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POGO Reveals Possible “Unholy Alliance” Between ADS, Inc. and the Pentagon

Posted  February 26, 2021

As small businesses throughout the United States struggle to survive the economic devastation caused by the COVID-19 pandemic, one company claiming to be a small business but with hundreds of employees and more than $3 billion in annual sales, as well as a long history of fraud allegations and settlements, continues to reap huge rewards from government contracts.  The company—Atlantic Diving Supply, Inc. (ADS)—is the focus of an investigative report recently released by the Project on Government Oversight (POGO), a non-partisan independent watchdog.  Based on interviews with “more than a dozen industry insiders, including several former ADS employees,” internal government memos obtained by FOIA requests, and allegations in whistleblower complaints, POGO’s report is a “case study of the government’s struggle to police procurement fraud.”  In particular, POGO’s investigation focuses attention on the need for greater oversight in how lucrative Department of Defense “set aside” contracts, which are legally reserved for small businesses owned by veterans, women, and racial and ethnic minorities, are actually awarded.

According to POGO, ADS started as a dive shop frequented by locals and military service members stationed near Virginia Beach, VA.  However, after winning its first major federal contract for specialized military equipment from the Department of Defense in 2000, ADS quickly grew into a defense contracting behemoth.  In FY2019, it was ranked the 24th largest federal contractor with more than $3 billion in sales.  And in January of this year, the Pentagon’s Defense Logistics Agency (DLA) awarded ADS (and affiliates) a contract worth up to $33 billion over ten years.  Nevertheless, ADS still claims to be a “small business” for purpose of DoD set aside contracts, with fewer than the legal limit of 500 employees.  Despite legal challenges from competitors, the Small Business Administration (SBA) has allowed ADS to maintain this status.

POGO attributes ADS’s success in part to a “revolving door” culture within the military and government agencies.  Specifically, POGO claims that, in order to help capture government contracts, ADS hires former high-ranking service members, including several members of SEAL Team Six, the elite squad that killed Osama Bin Laden.  POGO cites a 2012 Navy investigation into ADS and three other companies for “possible conflicts of interest concerning post-government employment” of SEAL Team Six members. POGO also references an August 2011 law enforcement memo related to a DLA employee’s complaint, obtained through a FOIA request, which pointed to “the revolving door between the military and ADS as a possible source of influence.”  POGO further cites anonymous industry insiders who say that ADS has the inside track to winning DLA contracts, in part because a former high-ranking DLA official is on the ADS advisory board.  Although none of these investigations have led to any charges against ADS, questions remain about ADS’s influence over the military contracting process.

POGO also describes suspicions that continue to swirl around ADS following the resolution of several civil and criminal cases that directly or indirectly involve ADS.  In August 2017, ADS and its subsidiaries agreed to pay $16 million to settle allegations brought by a whistleblower that they violated the False Claims Act by conspiring to fraudulently obtain small business contracts.  The settlement further resolved allegations that ADS engaged in improper bid rigging to obtain the contracts.  In 2018, DOJ reached a settlement with three alleged ADS shell companies involved in this same scheme.  Then, in August 2019, Luke Hillier, ADS’s majority owner, and former chief executive, agreed to pay $20 million to settle FCA claims that he caused the submission of false claims by falsely claiming to be a small business.  A few months prior to Hillier’s settlement, three non-ADS executives pleaded guilty to a felony scheme relating to set-aside contracts.  According to POGO’s investigation, DOJ court filings and statements by the settling defendants support the inference that Hillier was the mastermind behind this scheme.  Inexplicably, Hillier was himself never criminally charged for this conduct.

As George Soros has observed: “Perhaps the greatest threat to freedom and democracy in the world today comes from the formation of unholy alliances between government and business.”  Based on POGO’s investigation, such an unholy alliance appears to exist between the DLA and ADS.  Despite what U.S. Senator Thom Tillis, a member of the Senate Armed Services Committee, describes as ADS’s “known history of fraud,” the DLA continues to treat ADS as a small business and award it multibillion-dollar contracts.  Rubbing salt into taxpayer wounds, the SBA recently awarded ADS a $5 million loan through the Paycheck Protection Program.  Whistleblowers appear to be the best hope of correcting this apparent injustice.

If you are a whistleblower with knowledge of government contracting fraud, please contact a Constantine Cannon attorney for a confidential consultation.

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Tagged in: FCA Federal, FCA State, Government Procurement Fraud, Pricing Fraud, Set-Asides and Preferences, Trade Agreements,