New Orleans Mayor Mitch Landrieu hopes to make contracting more fair, and to help local businesses. (Flickr, dsb nola)

This week, The Washington Independent is featuring a series of investigative stories on the rebuilding of New Orleans, five years after Hurricane Katrina. Find all of them here.

Two weeks before the fifth anniversary of Hurricane Katrina, New Orleans’ mayor, Mitch Landrieu (D), just three months into his tenure, made a major announcement. A hundred recovery projects, from libraries to fire stations to parks, were ready to go after years of red tape and implementation scandals.

[Environment1] “I can say this with certainty: that these 100 projects are a priority in somebody’s mind in the city, that they are 100 percent funded, that they are part of the city’s long-term master plan and will be built, or are in the process of being built,” Landrieu told The Times-Picayune. “Some of them are further along than others. But you can take these to the bank.”

In a city that has long suffered from halting and ineffective efforts to contract municipal recovery funds, the news came as a welcome relief. It stoked hopes that Landrieu’s administration would offer a clean break from Mayor Ray Nagin’s (D) fraught eight-year tenure. “I think this city is ready to soar,” declared City Council President Arnie Fielkow.

But as the mayor gets ready to cut ribbons and break ground, a number of local labor and anti-discrimination groups are voicing worries that the new projects will not benefit the city’s local businesses. Their concerns center around the city’s Disadvantaged Business Enterprise (DBE) program, intended to make good-faith efforts to help local, women, and minority-owned firms secure city contracts. Wary due to rampant cronyism and corruption in the past, leaving local companies adrift, the NAACP and other groups are seizing on Landrieu’s announcement. For them, turning around the DBE will be the litmus test for success.

Even before Hurricane Katrina wreaked havoc on New Orleans, activists and businesses charged that the city had an opaque and cronyism-ridden system for awarding building and contracting deals — a major hurdle for local firms. The Bureau of Governmental Research, a private, independent research organization released a major report entitled “Contracting with Confidence” to call attention to the matter and make recommendations in March.

“An $81 million energy efficiency contract saddled the city with two decades of excessive payments and resulted in the convictions of an administration official, political supporters, and contractors who skimmed money from the deal,” the report said in its lengthy summary of recent examples of political patronage. “A contract for home monitoring of municipal offenders went to a politically connected firm that possessed no experience providing the service and that scored lowest on the city’s evaluation of proposals. The public paid 60 percent more to install and manage electronic parking meters than it would have had the city contracted with the firm that scored highest in the city’s own evaluation. A post-Katrina car removal contract went to the most expensive of 14 bidders through an evaluation process that did not account for the cost of services. The list goes on.”

Former Mayor Ray Nagin was implicated in the political patronage system as well after revelations that his family vacationed in Hawaii and Jamaica due to the largess of Mark St. Pierre, who held numerous city technology contracts. Later, St. Pierre was indicted, along with Greg Meffert, Nagin’s chief techonology officer, on 63 federal counts of bribery, money laundering, tax evasion and other crimes.

In the wake of the hurricane, when federal recovery money began pouring in and outside firms often secured work for complicated projects, rather than local businesses, the city’s opaque methods and history of corruption ginned up anger and outrage from an underemployed citizenry. Particularly troubling in the eyes of local business owners, particularly black business owners, was the persistent sense that the city was allowing the money to be funneled to out-of-state contractors who made little effort to hire local businesses.

“We’re dealing with local contractors on a daily basis and they’re not getting the work,” argues Barry Kaufman, secretary treasurer of the Construction and General Laborers Union Local 689. “There are more out-of-state contractors in here than holes in cheese. Local contractors are being low bidded by out-of-state contractors. It’s a shame how [Nagin] let that happen.”

When, in February 2009, the New Orleans City Council passed an ordinance that required Nagin’s closed-door review panels to meet in public, the mayor vetoed the bill and later issued an order that scrapped the evaluation panels altogether. That process, or the lack thereof, remained in place until Landrieu assumed office in May and made contracts reform a signature priority of his administration.

In addition to restoring transparency and expertise to city contracting, Landrieu’s administration also tried reaching out to disillusioned local groups. The mayor set up a “provisional certification program,” which allowed businesses certified as “disadvantaged” by state and other agencies to compete for city contracts alongside City Hall’s previous designees. He also created an Office of Supplier Diversity, tasked with enforcing city ordinances and implementing programs like DBE.

These new programs and agencies, however, have yet to perform up to expectations. A report on DBE released by the city’s Office of the Inspector General in early August made a number of damning observations about its effectiveness, including, “(1) that the personnel responsible for implementing this program did not have a clear understanding of the applicable legal standards; (2) that the certification procedure implemented did not have written rules or comply with open meeting laws; and, (3) that the responsible office lacks sufficient staff and funding to carry out its intended functions.”

The Inspector General’s observations, the report noted, reflected more on the failings of the DBE program over the years than any of Landrieu’s specific efforts, but they also highlighted that, thus far, progress has been substandard. Groups like the NAACP seized upon the report, voicing fears that the administration is faltering on its promise to help New Orleans-based and minority-owned businesses secure contracts on new recovery projects.

