11.27.11

Supreme Group Probed Over No-Bid Contracts to Feed Troops in Afghanistan

Supreme Group, a king of U.S. military logistics, earned billions supplying food to troops in Afghanistan. Now, in a case reminiscent of Halliburton’s Iraq scandal, the contractor is under investigation for overbilling taxpayers. Aram Roston reports.

At first blush, Michael Jacques Gans doesn’t appear to be your typical defense contractor. An attorney by training, Gans spends his spare time racing a mint-condition, sky-blue Bugatti race car—vintage 1927—on tracks across Europe. He doesn’t reside inside Washington’s Beltway, preferring instead his home in Germany or a multimillion-dollar duplex on New York’s Fifth Avenue, overlooking Central Park.

And Supreme Group, the firm he co-owns with his German-born wife, Nina Von Steuben, and American businessman Stephen Orenstein, is hardly a household name in the U.S. with its main operations in the Netherlands, Switzerland, and Dubai. But inside Afghanistan, Supreme is a king of U.S. military logistics, performing a dizzying amount of wartime business that has earned the firm billions of dollars, easily enough to support a luxury lifestyle for its owners.

For the last six years, Supreme has imported all of the U.S military’s food into Afghanistan, and its contract was extended by the Pentagon in 2010 for two years and $4 billion without the normal competitive bidding. But that’s just part of its business. Supreme also runs military mess halls on Forward Operating Bases, trucks gasoline and diesel into Afghanistan from both Uzbekistan and Pakistan, and operates two warehouses that it boasts are now the largest structures in Afghanistan, dwarfing even the country’s ancient palaces. Since 2005, the company’s various Pentagon contracts in Afghanistan have been worth $8 billion.

Supreme makes no bones about its lucrative opportunities. “There is a modern-day Silk Road, a transportation hub, that is coming together in Afghanistan,” Robert Dail, a retired Army general who now serves as Supreme’s U.S.-based president, boasted to a conference for contractors in Washington this month.

In many ways, Supreme Group has become to the Afghan War what Dick Cheney’s old company, Halliburton, was to Iraq, a mammoth defense contractor so integrated into the military that the Pentagon has proclaimed no one else can do its work. And like Halliburton, Supreme’s meteoric rise is now garnering scrutiny.

Supreme confirmed to Newsweek it is the target of a federal investigation into its billing practices after an audit report this year lambasted both Supreme Group and the Defense Logistics Agency, which awards the firm most of its business. The report alleges, among other things, that Supreme was charging taxpayers nearly $4 just in freight costs for every pound of fruit and vegetables it flew into Afghanistan, racking up $454 million in costs.

“There is an ongoing investigation and it would be inappropriate of me to comment at this time since it is open,” Dail said when asked about the probe.

Court records obtained by Newsweek also disclose that Supreme Group had been paying a percentage of its government income to another contractor, which had helped it get started in the business but has now been indicted for fraud in a separate case.

This might all be inside baseball—technical contracting disputes—except for the fact that every single soldier in Afghanistan depends on the food Supreme Group flies into the country, everything from chili powder to pancake mix to prime rib. It was Napoleon Bonaparte, more than 200 years ago, who quipped that an Army marches on its stomach.

“There is a modern-day Silk Road, a transportation hub, that is coming together in Afghanistan.”

In a brief interview, Gans downplayed his company’s rapid growth, suggesting it was simply logical to expand from delivering food to serving it. “The focus is still on food,” he explained, “but it also includes catering. If you move baked beans, you can move Snickers bars.”

As for the allegations of overcharges, Gans insists the audit findings were exaggerated. “They’ve gotten an awful lot wrong,” he told Newsweek. In a statement, Supreme Group added, “The majority of issues have now been resolved.”

Whatever the outcome, the rise of Supreme Group is a classic tale of a Pentagon procurement system still laboring to overcome decades of suspicions about overpriced hammers and toilet seats, conflicts of interests, kickbacks, and a revolving door between the government and private contractors.

Dail himself passed through that revolving door, leaving in 2008 as head of the Defense Logistics Agency, which had awarded Supreme Group its contracts, and going to work the next year at the contractor. He says there is no conflict of interest because he does not represent the company on the food contract in front of the DLA, and because his required two-year “cooling-off” period for ex-Pentagon officials has expired.

Still, Dail acknowledges it is fair to ask why he was hired. “I can see why you would ask that question,” he told Newsweek, “but I really was hired to develop business outside of the current business.”

