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Holding the Government Accountable

How a “Small Business” Kingpin Wins Billions in Defense Contracts

A case study of the government's struggle to police procurement fraud
(Photos: Stephanie Hillier / Vimeo still; Eduard Marmet / Flickr; Getty Images; Illustration: Leslie Garvey / POGO)

On January 5, the Pentagon’s Defense Logistics Agency (DLA) awarded a contract worth up to $33 billion over 10 years to a privately held equipment supplier called Atlantic Diving Supply, Inc., or ADS. Only small businesses were legally permitted to bid on the contract, and ADS has been accused of defrauding the Pentagon by falsely claiming to be a small business. According to the most recent official tally of top government contractors, ADS is ranked as the 24th largest federal contractor in fiscal year 2019 with more than $3 billion in sales and ADS is the only “small business” among the top 50 that year.

ADS’s gargantuan new award for work on a Pentagon logistics program landed after the company’s majority owner, Luke M. Hillier, personally agreed to pay $20 million in 2019 to settle civil charges that his company defrauded the same program by falsely claiming to be a small business, among other accusations. An ADS spokesperson told the Project On Government Oversight (POGO) that Hillier is “unavailable for comment” and emails to him went unanswered.

ADS is ranked as the 24th largest federal contractor in fiscal year 2019 with more than $3 billion in sales and ADS is the only small business among the top 50 that year.

In the months before Hillier’s settlement, three non-ADS executives including a former state politician pleaded guilty in a felony scheme. According to the Justice Department, Hillier—referred to as “Person Y” in court records—allegedly created the scheme to allow ADS to benefit from contracts set aside by law for small businesses owned by socially and economically disadvantaged individuals, often women- and minority-owned ventures. Companies controlled by those non-ADS executives then allegedly would partner with ADS to perform work on the contracts. The arrangement allegedly allowed ADS to benefit even though ADS is mostly owned by Hillier and thus was not eligible to bid on the contracts directly.

Hillier was never criminally charged, though whistleblowers have alleged in a False Claims Act lawsuit that ADS has manipulated the small business contracting system for years. In addition to Hillier’s personal settlement, ADS itself paid $16 million in 2017 to settle civil allegations of small business contracting fraud, including unlawfully obtaining contracts intended for service-disabled veteran-owned small businesses, and bribery. Both settlements came without admissions of wrongdoing by the company or its owner, but the Small Business Administration’s inspector general, Hannibal “Mike” Ware, said in a 2017 Justice Department statement that “the actions of ADS and its affiliated entities deprived legitimate small businesses of valuable federal contracting opportunities.”

ADS’s general counsel Adam Casagrande told POGO that “no ADS employee was indicted or convicted of any crime associated with the broad and lengthy investigation by the Department of Justice” and “ADS was completely exonerated, both civilly and criminally,” even though the company’s civil settlement agreement states that it is not “a concession by the United States that its claims are not well founded.” ADS has maintained that it has “always complied” with Small Business Administration standards and that it settled to put “this matter behind us.”

ADS has a known history of fraud, yet DoD continues to award contracts to this company.

Senator Thom Tillis (R-NC)

But the settlements have not put concerns to bed. “ADS has a known history of fraud, yet DoD continues to award contracts to this company,” Senator Thom Tillis (R-NC) wrote to the Defense Department’s top watchdog before this year’s massive new award, in a previously unpublished February 2020 letter obtained by POGO.

“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,” added Tillis, a member of the Senate Armed Services Committee. Tillis pointed to allegations that the company had “bribed at least one senior DLA contracting official,” “willfully made false statements,” and “engaged in bid rigging.”

Responding to the False Claims Act lawsuit upon which Tillis’s remarks are based, ADS’s Casagrande called the bribery allegation “fictitious and defamatory” and broadly denied ADS engaged in any wrongdoing. He also said, “Any insinuation that ADS can or could be suspended [from winning new contracts] due to those false accusations from years ago is absolutely false, and defamatory.”

Tillis’s office told POGO this January that it has also had “several meetings with the Small Business Administration about the fraud concerns surrounding Atlantic Diving Supply” and that the senator expects ADS should “be near the top of the list” for Small Business Administration (SBA) scrutiny for the $5 million Paycheck Protection Program loan that agency data shows it was approved to receive. A Small Business Administration spokesperson said the agency does not comment on individual borrowers; ADS did not comment on the loan.

Now, the new Pentagon “small business” contract that ADS scored will likely send billions of taxpayer dollars into its coffers until 2031. (The contract also went to five other companies, but if the past decade is prologue, ADS will receive most of the contract’s dollar value.)

