Abuses Mar Minority Contracting

When Belinda Guadarrama discovered the divorce papers, she thought her crusade might finally be over. For seven years, she had gathered documents that showed inconsistent ownership statements by her El Segundo-based competitor, which touted itself as woman- and Native American-owned and controlled.

Now, here it was, under penalty of perjury: Orie Rechtman swore he had “always exercised exclusive management and control” of Wareforce Inc., a computer hardware and software reseller. His wife, Anita Gabriel--who claims 25% Zuni heritage--was handed majority shares and the “nominal” title of chief executive “for business purposes only.”

The picture painted by Gabriel’s declaration in the divorce proceedings differed only slightly: Although she said she was “actively involved” in the business, Rechtman had always controlled the bank accounts. She hadn’t even realized how much money he earned.

Armed with the new documents, Guadarrama at last got the attention of officials--but what came next seemed not to go far enough to suit her. Wareforce was quietly dropped from the state Public Utilities Commission’s database of minority- and woman-owned firms. Then, earlier this year, the U.S. Small Business Administration notified Wareforce in a form letter that it did not currently qualify as disadvantaged; it politely invited the company to claim the status again in the future.

Tens of millions of Wareforce contract dollars had been counted toward federal and utility diversity goals. Now the principals were casting doubt on their own legitimacy. Still, no penalties. No warning. Not even an investigation into whether Wareforce had falsely claimed woman- and minority-ownership status.

No agency has accused Wareforce of wrongdoing. Yet its story, and Guadarrama’s battle to see the company scrutinized, offer a rare glimpse at a system in which abuse goes undeterred--one that is thriving despite attacks on affirmative action.

Today, everyone from government agencies to private corporations is stepping up efforts to contract with minority- and woman-owned firms, hoping to garner goodwill in a diversifying America. A stamp of approval from the many agencies that certify firms as disadvantaged--or the easy self-certification that some programs allow--is a marketing tool like never before for aggressive small businesses trying to squeeze in the door.

The prevalence of abuse is unknown, and official estimates range from rare to commonplace. Stricter certification programs do their best to weed out ineligible applicants, but enforcement ends there: Once a suspect firm makes it through the process--or simply checks a little box declaring disadvantaged status on federal forms--they are pretty much home free.

Penalties Are Seldom Applied

The responsibility to police the whole complex mess falls to competitors like Guadarrama, who are expected, on their own dime, to sleuth out evidence that supports their suspicions. But even when they do--a difficult task for someone running a small business--not much happens. Laws calling for fines or jail time for those who falsely claim disadvantaged status are virtually never applied.

“It’s a slap in the face of the minority business community that, when we do go to the various agencies for help in enforcing our programs, no one is really interested,” said Guadarrama, who chairs NASA’s Minority Business Resource Advisory Committee.

“There is definitely a victim,” she said. “The prime contractor or federal government included those dollars in their goal for minority businesses. . . . Those are dollars that should have gone to legitimate minority-owned businesses. There are hundreds of victims.”

Guadarrama’s company, Novato, Calif.-based GC Micro, is also a hardware and software supplier, but has not competed against Wareforce in years. Guadarrama said she has never met Rechtman or Gabriel, and monitored the company only to protect the integrity of the programs. Guadarrama knew the original Wareforce founder, she said, so when a customer told her the company was owned by a Native American woman, she was “somewhat surprised.” So began a years-long campaign that cost her plenty of time and energy.

While the system does little to crack down on violators, it is increasingly burdensome to the very entrepreneurs it was designed to help.

There is no centralized certifying agency, so businesses must endure many separate applications--some requiring mounds of financial records. At the opposite extreme, self-certification is so open to abuse that, beginning in October, federal agencies will no longer accept it. Disadvantaged businesses will instead have to undergo yet another detailed certification process.

“We spend so much time doing the paperwork to get certified, we don’t have time to get the jobs,” said Jan Bennett, a black woman whose Los Angeles company--Opportunity Marketing Group--helps match disadvantaged contractors with government and big business.

