Suspension of IT contractor has roots in 2008 bid protest

The suspension last week of one of the government's largest vendors can be traced to a controversial 2008 Homeland Security Department contract that sparked a lengthy lawsuit between two leading information technology contractors.

On Friday, the Small Business Administration issued a temporary yearlong suspension from government contracting against GTSI, a systems integrator based in Herndon, Va. The suspension notice claimed the company, which is large by the government's standards, manipulated small business set-aside rules to inappropriately win federal contracts.

The decision to suspend GTSI was extraordinary. The government has rarely moved to suspend a company as large as GTSI, which earned more than $540 million in prime contract awards in fiscal 2009, according to Government Executive's annual top 200 contractor rankings. The closest equivalent in terms of suspension was the Environmental Protection Agency's 2008 suspension of IBM, but that action was reversed in less than a week.

The allegations against GTSI stem from a contract awarded two years ago. In September 2008, a joint venture company known as MultiMaxArray was awarded a $165 million delivery order on Homeland Security's FirstSource information technology contract. FirstSource was a 100 percent small business set-aside contract reserved for companies with fewer than 150 employees.

Days after the award, Wildflower International Ltd., an IT firm that promotes itself as New Mexico's largest woman-owned small business, filed a protest with DHS, arguing MultiMaxArray was not eligible for the contract. Wildflower had submitted an unsuccessful bid for the delivery order.

Among Wildflower's arguments was MultiMaxArray was little more than a front company and most, if not all, the work was to be performed by GTSI, a company that, based on its size, was ineligible for the FirstSource contract. GTSI argued it was only a subcontractor on the delivery order.

Wildflower's accusation was based, in part, on a July 2008 teaming agreement -- which the company obtained -- that spelled out a business relationship on the FirstSource contract between GTSI and Dell Marketing/Dell Federal Systems. GTSI had established a purchasing agreement with Dell and other technology vendors specifically to fulfill the FirstSource delivery order, according to the protest. GTSI was also the subcontractor to at least one other prime contractor on the multivendor contract.

The protest filing said GTSI had "taken control" of MultiMaxArray, which at the time of the delivery order, had ceased to exist due to a merger months earlier with Harris Technical Services Corp., Wildflower said.

"GTSI apparently designs the systems necessary to satisfy a FirstSource delivery order, selects the computer hardware and software configurations, negotiates pricing with the vendors, prepares the MultiMaxArray proposal and then performs all of the necessary services to install, maintain and provide technical support and training for the DHS user," the protest document said.

The protest further claimed that during the kick-off meeting for the contract, several GTSI employees represented the prime contractor to discuss performance of the delivery order. Ultimately, MultiMaxArray decided not to fight the protest and the contract was terminated.

GTSI later filed suit against Wildflower, claiming the teaming agreement was confidential and proprietary. The suit charged Wildflower with misappropriating trade secrets.

After more than 14 months of contentious legal battle, the two parties settled out of court in April. Wildflower Chief Executive Officer Kimberly DeCastro said she was not at liberty to discuss the case. GTSI spokesman Paul Liberty, meanwhile, told Government Executive that SBA's suspension does not validate Wildflower's allegations.

"Prior to learning of the temporary suspension notification on Oct.1, GTSI had not been contacted by the SBA regarding this matter," Liberty said on Wednesday in response to questions about SBA's specific allegations, which cited GTSI's role in the FirstSource delivery contract.

"There is evidence that GTSI's prime contractors had little to no involvement in the performance of the contracts in direct contravention of applicable laws and regulations regarding the award of small business contracts," wrote SBA suspension and debarment official Michael Chodos in a letter to GTSI's President and Chief Executive Officer Scott W. Friedlander. "The evidence shows that GTSI was an active participant in a scheme that resulted in contracts set-aside for small businesses being awarded to ineligible contractors."

In the Oct. 1 suspension letter, SBA alleged that GTSI obtained multiple e-mail addresses from MultiMaxArray so that the company would appear to be the entity conducting business with the government. GTSI would then reportedly prepare proposals and send quotes to DHS using the prime contractor's e-mail address, according to allegations. The letter also accused GTSI officials of placing the letterhead of MultiMaxArray on contract invoices to disguise where the documents had originated.

In a message to his employees, customers and investors last week, Friedlander said he would "fight to restore our good name." On Monday, the company posted an update on its website, touting its reputation as a "trusted partner" with the federal government and highlighting its ethics training and "high standards of personal and professional conduct."

The company also warned that the suspension and related investigations could lead to "administrative, civil or criminal liabilities -- including repayments, fines or penalties being imposed on GTSI -- or GTSI's debarment from future U.S. government contracting, any of which could have a material adverse effect on GTSI's going concern status, financial condition and results of operations."

Nearly three-quarters of all GTSI revenue comes from government contracts, according to the firm's 2010 filings with the Securities and Exchange Commission.

This is not the first time GTSI has been in trouble with the government. In June 2005, the SBA inspector general recommended the government permanently debar GTSI for misrepresenting itself as a small business on a Navy IT hardware contract. The information was provided by Lloyd Chapman, president of the American Small Business League, a watchdog group that tracks small business contracts that have been awarded to large firms.

But after reviewing the recommendation, the SBA's Office of General Counsel decided it did not have the authority to debar GTSI since it was not an SBA contract in question, according to a December 2006 statement by the agency. SBA referred the case to the Defense Department, which declined to take action against the firm.

It is unclear why SBA chose not to intervene in a Navy contracting dispute in 2005, but decided to move forward with a suspension on a 2008 DHS contract.

"SBA's suspension and debarment decisions are not based upon any single circumstance or issue," said SBA spokeswoman Hayley Matz. "Each suspension or proposed debarment decision, by necessity, is entirely fact-specific and is based on the information available to the agency at the time. SBA's policy is to vigorously pursue appropriate suspension and debarment actions against parties to contracts with any federal agency (including SBA itself as well as other federal agencies) if the facts and circumstances demonstrate deliberate conduct designed to subvert laws and regulations designed to benefit small businesses."

GTSI has 30 days to challenge the suspension. Liberty said the company "intends to take prompt action to work with SBA to address this situation to allow GTSI to continue serving its federal government customers."

The contractor is facing other problems as well. Word of the suspension sent GTSI's stock price into a tailspin, prompting Eyak Technology LLC, an Alaska native corporation-owned firm, to drop its bid to acquire the Virginia firm.

The SBA IG also is investigating GTSI's actions in regard to its conduct as a subcontractor on other set-aside contracts, including those awarded to ANCs.