Whistleblowers Said This Company Is a Fake Small Business. It Got a PPP Loan.

This spring, a company that has raked in $1.25 billion in federal contracts so far this year secured a multimillion-dollar taxpayer-backed loan intended to help small businesses cope with the COVID-19 pandemic’s economic fallout. And two firms it was accused of conspiring with in a multibillion-dollar fraud scheme also obtained bailout loans.

In April, Atlantic Diving Supply, also known as ADS, Inc., obtained a Paycheck Protection Program loan worth between $2 million and $5 million, certifying, as all other loan applicants are required to do, that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The federal government may fully forgive Paycheck Protection Program loans without repayment.

A company with over $1 billion in federal contracts this year obtained a multimillion-dollar Paycheck Protection Program loan.

Although it sounds like a sleepy, beachside scuba shop, Atlantic Diving Supply was the 24th largest federal contractor in 2019, and equips the military and the Department of Homeland Security with everything from clothing to weapons to drones.

Much of its success, according to a whistleblower lawsuit, is due to fraud. The company, its former chief executive, its former general counsel, and others have separately settled that suit, which alleges the company defrauded the federal government by wrongly obtaining $2.8 billion in contracts meant to go to small businesses. The Justice Department remarked in a press release last year that the settlements “rank as the largest False Claims Act recovery based on allegations of small business contracting fraud.”

Last August, the company’s former chief executive officer, Luke M. Hillier, agreed to pay $20 million to settle accusations of his personal involvement in the scheme. Hillier maintains majority ownership of ADS, according to a 2019 Justice Department press release, and he remains chairman of ADS Tactical, Inc., ADS’s parent company, according to a corporate filing from July 20 of this year. In a related criminal case, a former Virginia state politician, who was named in the lawsuit as connected to ADS’s alleged scheme, pleaded guilty last year to defrauding the Small Business Administration (SBA).

“The actions of ADS and its affiliated entities deprived legitimate small businesses of valuable federal contracting opportunities,” said Hannibal Ware, the Small Business Administration’s inspector general, in 2017 when the government reached its first settlement with Atlantic Diving Supply. The law enforcement outcomes were prominently covered in the Washington Post.

“The actions of ADS and its affiliated entities deprived legitimate small businesses of valuable federal contracting opportunities.”

HANNIBAL WARE, THE SMALL BUSINESS ADMINISTRATION’S INSPECTOR GENERAL

Taken together, the settlements totaled $36 million. Yet that’s just a drop in the bucket compared to the value of the Virginia Beach-based company’s federal contracts, which have been routinely worth $1 billion or more annually for the last decade. In the last fiscal year alone, the feds awarded the company contracts worth $3.2 billion—a new high for ADS. The company beat back an attempt last year by the SBA to rescind its ability to win contracts reserved for small businesses. ADS continues to obtain small business contracts in 2020.

Atlantic Diving Supply is a poster child for how savvy companies can navigate the rules governing federal small business programs in ways that can appear to break them—rules that are in some ways even looser when it comes to the Paycheck Protection Program (PPP). And while the SBA prevents loans from going to entities that are at least 20% owned by someone with a pending criminal indictment or felony conviction within the last five years, the allegations that Atlantic Diving Supply defrauded the federal government were civil charges and were settled with no determination of fault.

Atlantic Diving Supply and Hillier did not respond to requests for comment.

Small Businesses?

Atlantic Diving Supply is not the only company with 10-figure sales numbers last year that obtained Paycheck Protection Program loans from the federal government.

It was one of at least 27 companies that had estimated annual sales last year of more than $1 billion that received the Small Business Administration loans, according to a review by the Anti-Corruption Data Collective (ACDC) and the Project On Government Oversight (POGO). There are 2,068 PPP loan recipients with estimated annual sales of over $100 million in 2019.

These sales figures raise questions about whether such large companies were eligible to receive money through a small business rescue program. To determine eligibility, the SBA primarily applies a revenue or workforce size standard specific to each company’s primary industry.

However, POGO and ACDC found that 16,692 loan recipients exceeded the relevant size standard for their industry—standards that can vary considerably depending on which business sector a company falls in. (See “Data Methodology” for more information.)