Ever since Rechtman bought into Wareforce in 1989, the company has offered competitive prices, customers said. Its disadvantaged status--a card it sometimes played as woman-owned, other times as Native American--only endeared it more to big companies eager to meet diversity goals.

Federal prime contractors like Hughes (now Raytheon Co.), TRW and the Jet Propulsion Laboratory were bound by U.S. regulations to track their success with disadvantaged subcontractors. Others, like Southern California Edison and Pacific Bell, used Wareforce contracts to meet voluntary goals set by the state Public Utilities Commission. Wareforce was comfortably lodged in their databases as a disadvantaged supplier, in easy reach of buyers.

The company was featured on a local cable TV show, “Making It! Minority Success Stories,” and graced a Top 10 list of local woman-owned businesses. How much its disadvantaged status helped its business is unclear. But it didn’t hurt: Annual sales grew from $2 million in 1989 to about $60 million in 1996, the last year for which figures are available.

Gabriel is no longer involved with Wareforce, which was granted to Rechtman in the divorce settlement. The company went public in July after merging with a Nevada-based corporation. The new entity, with Rechtman at the helm, trades on the Nasdaq market. Gabriel did not respond to a request for an interview. Rechtman now says his sworn declaration in the divorce was full of errors.

“In subsequent conversations, [Gabriel] refreshed my memory that she was in charge of the business from the time she became the CEO,” he said.

But records and interviews indicate Wareforce was claiming status as woman- and Native American-owned even before Gabriel began working there. According to former employees and Rechtman’s declaration in the divorce case, Gabriel had shares but no office or duties at Wareforce before 1992. But by 1991, the company had already won certification as woman- and minority-owned through the WMBE Clearinghouse--the certifying agency for the PUC. It had also landed in the Hughes database of disadvantaged firms--a status won by checking a box on a subcontracting form.

(While they maintain Rechtman was always in charge, former employees say Gabriel’s role in the company increased after 1992, and records she provided to the city of El Segundo indicate she purchased majority shares that spring with a check drawn on her personal bank account.)

Gabriel claims one-quarter Zuni heritage on her grandmother’s side, but the tribe does not recognize her. The company’s minority status with the PUC was first granted, then later denied. The city of Los Angeles in 1996 certified Wareforce as woman-owned, but denied it minority status.

Gabriel declined to submit to a blood test that would have confirmed her heritage, Rechtman said, because she found the suggestion “degrading.” Still, Wareforce used the minority label whenever proof was not required, claiming it on federal subcontracts and winning a place in Los Angeles County’s guide to companies certified as Native American-owned.

Affirmative action has suffered a string of assaults since the early days of Wareforce. Proposition 209 did away with California’s race-based preferences in 1996. And after a three-year freeze on the expansion of federal set-asides, the Clinton administration announced this summer that it will phase them out.

Incentives Remain to Get on the List

Yet strong incentives remain for companies to join the ranks of self-declared or certified woman- and minority-owned firms. In place of set-asides, the federal government is expanding bidding preferences for certain disadvantaged companies, and all federal agencies still maintain a 5% general contracting goal for disadvantaged firms. The U.S. Department of Transportation’s goal is double that--and it’s passed on to all agencies using those dollars, including the California Department of Transportation and the Metropolitan Transportation Authority.

And despite Proposition 209, some diversity goals in California remain strong: the PUC calls on investor-owned utilities to spend 15% of their contracting dollars with minority firms, 5% on women, and 1.5% on disabled veterans. Others have upped the ante. Southern California Edison’s 1998 goal is 30%; the city of Los Angeles and the Alameda Corridor Transportation Authority set 22% goals. Even private corporations are getting in on the action.

“[Companies like] GM or Coca-Cola, they aren’t interested in additional suppliers, except minority suppliers,” said Hollis Smith, president of the Southern California Regional Purchasing Council, which has certified 1,500 minority businesses for the private sector. “They want to have relationships with minorities because they want minorities buying those products.”