And, just three weeks after ADS won that contract, a top Defense Logistics Agency investigator declared there is a “law enforcement proceeding pending” as the basis for denying a document request from POGO. The records POGO requested related to ADS, Hillier, three companies allegedly affiliated with ADS that also paid settlements to the government, and a former ADS consultant who was an executive at one of those three companies (who pleaded guilty to fraud in 2019). Explaining the basis for the denial further, an agency spokesperson said in an email that the agency had provided “investigative support based on requests from a federal and a defense criminal investigative organization.” The spokesperson did not discuss the role, if any, of any of the subjects of the document request in the matter. The spokesperson further told POGO that this assistance occurred between 2016 and 2018. “We were informed their investigations remain active,” the spokesperson said in a February 11 email, “Therefore, any DLA records that may be responsive to your request remain unreleasable at this time.”

ADS’s Casagrande emailed POGO that “I can say unequivocally that ADS is not the subject or target of any investigation by a federal and defense criminal investigation.”

“I am confident that we would know if we were,” he said. “We are not.”

The Justice Department declined to comment on anything connected to ADS. In a standard response, the Pentagon’s top watchdog office emailed POGO this month that they “can neither confirm or [sic] deny the existence of an investigation” into ADS.

A History of Alleged Fraud

Allegations of ADS’s manipulation of the small business contracting system go back to the company’s explosive growth during the early years of the war on terrorism. The Pentagon’s knowledge of an element of ADS’s alleged fraud goes back just as far.

In 2005, Pentagon auditors discovered that ADS was “affiliated” with a supposed competitor, according to records obtained by POGO through the Freedom of Information Act. Two executives employed by that ostensible competitor were among Hillier’s associates who pleaded guilty to fraud charges in 2019. Other records POGO obtained reveal that a source within the Defense Logistics Agency filed a complaint in 2011 with the Pentagon’s inspector general alleging “unfair business practices” by ADS, including accusations that the company had pressured suppliers not to work with other contractors.

In a law enforcement saga stretching over several administrations, records show that despite a drumbeat of often-similar allegations, ADS has continued to win government contracts.

In a law enforcement saga stretching over several administrations, records show that despite a drumbeat of often-similar allegations—culminating in tens of millions of dollars in settlements—ADS has continued to win government contracts. This has happened even as the Justice Department touted its combined settlement involving the company and Hillier as the “largest False Claims Act recovery based on allegations of small business contracting fraud.”

As such, ADS offers a case study in how many companies with billions of dollars in revenue obtain lucrative government contracts reserved for America’s small businesses, including for enterprises owned by veterans, women, or racial and ethnic minorities, and do so with relative impunity. A decades-old systemic problem, the federal government has struggled to adequately addressthe challenge, especially salient today, as small businesses are failing by the thousands.

In an echo of Tillis’s remarks to the Pentagon about the company, more than a dozen industry insiders, including several former ADS employees, independently told POGO that in their view, the government’s efforts to hold the company and its executives accountable have fallen markedly short.

While the Small Business Administration declined to comment, according to a Defense Logistics Agency spokesperson, “the SBA held lead agency status throughout the investigations for purposes of assessing ADS’ responsibility” and declined to suspend the company from winning contracts. Because SBA never blocked ADS from winning new contracts, ADS has remained among America’s top federal contractors. ADS’s Casagrande told POGO there is no basis for barring ADS from winning federal business. He said that each government contracting officer has to assess whether ADS is responsible each time they award it contracts, and they keep doing so. “ADS has a robust compliance department and program which exceeds the guidelines as recommended by the Department of Justice for government contractors,” Casagrande wrote.

Industry insiders say the Defense Logistics Agency, which has seen a number of its former officials pass through the revolving door to work at ADS, is particularly protective of the company, its top supplier, which is denied by ADS and the agency. “ADS, nor any of its employees, employ influence, let alone improper influence, on the US Government or any of its departments,” ADS’s general counsel told POGO. And a Defense Logistics Agency spokesperson said, “DLA is not aware of any founded allegations of wrongdoing involving current or former DLA employees in relation to ADS.”

“Truly small”?

Much of ADS’s continuing success hinges on its “ability to bid on government procurement contracts as a small business distributor,” according to an assessment last week by Moody’s, the credit rating agency. Without that status, ADS would be legally ineligible to bid for many of the contracts it currently holds, which represent a major share of its revenue.

But the lawsuit alleging small business contracting fraud, which ADS and Hillier paid tens of millions to settle, said that the company had a workforce of more than 900 employees as of late 2013, if its alleged covert control of various companies is factored in. That’s well above the 500-employee limit for a company to be legally considered a small business on its defense contracts.

There are also other reasons to be skeptical of ADS’s claim to be a small business. For example, ADS told the government in 2011 that it had “approximately 440 employees.” Since then, its federal contract revenue has more than doubled and it has acquired a European shipping company. Yet ADS maintains that its workforce has barely grown and that it still has fewer than 500 employees.

