The company that won one of the largest local contracts at Wright-Patterson Air Force Base this year did so under a program that federal regulators have worried gives an unfair advantage to some companies and is wrought with fraud, a Dayton Daily News investigation has found.

The contract has a price tag of up to $82.5 million, and is for ongoing construction at WPAFB; the base spends far more on major weapon systems, but this contract is unique because it is local construction work.

But the entity awarded the contract this year has its main offices in Virginia, is 51 percent owned by Alaskan natives and is permitted under federal law to let a much larger German-owned company do most of its actual work.

The contract was set-aside only for disadvantaged firms. The company that won it qualified because it is majority-owned by one of many Alaskan Native Corporations set up to benefit Alaskan natives. But federal regulators have questioned whether these entities, called ANCs, enjoy an unfair “competitive advantage” over other companies in contracts set aside only for small and disadvantaged businesses, the Daily News found.

And the frequency of fraud and abuse allegations to come from ANC dealings — including a company that recently held the Wright-Patt contract — has led to calls for a congressional probe.

Allegations of abuse include:

The current Wright-Patterson contractor was mentioned in an Alaskan civil lawsuit that claimed it was used by the executive of another ANC to drain contracts from her Alaskan partners and continue taking advantage of the ANC program.

And this same Wright Patterson contract was the subject of a scandal two years ago when the primary contractor at that time ended up barred from working for the federal government because its CEO was found to be scamming his partners — a third Alaskan Native Corporation.

These claims arose as the use of Alaskan Native Corporations in federal contracting exploded. A 2009 Small Business Administration report noted that federal disadvantaged-business contracts with ANC participants had grown by 1,386 percent since 2000, and more than tripled from $1.1 billion in 2004 to $3.9 billion in 2008.

“We’ve always been concerned with (this) program and whether it’s operating as intended,” said Scott Amey, general counsel of the advocacy group Project on Government Oversight. “Especially considering now that there are quite a few ANCs that are now in the top 100 government contractors and are now bidding on high-dollar government contracts that are awarded without competition.”

Award ‘disappointing’

The current contract was awarded to a joint-venture called NICC JV. This is a joint venture of the companies North Island Corp. and Centennial Contractors Enterprises, a Virginia firm owned by a German company, Bilfinger Berger. North Island is 51 percent owned by an ANC named NIMA, and 49 percent owned by a Virginia man named Thomas Kearney. Centennial is North Island’s business mentor under a federal program meant to get small firms like North Island on their feet.

None of the companies have been accused of violating any rules and the Alaskan native owners of North Island praise the ANC program and their partners.

“The wrongs of a couple people shouldn’t brand an entire group of people or organizations,” said Wayne Don, an Alaskan native and chairman of NIMA, the majority shareholder in the current contract.

Company officials say the majority of the contract is pumped into the Dayton-area economy, and that on competitive contracts such as this one they have no advantage.

“On a competitive solicitation, ANCs have no particular advantage, except for the quality of their work,” Kearney wrote in a statement to the Daily News.

But local contractors question why the contract couldn’t have gone to a local firm.

The WPAFB contract is set aside for socially and economically disadvantaged firms under the U.S. Small Business Administration’s 8(a) program. ANCs qualify for this status with exemptions not given to other 8(a) companies under federal rules.

“Any time a significant contract is awarded with less than full and open competition, greater scrutiny is warranted and clearly necessary,” said Jeff Sadosky, spokesman for U.S. Sen. Rob Portman, who sits on the Senate Armed Services committee and a subcommittee on contracting oversight.

Company officials defend the program.

“Public agencies recognize that competition may be limited when disadvantaged enterprises, such as 8(a) (and other programs) are utilized. Nevertheless, the socioeconomic policies which underpin these programs are considered well worth the cost,” said Mark Bailey, president and CEO of Centennial.

The Wright-Patterson contract is called SABER, an acronym standing for Simplified Acquisition of Base Engineering Requirements. It allows base engineers and contracting officers to issue work orders for maintenance, repair, alteration or new construction on the base’s more than 800 structures spread over 8,000 acres.

“This contract is vital for the 88th Air Base Wing to keep the base operating,” said Col. Amanda Gladney, 88th Air Base Wing and Installation commander when the contract was awarded. “We are confident we have selected a team that is capable of meeting our many requirements at the best value for the Air Force.”