Minority- and woman-owned companies now must vie for contracts along with everyone else, but disadvantaged status can still offer a competitive edge.

“Everyone knows the government wants to see how good you’re doing in these areas,” said Tom May, manager of business opportunities for JPL, which counted more than $10 million in Wareforce contracts toward federal goals. “Procurement people look for these companies. They put you on a source list. They give you an ability to compete. . . . If I started a business tomorrow, I’d want them to know I was a black guy. You better believe that would help.”

Rechtman said Wareforce never won a set-aside, but the company’s minority- and woman-owned status got it noticed.

“Large organizations have minority reps that guide you through the system. . . . They give you a shortcut to the decision makers,” Rechtman said in an interview. “Every buyer has at least 10 or 15 different companies calling him a day. [If you can say] something like, ‘I’m a woman’ or ‘I’m a minority, listen to me for five minutes,’ that is a door opener.”

Against this backdrop, certification programs have become even more important. They form a complex maze that can drive small-business owners crazy. In addition to Hollis’ program, Caltrans, the MTA, the city of Los Angeles and the PUC each have separate programs that call for paperwork to document ownership and control. Others, like Los Angeles County’s program, require little or no documentation, and for years the federal government has allowed businesses to claim disadvantage simply by checking a box on a form.

Problem Appears to Be Widespread

Just how many suspect firms slip through the cracks is a matter of debate. One study concluded last year that more than half the manufacturing and wholesale firms contracting with the federal government as woman-owned were run by white men.

Timothy Bates, a professor of labor and urban affairs at Wayne State University in Detroit, cross-checked information provided to the federal government by supposedly woman-owned companies against Census Bureau surveys, where 55% of the same firms said they were male-run.

Bates declined to release his study because he conducted it for a private client. But he said it indicated that enforcement is so lax “they don’t even have the awareness to tell a consistent story on government forms.”

Women- and minority-business advocates cringe at this depiction, fearful that it will cast a shadow over the programs they have fought hard to secure.

“I think each one is an isolated incident,” said Vivian Shimoyama, president of the Los Angeles chapter of the National Assn. of Women Business Owners. “The piece of the pie is so small. To be throwing stones at one another for such a small piece [is not good]. We need to work together.”

But the number of denials at some of the tougher certification programs indicate that plenty of ineligible companies are trying to get in the door, said Carey Peck, manager of vendor services and outreach for the MTA. In April, for instance, the MTA received 25 applications for new certifications and denied four, a ratio Peck described as “shocking.”

“Most of the time it’s a pretty blatant front, to set up a minority or a female as head of a company,” Peck said. “If you say you’re the president and you own the company, yet your husband controls the bank account, we have to question whether you’re running the business.”

When ineligible firms do slip through, the chances of getting found out are slim. For example, Caltrans, which lists more than 6,000 companies in its database, decertified only 12 firms in the last fiscal year. The city of Los Angeles decertified three, the MTA two and WMBE Clearinghouse only one--Wareforce. Los Angeles County has never decertified a company.

Rather than monitor compliance, the programs instead rely on complaints--like Guadarrama’s--to uncover suspect companies.

Guadarrama, a longtime minority business advocate, says she hears weekly from businesses “concerned about the lack of enforcement,” but she adds that few follow up with federal officials.

Complaints received by the SBA dropped from 120 in fiscal 1994--15 of which were substantiated--to just seven so far this year, three of which were substantiated.

Sanctions Threat Rings Hollow

When complaints are substantiated, “nine times out of 10” the SBA merely notifies the firm that it does not currently qualify, said Calvin Jenkins, the agency’s deputy associate deputy administrator for government contracts. Only in rare cases--Wareforce included--is the matter forwarded to the SBA’s Office of Inspector General for further investigation.

The threat of sanctions--meant to deter fraud--has proven empty. Los Angeles County calls for a ban from contracting for three years for anyone who knowingly provides false information, but the penalty has never been imposed. Neither have PUC sanctions, which call for $5,000 fines or jail time.