“We have requested documentation from the city on previous contracts, but our focus right now is not what has happened in the past but on the one hundred projects just announced by Landrieu,” explains local NAACP chapter president Danatus King. “That’s a billion dollars worth of projects that the mayor publicized in the media last week. No matter what happened in the past, we want to make sure the law is enforced with respect to that.”

In order to keep tabs on all the contracts, King and other leaders have demanded that the city gather records for all its contracts — and all the required documentation contractors are required to submit for them — in publicly accessible folders that volunteers can access and use to monitor for compliance. “If the city doesn’t have the manpower to do it,” King explains, “we’re asking for citizens to get involved.”

Neither the city nor activists possess data on whether New Orleans is complying with an ordinance requiring that half of public spending go to locally owned companies and 35 percent to “socially and economically disadvantaged businesses.” It is not even clear which businesses qualify as “socially and economically disadvantaged.” While the ordinances originally included race- and gender-based criteria, the Supreme Court has since declared such rules to be unconstitutional. As a result, the city has tinkered with its certification process over the years but has yet to come up with firm criteria.

And while the DBE participation goals are “aspirational” in nature, the paperwork required to demonstrate a good faith effort in achieving them is not. Despite this fact, the Inspector General’s office noted that the current panel that approves companies for the city’s DBE program holds monthly meetings that are not advertised and are not open to the public — nor is there an adequate avenue of appeal if a business’s application is rejected. Moreover, the city’s Office of Supplier Diversity currently has only one employee, who has no time sufficiently monitor or enforce compliance on the part of contractors with the DBE program’s participation goals.

The mayor’s office announced earlier this year that it would undertake a “disparity study” to begin putting numbers on the debate. (The office declined to speak to TWI about the issue.) In the meantime, businesses, unions and activists remain unconvinced.  “I can tell you at the Langston Hughes school right over by the race track,” notes Kaufman, of the Construction and General Laborers Union Local 689. “This contractor from Biloxi, Miss., built that school. You’re telling me, with all the local contractors in New Orleans, we can’t build a school?”

“I think there’s one person in the office [of Supplier Diversity], but that’s no excuse,” he notes. “I think they’ve been doing this for years and years, and I think it’s business as usual. I hope it changes. We’re going to give Landrieu an opportunity to prove us wrong.”

According to the Council of the Inspectors General on Integrity and Efficiency, there were only 4,296 suspensions or debarments of contractors and individuals in fiscal year 2007, which was down from the 7,300 in FY 2006 and the 9,900 in FY 2005. All federal agencies under-utilize suspension and debarment against large contractors that supply the majority of the $530 billion worth of goods and services to the federal government each year. In fact, there have only been a handful of large contractors suspended since the 1990s – GE (for a period of five days), Worldcom, Enron, Arthur Anderson, Boeing (which received multiple waivers to receive new contracts during its suspension), and most recently IBM (for a period of eight days in 2008).

Basically, there are a number of Bad Contractor lists that apparently get ignored by contracting overseers, so even if Blackwater gets placed on one of them, that still won’t guarantee that it won’t get future government work. The system is basically set up to make it difficult to kick bad contractors out of the running. Which is pretty close to the dictionary definition of corruption.

Update: Very sorry for misspelling Amey’s name initially. Clearly Dick Armey rules my world.

Chinook helicopters fly over U.S. forces in Afghanistan (U.S. Army photo)

Former employees of ArmorGroup, the private security company that holds a State Department contract to protect the U.S. Embassy in Kabul, unveiled new allegations against the besieged contractor a week after photographic evidence emerged of its guards engaged in physical and sexual harassment. In a press conference revolving around an unlawful-termination lawsuit filed against ArmorGroup, former senior company officials said ArmorGroup was aware of widespread fraud; intentional use of non-English speaking guards to save money at the expense of embassy security; operations of a shell corporation in order to win contracts intended only for American companies; and even involvement in prostitution — and that the State Department knew about at least some of the company’s illicit practices.

Illustration by: Matt Mahurin

The allegations came from John Gorman, a former manager of ArmorGroup’s Kabul contract, and James Gordon, the former director of operation’s at ArmorGroup’s North American branch, headquartered in McLean, Va. Gordon, who yesterday sued the company for wrongful firing in federal court, spoke by teleconference from Kabul, where he said he was employed by an unspecified security company. Gorman and Gordon’s revelations come after the Project on Government Oversight wrote to Secretary of State Hillary Rodham Clinton last week detailing accusations of fraud in ArmorGroup’s $189 million contract; and a year after their former colleagues and fellow whistleblowers, James Sauer and Peter Martino, filed a similar lawsuit.

Both Gorman and Gordon said ArmorGroup intentionally misrepresented its cost requirements to the State Department’s Bureau of Diplomatic Security in order to win the contract to protect the embassy when it was initially put up for bid in 2006. Gordon’s lawsuit alleges that Michael O’Connell, ArmorGroup North America’s vice president of operations, emailed Sauer on March 11, 2007, “AGNA bid this at a very low price and a very low margin,” adding the next day that the timelines and resources given to State in its proposal “don’t match up,” but it wasn’t “a big deal unless” the State Department contracting officer’s representative “calls us on it.”

