Army Corps Probe Led U.S. to $1 Billion Contract Scheme
By Tom Schoenberg – Jul 11, 2013 12:01 AM ET
The case of Kerry Khan, who’s scheduled for sentencing today in federal court in Washington, began with a probe of fake contractor references and ended in discovery of plans for a $1 billion contracting fraud.
Khan, 55, pleaded guilty last year to masterminding a criminal enterprise that over four years stole more than $30 million from a no-bid contract he oversaw while working at the U.S. Army Corps of Engineers. He was also in the advanced stages of controlling a $1 billion contract under development at the time of his arrest in October 2011, prosecutors said.
“I don’t think any of us quite thought it would be of this magnitude and scope,” U.S. Attorney Ronald Machen in Washington said in an interview. “It just kept growing and growing.”
Based on cooperators, wiretaps and video recordings, prosecutors secured 15 guilty pleas, seized 34 bank accounts, 20 properties, eight luxury cars and numerous Rolex watches in busting up what they said was the largest domestic bribery and bid-steering scheme in the history of federal contracting.
“We hear a lot about contracting officers who give confidential bid information to certain contractors who then use that information to write their bids,” Assistant U.S. Attorney Michael Atkinson, who led the prosecution, said in an interview.
“But it’s very hard to prove those cases up. Here, with the wires and the cooperators, we had a front row seat to watch that unfold,” he said. “It’s rare to have that real time investigation of someone trying to steer a $1 billion contract and see all the pieces they had to get involved to get that planned contract through the administrative process.”
None of those charged has sought a trial. The probe is continuing with two unidentified government officials still in the mix, according to court filings.
The government is asking U.S. District Judge Emmet Sullivan to sentence Khan, who pleaded guilty to bribery and money laundering conspiracy, to 15 1/2 years in prison and repayment of $32.5 million in stolen funds.
“I liken it to some of cases that we’ve seen on Wall Street on the insider trading side of the equation where we’re not attacking it as a financial crime, we’re attacking it as a criminal enterprise,” Timothy Gallagher, the head of the criminal division at the FBI’s Washington field office, said in an interview.
The case began with a tip to the Federal Bureau of Investigation in the summer of 2009. The tipster said Rajesh Malik, then the executive vice president of MED Trends Inc., a health-careinformation technology consulting company in Rockville, Maryland, used falsified performance references and had a service-disabled veteran posing as the company’s owner in order to win government contracts.
The information came from divorce attorneys for Malik’s wife, who found the documents in the couple’s home. Malik is now a fugitive, according to court records.
“The case came in as a very run-of-the-mill Small Business Administration fraud involving a small contractor,” Atkinson said.
Over the next year, investigators traced the false references to officials at Nova Datacom LLC, a computer services and consulting company based in Chantilly, Virginia. Through a cooperator, they learned that Nova Datacom employed relatives of Army Corps officials, Atkinson said.
Investigators got their big break in March 2011 when Alex Cho, the company’s chief technology officer and former president, agreed to cooperate, he said.
Cho, who prosecutors said was close friend of Khan’s, provided details of a contract-steering fraud run out the Army Corps by Khan and Michael Alexander, another contracting official, and through a prime contractor, Eyak Technology LLC, Atkinson said.
Most of Eyak Corp.’s federal awards came through Eyak Technology, or EyakTek, which won contracts valued at more than $1.5 billion since the fiscal year that began October 2001, according to court records.
The scheme involved a five-year contract with the Army Corps under a program known a TIGER. Government agencies, including Homeland Security, NASA and the Coast Guard, use the TIGER contract to acquire information-technology services and physical and infrastructure security.
Here’s how the scheme worked, according to prosecutors: Khan would direct Nova Datacom and others to submit fraudulently inflated subcontracts to EyakTek for equipment and services. In most instances, the actual equipment and services were delivered. The inflated amounts, which Khan and his conspirators called “overhead,” were then kicked back to Khan, Alexander and Harold Babb, EyakTek’s director of contracts.