Base contracting officials only let businesses compete for SABER that are designated 8(a). This is done to help the base meet its goal of awarding 53 percent of contracts to small businesses and 19 percent to small/disadvantaged businesses.

“Market research was conducted and revealed significant competition was available from certified 8(a) contractors for the SABER contract,” Daryl Mayer, base spokesman, said in a written statement. “The solicitation for the WPAFB SABER contract yielded robust competition (14 proposals) and significant savings to the taxpayer.”

The SABER contract attracted 14 bidders, according to base officials. The Department of Defense denied a Dayton Daily News Freedom of Information Act request for names of the losing bidders.

Some lament the outcome.

“It’s disappointing when jobs like that, that are based in Ohio, are awarded to companies that are not in Ohio,” said Ron Stake, president of the Ohio Small Business Association. “I would venture to guess that there are 8(a) businesses in Ohio that are able to do it, absolutely.”

Report: ANCs may have ‘clear advantages’

A 2009 report by the SBA’s Office of Inspector General found that Alaskan Native Corporations represent 26 percent of 8(a) awards even though ANCs constitute just 2 percent of companies in the program.

ANCs enjoy special advantages over most other 8(a) businesses.

The largest is that they can receive no-bid contracts of any value, while other 8(a)s are limited at contracts up to $5.5 million. ANC’s are also exempted from a rule that prohibits companies with more than $100 million in federal contracts from getting no-bid awards.

And unlike other 8(a) companies, they do not have to be managed by someone who is socially and economically disadvantaged.

The SBA report questioned whether other 8(a) firms could successfully compete against ANCs.

“Although designated by statute as disadvantaged, many ANC firms have clear advantages over other 8(a) program participants when competing for contracts due to their association with their large parent corporations and affiliates, which often provide them access to capital and credit as well as management expertise,” the report said.

“Requiring non-ANC small businesses to compete against these ANC participants appears to be inconsistent with the primary purpose of the 8(a) program of helping small-disadvantaged firms develop the skills needed to compete in the American economy.”

Darryl Hairston, the SBA’s associate administrator for business development, said the goals of the 8(a) program were to “facilitate the competitive viability and access to the marketplace for firms controlled by individuals who are socially and economically disadvantaged.”

This differs from the goal of the ANC exemptions within the program that were meant to “enable them (ANCs) to be able to develop organizations that could provide a meaningful benefit back to their communities,” he said.

It “would be hard to dispute” that the exemptions give ANCs an advantage, Hairston said.

There are some ANCs that due to their sheer size would have an advantage over other 8(a) firms, but he said it’s unsubstantiated whether ANCs in general have an advantage in competitive contracts.

“There are some 8(a) firms in the portfolio that are not ANCs that probably have the wherewithal to bid on an $82 million contract,” he said. “At the end of the day when you look at our program, there are only a small number of firms both ANC and otherwise that can do that.”

Local contractor concerns

Scott Coale, president of DaytonDefense, said the SABER award is frustrating, “because you’d think that the people who are here locally would be in a better position to satisfy the requirements.”

Coale said he’s confident that an Ohio company could have done the work, just maybe not one that is both a small disadvantaged business and also large enough to handle this size of contract.

“It almost seems like it’s a little bit self-defeating (to) the intent of the small business set-aside,” he said.

“It probably boils down to the people involved in awarding the contract,” said Stake of the Ohio Small Business Association. “These are government workers and they’re like everyone else. They take the path of least resistance. If they’re familiar with these kind of folks, they lean toward them.”

Bill Butt, president of Dayton-based Butt Construction Co., which has bid on work under the SABER contract, said it’s contradictory to set aside a project of this size only to disadvantaged small businesses, most of which couldn’t qualify for a performance bond for a project of this size.

“I think done appropriately I think it (the 8(a) program) is a fine thing,” he said, but “I believe the number of set asides, 8(a) and otherwise, has gotten to be excessive and the size (of the contracts) they’re setting aside I believe to be inappropriate.”

Company: Most money spent locally

From 2009 through 2011, various agencies of the federal government — mostly the military — paid NICC JV $7.8 million, paid North Island $10.6 million and paid Centennial $18 million under various contracts, according to USA Spending.gov.