Experts say government insiders like Dail can bring enormous value to contractors even if they never contact their old agencies. “This company was very smart in luring this gentleman to work there, even with a two-year cooling-off period,” says Scott Amey of the nonprofit Project on Government Oversight, which monitors federal contracting. “It still provides them with a competitive advantage to learn about the DLA operations.”

Even though Dail refrained from contacting his former agency, his firm managed to persuade DLA in 2010 to declare that Supreme Group was the “only” company that could provide food for America’s 100,000 soldiers in Afghanistan, and that requiring it to face competitive bidding would cause “mission failure.” That declaration pushed the firm into a category of elite contractors that get their work renewed without bidding.

The Pentagon’s growing reliance on such no-bid contracts alarms some watchdogs, who fear bypassing competitive contracting puts taxpayers at risk of being overcharged. The Center for Public Integrity, a nonprofit, nonpartisan investigative news organization in Washington, recently calculated that the Pentagon awarded $140 billion in sole-source contracts (including Supreme) in 2010, almost triple the amount spent in 2001.

“Why are we going to continue to tolerate that? It is a problem, all of these sole-source contracts,” says Bunnatine “Bunny” Greenhouse, an Army Corps of Engineers official who blew the whistle on excessive spending associated with no-bid contracts awarded to Halliburton during the Iraq War.

In a statement to Newsweek, DLA says Supreme “was the only contractor capable of providing the services in the required timeframe.” The Pentagon says the next food contract for Afghanistan, however, will be decided competitively, and the bidding is already in the works.

Supreme’s entry into large-scale Pentagon contracting also speaks volumes about how the system works.

In 2004, Afghanistan was on the back burner, and Iraq was the Pentagon’s dominant focus. A company called Public Warehousing Company of Kuwait was already transporting military food into Iraq. When the U.S. government announced it was planning to hire a separate contractor to handle food imports in Afghanistan, officials decided a firm like PWC could not service both countries.

So PWC and Supreme joined forces “to partner in a bid” and signed a “services agreement,” in which Supreme Group agreed to pay PWC and another consulting firm a 3.5 percent share of the revenue from taxpayers if it won the contract, according to court documents reviewed by Newsweek. In a sense, PWC served as a kind of talent agency for Supreme Group, mentoring it, coaching it, and then earning a fee.

Supreme Group’s Pentagon food contract in 2005 was a $726 million deal over five years. That quickly grew to $3 billion as Supreme expanded its reach beyond food to other transportation operations.

The margins were impressive.

Ornstein, one of the company’s owners, testified Supreme Group’s fee was “usually 18 to 21 percent” on top of the cost of the food. Once the company started flying cargo planes and helicopters, he testified, it was “very common that the percentage of total revenue, the service fee percentage, exceeded 75 percent.” That means, for every $100 pound bag of apples, the company could charge $175.

Soon, Supreme Group balked at paying the fee to its mentor, PWC, prompting arbitration. And then in 2009, a federal grand jury indicted PWC for allegedly engineering a massive fraud in its operations in Iraq. PWC, which has changed its name (to Agility), has pleaded not guilty.

In a statement to Newsweek, Supreme Group argues its success fee to PWC did not cost American taxpayers extra, because it came out of its own profits. But earlier this year, auditors for the Pentagon inspector general’s office outlined several other concerns, including that Supreme:

_charged $455 million for food transportation flights. (The $3.74 price per pound shipped was an “oversight,” the Pentagon told auditors.) The auditors said Supreme’s original contract did not include a provision for flying food into the country, and that work was added without rewriting the contract.

_charged as much as $8.35 per pound shipped when it used a helicopter instead of an airplane.

_billed the Pentagon in one year for 8.8 million pounds of food flown by helicopter, when it really only flew 7.7 million pounds.

_sought profits guaranteed at 10% for the airplane flights and 13% for helicopters.

The company disputes many of those findings. “Supreme’s position as a company,” Dail tells Newsweek, “would be that we disagree with the implication that we overcharged the government. We welcome oversight.”

Congress is now stirring on the matter. Investigators for Rep. John Tierney of Massachusetts, a top Democrat on the House Oversight and Government Reform Committee, are examining Supreme’s work, and Tierney is calling for a full committee investigation.

“There are enormous amounts of money that could be going to waste, fraud and abuse,” Tierney said. “We’ve got to take a look at that.”