Without its small business status, ADS would be legally ineligible to bid for many of the contracts it currently holds.

In early 2019, after ADS’s corporate settlement, the Small Business Administration briefly revoked ADS’s status as a small business. A key aspect of the Small Business Administration’s case against ADS was the company’s “lack of disclosure” of its ties to other businesses and individuals.

ADS appealed the revocation partly on the basis that the company had never admitted wrongdoing in its 2017 settlement with the Justice Department; that its alleged frauds took place in the past from 2006 to 2016; and that the Small Business Administration relied on outdated information.

Based on those and other arguments, a Small Business Administration appeals panel reversed the revocation and reinstated ADS’s legal status as a “small business” in May 2019.

The Defense Logistics Agency lodged another challenge later that year, a DLA spokesperson told POGO. “In November 2019, DLA Troop Support filed a size protest questioning ADS’s small business status,” the spokesperson emailed. “In 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.”

Casagrande, ADS’s general counsel, explained that the increase in ADS’s federal revenue can be explained by the government purchasing more expensive gear from ADS. “ADS’s gross revenue growth is wholly unrelated to its number of employees,” Casagrande told POGO. “The revenue involved is completely dependent on the item or items the government orders. If it is a high dollar item, the revenue is greater, and if it is low value item, the revenue is smaller.”

And ADS just gets a cut of the revenue, because the gear’s actual manufacturers have to be compensated. Given the competitive nature of the industry, Casagrande wrote there is “a ‘race to the bottom’ where the winning contractor makes razor thin margins on the items sold.” He refused to provide ADS’s profits or profit margins or the dividends paid out to ADS’s majority owner Hillier, stating that this information is “confidential and private.”

The Small Business Administration’s size standards can vary, but ADS’s Defense Logistics Agency contracts have “a corresponding 500 employee size standard.” According to an August 2020 Congressional Research Service report, some members of Congress have been “concerned that the size standards may not adequately target assistance to firms that they consider to be truly small.”

Casagrande emailed POGO that “the SBA did not set the size standard that allows for ADS to operate as a small business under its small business contracts.” Instead, he said the company’s small business status comes from an SBA rule where the size standard was set by Congress. He also wrote that, “there will always be small businesses that have gross revenues of billions on government contracts.”

One former ADS employee who continues to do business with ADS is Phil Hurni, the CEO of Defense Venture Holdings. “Maybe the small business size standards need to be changed,” Hurni told POGO, “but that’s not ADS’s fault.”

From Mom and Pop Dive Shop to Corporate Behemoth

ADS grew out of a dive shop frequented by locals and special forces operatives stationed near Virginia Beach when it won its first major federal contract from the Defense Logistics Agency in 2000. Then came the 9/11 terrorist attacks, which propelled the company’s super-charged growth of 6,000% from 2001 through 2004.

ADS’s rapid rise was due in large part to its niche: specialized equipment for soldiers, including special forces such as the Navy SEALs, deployed in ever larger numbers.

Rather than making gear itself, ADS operates as an intermediary, taking a cut as it buys equipment from manufacturers and passes it on to the Pentagon. Like its competitors, ADS describes itself to manufacturers as an outsourced sales force.

Some of ADS’s tactics in becoming “the Wal-Mart of government contracting,” as a whistleblower lawsuit describes the company’s aspiration, are savvy. Its tradeshow, Warrior Expo, “is timed to capture the spending increase ahead of the U.S. government’s September 30 fiscal year-end,” according to the company. ADS executives also created a trade association, the Warrior Protection & Readiness Coalition. The association lobbies Congress and the Department of Defense, including the Defense Logistics Agency.

In Iraq and Afghanistan, former company insiders told POGO, ADS had sales representatives on the ground, positioning them closer to the battlefield to help win more military contracts. The company would also hire servicemembers leaving the military. Government records obtained by POGO support this account.

And while hiring former members of the military is not unusual among defense contractors, when those hires appear to influence the purchasing decisions of their one-time colleagues, the practice raises ethical questions.

In 2012, citing “concerns about relationships with contractors,” the Navy investigated ADS’s and three other companies’ ties to members of the Navy’s elite Special Warfare Development Group, better known as SEAL Team Six. One of the companies ADS worked with was the Element Group, owned by former SEAL Team Six operator Matt Bissonette, who was part of the 2011 Bin Laden raid.

Navy investigators raised the question of “possible conflicts of interest concerning post-government employment” of the special operators. And several SEAL Team Six sailors appeared to have been compensated by at least some of the companies while still in the military. Investigators wrote that one Navy contracting specialist said “most of the recommended sources [for gear requested by the SEALs] were ADS.”