One immediate consequence of the emphasis on hiding fraud, Gordon said, was hiring Nepalese guards, known as Gurkhas, who did not speak adequate English to guard the embassy. “It was impossible to safeguard the embassy with a guard force that couldn’t communicate with one another,” he said. “I was told that no language test had ever been given. I immediately reported this violation to the Department of State. To this day, AGNA has not corrected the problem.”

The Washington Independent reported on Friday that ArmorGroup’s predecessor on the embassy security contract, MVM Inc., lost its contract in 2007 precisely because the Gurkhas it hired spoke inadequate English. Gordon said it was “common knowledge” within ArmorGroup why MVM had lost its contract, but persisted with the inadequate guards anyway. Gorman added that ArmorGroup also misled the State Department about hiring male and female interpreters familiar with all Afghan and coalition languages, but “no such people existed.”

Gorman, a retired Marine who now works as an addiction counselor in Connecticut, was fired from ArmorGroup’s Kabul office on June 13, 2007, after he, Sauer and Martino prepared a formal report for the Regional Security Officer of the embassy, Nick Pietrowicz, detailing numerous breaches of contract that he said compromised the security of the embassy. Among them: recruiting people who had inadequate military records and other identification, and “one individual who had been fired from a previous project for pulling a pistol on another employee while drunk.” Gorman said that he felt personally endangered, as he was jeopardizing a $187 million contract in Afghanistan and another security contract with State worth $500 million in Iraq. “Not popular” was how he described himself with his ArmorGroup colleagues. Pietrowicz, a State Department officer, found the prospect of violent retaliation against the whistleblowers so acute that he “asked if we wanted to stay in his apartment on the embassy compound,” Gorman said.

Gordon, a citizen of New Zealand and a military veteran, issued a variety of new allegations against ArmorGroup. He said ArmorGroup’s logistics manager spent contract funds to purchase “counterfeit North Face jackets and Altama boots” for the guards from his wife’s company in Lebanon, which “could never keep the men warm during the cold winters in Afghanistan,” and the company ignored a State Department order to fire the manager after Gordon informed State of the abuse. Similarly, ArmorGroup succeeded in getting money released from the State Department to uphold a fleet of beat-up vehicles used to transport guards that were colloquially known as “white coffins.” But “the money was immediately transformed to ArmorGroup International [and] the escort vehicles were never bought,” Gordon said.

Perhaps most seriously, Gordon said that he found out that both guards and even ArmorGroup program manager Nick Du Plessis were regularly frequenting brothels in Kabul. “Many of the prostitutes in Kabul are young Chinese girls who were taken against their will to Kabul for sexual exploitation,” Gordon said. Federal contracting regulations designed to support the Trafficking in Victims Protection Act prevents contractors from “procuring commercial sex acts during the period of performance of the contract,” meaning that ArmorGroup could lose its contract if State learned of the violation. Yet Gordon’s lawsuit alleges he was shut out of an investigation into the solicitation of prostitutes at the behest of Armor Group’s London-based parent company, despite recurring evidence that ArmorGroup employees continued to solicit prostitutes and perhaps even run their own prostitution services. A trainee boasted to Gordon “that he could purchase a girl for $20,000 and turn a profit after a month.”

Gordon said that he “immediately notified the State Department” and ArmorGroup North America’s president, but “to my knowledge, neither AGNA nor the State Department conducted a follow up investigation.” In July 2008, despite repeated formal warnings from the State Department about inadequate fulfillment of contract responsibilities, the State Department re-awarded the embassy security contract to ArmorGroup. The State Department’s inspector general, Howard Geisel, opened an investigation into the ArmorGroup contract last week.

Neither ArmorGroup nor the State Department responded to requests for comment on the lawsuit or the allegations made by Gordon and Gorman by press time, but The Washington Independent will print whatever responses it eventually receives.

A lawyer for Gordon, Janet Goldstein, said the pattern of ArmorGroup International squelching inquiries from employees of ArmorGroup North America, alleged in the lawsuit, suggested that ArmorGroup North America is “essentially a shell company” existing to “acquire, bid on and award contracts that have to be awarded to a U.S. company.”

Gordon alleges in the lawsuit that while he was not formally fired, he was pushed out of the company in February 2008 after leaving him “with nothing to do but sit in my office and play solitaire.” He is not suing for any specific dollar figure, and his lawyers said his lawsuit was an attempt to get the State Department to redress concerns about ArmorGroup’s embassy security contract that still exist.

Gorman said that he disbelieves that ArmorGroup is adequately protecting the Kabul embassy today, despite both company and State Department assurances that it is in no danger. “They need to say that because if they say the embassy is insecure, they give a green light to the Taliban,” he said.

–

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Treasury Secretary Timothy Geithner (WDCpix)

As the Wall Street bailout nears its first anniversary, the controversy over giving public money to private banks has become public knowledge. But an equally risky aspect of the financial rescue has flown largely under the radar: the government’s reliance on private contractors – many with potentially significant conflicts of interest – to help revive the stalled economy.

The Treasury Department knows that the law firms and investment managers hired to aid its salvage effort could be influenced by their ties to bailed-out banks; in fact, the department released a rule in January aiming to mitigate the problem.