Federal penalties are highest of all, calling for $10,000 fines for each false self-certification, and imprisonment, civil litigation and more. Jodi Newman, deputy assistant inspector general for investigations at the SBA, can count the cases on one hand. None have been criminally prosecuted, she said, and only a few have been pursued civilly under the False Claims Act, partly because the suspect firms often get the job done well.

“Without showing a loss to the government, it’s very hard to get a prosecutor to go with these, even if they falsely self-certify,” Newman said.

Prosecutors must also prove intent. But determining whether someone knew they didn’t qualify when they checked a small box on a contracting form is nearly impossible.

The Wareforce case fell short in other ways. Not only was there no loss to the government, Wareforce wasn’t even directly pocketing federal dollars, just tapping into federal subcontracting goals, said Deborah Jones, special agent in charge with the SBA’s Office of Inspector General in Glendale. The big prime contractors were getting a good price from Wareforce, and meeting their diversity goals at the same time.

“Everyone is sort of going through the motions here of saying, ‘Yeah, we’re doing the right thing,’ ” Jones said. “As long as the work gets done and they check the right box, everybody’s happy.”

While Jones wrote in a July 31 letter to Guadarrama that “the possibility exists that the [Wareforce] principals . . . may have been falsely claiming to be a small disadvantaged or woman-owned business,” she declined to pursue the matter.

The story changes markedly when an alleged loss is involved. A case now winding its way through U.S. District Court in Los Angeles shows just how high the stakes can be.

The $43.5-million civil case filed last year alleges that Orange County real estate auctioneer William Lange and his wife, Alisha Lange, set up a sham company under her name to win contracts with the Federal Deposit Insurance Corp. and the Resolution Trust Corp. The complaint also alleges that the couple overbilled the government by as much as triple the going rate.

Prosecutors allege that the company--LFC Real Estate Clearinghouse--was a front for Lange Financial Corp., which William Lange controlled himself. The FDIC accepted self-certification; the RTC certified the company as woman-owned. Documents in the case include an e-mail sent to employees before an RTC inspection, reminding them that “Alisha A. Lange owns the company and is an active, full-time employee of the company.”

The couple’s attorneys have maintained that the company was under Alisha Lange’s control. They filed motions to have most of the case dismissed, but U.S. District Judge Carlos Moreno denied those requests in July. No trial date has been set.

Pros and Cons of Tougher Certification

Some say that a stricter certification process is the only way to fix the mess, but others complain that legitimate companies are already suffering under myriad requirements.

“We have women who call themselves the queen of certification because they have to get so many,” said Janet Harris-Lange, who heads the Florida-based National Women Business Owners Corp., a sister to the National Assn. of Women Business Owners. “Some have 35 certifications. It’s very time-consuming. It’s very costly.”

Harris-Lange’s group provides yet another certification to women, with the idea that it will become a national standard.

Others also are trying to centralize the process. The MTA is vying to become a one-stop certification center for all transportation agencies in the state. And legislation written by state Sen. Richard Polanco (D-Los Angeles) and passed into law requires that all programs in California accept Caltrans certification, although implementation has stalled.

The federal government, meantime, is doing away with self-certification in an attempt to weed out fraud. Last month, the SBA began accepting applications for a new certification program, which takes effect in October. The change should “put down additional safeguards so the benefits of the program truly go to those people who are eligible,” the SBA’s Jenkins said.

But even under the new system, policing duties will continue to fall to people like Guadarrama, whose complaints will be heard only if they are made after a suspect firm bids on a contract, but before they are awarded the job.

For Guadarrama, it’s an exercise in frustration.

“It’s the same as asking the victim of a burglary to go out and identify the burglar, put the case together and then take it to the police and say, ‘Can you do something about this?’ ” she said.

“It makes me feel like a second-class citizen that they don’t think enough of our programs that they’re willing to work with us to police them.”