ADS’s Casagrande told POGO that “ADS has never paid any fees or money to active military members,” including SEAL Team Six. “ADS’s agreement with Element Group expressly prohibited the use of active duty members in any work done by or with ADS associated with that agreement.” He added, “If Element Group made payments to active duty military members, this was done in violation of its agreement with ADS and unknown to ADS. It also likely would have been prosecuted.” The Obama-era Justice Department declined to charge Element Group’s Bissonnette.

One senior officer who passed through the revolving door is Rear Admiral Scott P. Moore, a former commander of SEAL Team Six. After his retirement in 2014, and several years after the Navy’s investigation, he joined ADS’s advisory board. He did not respond to POGO’s request for comment. A former SEAL Team Six member named Brant Feldman is ADS’s top sales executive and has been with the company since 2008. Feldman told POGO that “Neither I nor ADS has been involved in compensating active-duty members of the military.” Casagrande added that Feldman “does not exercise any influence, let alone undue influence, on” any part of the federal government, including the SEAL Teams.

The Navy did not respond to a request for comment.

Settling “on the cheap”

From a financial perspective, attempts to hold Hillier and ADS accountable appear to have fallen short, according to two legal experts.

The combined settlement including ADS’s agreement in 2017, those of three alleged ADS shell companies in 2018, and Luke Hillier and ADS’s former general counsel Charles Salle’s agreements in 2019 is about $37 million. But the Justice Department had said in its settlement with ADS, first made public by the Virginian-Pilot, that “the United States has a valid claim against ADS in the amount of $200,000,000” for alleged wrongdoing committed between 2006 and 2016.

Casagrande, who was a signatory to ADS’s $16 million settlement, emailed POGO that the $200 million figure “has nothing to do whatsoever with the claims or any findings of liability by the DOJ. It’s merely an insurance policy for the DOJ for the settlement in the case of an ADS bankruptcy.”

Yet former senior Justice Department attorney Renée Brooker, a partner with the firm Tycko & Zavareei with extensive False Claims Act experience, disputed Casagrande’s characterization.

“This settlement entered by ADS is based on an ability to pay analysis that would have been performed by a financial analyst at the Department of Justice,” Brooker emailed POGO. She said this passage describes the “assessed liability of $200M, which would have likely been based upon DOJ’s determination of single damages that were trebled.” (Under the False Claims Act, violators are liable to pay three times the amount of their alleged fraud.) Brooker said, “the United States protected itself in the event of bankruptcy…for the full liability of $200M.” Reuben Guttman, another veteran False Claims Act attorney unconnected to the case, echoed Brooker’s remarks.

In their lawsuit, the whistleblowers claimed that the company had defrauded the U.S. government to the tune of $2.8 billion.

The settlements addressed allegations made in a False Claims Act lawsuit by two whistleblowers on behalf of the federal government. The whistleblowers are a former ADS employee and a government contracts consultant whose identities are confidential. In their lawsuit, they claimed that the company had defrauded the U.S. government to the tune of $2.8 billion.

ADS engineered its own corporate settlement of $16 million with the help of elite white-collar defense lawyer Emmet T. Flood, who represented President Donald Trump during Special Counsel Robert Mueller’s investigation, and President Bill Clinton during his impeachment. One individual familiar with the federal investigation of ADS told POGO, “ADS had a lot of high-powered lawyers from DC with political pull that made the Justice Department think twice.”

Individuals with knowledge of the settlement negotiations told POGO that ADS successfully argued it didn’t have enough money to pay for the full amount the government claimed and would go out of business if forced to do so. The Justice Department declined to discuss the case with POGO.

Andrew Miller, an attorney who represented whistleblowers in the False Claims lawsuit against ADS that resulted in the settlements, said in an interview in 2019 that companies arguing an inability to pay the full amount they would otherwise owe “is something that comes up in a lot of cases and we’re seeing it more and more.” (It’s not clear if Miller was referring specifically to ADS; he declined to comment.)

Similarly, Guttman, founding partner of the firm Guttman, Buschner & Brooks, told POGO that Trump’s Justice Department tended “to settle on the cheap” in corporate fraud cases and said he believes that’s what happened with ADS.

ADS’s Casagrande did not address questions about settlement negotiations posed by POGO. Instead, he said that “the Department of Justice never joined the [whistleblowers’] lawsuit, so any and all of the allegations made as part of that suit were never made by the federal government.”

Yet Casagrande’s statement is not fully accurate. Nearly two years after ADS settled the part of the case against the company, the Justice Department did intervene in the lawsuit against Hillier, who is not only the company’s principal owner, but is also its current board chairman. And, according to an email from Casagrande, who also serves as the board’s vice president and secretary, the board “controls the company.”

Luke Hillier
(Source: Stephanie Hillier / Vimeo still)

In August 2019, when the Justice Department announced Hillier would pay $20 million to settle civil allegations, a press release by the law firm for the whistleblowers said Hillier’s False Claims Act settlement was “among the largest secured against an individual.”

