Pentagon's award of a big contract rekindled debate about a Virginia company's 'small business' status
By AARON GREGG | The Washington Post | Published: February 18, 2021
WASHINGTON — In early January, the Pentagon gave six businesses a massive, open-ended opportunity to supply the U.S. war effort.
The Tailored Logistics Support program, known as TLS, exists so military agencies can buy large quantities of items such as weapons accessories, clothing, and diving equipment, relying on a handful of "re-sellers" to connect the government with specialized manufacturers. Without knowing how long America's foreign wars might last, or how much it might cost to keep equipping deployed service members, the Defense Department came up with a generous contract when sizing up the next phase of the program: Up to $33 billion over five two-year increments.
The program's rules require that the re-sellers be small businesses rather than large military-industrial conglomerates. But one of the six contract recipients stands out from the rest.
Atlantic Diving Supply, known as ADS, has historically dominated the logistics program, bringing in more than $3 billion from the federal government in 2020 while its competitors trailed far behind, according to federal contracting data. In one previous year, ADS captured more than 90 percent of the program's contract awards.
Although the Small Business Administration still considers it a small business, ADS has achieved astonishing growth since its early days. In 2011, its parent company filed papers to go public, something that is usually the purview of large corporations. In 2015 it bought a Switzerland-based food supply operation that had offices in seven countries.
And it has repeatedly been accused ― by competitors, suppliers, government officials and others ― of outgrowing a program meant for truly small businesses. In some cases, those criticisms have played into accusations of bid-rigging and fraud. In 2017 the company settled allegations that it fraudulently mis-represented its size status without admitting wrongdoing.
New details surrounding a string of investigations into ADS's size status, including previously undisclosed audits and law enforcement memos stretching back to 2005, are detailed in an in-depth report published Thursday by the nonprofit Project on Government Oversight.
POGO's investigation depicts a business whose fortunes soared as the U.S. military expanded its presence in Iraq and Afghanistan, profiting for more than a decade from a government program meant to give small businesses a foothold in the military supply chain. It also describes how the Defense Department maintained a close relationship with ADS through fraud settlements, questions raised within the Pentagon and an intervention from a U.S. senator.
"POGO's investigation raises troubling questions about whether federal small business programs always truly assist what most Americans would consider small businesses and whether government interests are sufficiently protected when there are credible allegations that companies have defrauded taxpayers," said Nick Schwellenbach, one of three POGO investigators who contributed to the report.
ADS Executive Vice President and General Counsel Adam Casagrande told POGO that ADS has been "completely exonerated, both civilly and criminally" in relation to accusations that it mis-represented its size in order to keep profiting from the Tailored Logistics Support program, according to the report published by POGO. In a separate statement to The Washington Post, Casagrande emphasized that the company's small business status has not been called into question since 2019.
"As previously reported, ADS was subject to an almost year-long audit and investigation by the SBA to determine whether it was a small business pursuant to the requisite rules, and the SBA ultimately found that ADS in fact was and has always been a small business," Casagrande said in an email.
The company's ability to hold onto that status even as its revenue climbed into the billions is aided by how the SBA defines small businesses under the law. The industry sector that ADS operates in does not have any revenue or profit-based regulations in how it defines which businesses qualify as "small" for the purpose of federal contract eligibility.
A business can be eligible to participate in the logistics program as long as it has fewer than 500 employees. As a result, ADS was still classified as a small business even as its revenue skyrocketed. The publicly disclosed portion of its revenue climbed to $3.2 billion in 2019 and held steady in 2020 despite the pandemic. It received a Paycheck Protection Program pandemic relief loan from the SBA, according to public records, and applied to have it forgiven.
Casagrande emphasized that the loan helped ADS offer stable employment to hundreds of families during the pandemic.
"ADS has, and continues to pay its warehouse workers hazard pay on top of their regular pay, and they, also, continue to receive full healthcare benefits for themselves and their families with ADS covering the entire cost," said Casagrande, the ADS general counsel.
