA's inspector general's office found that the agency had done little to keep track of the Alaska firms despite the early warnings and suggested that Congress might want to determine whether they had "a substantial unfair competitive advantage" over other small businesses.
That month, McCaskill led a hearing on the program before the Senate subcommittee on contracting, listening to testimony that the native firms were prone to waste and fraud, with exorbitant pay to some nonnative executives.
"From the taxpayer perspective, it's hard to see why the Alaska native corporations should be able to receive enormous contracts with no competition," she said at the time.
Yet the money continued to flow, a record $5.5 billion last year alone.
'Unintended consequences'
Oversight of the Alaska corporations begins with the Small Business Administration, an agency whose mission is both to boost businesses and look out for taxpayers. Repeated audits show that during the past decade, the SBA faltered in its roles, in part because its budget and staff were slashed at a time when the contracts soared to record levels.
Four years ago, auditors criticized the agency for failing to monitor the contracts and for relying on paper records because of insufficient technology. The agency promised to upgrade and do an electronic review.
But The Post found that the SBA still relies largely on paper records maintained in metal file cabinets in Anchorage. Because of cutbacks in the Bush years, the Anchorage office has had on average only three employees devoted to the Alaska native contracting program over the past decade. No electronic reviews have been done.
The SBA initially certifies each new subsidiary but generally does not review their activities or continuing eligibility, relying on an honor system. "Unless we have reason to believe otherwise, we take them at their word," said Anchorage district office director Karen Forsland.
In an interview with The Post, associate SBA administrator Joseph Jordan said that the agency had been working to upgrade its technology and that it had added two employees in Anchorage and trained a third in San Francisco to help monitor the program.
"We came in and recognized right away there was a need for more personnel," said Jordan, who joined the agency last year. "A lot of what we do in the government is done with the best of intentions. But there are unintended consequences."
The task of protecting Alaska native shareholders, including monitoring corporate finances and board elections, fell to the Alaska division of banking and securities, which has struggled with that mandate.
A decade ago, an Alaska state audit found that shareholders had difficulty understanding the annual reports, a problem that persists, said Stephen Colt, an associate professor of economics who studies ANCs at the University of Alaska.
The audit also found that state oversight was "weak," in part because the division had only one person assigned to the task and relied on archaic technology. A recent visit to the office found that there was still only one examiner and that financial records were still being maintained on paper, in a 10-by-12 room.
Jill Farrell, the examiner, said that she and her colleagues were working hard to computerize records but that she had little time to investigate shareholder complaints and allegations of abuses.
"It's just patently ridiculous," Farrell said. "I'm just swimming upstream all the time. We're overwhelmed."
PART TWO
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.
PART THREE
In summer 2008, the U.S. military had a major problem. More than 2,400 service members had reported being sexually assaulted the previous year, and the number was rising. Congress wanted immediate action.
The Army responded by reaching out to a tiny firm in Delaware.
It was an unlikely choice for such a sensitive task. The year before, United Solutions and Services, known as US2, had just three employees and several small contracts for janitorial services and other work. It was based in a four-bedroom colonial, where the founder worked out of his living room.
But the firm had one quality the Army prized: It was co-owned by an Alaska native corporation (ANC) and therefore could receive federal contracts of any size without competition, under special set-aside exemptions granted by Congress to help impoverished Alaska natives.
On Sept. 2, 2008, US2 was granted a deal worth as much as $250 million - 3,000 times the $73,000 in revenue the firm claimed the year before. The contract enabled the Army to quickly fund a wide array of projects, including a global campaign to prevent sexual assault and harassment, without seeking outside bids.
US2 could not do the work by itself, though. With the Army's knowledge, the firm subcontracted the majority of it to more established companies, a Washington Post investigation has found.
Federal rules generally require prime contractors on set-aside deals to perform at least half of the work, something US2 did not do on more than $100 million worth of jobs, according to interviews with Army officials and an analysis of federal procurement data.
In response to The Post's findings, officials at the Department of the Interior, which managed the contract for the Army, said proper procedures were followed in the contract award. But they said in a statement that they have asked the department's inspector general to investigate.
