Feds Suspend Major IT Contractor From Government WorkFeds Suspend Major IT Contractor From Government Work

The federal government on Friday suspended major government systems integrator and IT service provider GTSI Corp. from receiving contracts and doing business with the government over allegations that GTSI used small companies as fronts to do work and earn money that had been supposed to be set aside for small businesses.

GTSI has said it will fight the charge, but the company is already seeing negative effects from the suspension. Alaska's Eyak Technology announced Monday morning that it had withdrawn an offer to buy GTSi, which, along with the company's suspension, sent GTSi's stock down more than 40% from Friday's close.

The suspension came just one day after the Washington Post reported that GTSI had agreements in place to do all of the work and receive as much as 99.5% of the revenue on certain contracts that had been set aside for small businesses, and that top GTSI executives were aware of these deals.

At the same time, the Small Business Administration, which initiated the suspension, has been working over the last 18 months to strengthen its oversight and enforcement of federal contracts, its administrator said in an emailed statement. “The Small Business Administration has no tolerance for fraud, waste and abuse in any of our programs," SBA administrator Karen Mills said in a statement. "In line with that, SBA suspended GTSI Corporation from federal government contracting."

In a letter to GTSI, the Small Business Administration's suspension and debarment official alleges that, in "various" Department of Homeland Security contracts with small businesses where GTSI was a subcontractor, those subcontractors were little but fronts for a "scheme" participated in by GTSI. "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," the letter said.

According to the letter, GTSI represented itself as the small businesses to third parties, resorted to using email addresses attributed to the small businesses to avoid allegations of impropriety, prepared and sent proposals and quotes to the government as if it were the small businesses itself, and created invoices on the letterhead of the small businesses so the invoice would appear as though it came from the small businesses instead of GTSI.

In addition, the letter said, GTSI prepared and even received and sent, on behalf of the small businesses, responses to contract officers regarding contract opportunities. "There is ample evidence to suggest this scheme subverted the competitive process and directly affects the integrity of any procurement these prime contractors were or are involved in," the letter said. For its part, GTSI said that, before the suspension was made public, it hadn't received any indications that any government agency had alleged legal or regulatory violations. "We will fight to restore our good name," GTSI CEO Scott Freidlander said Friday in an open letter to employees, customers, partners and investors. However, it did not specifically deny any of the allegations in either the Post articles or a suspension letter.

Suspensions and other moves to exclude contractors from working with the federal government happen regularly. There had been six such moves by lunchtime Monday alone, according to the General Service Administration's Excluded Parties List System, a website that tracks which individuals and businesses have been declared ineligible for contracts with the federal government.

However, government-wide suspensions of companies of this magnitude are rare. The last major suspension was in 2008, when the Environmental Protection Agency took action against IBM over charges that IBM improperly colluded with an EPA employee in a bid for an $84 million financial system modernization contract that was eventually won by the CGI Group. That suspension was lifted only three days later when IBM withdrew a protest it had raised over CGI's award and agreed to take additional actions to review its compliance with federal regulations.

GTSI had annual revenues of $762 million and gross profits of $101 million in 2009. Most of that comes from federal government work. "Any issue that compromises our relationship with agencies of the federal government would cause serious harm to our business," the company said in its most recent quarterly earnings report filed with the SEC.

Allegations of this type are also rare, Ray Bjorklund, senior VP and chief knowledge officer for government market research firm FedSources, said in an interview. "It's hard for the government to look down at things to this level, because if you ask too much, it starts to raise the price of the contract," he said. "I don't recall having seen this kind of allegation in years, but if these oversight checks are going on behind the scene, this type of thing has the potential to be more prevalent."