Middlemen seeking to profit from the coronavirus pandemic have sprung up overnight to score billions of dollars in federal COVID-19 contracts, their stake as small as a mailbox rental or virtual office subscription.
Some never touch the product: They simply buy it from a manufacturer and resell it directly to the government – at an often steep markup.
Global demand for personal protective equipment has attracted hundreds of companies from construction, financing and technology that have shifted the focus of their business to supplying health care products, many of them without any experience. One in 10 federal COVID-19 vendors are government contracting newcomers.
With traditional manufacturers still backlogged – and another surge of cases well underway – this murky segment of the market has forced the government into an unfamiliar corner where it has to rely on unproven middlemen for lifesaving supplies.
Federal agencies cited critical need and noted that if a contract is not fulfilled, the government does not pay. Brokers who spoke with USA TODAY also said that they’re just trying to help fill gaps in the supply chain. But the companies that manufacture these products point to the potential for counterfeits, which swells greatly with unauthorized third-party resellers.
The contracting market has become dizzying for purchasing officers trying to decipher which vendors are credible. When brokers cannot deliver, officials are stuck scrambling to reissue contracts and track down new suppliers, all while the clock ticks away on frontline health care workers.
“It’s clearly opportunism,” said Benjamin Brunjes, an assistant professor at the Daniel J. Evans School of Public Policy and Governance at the University of Washington. “People are aware that there’s a huge amount of new money, and they’re taking a slice.”
From advanced research to emergency travel, the federal government has spent more than $19 billion in response to COVID-19, with agencies like the Department of Veterans Affairs, Homeland Security and NASA all competing for the same supplies. To expedite delivery, the federal government has eased standards on vendor competition.
As part of ongoing reporting on those contracts, USA TODAY scoured more than 1,600 single-source orders awarded to vendors from 15 states, including the largest and those hardest-hit by the virus. Journalists spoke to coronavirus middlemen, along with former procurement officials, public management professors, regulators and attorneys.
That review found nearly 10% of vendors who received a COVID-19 contract without competition listed a residence for their address, often an indication that they are middlemen. In the states analyzed, more than $75 million in single-sourced bids were awarded to these companies. If a similar proportion extends across the U.S., that would mean up to $250 million for home-based businesses.
In all, the government shelled out more than $2.7 billion nationwide to vendors completely new to the market and about $5 billion to hundreds of companies classified as wholesalers, according to an analysis of the spending data.
The coronavirus has created unique needs, ranging from refrigerated trailers to provide overflow morgue capacity at veterans’ hospitals to individually packed breakfast bars to limit the spread at a women’s prison camp in Alabama.
But the staple for these middlemen is the ongoing shortage of basic coronavirus supplies: N95 masks, PPE and other medical gear. A lack of federal oversight allows them to flourish.
“The contracting for PPE was not done at all like normal,” said Charles Tiefer, a professor at the University of Baltimore who specializes in federal procurement. “The government, by and large, does not work through brokers. It goes to the suppliers.”
The fact that vendors are small, or run a business out of their garage, does not preclude them from government contracts. Nothing in federal law bars newcomers either.
In certain instances, that kind of activity can be the sign of an evolving market, said Trevor Brown, a professor of public management at Ohio State University. Brown pointed to a store owner in Oregon who usually sold trinkets from China but used those same connections to source $1 million in COVID-19 masks.
“In normal times, you would want to go with someone with experience in the business who has been doing this for a while,” Brown said. “In times of crisis, purchasers are scrambling.”
Not all of those contracts were fulfilled as expected. Across the federal government, at least $130 million in mask orders alone were returned, adjusted or canceled, records show. The government has recouped its money, but those crucial supplies never found their way to the health care providers expecting them. In some cases, it meant delays of several months.
In Virginia, retired Army Captain Hans Mumm said an overseas PPE provider contacted him this spring needing help brokering a deal with the Bureau of Prisons for protective gowns.
He already had established his home-based small business and registered with the federal contracting system but had never received a procurement.
Mumm contacted the prisons system about his line on protective gear, and the $640,000 order came through quickly, with no competition. But it disintegrated within a week in early April – with no money ever exchanging hands – when his PPE supplier backed out because it couldn’t source the materials from China, Vietnam or India.
