Bad Contracting Decision Comes Back to Haunt Pentagon

Several weeks ago, a federal administrative tribunal that presides over disputes between contractors and the government rendered a decision in a particularly noteworthy case involving overseas contingency operation contracts. At issue was the Pentagon’s decision over a decade ago to cancel contracts to supply weapons to the Iraqi security forces. What makes this case noteworthy is that the contractor involved is AEY, Inc., the company run by Efraim Diveroli, the “stoner arms dealer” whose exploits with business partner David Packouz inspired the 2016 movie War Dogs.

In a June 22 decision that largely escaped public notice, the Armed Services Board of Contract Appeals (Appeals Board) ruled that in mid-2008 the Department of Defense improperly closed out five contracts with AEY to supply firearms, ammunition, and accessories to the Iraqis in 2007 and 2008. The government terminated the contracts “for cause” or “default,” which is the usual course of action when the contractor is at fault for not meeting its obligations. However, the Board found that most of the performance failures on the contracts were caused by factors beyond AEY’s control, so the contracts should have been terminated “for convenience.” This puts the government on the hook for the contractor’s economic damages.

Unless the government files an appeal, both sides must now negotiate a settlement. The contracts had a combined total value of more than $22 million. With potentially millions of dollars in damages—and 10 years of accumulated interest—AEY could be looking at a very large payout.

We reached out to Diveroli and the government for comment about the case. Diveroli did not respond. The U.S. Army, which is handling the dispute for the government, replied that “as a matter of policy the Army does not comment on matters of pending litigation.”

At the same time the events that gave rise to the Appeals Board case were going on, AEY was also working on a separate $300 million Army contract to supply ammunition to the Afghan security forces. This was the contract that propelled Diveroli and AEY to international infamy. The company was caught supplying defective gun cartridges, some of which had been illegally obtained from China, which led to Diveroli getting a four-year prison sentence and a 14-year debarment from federal contracting.

The Afghanistan contract debacle was a case study in all that was wrong with the Pentagon’s contingency operations contracting process during the Bush Administration as it struggled to stabilize and rebuild Afghanistan. The March 2008 New York Times story that broke the scandal found a multitude of systemic problems. AEY was a small-time federal supplier, having won a total of $10.5 million in government business. It sold various agencies a scattered assortment of products that included weapons and ammo, clothing, freight elevators, telephone equipment, scaffolding, cranes, photographic supplies, tractors, food packages, and marine equipment. Yet the company was already gaining a reputation for unreliability—three purchase orders had been terminated for default. The Times story also recounted Diveroli’s history of run-ins with local law enforcement. Yet Army contracting officials, under intense pressure to beef up Afghanistan’s internal security, either failed to catch or outright ignored these red flags. And poor pre-award vetting was just part of the problem. The Afghanistan contract was vaguely worded and had few quality assurance restrictions, and the Army was slow to react when problems with AEY’s performance—and evidence of its shady practices—began cropping up.

Today, the 32-year-old Diveroli, now out of prison but barred from federal contracting until 2025, continues to run AEY. He has been in and out of the news in recent years for his involvement in various legal disputes over film and literary portrayals of his life story, and with former business associates who claim he owes them money from the Afghanistan contract.

The saga of Efraim Diveroli and AEY serves as a teachable moment for contracting officials. There will always be a need for contractors in contingency operations. But such operations are particularly susceptible to fraud, waste, and abuse, posing unique management and oversight challenges. We can only hope that, through its dealings with AEY, the Pentagon has learned from its mistakes and is now adequately addressing these challenges.