Alaska native corporations were created in 1971 to settle land claims and help improve life for tens of thousands of impoverished native people. Almost 300 subsidiaries have been created to pursue federal work, and they have received more than $29 billion over the past decade, most of it through contracts awarded without competition.
A Post investigation published in September and October found that those contracts often enriched nonnative executives and employees but sent relatively little money back to Alaska. The Post also found that small firms were passing on work to established contractors. Three of the firms highlighted in the series have been suspended from federal contracting work, and legislation curtailing Alaska native privileges has been introduced in the House of Representatives and Senate.
No competition
The US2 deal shows one way federal agencies have increasingly avoided contracting competitions, which specialists say generally get the best deals for taxpayers. And it underscores how small ANC subsidiaries run by nonnatives have benefitted from an unprecedented surge of outsourcing by the military at a time of war.
Army officials acknowledged using the firm to avoid competition, saying they did not have enough time or contracting workers to seek other bids.
"At some point, you don't have time to use the six-, nine-month sort of standard contracting route," said Andrew Jones, chief of budget integration for Army Manpower and Reserve Affairs. "Our internal contract office here, they can't always handle the surge of requirements."
Jones played down the company's lack of experience. "All that prior stuff is irrelevant," he said, because the firm has delivered solid results.
Told about US2's contract, Rep. Henry A. Waxman (D-Calif.), who examined the ANC program four years ago, said: "It's a misuse of taxpayers' dollars. . . . This is an egregious example, but I fear there are many others."
The contract also illustrates the contrast between the money flowing to nonnative executives and subcontractors working for ANC subsidiaries in the lower 48 states and the profits that go back to Alaska.
US2's Alaska native corporation parent, Cape Fox, received $641,000 of the net income last year from US2, according to internal financial records provided to The Post. That represented 1 percent of US2's $61.7 million in revenue.
Stephen Hadley, the nonnative chief executive operating out of his living room in Delaware, received $615,000 last year as 49 percent owner of US2. That amount does not include his salary, which he declined to disclose. William Walker, an attorney for US2 and Cape Fox, said Hadley's compensation agreements were approved by the Cape Fox board. Walker said US2's profits "played an integral part" in providing benefits to Cape Fox shareholders, contributing to a total of $5.2 million in dividends since 2001.
Hadley said he has worked hard to build US2.
"When I got into the 'federal world' and realized that I had a chance to be entrepreneurial, do public service and help out the Alaskan natives, I fell immediately for the challenge," he said. "I am very proud of what we have accomplished. All it took was a good plan, lots of luck, perseverance, people willing to take a chance and God's will to make it happen."
Procurement specialists said arrangements in which prime contractors pass on a majority of the work to subcontractors typically add costs to taxpayers as each layer takes a share of the revenue. Costs can rise further if the contract is awarded without competing bids. US2 and Cape Fox officials said that is not the case for their work.
"Contrary to your misinformed view, this contract is an example of the way in which the government can solicit strong results on the part of federal contractors to ensure taxpayer interests are effectively represented," Walker said.
Army officials said the firm has done uniformly good work at a good price. But they declined to provide documentation.
"This is one of the things that's going right with contracting," said Walter Wood, a contracting official for the Army.
Creation of a contractor
For its first three decades of existence, US2's parent, Cape Fox, was primarily a logging operation. But its forests became depleted, and ventures into tourism, real estate and other areas were unprofitable.
Company executives turned to federal contracting. In late 2004, Hadley launched US2. Cape Fox owned 51 percent of the new company, qualifying it under federal rules to receive the contracting benefits bestowed on Alaska native corporations.
Hadley has long lived in Delaware, but under the unique rules approved by Congress, ANC subsidiaries do not have to be run by native executives or operate in Alaska. US2 has no native employees.
Hadley spent much of his career at Delmarva Power & Light, working as a lineman, field supervisor, training supervisor and project manager. He has had management jobs with other firms, including another ANC subsidiary.
US2 was registered to do business in Delaware, with its base at Hadley's home in Hockessin.
Federal records show that from 2005 to spring 2008, US2 had $33,000 in revenue, just under half for janitorial services. Hadley and Cape Fox officials said the amount is more than $100,000, but that figure is not reflected in the online Federal Procurement Data System.