That rule, however, has raised questions from watchdogs by asking contractors to identify and police their own conflicts of interest. And a careful review of bailout hiring agreements reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government.

Illustration by: Matt Mahurin

“It’s just a wonderfully closed circle,” Simon Johnson, former chief economist at the International Monetary Fund and leading critic of the bailout, said in a recent interview.

“They’ll sell you on this line that there’s a scarcity of talent,” so contractors must be plucked from Wall Street and remain part of its culture, Johnson continued. “It’s the same argument they’re using to explain why they’re appointing a Goldman Sachs lobbyist as [Treasury Secretary Tim] Geithner’s chief of staff. That’s part of how the club thinks.”

Can these contractors guide the bailout with the public interest in mind while simultaneously courting bailout-related business for themselves? It’s tough to say, but imposing greater transparency requirements is crucial, according to more than a dozen financial and legal experts interviewed for this story.

Right now, even as more of these lawyers and financiers are helping with the financial rescue, less is being disclosed about their handling of taxpayer-owned assets. Investment managers are setting values for securities that their companies may also hold privately, while law firms are approving government aid for companies they still represent in certain cases – but the public remains almost completely in the dark.

The Investment Managers

Consider the case of AllianceBernstein. Like many investment management firms, Alliance did not have a good 2008. Assets dropped by more than 40 percent, net income fell by one-third and the company was forced into its first layoffs in 35 years.

Yet things were looking up by late April, thanks to the Treasury. Alliance was one of three firms the department chose to monitor the assets and debt of banks receiving bailout. Its contract involves Alliance in highly sensitive issues, from executive pay limits to the execution of government stock warrants.

“We expect this to be an attractive proposition from a profitability point of view,” CEO Peter Kraus told analysts as he announced the news.

But Alliance executives also told analysts that the firm plans to apply for the Treasury’s Public-Private Investment Program, which could allow the firm to leverage its look at banks’ balance sheets into profits down the road.

If Alliance joins the PPIP, the company could partner with private investors to purchase the same types of mortgage-backed securities that it’s also handling for the government – thus earning a double windfall when the market value of those mortgage-backed securities increases.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program warned of this potential conflict in his most recent report to Congress: “transactions in these frozen markets will have a significant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefit anyone who owns or manages the same asset, including the [public-private program] manager who is making the investment decisions…”

Under the Treasury’s conflict-of-interest rule, Alliance and its fellow contractors (FSI Group and Piedmont Investment Advisors) are only required to step aside from managing assets owned by a bailed-out bank if that bank’s assets provided more than 5 percent of the firm’s most recent annual revenue.

The contracts signed by Alliance, FSI and Piedmont, posted on the Treasury’s website, acknowledge six potential conflicts of interest and suggest how each can be worked around. Yet Treasury did not reveal which banks’ assets were given to which contractor, or even whether the investment managers are doing anything with the securities they’re being paid to watch.

An Alliance spokesman declined to comment when asked how the firm is working out any conflict-of-interest risks it may face.

“The whole idiocy of this,” Chris Whalen, co-founder of the banking risk-management firm Institutional Risk Analytics, said during a recent conversation, “is that the administration would even have these firms pretending to manage this stuff, giving them subsidized deals.”

Alliance is now poised to value assets once held by Merrill Lynch – the same company that paid Alliance CEO Kraus a $25-million bonus for three months of work. Kraus’ bonus, distributed just before Merrill was sold to Bank of America, was part of a $3.6 billion pot that is now under investigation by the New York attorney general and the Securities and Exchange Commission.

A Treasury spokesman did not respond to several requests for comment on conflicts of interest, but did point to its January regulation as evidence of the government’s action on the issue and awareness of possible problems.

The Law Firms

The risk of conflicts of interest is not limited to asset managers sitting on toxic mortgage-backed assets. Simpson Thacher & Bartlett, the prominent New York law firm chosen in October to be the chief legal adviser to the TARP, has a long history of shepherding mergers and acquisitions in the banking industry, particularly during the housing bubble’s halcyon days.

Before the bailout began, Simpson Thacher had advised Washington Mutual on avoiding insolvency and the board of AIG on winning help from the Federal Reserve. Come the crash, however, the law firm was put in charge of setting terms for the government’s investment in major banks – on the opposite side of the table from the banks it once helped make mighty.

Simpson Thacher’s original contract, signed in October, did not mention the need to work around or waive conflicts. When the law firm agreed to expand its bailout work in February, however, that pact stated that Treasury “HAS NOT WAIVED any potential conflicts of interest” – giving the government room to make case-by-case decisions if problems arose.

Yet the law firm’s contract, however, appears to allow an inherent conflict of interest: The Treasury cleared Simpson Thacher to continue representing private clients participating in “other programs in support of the [bailout]” – non-TARP initiatives such as the PPIP or the Term Asset-Backed Securities Loan Facility.

In fact, Simpson Thacher senior partner Lee Meyerson, whose pivotal role in the TARP made him American Lawyer’s No. 4 “Dealmaker of the Year,” continued to advise private-equity clients on how to snap up failing banks while he worked on the bailout. When Florida’s BankUnited collapsed last month, costing the government $4.9 billion, three private equity firms represented by Meyerson swooped in to take over the property.