Khan had authority to place orders through TIGER that didn’t require competitive bidding. He was also the official who certified that the products and services were received.
Cho also told investigators of Khan’s plan to target a new contracting program called CORES, a planned replacement for TIGER, according to court papers.
Prosecutors used Cho to make a video of a payment to Alexander and record conversations with Khan and other participants. They then used wiretaps and other surveillance to monitor Khan and the conspirators.
In one video, Alexander is seen accepting an envelope with $20,000 in cash from Cho in a vehicle across the street from the Army Corps headquarters in downtown Washington — a location adjacent to the FBI’s Washington field office, which was leading the surveillance.
As investigators watched Khan, they discovered additional raids on the TIGER contract involving other companies, including one contractor who stiffed Khan out of his cut of more than $3.4 million in “overhead” money, Atkinson said. Another contractor stopped doing business with Khan because of increasing demands to file completely fictitious work orders, he said.
Prosecutors quietly scooped up these conspirators and secured their cooperation through plea deals.
Investigators also watched as Khan sought to maneuver the CORES contract under his control. For Khan, CORES presented an opportunity to continue doing business with the Army Corps after he left government through a subcontracting company controlled by his son, prosecutors said.
For that to happen, Khan first had to get the Army Corps interested in the contract and then rig the process so Nova Datacom would be selected as prime contractor.
The FBI recorded meetings where Khan, Cho and other Nova Datacom employees discussed different ways the contract’s “statement of objectives” could be drafted to ensure Nova Datacom won the bid. Nova Datacom pleaded guilty to conspiracy to defraud the U.S. and bribery.
Khan also managed to put a co-worker he considered a “trusted person” on the contract selection panel, according to court papers. In July 2011, Khan put a $56,000 down payment on a lease for a new BMW convertible for the person, who remains unidentified in court filings. A month later, he paid more than $23,000 to a home-improvement company for work on the colleague’s home.
Prosecutors wanted to see if Khan would be successful in his attempt to line up the contract, though delays in the process combined other circumstances caused them to move in sooner, according to court papers.
In July 2011, investigators captured text messages between Khan and an associate in thePhilippines that they interpreted as plans for Khan to have sex with a 15-year-old girl there, prosecutors said.
An FBI agent and a military investigator broke up the plan by visiting Khan at his Alexandria, Virginia, home, telling him his associate was under investigation by foreign law enforcement for sex trafficking, according to court papers. They told Khan that given his top secret security clearance, he might be blackmailed by foreign intelligence agents. Khan told the agents that he would postpone his trip, according to a government sentencing memorandum.
With Cho and Nova Datacom cooperating, Khan wasn’t receiving his kickbacks and was owed $6 million in bribe proceeds, prosecutors said. As Khan became more aggressive in his demands on Cho, the FBI rounded up conspirators on Oct. 4, 2011.
Alexander’s cooperation began almost immediately, followed quickly by Khan and Babb, according to prosecutors.
Their evidence was strong, Jeffrey Jacobovitz, a lawyer at Arnall Golden Gregory LLP who represented Babb, said in an interview.
“They had Babb on tape, they had others on tape,” Jacobovitz said. “Once people start pleading in the case it makes defense of the case that much more difficult.”
Khan in court papers seeks a sentence of 10 years in prison, arguing that the government’s proposal is twice the time that Alexander and Babb received. Khan’s lawyers, David Smith and Jeffrey Zimmerman, didn’t immediately respond to e-mail messages seeking comment on the government’s case.
“I have caused embarrassment and shame to my family, my friends, my country and to myself,” Khan told Sullivan at his May 17, 2012, plea hearing.
The Army Corps of Engineers didn’t respond to a phone call and online requests for comment about whether the agency had changed any of its contracting policies in the wake of the case.
The case is U.S. v. Khan, 11-cr-00276, U.S. District Court, District of Columbia (Washington).
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