“I wasn’t trying to profiteer; I was trying to connect people in a situation where the (prisons bureau) was desperate for these gowns,” Mumm said. “I got suckered, but I’m one of the good guys. As soon as it fell apart I got in touch to cancel. I didn’t string them along or play games.”
He said the margins were thin and he hadn’t even calculated profit – he was just trying to do his part to help. He has no plans to try again.
Thomas Caulfield, special inspector general for pandemic recovery in the U.S. Department of the Treasury, said some vendors are actually trying to help, while others “see an opportunity to make money and sometimes inflate costs.”
“The government, rightfully so, is trying to figure out how to get the funds to people who need it,” Caulfield said. “You weigh the good of the people versus (oversight) protection, but it usually comes down to getting the supplies out.”
Counterfeit masks called into question
In dire need of surgical masks, the U.S. Forest Service turned to an unlikely source: a used-phone wholesaler that had never sold anything to the federal government. The agency agreed to pay $757,000 in late May for the shipment.
The Forest Service was satisfied with its order. But earlier that month, New York City officials had rejected masks from the same company, alleging the products were counterfeit, according to a federal lawsuit.
GlobalGeeks Inc., which operates from a sleepy New Jersey corporate park, had promised more than 1 million of the Chinese-made KN95 masks to various public and private customers. The company’s soured deal with New York City landed in federal court.
Importer USA Asia Global Inc. filed a civil lawsuit against GlobalGeeks in May, alleging the company held the masks in question hostage in its warehouse for three weeks, refusing to pay for them or release them back to the supplier.
GlobalGeeks filed a countersuit in June against SZN LLC, a second tier of middleman in the deal who brokered the transaction from a Brooklyn apartment and was working on commission for USA Asia, the suit said.
GlobalGeeks alleged it paid SZN up to $4 a mask, ultimately taking a $1.2 million loss on the rejected products.
Citing the pending litigation, an attorney representing USA Asia Global Inc. and SZN declined to comment. Lawyers for GlobalGeeks also declined to comment for this story, but in April a company executive discussed a plan to donate masks to officials in the Northeast.
“Our police officers, our firefighters: There are a lot of front-line workers that really, really need them,” GlobalGeeks Chief Operating Officer Kalid Loul told ABC 6 in Philadelphia. “We got our facility registered … we did all of our due diligence.”
As with wars or natural disasters, third-party brokers like GlobalGeeks and SZN emerge when demand outstrips availability.
But attorneys and procurement experts say the dynamics also are ripe for the potential of counterfeiting. Middlemen have targeted government officials with a variety of fake offers, mislabeled products and deceptive marketing tactics.
“When you throw that much money at a problem in a matter of weeks, it’s a flood, and it’s going to be much more difficult to control,” said Bruce Dorris, president and CEO of the Association of Certified Fraud Examiners. “There will always be people who take advantage of it, and effectively game the system.”
Home-based vendors flood the market
On a grassy corner lot south of Raleigh in North Carolina, Army veteran Jeffery Agyarko runs an IT solutions company out of his brick home.
Noelani Ventures LLC had done some technology business with the federal government in the past, including $36,590 of contracts in fiscal year 2018-19. But the coronavirus era is its first time sourcing medical gear.
In April, Noelani Ventures committed to provide more than $160,000 in medical gowns to the Federal Emergency Management Agency. The supplies were destined for Boston.
Within a week of the deal, the agency canceled the order, paying Agyarko nothing. Agyarko said he defaulted on the contract because suppliers in London – connections he had made in the technology world – skipped out on the transaction. He said he just wanted to help people.
“It’s difficult trying to find a reliable manufacturer or supplier,” Agyarko said. “It’s crazy. The market is saturated with nonsense, and it’s difficult to try to determine what is right and what is not. For small companies, like mine, it’s hard. We don’t have the resources to do all of the research.”
The flood of home-based business has made it difficult for government agencies to decipher who can really come through with supplies. Many agencies are doing minimal screening of the businesses and their owners. And procurement regulations actually give bidding preferences to small companies.
Stephen Berge is a former hospital nurse and Marine who won a $10,000 grant in 2016 from Florida Gulf Coast University’s “shark tank for veterans” to help launch his company, which started by searching for construction projects to sell window sills.
Berge runs the business out of his Cape Coral home, according to the state’s corporation registry. He previously faced a foreclosure judgment in 2010 after defaulting on $286,000 in loans. He also filed for Chapter 7 bankruptcy in 2011, listing more than $400,000 in liabilities, court records show.