Simpson Thacher did not respond to repeated requests for comment about the language in its Treasury contract and on its internal mechanisms to prevent conflicts of interest.

“These firms are making up the rules [of the bailout] and advising private clients about the rules,” Yale Law School professor Jonathan Macey, a banking specialist and author, said in a recent interview.

“The problem is, No. 1, this means we lose the appearance of fairness,” he continued. “And, No. 2, there’s a very strong inclination for the people making up the rules to be sympathetic to their own clients as opposed to other people’s clients when they’re writing the rules.”

Davis Polk & Wardwell, another law firm turned Treasury contractor, was so closely involved in drafting Geithner’s proposal for “resolution authority” to wind down non-bank institutions that when members of Congress received the Obama administration’s draft proposal on the topic, it still bore Davis Polk’s computer signature. Ironically, Davis Polk turned down a chance to apply for Simpson Thacher’s first bailout contract – citing the risk of conflicts of interest.

At the Federal Reserve

The Treasury is not the only bailout administrator that has come to lean on contractors.

BlackRock, which manages a $1.3 trillion asset portfolio that ranks largest in the world, was hired for three no-bid deals in October by now-Treasury Secretary Geithner, then president of the Federal Reserve Bank of New York.

Geithner assigned BlackRock to supervise toxic assets once held by Bear Stearns, as well as those held by AIG – deals worth at least $71.3 million over three years. Yet BlackRock, like Alliance, plans to participate in the Treasury’s PPIP, again offering the firm the possibility of benefits based on its knowledge of AIG and Bear’s exposure.

Lawmakers in both parties have raised concerns about BlackRock’s conflicts, as The New York Times reported earlier this month. But Charles Hallac, a founding partner of BlackRock and the head of its risk-advisory arm, BlackRock Solutions, said such concerns are unfounded.

No BlackRock analyst managing the AIG and Bear holdings will take part in the PPIP, or “any kind of program where they’re using government funds to make money for clients, Hallac explained in a telephone interview.

BlackRock was selected because of its expertise in separating its investment business from its risk-advisory business, Hallac added. “We didn’t want to show this to anybody who was going to try to make money in the markets with this information. So we created a separate team within BlackRock Solutions to just manage the Fed portfolio.”

However, he said some employees in line to work on the PPIP have helped with a separate Fed program that involves buying up mortgage-backed securities.

The financial world often uses the anachronistic phrase “Chinese wall” – a phrase that came into wide use after the 1929 stock market crash – to describe an investment firm’s internal efforts to isolate compromising information.

To a certain extent, then, the debate over conflicts of interest at BlackRock and other firms depends on whether you believe Chinese walls can survive in the age of BlackBerries and blogs.

“Let’s be honest, it’s bullshit. They don’t exist,” Barry Ritholtz, the CEO of the independent research firm Fusion IQ and the creator of the Big Picture financial blog, said in an interview. “They’re a theoretical, abstract legal construct that looks and sounds good when you’re developing legal constructs.”

One hedge fund manager, who requested anonymity in order to speak candidly, said he is more concerned bailout contractors’ access to Geithner and Federal Reserve Chairman Ben Bernanke.

“The public-private cooperation that’s going on – not just in the PPIP – ought to be very unsettling to people,” the hedge-fund manager said. “These guys are on the phone with Geithner, Bernanke, with everybody who matters and is setting policy in Washington. And at the same time, they’re trading their own books.”

While bias among these government contractors is undeniably problematic, some experts asserted that it is also unavoidable. As this argument goes, if the government ruled out firms that did significant business with a bailed-out bank, there would be no one left to hire.

“Because Treasury doesn’t have the in-house expertise, it’s inevitable that they would have to contract out,” said Campbell Harvey, a professor of international business at Duke University. “It’s also inevitable that there will be conflicts of interest. If you’re qualified, then almost by definition, there’s a conflict of interest.”

William Seidman, former chairman of the Resolution Trust Corporation (RTC), which led the recovery effort after the 1990s savings-and-loan crisis, offered a sharp contrast to Treasury’s current opaque bailout contracts.

Seidman said he racked up large auditing bills to ensure that his contractors were complying with conflict-of-interest rules. “Occasionally we had transactions that we didn’t make public for some sort of public-policy reason, but … most we had to report to Congress,” he said in an interview shortly before his death on May 13.

“It was expensive,” Seidman added, “but the program had so much potential for fraud or conflict that we thought it was essential.”

Elana Schor is the Washington correspondent for Streetsblog, a news Website focusing on sustainable transportation and infrastructure. She has formerly covered Congress for The Hill and The Guardian.

[T]he stimulus bill fails to adequately protect employees of government contractors, who are in the best position to blow the whistle on fraud and abuse of taxpayer money. The Senate version of the bill also doesn’t protect federal employee whistleblowers — an odd oversight given that state and local employees are protected. And neither version explains how the government is going to ramp up its own hiring quickly enough to oversee and coordinate all these new government contracts.

Today, President Obama took a big step toward rectifying these problems when he signed the Federal Enforcement and Recovery Act of 2009 (pdf) into law, extending broad new protections for employees of federal contractors and subcontractors who shed light on fraud.