The loans obtained by those 16,692 companies collectively are worth at least $22 billion and up to $50 billion. (The SBA provides a range, not the specific value of each loan.) This aligns with other reports finding that large, established businesses were able to obtain loans from banks, while many mom and pop businesses have reported difficulty accessing them. Congress had directed that loans to small businesses “in operation for less than 2 years,” especially those run by women, minorities, and veterans, should take priority.

Recipients exceeding these size standards may not have necessarily committed any wrongdoing, since the SBA also uses an alternative standard that can take into account a company’s debt and liabilities. But the PPP data does not indicate if loan recipients qualified on the basis of this other standard, nor is there public data on the debt and liabilities of privately owned companies, which make up the vast majority of PPP recipients.

In fact, the Small Business Administration inspector general and Government Accountability Office have, in the past, found the agency giving loans to companies that are ineligible for them, sometimes because the actual companies benefitting are concealed or because a small entity is controlled by a larger organization.

Part of these worries stem from the scale of the Paycheck Protection Program, which was far greater than anything the SBA had ever previously administered and was executed in an extraordinarily truncated period of time. Lenders affiliated with the program doled out $525.8 billion in loans between April 3 and May 6, 2020, “an amount representing more than 20 times the largest year in SBA’s history in just 33 days,” according to its inspector general. In a lessons learned report, that watchdog further wrote that “increased loan volume, loan amounts, and expedited loan processing timeframes may make it more difficult for SBA to identify red flags in loan applications.”

“A Vision of Something Greater”

Twenty years ago, Atlantic Diving Supply was far smaller than it is today.

In 2000, the Defense Logistics Agency, which supplies the military with gear, awarded Atlantic Diving Supply with its first major contract, according to the company’s website. After the attacks of September 11, 2001, special operators like the Navy’s elite and secretive SEAL Team Six, which would eventually kill Osama bin Laden and is based near the company, would take on an increasing share of the combat in the newly declared war on terror. And the contracts to supply them flowed, many in the direction of Atlantic Diving Supply. Perhaps no single factor explains Atlantic Diving Supply’s growth more than the post-9/11 boom in military spending.

But there are other likely factors behind its success too. Hillier, the company’s former CEO and the current chairman of its parent company, worked for the Navy handling contracts in the early 1990s, according to a 2012 profile of him in the Virginia Pilot. That experience may have proved useful when Atlantic Diving Supply was spun out of his family’s business in 1999 with a focus on winning military contracts. According to Atlantic Diving Supply’s website, “Luke brought a vision of something greater for the dive shop” that his family had run since the late 1970s. Later on, Atlantic Diving Supply brought on former high-level military officers to its board of advisors.

Atlantic Diving Supply operates as a classic middle man, connecting the Pentagon and other federal customers with a wide range of goods from thousands of vendors. Illustrating that role, the company supplied defective combat boots to Somali troops battling al-Qaida-allied al-Shabab fighters. A court filing in a lawsuit over the incident said the boots were made in China and purchased by ADS from another company. A 2011 online Halloween ad posting by that company features the boots as part of a “Hot Shots / Charlie Sheen costume.”

While that was an instance of ADS working as a subcontractor, it has directly won many other federal contracts, some exclusively set aside for small businesses. For companies working in Atlantic Diving Supply’s industry, the relevant size standard set by the SBA is its number of employees. To be considered a small business it has to employ 500 employees or fewer.

But as the company grew, it allegedly found ways to get around this. The crux of the whistleblower lawsuit against Atlantic Diving Supply, brought by an anonymous former employee and an anonymous consultant, claimed the company evaded this eligibility restriction by concealing its affiliation with a number of other companies that it actually controlled.

Had the government known the other companies were actually controlled by Atlantic Diving Supply, and totaled the combined company’s staffing numbers accordingly, Atlantic Diving Supply would have been deemed ineligible for contracts that the federal government sets aside specifically for small businesses, the whistleblower suit alleged.

The complaint details seven other businesses that were part of the alleged scheme.