Neither Hillier, nor ADS addressed questions regarding Hillier’s settlement, which hasn’t seemed to have hampered his lavish lifestyle.

Companies controlled by Hillier have purchased $24 million of beachfront property on Kauai since 2017, including two adjacent Hanalei Bay homes worth $18 million at the time of purchase. In addition to Hawaii, Hillier continues to routinely travel to the Bahamas, a well-known tax haven, on his private jet. He owns two corporate entities there called Bahomco, Ltd. and Restoration Archipelago, Ltd. with unknown functions. Hillier recently bought a superyacht called the Lazy Z, listed at just under $13 million and registered in the Cayman Islands.

“The people above them, nothing has happened to them”

For a period, criminal investigators were examining Hillier and his role. But by early June 2019, a few months before his civil settlement was announced, the Justice Department decided not to criminally prosecute him, according to records reviewed by POGO. No explanation has been forthcoming. Hillier did not respond to requests to comment regarding the criminal investigation. The Justice Department declined to comment.

However, the lack of criminal charges did not go unnoticed by one of Hillier’s non-ADS associates who faced prosecution.

Two individuals who faced charges were executives for one of the companies that allegedly fronted for ADS: SEK Solutions, which has billed itself as a logistics and services provider for the military and law enforcement. ADS was alleged to have “controlled the management of SEK Solutions” and, along with SEK Solutions and other companies, “improperly bid on and received certain set-aside contracts for which they were not eligible,” according to ADS's settlement agreement also signed by the Justice Department (the agreement arose from the False Claims Act case, not the criminal investigation).

After pleading guilty to fraudulently winning contracts meant for women-owned businesses, SEK Solutions executive Khalil Naim faced sentencing in a federal courthouse in Norfolk, Virginia, in July 2019.

Naim’s lawyer Trey Kelleter pointed to the lack of charges brought against the alleged mastermind of the criminal scheme Naim was involved in.

“Mr. Y got nothing,” Kelleter told the judge, referring to Luke Hillier by a pseudonym given to him by the Justice Department.

“This was all orchestrated with Mr. Y,” Kelleter said, describing how Hillier set up what Kelleter called a “conspiracy to criminally violate the small business laws,” according to a court transcript. “The people who own the minority businesses, they’re the ones who have been convicted and are facing punishment for their crimes, but the people above them, nothing has happened to them,” Kelleter said.

"You're not being told the big picture," Kelleter told the judge.

Entities Allegedly Affiliated with ADS

A Justice Department court filing supports Kelleter’s account. SEK, founded in 2000, did not start out working with ADS. The Justice Department says that Hillier, also referred to as “Person Y,” proposed the scheme to Naim in 2005 in order for ADS to obtain federal contract dollars legally designated only for companies owned by socially and economically disadvantaged people, often women- or minority-owned companies, called 8(a) contracts. “Person Y explained to Naim how Person Y’s company could access the market for 8(a) contracts by partnering with an 8(a) company such as” Naim’s, according to the filing.

To help run Naim’s company, Hillier linked up Naim with ADS consultant Ronald A. Villanueva, who became an SEK executive and later pleaded guilty along with Naim and another person involved in the $80 million scheme. During several years as the scheme unfolded, Villanueva also served as a Republican legislator in Virginia’s House of Delegates and on the Virginia Beach City Council. Over the years, Hillier and ADS contributed a combined $36,000 to his political campaigns, according to campaign finance data.

In certifications to the federal government, SEK Solutions falsely portrayed itself as a woman-owned business (Naim’s wife was purportedly the owner and was not charged). Federal rules clearly state that “no non-disadvantaged individual or immediate family member may … exercise actual control or have the power to control” a firm designated as a socially disadvantaged small business contractor. In other words, the designated owner cannot be a figurehead, and must actually run the business.

More than a decade before the Justice Department criminally charged Naim and Villanueva, Pentagon auditors discovered some of the fundamentals of their fraud scheme, according to documents POGO obtained through the Freedom of Information Act.

In a 2005 review, Pentagon auditors found ADS had overcharged the Army for bicycles, and that ADS and SEK Solutions “are affiliated companies and share the same address.”

ADS was able to charge the Army “significantly inflated prices” because it relied on SEK Solutions’ price quote “as support that the prices for this order was [sic] reasonable.”

In 2006, the auditors’ findings were sent to Navy and Army law enforcement agencies “for action as deemed appropriate.” Apparently no serious actions were taken, as ADS and SEK Solutions continued winning federal contracts and their relationship continued without disruption for years.

Twelve years after the auditors’ findings, in 2017, ADS would sign a settlement agreement alleging that it controlled SEK Solutions and that ADS and the companies it controlled “participated in illegal bid collusion or rigging schemes that inflated or distorted prices, or otherwise harmed the Government.”