The National Whistleblowers Center released a statement praising the new legislation:

This new law fixes problems in the False Claims Act, extends whistleblower protections to those who work for contractors and provides new funds for the government to investigate fraud.  Most significantly, the Act overturns the recent Supreme Court decision in Allison Engine,  which created a major loophole allowing government subcontractors to escape liability under federal anti-fraud laws.

“This is a great day for whistleblowers and a bad day for those who would defraud the government,” Stephen M. Kohn, Executive Director of the NWC.

“President Obama has taken a significant first step in changing America’s whistleblower laws.  We hope he continues to fulfill his campaign promises on this issue,” Kohn stated.

“Congress and the President did the right thing.  Billions and billions of dollars in new government spending has been authorized.  The taxpayers need the strongest possible anti-fraud laws in order to prevent financial recovery monies from being looted.  Every major study documents that whistleblowers are key to fraud detection.  This law is designed to encourage whistleblowers and reward them for their sacrifices.” Kohn added.

Among other provisions the new law:

• Fixes the loophole which allowed companies to use subcontractors to escape from liability under federal anti-fraud laws;
• Extends whistleblower protection to contractors, sub-contractors and agents who report fraud.
• Eliminates the requirement for “specific intent” created by the Allison Engine Supreme Court decision. Previously the Supreme Court required proof that a sub-contractor specifically intended to defraud the government in addition to showing a certification was false. Now it will be possible to sue under the False Claims Act if a subcontractor knowingly uses a false statement and obtains payment. This eliminates the ability of a sub-contractor to hide behind a prime contractor in False Claims Act cases.
• Permits whistleblowers to expose fraud whenever Government money is at stake. This provision in the law is a rebuke to a decision issued by Chief Justice John Roberts, when he served on the federal appeals court. In that case, Totten v. Bombardier Corp., Judge Roberts ruled that taxpayers could not recover for fraud committed against Amtrak, even though it was the taxpayer who paid the final bill.

“We are especially happy that the new law will extend whistleblower protection to independent contractors, sub-contractors and all those who risk their career to expose fraud.  No company should be allowed to hide behind loopholes in the law to rip off the taxpayer,” Kohn said.

[L]ast year, Murtech received $4 million in Pentagon work, all of it without competition, for a variety of warehousing and engineering services. With its long corridor of sparsely occupied offices and an unmanned reception area, Murtech’s most striking feature is its owner — Robert C. Murtha Jr., 49. He is the nephew of  Rep. John P. Murtha, the Pennsylvania Democrat who has significant sway over the Defense Department’s spending as chairman of the House Appropriations defense subcommittee.

Robert Murtha said he is not at liberty to discuss in detail what his company does, but for four years it has subsisted on defense contracts, according to records and interviews. He said Murtech’s 17 employees “provide necessary logistical support” to Pentagon testing programs that focus on detecting chemical, biological, radiological and nuclear threats, “and that’s about as far as I feel comfortable going.” Giving more details could provide important clues to terrorist plotters, he said.

The Pentagon has denied that Murtha the congressman had any influence over the contract award, The Post reported. Still, the Army’s justification for choosing the contractor without accepting competitor’s bids is as large a scandal as the Murtha family cleaning up on the public’s dime.

Leo Fratis, the Army contracting officer who handled the matter, said there was “nothing improper” about the contract. He said it was awarded on a no-bid basis only because the Army command “had a lot of things going on at the time.”

Of course, if the protection of taxpayer dollars by way of competitive bidding is dependent on the Army not having a lot of things going on, the country’s budget problems may be worse than we think.

Senate Majority Leader Harry Reid (D-Nev.)(WDCpix)

Internet junkies and wonks alike may have jumped the gun in looking forward to the new online transparency hyped by House members who vowed to put contracts doled out from the $800 billion stimulus package online.

That promise, included in the initial House bill, was hailed by watchdog groups, who pointed to it as real reform in government contracting. However, in a major concession to government contractors, which opposed having the contracts made public, the final bill requires only a “summary of the contracts” to be posted online; and even the summaries will only be available for contracts worth more than $500,000.

Illustration by: Matt Mahurin

According to the law, the government has to provide certain data about federal contracts, including whether the contracting process was competitive, how the contract was awarded, and for those contracts over $500,000 “a summary of the contract.”

But is a summary good enough? If good-government groups or journalists or anyone else wants to identify what the government is spending $787 billion on and how reasonable those expenditures are, a summary of the contract isn’t going to do it.

“That’s one of the biggest complaints good-government groups have had,” said Michael Smallberg, outreach associate with the Project on Government Oversight.

A report on the stimulus bill issued by OMB Watch notes that “The enacted bill steps back from the level of transparency proposed in the House and Senate bills in two crucial aspects. First, whereas the House bill would have required each contract awarded or grant issued to be posted on the Internet, the enacted bill does not require that contracts or grants be made available as such.”

And in a document published by the Coalition for an Accountable Recovery, consisting of 32 good-government and transparency advocates recommending steps the government should take to make stimulus spending easier to track, the coalition writes that requiring only contract summaries on contracts larger than $500,000 and those awarded without open competition “is not fully satisfactory.” The report urged that “the full contract (with redactions, if necessary), and the Request for Proposals should be posted.”