In April 2008, the firm's fortunes began to improve. It received a no-bid contract from the Army potentially worth more than $7 million for "professional, scientific and technical services." Three months later, the company received a $22 million construction contract without competition to build a 15,000-square-foot Army Experience Center, a high-tech facility in Philadelphia intended to support Army recruitment.
Walker said that job made US2's reputation inside the Pentagon.
"As a result of US2's successful work on this project and other previous contract awards on behalf of the U.S. Army, the company earned a reputation as a quality, reliable contractor," he said.
At the time, the Army was under pressure to address the more than 2,400 reported sexual assaults each year in the military.
On Sept. 2, 2008, US2 received the contract for $250 million over five years to provide human resources and technical support to the Assistant Secretary for Manpower and Reserve Affairs.
Under the contract's broad terms, jobs quickly began flowing to the small firm, including the Sexual Harassment and Assault Response and Prevention Program (SHARP). In a few days at the end of September 2008 alone, the Army issued $42 million worth of task orders. Nearly all of the Army spending so far - 97 percent of about $143 million - has been approved in the last few days of the past three fiscal years, federal procurement records show.
The work has included advising a reality television production about Army life, a video about Walter Reed Army Medical Center, diversity training and a technology help desk project worth tens of millions of dollars.
In 2009, US2 was asked to provide support to a program to identify 145,000 servicemen and -women, veterans and their beneficiaries who were eligible for special "stop-loss" pay for serving extended tours in Iraq and Afghanistan. This year, the Army has used US2 for programs that deal with drug and alcohol abuse, suicide prevention, traumatic brain injury and post-traumatic stress disorder, according to the Interior Department. US2 also provides support services for the U.S. Army Medical Command.
Farming out the work
The Army is using US2 so extensively that the ceiling on the contract was raised by 50 percent, to $375 million, documents show.
To perform all those jobs, US2 said it has relied on a constellation of subcontractors, including Summit Marketing Group, General Dynamics Information Technology, the nonprofit government contractor LMI and the public relations firm O'Keeffe and Co.
Hadley acknowledged that US2 does not have the experience in-house to do all the work. "We hire people to do that," he said.
O'Keeffe and Co. founder and principal Steve O'Keeffe devotes six to 20 employees to SHARP each month but declined to say how much his company is paid.
Documents obtained by The Post show that for the SHARP project, US2 and its subcontractors proposed charging between $55 and $309 an hour for labor.
Jobs included program manager, account supervisor and copywriter. In one document, US2 said it would cost the government $1.1 million for a subcontractor to produce 6,495 "public affairs kits," at $170 each. A video production was to cost $500,000.
Walker said the rates "have been audited by the Defense Contract Audit Agency (DCAA) to ensure they are fair and equitable for the U.S. government. Further, it would be inaccurate and inappropriate to estimate or project from these hourly rates any gross annual income received by US2 personnel."
Summit Marketing chief executive Daniel Renz said his firm has provided five to 15 employees on a variety of jobs, including SHARP, stop-loss and other programs.
Hadley said US2 had 18 employees at the time the $250 million deal was awarded. It now has about 96 employees who work at several military facilities, he said.
The company leases office space in Reston from Native American Management Services, another native contractor. Hadley said he works some days in his living room in Delaware and some days in Reston. US2's Web site says it maintains program offices in Paris, Tex., and Chambersburg, Pa.
Federal rules generally require that ANCs do at least 50 percent of the work on service contracts, but Army officials and Hadley said that US2 began meeting that threshold only in June.
Walker said no one expected the firm to do more than half the work immediately, because it is operating in a "business development program" at the Small Business Administration, which oversees the ANC program.
"The fact that our use of subcontractors is diminishing and that by the end of the contract, we will have complied with all performance requirements shows that the program works as intended," Walker said.
In a statement, the SBA said that under the type of contract US2 has with the Army, a firm "must have performed the applicable percentage of work (50%) with its own employees in the aggregate at any point in time."
PART FOUR
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.”
Alaska corporations
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.
Joint ventures
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.”
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