In April, Berge got a $208,000 purchase order from the VA for anesthesia machines to be retrofitted for use as ventilators, which the VA says it received. Just weeks earlier, the Food and Drug Administration had approved the converted machines for treating COVID-19 patients.
That award was among more than $20 million Berge’s company, Bravo Inc., has received in government contracts over the past five years, federal records show.
Berge said he started supplying medical equipment even before the pandemic. He would not answer any more basic questions about his background or his sale of anesthesia machines to the government.
“I try not to give out anything about what we do or how we do it,” he said. “It’s a weird, cutthroat industry.”
No track record of scoring PPE
Across the country, the federal government has awarded COVID-19 orders to some 5,100 unique vendors, who’ve provided services ranging from security to janitorial cleaning and procuring medical products, according to nationwide data through July 6.
That includes more than 500 companies that had never received government contracting work before the start of 2020 – about one in every 10 vendors.
Among the newcomers was VPL Medical LLC, set up days before it landed more than $20 million in federal contracts.
The company was spotlighted by investigative nonprofit news outlet ProPublica earlier this summer because the government had failed to realize it was run jointly with Jason Cardiff, who is under sanction by the Federal Trade Commission for an allegedly fraudulent scheme involving smoking cessation strips and male sexual enhancement pills.
One of the business partners, Bobby Bedi, told USA TODAY in early June that the company had leveraged previous business relationships in Asia to land the contracts in the new venture.
“I watched closely what was going on in the world and established trusted sources of quality equipment before lots of manufacturers and brokers popped up who produce non-certified, substandard products,” Bedi wrote in an email. “It was solely through hard work and determination that I was able to make contacts in the government and land those contracts.”
A U.S. District Court judge froze the company’s assets in late June, arguing VPL assets should be seized just like the rest of Cardiff’s ventures. Court records from a receiver’s report show Bedi and Cardiff had paid themselves at least $420,000 out of a $5.4 million mask deal with the VA, which said the vendor delivered the 8 million masks.
Bedi, Cardiff and attorneys for VPL all have denied any wrongdoing and sought to unfreeze the government’s hold on the company’s finances.
Typically government purchasers will weigh a vendor’s past performance when deciding among bids. In normal times, that record can count toward as much as a third of the points used to determine who gets the award.
A vendor’s past performance is especially crucial during a pandemic, procurement experts say, when many of the safeguards to weed out possible fraud and abuse are circumvented to get supplies out more quickly. Companies lacking prior contracts can be harder to judge.
Hope Peddlers and Profiteers: Hundreds of millions of dollars goes to COVID-19 contractors accused of prior fraud
“Whenever you have the government throwing money at a problem, you’ll have folks who look to take advantage of it,” said Derek Cohen, former deputy chief of the fraud section at the U.S. Department of Justice, who now specializes in white-collar defense. “For all of these crises that you have to move quickly on, there’s a level of fraud baked in.”
Based out of a small suburb of Dallas, first-time vendor Alpha Jalla Services LLC secured up to $1.2 million from the VA through six orders for surgical supplies and PPE, getting preferential federal contracting status as a service-disabled veteran and Black-owned business.
Jeffrey Carter runs the company out of his home in Red Oak, Texas. His website lists a variety of PPE aimed at the pandemic, including hard-to-get N95 masks.
While Carter acknowledges the pandemic has opened up business for more middlemen, he argues the federal government remains too restrictive with smaller and lesser-known vendors. Most contracting officials, he said, still prefer to wait for a major company like 3M, even if it means waiting longer.
Carter says he has been able to meet his various government orders through suppliers in China and Thailand, although he would not explain how he found them. He insisted that all of his COVID-19 contracts were above board. The VA also confirmed it had received them.
But Carter acknowledged the situation is ripe for profiteering, especially by companies with close political ties.
“Right now, suppliers know that they can overcharge (agencies) and get away with it because they have a good relationship with the government,” said Carter, who added that government purchasing officers “go with who they know.”
Others question the ability of unproven vendors to deliver and doubt the quality of the products they’re finding.
“If 3M still cannot get any masks, and some vendor you’ve never heard of is saying they can, just based on common sense, it would raise a red flag in my mind,” said Steve Kelman, who was the top procurement official during the Clinton administration and now teaches at Harvard University. “The big question is whether they deliver, and will it be an acceptable product?”