Moreover, it’s not clear what information must be posted about contracts worth less than $500,000. “I’ve heard lots of people saying they wouldn’t be surprised if we see a lot of contracts coming in at $499,000, right under the threshold,” said Smallberg.

It’s no coincidence that the provision requiring publication of contracts was changed. As Jeremy Madson, spokesman for the government contractor lobbying group the Professional Services Council said after the House bill was approved, “the bill raises big questions about what information is published. In the past, it was usually just the amount of the contract and who won it,” he said. Publishing the entire contract raises concerns about releasing proprietary information of government contractors, he said. “That’s got to be worked out in details,” he said. Lawyers representing government contractors confirmed that that was among their clients’ most serious concerns about the House version of the bill.

Although transparency advocates claim those concerns could have been easily addressed by simply redacting any proprietary information in the published versions of the contracts, the government contractors apparently won that argument.

The watered-down posting rules don’t necessarily mean that all hope for reform is over. Just last week, President Obama declared that he intends to put a stop to wasteful government spending, as TWI’s Spencer Ackerman reported. In a presidential memorandum, Obama directed the Office of Management and Budget to prepare guidelines for evaluating existing contracts and issuing new ones, “in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency’s needs.”

“When awarding Government contracts, the Federal Government must strive for an open and competitive process,” Obama said in the March 4 Memorandum for the heads of executive departments and agencies, citing a General Accountability Office study last year of 95 major defense projects with more than $295 billion in cost overruns. “Improved contract oversight could reduce such sums significantly.”

As TWI reported before, the stimulus bill also created a new board to oversee and coordinate federal spending and prevent “waste, fraud and abuse.” Any agency’s inspectors general can review concerns about spending under the program, and the GAO will conduct regular and reports on how the money is being spent.

Still, government watchdog groups worry. In addition to the concealed contracts, the OMB guidance on the bill so far requires only publication of the primary government contractor and the first subcontractor, but not the names or terms of agreement reached with any other subcontractors. As the Coalition for an Accountable Recovery describes it, “a city that receives federal funds from a state would be the last organizational user to report on the use of federal funds.” Yet government contractors often sub-contract portions of the work to multiple layers of sub-contractors. That was common in Iraq, for example, where House Committee on Government Oversight and Reform, among others, found egregious examples of waste, fraud and abuse in contracting.

The Coalition’s proposal would require that “any organization that receive funds from the city – such as a contractor hired to build a school and that contractor’s subcontractors and suppliers – be required to report on their use of federal funds if above a de minimis amount of money.”

Because that rule is so far only part of the OMB Guidance, which was still revised, that’s something that advocates hope to keep pushing for. “The guidelines can’t override what was passed by Congress,” said Smallberg, referring to the legislation’s failure to require publication of the actual government contracts. “But the bill left some blanks about implementation. OMB will fill those in.”

Good government groups are working hard to influence the fine print.

The F-22 Raptor is produced by Lockheed Martin, the largest American defense contractor. (U.S. Air Force photo)

With President Obama’s announcement Wednesday that he intends to attack wasteful Pentagon spending, one of the most powerful and entrenched interests in Washington — the multi-billion dollar defense lobby — is sure to retaliate. Obama aides insist that they’re prepared for the fight ahead. Defense reformers and lobbyists aren’t yet convinced that they are.

As part of a plan for fiscal responsibility, Obama issued a memorandum to all government agencies and departments informing them that the White House’s Office of Management and Budget will issue new guidelines by July 1 instructing them on what “inherently governmental” jobs cannot be outsourced and what new procedures are to be created to prevent government contracts from spiraling over budget — including “modifying or canceling such contracts.” At a press conference unveiling the memorandum, Obama singled out the defense industry for special opprobrium. “The days of giving defense contractors a blank check are over,” Obama said.

Illustration by: Matt Mahurin

Defense bloat has stunned auditors. A report last year from the Government Accountability Office found that 95 ongoing major defense programs exceeded their budgets, providing an accumulated excess cost of $295 billion to taxpayers. The programs include big-ticket items beloved by the military services, including the Army’s Future Combat System, the Navy’s Littoral Combat Ship and the Air Force’s Joint Strike Fighter, which are built by defense-industry giants like Lockheed Martin Corp., Boeing Co., and Raytheon Company, all of which have aggressive lobbying arms and excellent relationships with defense barons on Capitol Hill. According to the government’s Federal Procurement Database, which tracks federal contracts, the Defense Department reported over $394 billion worth of business with private contractors in fiscal 2008 alone.

Defense contractors and their allies in government will not let that money go without a confrontation, say defense reformers. If he were a lobbyist, “I’d work with the bureaucrats to do what they always do,” said Winslow Wheeler, a three-decade veteran of Senate defense-budget fights who now directs a military-reform project at the Center for Defense Information. “The way the Pentagon wags say it is: ‘I’ll make them into a mushroom: keep ‘em in the dark and feed ‘em [manure].”

Kenneth Baer, a spokesman for the Office of Management and Budget, had a combative tone for the defense lobby. “We have just lived through an era of irresponsibility where taxpayer dollars were wasted and some of the biggest challenges we face were kicked down the road and not dealt with,” he said. “We can keep our people safe and our defense strong without all of this waste and inefficiency.”