The Wright-Patterson contract is one of eight federal contracts held by NICC JV, including four other SABER contracts, according to company officials.

“The vast majority of the costs of construction projects are the subcontractor costs. Therefore the vast majority of this contract will be pumped back into the local economy,” said Centennial CEO Bailey.

Kearney wrote that North Island hosted a Dayton-area contractor fair in August attended by 100 businesses and he expects that “over the life of the contract, 80 percent to 90 percent of the sub work will be performed by local small businesses.”

He said the company employs about 10 people directly at the base and purchases most of its materials locally.

Wright-Patterson contracting officials say North Island received the SABER contract after a competitive bid that took into account price and past performance.

So far, the company has delivered on the work, they say. This has included renovating restrooms at one base building for $102,059, installing parking lot lighting for $32,717 and replacing a loading dock canopy for $79,999.

Kearney said that $82.5 million is the contract ceiling, with the actual amount determined by how much work base officials want done. The contract only guarantees his company $75,000. “With significant federal spending cutbacks in the works, the risk that we don’t reach maximum value on this contract is substantial,” he wrote.

Base officials say the SABER process is an invaluable convenience allowing them to issue work orders instead of bidding out each project.

But the Project on Government Oversight’s Scott Amey questions whether the Air Force would save money by doing its own subcontracting.

“They could probably get more bang for the buck if they took the extra time to award individual contracts for individual projects,” he said. “In cutting red tape and making government more efficient they’ve taken the easy way out and there may be unintended consequences for not competing the individual projects.”

Major company profits more than natives

North Island is eligible for 8(a) status because it is 51 percent owned by Alaskan natives.

Centennial is considered North Island’s mentor under another SBA program. The rules require the joint venture NICC JV to do 15 percent of the cost of the contract. Of that portion, Centennial can do up to 60 percent of the work and receive up to 49 percent of the revenue.

This mentor-protégé relationship is authorized by the SBA for a limited number of years to allow small disadvantaged companies to get up to speed.

The outcome of these rules is that Kearney earns roughly $500,000 in annual compensation from North Island Corp. and the native Alaskan shareholders earn $100,000 split 305 ways, according to a Washington Post investigation published earlier this year. Centennial can earn more than either other party.

In a written statement to the Daily News, Kearney said he gets a “reasonable salary for his position as president,” and it’s “a fraction” of $500,000, and that NIMA has received “an order of magnitude more” than the $100,000 quoted plus pays for other shareholder benefits such as a scholarship program. He did not say what the actual numbers are but said two-thirds of the profits of North Island are reinvested back into the company.

NIMA is based on Nunivak Island off the southwest coast of Alaska and represents 305 native shareholders. Federal contracting through North Island Corp. is by far NIMA’s largest venture. It also runs a general store and a home renovating business. And it provides services to shareholders such as burial assistance, a scholarship program and fuel subsidies.

NIMA Chairman Wayne Don said on the surface it can appear that Alaskan native shareholders are getting a small share of the profits. But that’s only because the business is reinvesting in itself to provide its shareholders with long-term benefits.

“There are very legitimate reasons the distributions are split the way they are,” he said. “I would say at this point we’re still on the upward swing of our growth strategy.”

Origins of North Island Corp.

But three examples show how ANC’s can be accused of self-dealing by non-native executives

In a 2008 lawsuit in Alaska Superior Court that mentioned North Island, an Alaskan Native firm called MTNT accused the company’s president, a Washington D.C. lawyer named Paralee White, of exploiting it.

The suit said White owned 49 percent of a subsidiary company called Sentinel, the Alaskans owned the other 51 percent, and that White used the company to secure hundreds of millions of dollars of contracts using the 8(a) program and entered into a mentor/protege agreement with Centennial.

It says White wrote agreements making it nearly impossible to fire her, entitled herself to more than 49 percent of the company’s profits by guaranteeing herself up to 4 percent of the company’s gross as an “incentive payment,” and staffed the company with family members. The suit alleges she drained millions of dollars from Sentinel and MTNT.

When MTNT balked at setting up another company with her under the same terms, the suit alleges White helped Kearney set up the company North Island Corp. with the NIMA Alaskan corporation in 2006 to compete with Sentinel. The suit claims she arranged for Kearney — who the suit claimed is White’s sister’s boyfriend and with whom she owns a business and property — to obtain 49 percent ownership of North Island. The suit alleges White funneled trade information, contacts, employees and contracts to North Island Corp. from MTNT and Sentinel.

