This story has been updated.
A Virginia Beach company that supplies advanced equipment for the U.S. military’s search-and-rescue operations has agreed to pay $16 million to settle allegations that it fraudulently obtained government contracts and engaged in illegal bid-rigging schemes, the Justice Department announced Thursday.
The Justice Department said the settlement resolves the government’s claims against the company, closing the matter without making a determination of who might be liable.
“After spending many months cooperating closely with the government’s investigation, we concluded that our company, our customers, and our employees would be best served by putting this matter behind us,” ADS said in a statement. “We are pleased that we were able to settle the matter amicably and that the settlement does not impede in any way ADS’s continuing service to all of its customers under its current contracts.”
The Justice Department said the $16 million payment was one of the largest ever made in connection with small business contracting programs, enough money to put a lot of small businesses under water. But ADS isn’t so small anymore: it made about $1 billion from federal contracts last year, making it the 56th-largest defense contractor, according to Bloomberg Government.
The company was little more than a dive shop called Atlantic Diving Supply when it started outfitting U.S. Navy SEALs with wet suits 20 years ago. It operated out of a trailer behind Lynnhaven Dive Center in Virginia Beach, and later nabbed a lucrative contract to supply the military’s search-and-rescue operations. As the company grew, it started selling more expensive supplies like robotics and construction equipment.
By April 2014, the company counted about 400 employees, according to the ADS’s website.
The allegations concern a collection of federal programs meant to help small businesses learn the ropes of the complicated government procurement process and secure contracts. The Justice Department alleges the company managed to take advantage of these programs despite its size by relying on an elaborate network of smaller companies.
The companies allegedly include London Bridge Trading Company, also based out of Virginia Beach, which makes ammunition pouches and tactical K-9 harnesses. That firm is facing its own federal investigation for allegedly manufacturing U.S. military materials outside the United States, in violation of U.S. acquisition policy, according to the Virginian-Pilot.
Also implicated is MJL Enterprises, which provides the military with a range of products including medical supplies, office supplies and tactical combat training. The Justice Department alleges MJL falsely claimed to be eligible for a contracting status set aside for service-disabled veterans.
The Justice Department named two other businesses, SEK Solutions and Karda Systems LLC, which allegedly falsely claimed to qualify for certain perks from the Small Business Administration.
The Justice Department claimed ADS hid its affiliation with these small businesses and misrepresented their size when applying for contract set-asides. The Justice Department did not say exactly how these businesses are allegedly affiliated.
The lawsuit was brought by an unnamed whistleblower, who is to receive approximately $2.9 million as part of the settlement, the Justice Department said.
“When ineligible companies improperly obtain set-aside contracts, they prevent the small business community from receiving the assistance that Congress intended,” Acting Assistant Attorney General Chad A. Readler said in a statement announcing the settlement.
Franklin Turner, a government contracts lawyer with the law firm McCarter and English, said the government has been closely scrutinizing the small business set-aside programs for years. Part of the problem, he said, is that companies don’t always devote resources to making sure they’re compliant with the law.
“The regulations are complicated, and the companies competing for those contracts don’t have a lot of lawyers making sure they’re compliant,” said Turner. “So the potential to make a mistake is stratospheric.”