Neither the Army nor the Navy responded to POGO’s request for comment. Naim and Kelleter declined to comment, and Villanueva did not respond to a request for comment. ADS did not comment on the 2005 findings.

The federal government barred SEK Solutions from winning new federal contracts in June 2018 and the company will not be eligible to compete again until June 2022.

“Unfair business practices”

While ADS has many other federal customers such as the FBI and U.S. Customs and Border Protection, the Defense Logistics Agency has long been the company’s largest source of federal dollars. Over the last year, $2.8 billion—over 90% of its annual federal contract revenue—came from the agency, and ADS was the top Defense Logistics Agency contractor, a fact they display on the company’s website. And for more than a decade, ADS has dominated the agency’s Special Operations Equipment Tailored Logistics Support program, with its recent multibillion-dollar award coming through the program.

The program, often referred to by the abbreviation TLS, relies on a handful of prime vendors such as ADS to meet the needs of military and other government customers seeking gear. The prime vendors are intermediaries: They do not manufacture the gear they supply to the program, but source it from other companies. The prime vendors compete to provide the best deal to the government.

According to an August 2011 law enforcement memo POGO obtained under the Freedom of Information Act, someone within the Philadelphia-based DLA Troop Support division—which manages the Tailored Logistics Support program—grew concerned that ADS was engaged in “unfair business practices” allowing it to win the vast majority of awards.

The memo said the Defense Logistics Agency source, whose name is redacted, alleged that ADS “may be engaging in unfair pricing practices and steadily eroding the ability of the other prime vendors to competitively participate.”

Without doubt ADS was capturing the lion’s share of awards flowing through the Tailored Logistics Support program. ADS was “the largest volume participant in the program, receiving approximately ninety-three percent (93%) of the actual awards” worth more than $513 million in 2009 and 2010, the memo states. Four other prime vendors split the rest. The memo notes that ADS’s pricing was “satisfactory” at the time.

But Defense Logistics Agency Troop Support “staff expressed concerns that ADS has commanded such a great proportion of the awards and has successfully garnered influence with customers and suppliers ... that healthy competition may be negatively impacted,” the memo states.

The memo points to the revolving door between the military and ADS as a possible source of influence, hardly the only time the issue was raised with government investigators.

But the investigation based on the DLA employee’s complaint was closed, finding “no viable allegations of any criminal activity and no basis for civil action.” However, the investigator wrote, the “effort to date revealed concerns that” the Tailored Logistics Support program “may, as a result of its current provisions, limit competition and that actual contractual performance may not further the interests of DLA, its customers, or the Department of Defense.”

The Defense Logistics Agency “is aware of these concerns and has the unilateral ability to” take actions to protect government interests, according to the investigator’s memo. A Defense Logistics Agency spokesperson did not identify any actions made in response to the 2011 memo. ADS had no comment on numerous quotes from the 2011 memo that POGO supplied. (The source also tipped off investigators to allegations that ADS's suppliers violated laws requiring certain goods be made in the U.S. ADS did remark on those allegations. See “ADS: Foreign Goods or Made in the USA?” below for more.)

To this day, ADS continues to be the Tailored Logistics Support vendor winning the majority of its awards.

For over a decade, ADS and companies in its orbit have come under suspicion of having violated a law known as the Berry Amendment, which requires the Pentagon to buy items such as textiles, clothes, shoes, and food grown or produced in the U.S. ADS denies any violation of the law. “ADS has a rigorous Berry Compliance program,” ADS’s general counsel, Adam Casagrande, emailed POGO. “Our entire company is trained on it consistently, and we perform audits on ourselves and our vendors, some without notice, regularly to ensure compliance.”

So-called “Buy American” laws like the Berry Amendment recently got a boost from an executive order from President Joe Biden stating that “the United States Government should, whenever possible, procure goods, products, materials, and services from sources that will help American businesses compete in strategic industries and help America’s workers thrive.” The Trump administration also took recent steps to buy more goods made in the U.S.

According to a 2011 Defense Criminal Investigative Service memo, sources within the Defense Logistics Agency (DLA) shared Berry Amendment allegations with criminal investigators: “Allegations have also been raised to DLA by competing vendors concerning issues that ADS has affiliations with certain manufacturers, some of which have production facilities overseas, which ADS utilizes to fill purchase order awards, possibly in violation of the Berry Amendment.”

Referring to this memo and another, Casagrande emailed that “the quotes in the memos do not directly implicate ADS.”

“On occasion, through no fault of ADS, a supplier will incorporate something non-Berry compliant into a product ADS purchases,” Casagrande wrote. “That is never with ADS’s knowledge, and, when it comes to light, ADS has always remediated the situation with the government immediately, at its own loss if the supplier is unable to cover the costs. The Government does not pay nor get harmed in the few instances that has occurred.”