Baer pointed to Obama’s YouTube address on his budget from Saturday, in which the president adopted more strident rhetoric than he has used to date to discuss the coming budget fight. “Special interests and lobbyists” are “gearing up for a fight” over his proposals, Obama said. “My message to them is this: So am I.”

Over the past several months, as the economic picture worsened and Defense Secretary Bob Gates publicly warned the defense industry that the financial “spigot that opened on 9/11… is closing,” industry efforts have fought back. A high-profile lobbying campaign to portray the Air Force’s expensive F-22 Raptor fighter jet — which the service and manufacturer Lockheed Martin fear may be a casualty of defense cuts — as a jobs machine has accelerated.  Allies like Sen. Saxby Chambliss (R-Ga.), whose home state features a major F-22 manufacturing plant, reciting the company’s talking point that 95,000 jobs could be lost if the jet gets the budgetary axe. A flurry of op-eds and blog posts from conservative writers have portrayed Obama’s first Pentagon budget request — estimated at $663.7 billion , which represents a four percent increase over the previous year’s budget before the costs of the two wars are factored in — as irresponsibly “sacrific[ing] American primacy,” in the words of a Bush administration Pentagon comptroller.

One Pentagon official expects much more of that as the services and the defense industry push back against reform. Their “ground game,” the official said, will be run from the services’ legislative outreach and public-affairs offices, feeding talking points and strategy information to sympathetic members of Congress — something that “got the services in trouble in 2002″ with Defense Secretary Donald Rumsfeld when the Army resisted his ultimately-successful plan to scrap an archaic artillery system called Crusader. An “air game” will feature “a lot of ominous whispers on background to the press and conservative think tanks and commentators about endangering the American people and costing lives in some future fight.”

Gates, whom Obama tasked with working closely with OMB, has told confidantes that he views a sustainable long-term rebalancing of defense priorities as one of his most important tasks now that Obama has given him the chance to continue on as Pentagon chief. His service under the Bush administration was more about supporting the immediate needs of the Iraq war after Bush fired Rumsfeld in November 2006. “The services are accustomed to reviews that start out with a lot of talk about setting priorities and making tough choices but in reality usually end with leaving everything more or less intact,” the Pentagon official said. “This time they have a secretary who really means it.”

A former Lockheed Martin official who requested anonymity spelled out a substantive scenario for the defense industry to combat the OMB review process. The process would put the blame for cost overruns not on the contractors, but on the military services for failing to be specific about what precisely they want built or delivered. “I would lead with [telling the government], ‘We waste money because you can’t make up your mind,” the ex-official said.

The ex-official explained that there is an inherent dynamic in the procurement process leading to companies undervaluing the true expense of their work in order to win a contract. “I make up a budget with my engineers, ‘OK, this is how much the project will cost.’ One bid will come in low among contractors A, B, C and D.” But in order to offer the low bid and win the contract, a contractor feels an incentive to shade down the project’s true cost. “So I’ll cut [my bid] 10 percent across the board,” the ex-official continued. “The engineers gave an accurate assessment, but you just cut it. When it comes to actually building the ship, everyone says ‘I need more money,’” in line with what the original engineering assessment of cost. Since the Pentagon has few restrictions against paying the increased cost of the contract after it’s been awarded — a practice that the OMB review will study — little prevents the overages from accumulating. Even less prevents the defense industry from low-bidding on a contract.

One solution, the ex-Lockheed official proposed, is called firm fixed-price contracting, whereby the Defense Department informs contractors that it will pay for a contract up to a certain point and any overages must be paid by the contractor. Firm fixed-price contracting is in place for some defense items. “When they do that, contractors are very honest” with their cost estimates, the ex-Lockheed official said. “But then the government tends to say ‘We don’t like that number,’ or it’s too expensive. For decades you’ve been getting low bids, so when you get an honest bid you say it’s way too expensive.”

The Pentagon official said that a smart strategy for the services would be to combat reform “indirectly through industry or military and veterans’ associations rather than directly.” Noting that the Army has already started distributing information about the value of Future Combat Systems, the official added, “The Army doesn’t seem to have figured this out.”

If the ex-Lockheed official’s scenario doesn’t work, Scott Amey, the general counsel of the Project on Government Oversight, a budget watchdog organization, anticipates a different one. “I guarantee you we’re going to hear that the government can’t operate without defense contractors,” Amey said.  “They’re [portrayed as] the driving force behind technology and innovation, and so a reliance on defense contractors is justified. We’re also going to hear some kind of backlash: ‘Many contractors operate efficiently and effectively, don’t allow a few bad defense contractors to spoil the bunch.”

For Wheeler, the author of “The Wastrels of Defense: How Congress Sabotages U.S. Security,” the process will come down to how prepared OMB chief Peter Orzsag, his deputy for defense programs, Steve Kosiak, and Gates are to outmaneuver the defense lobby and its allies. “This is a real test for Gates and Peter Orzsag to write regulations that make it easier to do right thing and harder to do wrong thing and then fight the nasty brutal battles that will make it stick,” he said. “This is the first step in a long journey, if they’re serious.”