Private companies step in for oversight
Experts attribute the middleman phenomenon to a mix of desperation, lax oversight and poor vetting of COVID-19 contractors – with an emphasis on speed over accountability.
“The government threw the kitchen sink at the problem in terms of contracting approaches,” said Jerry McGinn, executive director of the Center for Government Contracting at George Mason University. “They’re trying to go after anything they can to meet the need.”
In the absence of government vetting, larger companies – like mask manufacturer 3M – have tried to step in and protect their brand by going after third-party distributors in court. 3M has shut down more than 7,000 websites it claims peddle fraudulent or counterfeit masks. It has a particular emphasis on price gouging even with authentic 3M masks since the company has vowed not to raise its prices in the pandemic.
3M pursues middlemen: Arrest, lawsuits provide glimpse into coronavirus price-gouging playbook
What 3M found offers a deeper look at the problems with some middlemen.
“It’s giving bad actors an opportunity to exploit the market and take advantage of need,” said Haley Schaffer, 3M assistant general counsel for litigation. “Vendors are offering millions, billions, trillions of masks, and they don’t have the supply … the danger exposed from counterfeit products is scary.”
3M attorneys claim a Texas man set up a “3M Company Trust Account” to solicit money that was just a UPS Store mailbox – and a fraud.
In another civil lawsuit, a man allegedly living out of a Nevada hotel targeted Indiana state officials with emails offering “a nice Easter gift” of 100 million N95 masks at $2.82 apiece. 3M’s investigation initially led to Zachary Puznak.
Puznak settled his civil fraud case with 3M in July, saying in a statement that “people who contacted me were attempting to take advantage of my best intentions.” In an email to USA TODAY after the settlement, Puznak said he was eager to get back to selling masks.
Earlier this summer, 3M sued Georgia-based 1 Ignite Capital for allegedly offering state governments up to 10 million N95 masks at nearly five times normal cost. The price of a 3M mask can vary depending on the model, but its most common N95s sell for about $1.30 each.
Auta Lopes, founder and CEO of Lopes 1 Ignite Capital, told USA TODAY that she was a financial consultant operating as a medical supplies broker for the first time. The company denied the allegations and settled the case with 3M in May. Lopes said she is prohibited from discussing it.
Undeterred, Lopes also said she plans to continue middlemanning coronavirus supplies “now that the doors are open.”
Its hospitals and clinics battered by the virus, the VA is among the federal agencies that has turned to COVID-19 middlemen and unproven suppliers the most, spending more than $180 million on vendors new to the market. Only three other agencies, including FEMA and the Office of Preparedness and Response, spent more on newcomers.
The agency pointed to the intense demand for supplies and noted that if a vendor doesn’t deliver, or if a contract is terminated for default, the government is not out any money.
“During this time of unprecedented global demand for PPE, VA must cast a wide net in order to ensure we’re procuring lifesaving supplies needed to keep Veterans and employees safe,” agency spokeswoman Christina Noel said in an emailed statement. “All of our contractors have met the relevant criteria to become vendors for the federal government under federal law.”
The federal prison system had a similar response to its COVID-19 contracting.
“The federal government encourages and promotes small business and does not have an exclusion on new businesses,” prisons system spokesman Justin Long wrote in an email. “If a vendor is registered … can meet the specifications, and is competitive in price, they are eligible for an award.”
While many of these vendors managed to come through on promised shipments, court documents and procurement experts indicate the brokers can charge a markup from a low of about 2% up to whatever cut they can muster – an additional layer of cost ultimately paid by taxpayers.
With more traditional suppliers, quality controls like regular government facility inspections are built in, leaving governments less exposed to risk, said Brunjes, the assistant professor at the University of Washington.
“We’re spending so much money, it’s just impossible for anybody to keep track of where it’s all going, and you start to see these suspect businesses,” Brunjes said. “A lot of that is related to a lack of accountability.”
“I don’t see any benefit to using these middlemen.”
Josh Salman, Nick Penzenstadler and Dak Le are reporters on the USA TODAY investigations team. Josh can be reached at [email protected] or @joshsalman, or (941) 361-4967. Nick can be reached [email protected] or @npenzenstadler, or on Signal at (720) 507-5273.
This article originally appeared on USA TODAY: Rookie middlemen muddle the government’s effort to buy coronavirus supplies