In episodes where Berry Amendment violations have been confirmed, ADS and its executives may have been unaware of what transpired. A 2009 Defense Criminal Investigative Service memo on ADS states that a tipster “alleged DoD [Department of Defense] vendors attempted to improperly influence the award of U.S. Army and USMC [U.S. Marine Corps] contracts” and that a vendor had violated the Berry Amendment.

The memo was silent on the first set of allegations, but testing of fabric in balaclavas that were the kind supplied by ADS showed the “fabric was processed overseas, and therefore not compliant with the Berry Amendment.”

A spokesperson for the Defense Criminal Investigative Service told POGO it could not comment.

The Defense Department learned that other products supplied by ADS that were legally required to be made in the U.S. were in fact made overseas. Barrier Wear, an ADS subcontractor from 2008 to 2012, supplied the Pentagon $30 million in garments that were made in Mexico but were falsely certified as made in the U.S, the Arizona Daily Star reported.

“Our investigation also demonstrated that Barrier Wear took steps to conceal that its clothing was manufactured abroad, consistent with the conclusion that it was aware of its Berry Amendment obligations and intentionally disregarded them,” according to a Pentagon investigator’s 2016 affidavit obtained by the Arizona Daily Star.

There’s no apparent indication that ADS was aware of the scheme, however, and the investigator wrote that Barrier Wear sought to hide its lawbreaking from ADS. Barrier Wear’s owners were sentenced to three years of probation.

More recently, in 2017, federal law enforcement agents executed a search warrant at London Bridge Trading, a company that the Justice Department stated in a 2017 press release was among several “purported small businesses affiliated with ADS.” (The press release was about a False Claims Act lawsuit, but London Bridge Trading was not formally accused in the lawsuit itself. ADS and Luke Hillier, its majority owner, settled the lawsuit in 2017 and 2019, respectively, both without admitting wrongdoing.)

According to the Virginian-Pilot, the federal investigation was into potential Berry Amendment violations by London Bridge Trading, which has disclosed that it uses manufacturers in Peru and Mexico. The company, which primarily makes “tactical nylon products” like body armor and backpacks, said in a factsheet at the time that the products made overseas are not sold to the Defense Department, but commercially and to other customers where the Berry Amendment does not apply.

“We have always taken our compliance obligations under the Berry Amendment seriously and we are fully cooperating with the authorities in this matter,” the company’s chairman said in a 2017 statement. No charges have been brought to date. London Bridge Trading’s chief executive did not respond to questions regarding the Berry Amendment and about the allegation that London Bridge Trading is affiliated with ADS.

“I want it known that when we were informed of the 2017 search of LBT by the federal government regarded [sic] possible Berry violations, ADS immediately stopped all purchasing and shipments of all products by LBT,” Casagrande told POGO. “Then, at its own cost, ADS performed its own independent audit of LBT to ensure there were no Berry violations occurring, engaging a third party. Not until after that audit found there were no violations did ADS resume purchasing and selling products from LBT.”

A trade group called the Warrior Protection & Readiness Coalition, formed by ADS executives and whose chairman’s council is comprised of Luke Hillier and London Bridge Trading President David M. Bohannon II, recently touted its lobbying efforts to bolster the Berry Amendment.

“Hard work and determination”

The 2011 complaint from inside the Defense Logistics Agency wasn’t the last time concerns were raised about ADS and the Tailored Logistics Support program. The next time would lead to a different outcome.

In November 2013, two anonymous whistleblowers filed a False Claims Act lawsuit against ADS, a host of allegedly affiliated companies, and individuals including Luke Hillier.

One of the lawsuit’s core claims was that ADS defrauded the federal government by concealing the fact that ADS was not truly a small business while winning billions of dollars from the Tailored Logistics Support program.

The lawsuit also alleged that in 2008 ADS bribed a Defense Logistics Agency employee named Cynthia Skrocki with a “consulting fee” of more than $100,000 in order to “secure Skrocki’s favorable treatment of ADS’ bids, including ADS’ winning bids on the TLS Program and Prime Vendor contract vehicles and subsequent quotes.”

“In exchange for these payments, Skrocki kept ADS apprised of contractor bid or proposal information submitted by ADS’ competitors, providing ADS with the precise bid amounts of all the other bidders,” according to the lawsuit. “This information provided ADS with the ability to secure contracts with bids designed to narrowly undercut those of their competitors,” the whistleblowers alleged.

Within months of the lawsuit’s filing and while it still was under seal and thus not public, Skrocki retired from the Defense Logistics Agency. No charges were brought against her, but ADS’s 2017 civil settlement agreement alleged that ADS paid “improper kickbacks or bribes and ... received non-public information relating to federal procurements.” (As stated earlier, the settlement is not an admission of wrongdoing.)