For instance, the lawsuit states about a company called MJL Enterprises, “ADS has used MJL simply as a ‘pass through’ entity in order to illegally win” service-disabled veteran-owned small business set-aside contracts. It notes that MJL also was at one time based at Atlantic Diving Supply’s former address. MJL settled claims in the whistleblower lawsuit for $400,000.

The lawsuit goes on to state about another company, called Iron Brick Enterprises, that “Iron Brick shares common management with ADS” and its address is the same as another business started by Hillier.

This spring, both MJL and Iron Brick obtained Paycheck Protection Program loans. According to Small Business Administration data, MJL obtained a loan worth between $150,000 and $350,000, and Iron Brick obtained one worth between $350,000 and $1 million.

MJL and Iron Brick did not respond to requests for comment.

The whistleblower suit extensively cites the Small Business Administration’s affiliation rule, which says that if separate companies are substantially controlled by the same management, they can be seen as affiliated—in other words, as just different parts of one common entity.

The rule was recently the focus of lobbying by various interests when Congress created the Paycheck Protection Program. The coronavirus relief law creating the PPP carved out loopholes so some companies would not have to abide by the affiliation rule, and killed off a more restrictive version of the rule. The law also suspended “the ordinary requirement that borrowers must be unable to obtain credit elsewhere,” although “borrowers still must certify in good faith that their PPP loan request is necessary,” according to the Treasury Department. This change opened the door to businesses owned by larger companies or that have wealthy investors to receive Paycheck Protection Program loans.

“Hillier has used revenues from fraudulent SBA set-aside contracts to fund an opulent lifestyle.”

WHISTLEBLOWER LAWSUIT

According to experts, there has been “confusion” over how the affiliation rule works in relation to the Paycheck Protection Program. Corporate defense attorneys say the rule will continue to be relevant for many loan recipients who may face law enforcement scrutiny and whistleblower lawsuits.

But the wheels of justice can turn slowly: Nearly six years passed between the filing of the whistleblower suit against Atlantic Diving Supply in 2013 and Hillier’s settlement.

The 105-page complaint described how “Hillier has used revenues from fraudulent SBA set-aside contracts to fund an opulent lifestyle,” including buying a Ferrari, a $4.8 million ocean-side home in 2008, and another $7.6 million home the next year.

ADS and Hillier had been active donors to political campaigns, including giving tens of thousands of dollars to a former member of Virginia’s House of Delegates, Ron Villanueva, a Republican who represented the Virginia Beach area. Villanueva is featured in the lawsuit as being intimately connected to two companies that were allegedly part of Atlantic Diving’s scheme. Both of those companies settled claims in the lawsuit for $220,000.

Villanueva pleaded guilty last year to participating “in a nine-year conspiracy involving over $80 million in fraudulently obtained government contracts,” according to a Justice Department press release. According to reporting by the Virginia Pilot, Hillier brokered introductions between Villanueva and others who were part of the fraud scheme.

“We … Own up to Mistakes”

Despite the law enforcement actions involving Atlantic Diving Supply, it doesn’t appear that the company has been hit with a tidal wave of consequences. Although, as the Washington Post first reported, the Small Business Administration rescinded Atlantic Diving Supply’s status as a small business in March 2019, the company successfully appealed, reversing the agency’s decision in May.

In theory, the Small Business Administration could have considered debarring Atlantic Diving Supply, blocking it from winning new federal contracts and loans for a period of time. “A government contractor that is suspected of willingly misrepresenting its size should be referred to SBA’s Suspension and Debarment Official (SDO) to be considered for debarment,” according to the agency’s procedures. Atlantic Diving Supply was never debarred.

The Small Business Administration would not comment.

And while the company’s website states, “we hold each other and ourselves accountable to follow through on commitments [and] own up to mistakes,” it and its chairman’s settlements of the whistleblower lawsuit contained no admissions of wrongdoing. In their wake, the contracts have continued to flow and the company obtained a Paycheck Protection Program loan.

For Atlantic Diving Supply, the financial impact of the coronavirus and of the whistleblower lawsuit appears to have been little more than a ripple.