A 22-year-old defense contractor pleaded not guilty on Monday to charges that he defrauded the federal government by delivering faulty, decades-old munitions to Afghan security forces.
Efraim Diveroli, president and owner of AEY Inc., was indicted by a federal grand jury last month on 71 counts related to the sale of banned Chinese ammunition through a $298 million Defense Department contract. Prosecutors said Diveroli claimed the munitions were from Albania and then attempted to conceal their true origins.
Diveroli originally was scheduled to appear for his arraignment in a Miami federal court on Wednesday, but because of a clerical error, the proceedings were moved up two days. He remains free on bail.
Howard Srebnick, Diveroli's attorney, plans to argue that the federal regulation cited in the indictment only prohibits the delivery of ammunition acquired directly or indirectly from China if the ammunition was purchased after a 1989 embargo. AEY purchased the munitions from the Albanian government, which bought them from China in the 1960s and 1970s, he said.
It is "not a crime to buy [and] sell Chinese-made ammo acquired by [the] government of Albania pre- [the 1989 Chinese munitions] embargo," Srebnick said in an e-mail.
Srebnick plans to file a motion to dismiss the case by end of the month.
The attorney further argued that the Pentagon knew the source of the ammunition and is deliberately misconstruing the regulations to avoid fulfilling the terms of the contract. The Defense Department has halted all shipments from AEY and suspended the company from receiving additional payments.
Prosecutors also indicted AEY Director and Vice President David Packouz; company agent Alexander Podrizki; and Ralph Merrill, a business associate of Diveroli.
All four defendants are charged with one count of conspiracy and 35 counts of procurement fraud. Diveroli additionally is charged with 35 counts of making false statements to the Army. Each faces a maximum of five years in prison per count if convicted of the conspiracy and false statement charges and 10 years per count for the procurement fraud charges.
AEY has run into other questions about its honesty with federal contracting officials.
An investigation by Government Executive in April showed that the company had been improperly designated as a small disadvantaged business less than a year before receiving the massive arms contract. Since that label was applied, AEY has earned more than $204 million in federal contracts.
Small Business Administration officials said they have no record of AEY ever applying for or receiving an SDB solicitation. But, in a May letter to Sen. John Kerry, D-Mass., chairman of the Senate Small Business and Entrepreneurship Committee, the agency acknowledged that AEY did classify itself as a small disadvantaged business on its certification and representation forms.
"Insofar as we can determine, AEY Inc. received no benefit toward source selection for the federal contracts" wrote Fay Ott, SBA's associate administrator for government contracting and business development. "SDBs currently receive no benefit in the selection process, with the possible exception of contracts awarded by NASA or the Coast Guard."
A committee source, speaking on background, said larger questions persist, such as how the small disadvantaged business label could be mistakenly applied to dozens of contracts without it being caught by agency officials. Kerry is considering holding a hearing in the coming months about issues related to contracting oversight, including the AEY case, the source said.
Jeffrey Bergner, assistant secretary of legislative affairs at State, pointed the finger at the contractor for the mistake, noting that agency contracting officers rely on information in the Central Contracting Registry to validate a company's small business size status. Bergner noted that vendors enter the data in the registry and said agency officials cannot go into the database and change the small business designation.
Meanwhile, James Finley, deputy undersecretary of defense for acquisition and technology, wrote that "for competitive acquisitions the contracting officer would not have to confirm the SDB status of contractors claiming the designation."
The federal government has statutory goals for the percentage of contract dollars going to small businesses and other subcategories such as small disadvantaged businesses. Finley acknowledged that the Defense Department did take credit for AEY under those reporting goals in fiscal 2006 and 2007.
State and Defense officials came under fire from lawmakers during a hearing last month for not sharing information that could have prevented AEY from ever earning the munitions contract.