Records obtained by POGO through the Freedom of Information Act and shared with The Post show that questions have been raised about ADS's reliance on affiliate companies as far back as 2005, when a Defense Department auditor looked into inflated prices on an order of TREK bicycles the government purchased through ADS.
When pricing the bicycles, the government turned to a company called SEK Solutions to determine whether ADS had offered a fair price, a federal law enforcement memo shows. But the audit concluded that ADS and SEK were affiliated with one another and in fact shared an address. That audit did not lead to any law enforcement action at the time, nor did it cause ADS to lose its small business status.
"It is clear that the investigative authority that referral went to did not find the auditor's conclusions credible, as ADS was never investigated for the accusations made," said Casagrande, the ADS general counsel.
An alleged relationship between ADS and SEK resurfaced years later as part of a federal lawsuit brought by whistleblowers. The lawsuit alleged that the company's employee count was more than 900 when one took into account ADS' "affiliate companies" including SEK.
In 2017 ADS and former chief executive Luke Hillier, who still owns a majority share of the company, separately agreed to pay the Justice Department a total of $36 million to settle related bid-rigging and fraud allegations without admitting wrongdoing.
Those allegations resurfaced again last year despite the settlements. In a February 2020 letter obtained by The Washington Post and separately reported on by POGO, a senior member of the powerful Senate Armed Services Committee referred to ADS as a "fraudulent company" and asked Glenn Fine, then the Defense Department inspector general, to investigate.
Senator Thom Tillis, R-N.C., said the continued awards to ADS may violate federal rules requiring that the government do business only with companies that are "responsible."
"Despite the known wrongdoing and multiple settlements, neither ADS nor any ADS-affiliated official has been criminally prosecuted, suspended, or debarred from doing business with the federal government," Tillis wrote. "More concerning, ADS still is regarded as a trusted federal contractor and continues to win contract awards."
In response, Casagrande said the Tillis letter is "over a year old and has no merit." He later added that ADS has been found to be presently responsible "tens of thousands of times, if not hundreds of thousands of times" by government contracting officers when awarded contracts by various agencies.
A person familiar with the matter confirmed that the DoD Inspector General referred the issue to the Small Business Administration rather than conduct an in-depth investigation of its own. Dwrena Allen, a spokeswoman for the Defense Department Inspector General, said she "could not confirm" whether the matter was referred to the SBA. An SBA spokeswoman declined to comment.
A different SBA audit in 2019 concluded that ADS was so closely affiliated with another business that that company's employees should be included in ADS's employee count, something that would push the company's headcount above the 500-employee cap. That decision temporarily barred ADS from bidding on new small business contracts, but the decision was later reversed after an appeals body determined it relied on old data.
Defense Logistics Agency spokesman Patrick Mackin said that the SBA, not the Defense Department, is the government body responsible for setting size standards and determining whether individual businesses qualify. He noted that his agency had previously raised questions with the SBA regarding ADS's size.
Mackin said the Defense Logistics Agency filed a size protest with SBA questioning ADS's small business status. "In its November 2019 response, the SBA determined that ADS was in fact a small business concern and was therefore eligible to receive small business set-aside contracts in the future."
Schwellenbach, the POGO investigator, said the experience with ADS shows how policymakers should pay closer attention to long-running programs that are meant to help small businesses.
"With the economy still crippled, ensuring that federal small business programs work for companies that really need a leg up and that play by the rules should be an important part of the economic policy agenda," Schwellenbach said.
Casagrande, the ADS general counsel, told The Post that the company's employee count is below 500 even when factoring in its subsidiaries. He emphasized that the company has a robust compliance program and that neither it nor any of its executives have been indicted for any crime.
He also said that "members of the United States Government that would or should know of any such investigations" have assured his company it is "not the object or target" of any current law enforcement investigation.