POGO received no response after multiple attempts to reach Skrocki. ADS told POGO that the bribery allegation is false and “was investigated by the Department of Justice and clearly found to have no merit.”

A source with significant experience in DLA contracting who requested anonymity out of fear of retaliation told POGO that ADS has seemed to have the inside track elsewhere within the agency, too. The source provided POGO with a 2014 DLA contracting document in which ADS’s price quote was crossed out by a DLA employee and replaced with a new ADS quote undercutting the lowest bid by a competitor by one cent. POGO verified the authenticity of the document with a government source.

ADS did not specifically comment on this 2014 document, but broadly denied having any influence inside any government agency.

Defense Logistics Agency Acquisition director Nancy Heimbaugh ends her 38-year federal career during a retirement ceremony, February 3, 2014. She would later join ADS' advisory board.
(Source: Teodora Mocanu, via DVIDS)

In the months after the lawsuit was filed, another key DLA official suddenly left the agency: Skrocki’s former boss, Nancy Heimbaugh, who had been the agency’s first acquisition executive at its office in Philadelphia and its acquisition executive at its headquarters in Virginia. Heimbaugh would join ADS’s advisory board.

Referring to Heimbaugh, a different industry insider told POGO that ADS’s “competitors fear ADS’s influence at DLA because she’s on their board.”

The insider said, “DLA is an 800 lb gorilla, and if they shift weight, they can destroy someone,” a reference to the agency’s ability to make it harder for companies to win contracts. Several industry sources told POGO they fear speaking up about ADS’s relationship with DLA because of potential retaliation by the agency.

Heimbaugh told POGO in an email that “I do not give ADS or anyone else influence at DLA.” She wrote that “As a member of the ADS Advisory Board, I provided non-binding strategic advice to the management of the Company. I was paid something for my work on the Advisory Board when meetings were held. There has not been an Advisory Board meeting for the past few years.” She said she was unaware of the False Claims Act lawsuit when she still worked at DLA and retired from government service after 38 years “to spend more time with my family.” She said she had no comment on the bribery allegation and was never interviewed by federal law enforcement.

Heimbaugh isn’t the only person from DLA to pass through the revolving door. “DLA people went to work for ADS all the time,” one former ADS employee told POGO.

For example: Ralph Lund, who worked for the DLA on the Tailored Logistics Support program, became a vice president for business development at ADS. Retired Army Lieutenant General Robert T. Dail, who was the director of the Defense Logistics Agency from August 2006 through November 2008, joined ADS’s advisory board in January 2009, according to his LinkedIn profile—the same month that DLA awarded ADS an earlier Tailored Logistics Support contract. No public allegations of wrongdoing involving ADS have been made against these individuals.

Lund and Dail did not respond to requests for comment.

ADS’s general counsel Adam Casagrande emailed POGO that ADS “always reviews all” ethics restrictions “imposed prior to employing anyone, and has a program in place to ensure compliance with all such allowances and prohibitions. Neither ADS nor any of its former government employees or [advisory] board members have ever violated those boundaries.” He said that the company’s compliance “program puts ADS ahead of the field and beyond reproach.”

By the end of 2015, federal investigators had shuttered their criminal investigation into “bribery, illegal gratuities, and bid-rigging” by ADS, according to a January 2016 memo, “due to lack of sufficient evidence.” Agents with the Small Business Administration and General Services Administration inspectors general continued pursuing a civil investigation.

But over the next few years, investigators revived the criminal case with SEK Solutions’ Khalil Naim as “the first domino” to fall, as a 2019 court filing puts it. Despite Naim’s “fulsome” cooperation with federal law enforcement, only two other dominos fell: Ron Villanueva and Villanueva’s brother-in-law, Samuel Caragan, who was involved in running another company called Karda Systems, created to continue winning set-aside contracts for socially disadvantaged companies after SEK Solutions was no longer eligible. (Companies can only win such contracts for nine years.)

In addition to being ordered to pay varying amounts of restitution, Villanueva was sentenced to two and a half years in prison (he was released to home confinement early due to coronavirus); Naim was sentenced to one month in prison; and Caragan to four years of probation, including six months of home detention.

The case never led to the prosecution of anyone at ADS, including the man who government court documents say created the conspiracy that landed Naim and two others in prison: “Person Y,” aka Luke Hillier.

After the cases against ADS and Hillier ended, the government celebrated. An October 2020 government award to law enforcement personnel from eight agencies working on the ADS investigation said it was issued “in recognition of hard work and determination resulting in three criminal convictions and record setting civil settlements in a major set aside contract fraud case.”

Yet all the hard work of law enforcement did nothing to stop the flow of new multibillion-dollar “small business” government contracts to ADS, including a new Tailored Logistics Support contract just months after the award ceremony.

Do you have more information? We are listening. Email Jason Paladino at [email protected], on protonmail at [email protected], or use POGO's secure resources here.