“These subcontracts, and North Island’s resulting competitive advantage, have resulted in North Island taking over significant contracts worth hundreds of millions of dollars, which at one time were performed by Sentinel,” the suit says.

The case was settled in 2009 with MTNT taking complete control of Sentinel. The parties signed a nondisclosure agreement, so the terms of the settlement are unknown.

“We were taken advantage of,” MTNT Chief Executive Vicki Otte told the Washington Post in a story this year. “When we realized what was going on, we took the company back.”

Calls to MTNT’s Anchorage office were not returned.

Centennial remains a minority partner in Sentinel, which is now 100 percent owned by MTNT, according to company officials.

Kearney told the Dayton Daily News that Paralee White has no role with NICC JV, North Island or NIMA, and that the case was settled “which means that none of the allegations were ever proven.”

Scandal plagued former ANC contractor

The former SABER contract at Wright-Patt was held by a company named Arctic Pipe and Materials (APM), which was 55 percent owned by an Alaskan Native Corporation named Cape Fox and 45 percent owned by company president Craig Jackson.

APM, Jackson and Jackson’s brother were suspended from federal contracting in September 2009 and later barred after an SBA Inspector General’s audit found that the company was flouting SBA rules and directing more money than allowed to Jackson and his family.

The U.S. Small Business Administration concluded APM had withheld information about its ownership and management that would have made the company ineligible for the 8(a) program.

Cape Fox Corp. sued company CEO Craig Jackson and his brother in 2010. The suit claims the Jacksons charged more than $16 million in fees to the company.

The Air Force transferred its investigation of APM and other companies suspended from federal contracting work to the Justice Department. No charges have been brought against APM.

Wright-Patterson spent at least $48 million with APM under the contract that began in January 2007 and could have continued until January 2012. APM’s contract specified maximum spending limits of $12 million annually, but Wright-Patterson spent more than $26 million with the company in 2009, including $12 million in stimulus funding.

Alleged ANC fraud historic

There have been changes this year to the federal rules governing 8(a) firms.

They now must perform 40 percent of the work in a joint venture — opposed to a “significant portion” previously — and firms owned by ANCs must report benefits flowing back to their communities.

SBA officials said these rules are being implemented and reporting will begin within months. But it would take a legislative change to undo the exemptions given to ANCs over other 8(a) firms, and that has not happened.

In October, several members of the U.S. Senate began asking for a review of the program and whether it was particularly susceptible to fraud. This followed allegations of a multimillion dollar kickback scheme involving the U.S. Army Corps of Engineers and the subsidiary of yet another ANC called The Eyak Corporation.

Federal prosecutors called it one of the largest corruption schemes in the history of federal contracting when indictments of four men in that case were made public in October. The four men were accused in a $20 million bribery and money-laundering scheme. Prosecutors say government work was directed to a favored information technology subcontractor in exchange for kickbacks that paid for real estate, fancy clothes and other luxuries.

Eyak Corp subsidiary EyakTek was the prime contractor for a five-year, $1 billion contract administered by the Army Corps of Engineers.

U.S. Sens. Claire McCaskill and John McCain sent a letter to the Department of Defense asking the department to strengthen rules that apply to ANCs.

‘These folks come in and take advantage’

Hairston of the SBA said what makes ANCs unique, he said, is the size of the contracts they deal with and the fact that managers of the companies don’t have to themselves be socially or economically disadvantaged and aren’t the intended recipient of the program.

“For the most part they’re not generally operating illegally with respect to how they’re structured or how they’re operating,” he said.

“What you generally see is they are allowed to have non-disadvantaged individuals involved in the operation of the firm and generally you’ll find these individuals is where you’ll find the fraud and the abuse.”

NIMA chairman Wayne Don said lawmakers shouldn’t overreach in dealing with concerns of fraud or abuse in the program.

“Those instances are very unfortunate, and hopefully by scrutinizing the program as some officials have...I would hope that organizations like ours that are compliant and abide by the rules are not unduly affected by that and they continue to allow us to participate in the program,” he said.

Staff Writer John Nolan contributed to this report.