U.S. Program to Help Minority Firms Plagued by Failures : Contractors: The goal is to help disadvantaged businesses cash in on federal projects, but critics say the effort too often becomes a crutch that supports poorly run companies.

Gerard E. Ramirez, owner of Federal Data Systems, used to boast that he would one day run a major defense company.

Although his tiny Los Angeles firm had no experience in strategic weapons, it won an Air Force contract in 1985 to study a nuclear missile basing system. The Navy reluctantly awarded an electronics contract later, thanks to the government’s “8a program” to help disadvantaged businesses.

When his future looked bright, Ramirez leased a suburban Washington apartment to help market his firm and entertained Air Force big shots at the Space Division officers club in El Segundo. He drove a Mercedes-Benz, his wife a Jaguar.

For help, he turned to Congress: Rep. Duncan L. Hunter (R-Coronado) and then-Sen. Pete Wilson (R-Calif.), both of whom received contributions from Ramirez, wrote letters to top Pentagon officials on his behalf. Ramirez even joined the exclusive Republican Eagles Club for a while.

But today Federal Data Systems is mired in U.S. Bankruptcy Court, owing former employees, business partners and subcontractors more than $1 million. Allegations of fraud and national security violations, raised by former supervisors at Federal Data, are under investigation by Navy and Air Force agents.

The Internal Revenue Service is after Federal Data to pay back taxes. California recently suspended the firm’s corporate charter. And last month, the Air Force Space Division canceled a contract. Ramirez is attempting to reorganize the firm. He asserted in a lengthy interview that although he had made mistakes, everything was done legally.

The mess at Federal Data is symptomatic of the embarrassing problems that have long dogged the government’s 8a program, the broadest and largest U.S. effort to help minority-owned firms gain access to federal contracts.

Under the program, the U.S. Small Business Administration sets aside contracts for qualifying firms and pays them up to 10% above fair market value. Nationally, 3,600 firms have 8a status and hold contracts worth $13.8 billion.

When the 8a program works as it should, minority firms are nurtured into successful businesses and a share of the vast wealth of the federal acquisition system reaches minority communities. But all too often the program becomes a crutch that supports poorly run firms that wreak economic harm on employees, subcontractors and the government itself, critics say.

“Everybody suffers with this system, which is outdated and increasingly unable to perform,” said Herbert Fenster, a Washington attorney and a leading authority on defense contracting issues. “We are not doing a good job with the 8a program, and it is getting worse. The failure rates are way up.”

Many 8a firms end up over their heads financially and administratively, creating pressures to cut corners, Fenster said. In addition, 8a firms face the same convoluted Pentagon regulatory apparatus as big weapons firms--but with fewer resources to surmount bureaucratic hurdles. Among other things, that means that the small firms are forced to play political poker, just as prime contractors.

The SBA is implementing major reforms of the program, passed after the Wedtech contracting scandal in the late 1980s. Former executives of Bronx-based Wedtech testified that they paid hundreds of thousands of dollars to politicians and consultants to help win $400 million in Pentagon contracts.

Sixteen individuals were convicted, though four convictions have been thrown out on appeal. Overall, 80 of the SBA’s 8a contractors have been convicted on criminal charges in the past five years.

Although Wedtech was an extreme case, a number of prominent 8a firms that won controversial political help from Congress have failed. Univox-California Inc., a Los Angeles firm that was one of the Pentagon’s largest 8a firms, sought bankruptcy court protection in 1986 after a Commerce Department audit found the owner of the firm to be engaging in a “pattern of abuse.”

Some successful minority-owned firms eschew the 8a program because it stigmatizes their success as attributable to government assistance, according to one subcontractor who declined to be identified, citing the program’s political sensitivity.

Indeed, some advocates want to change the designation of 8a firms from “disadvantaged” to “historically underutilized.”

The SBA says the program is working better than in the past.

“I personally believe the program is working well,” said Oscar Wright, the SBA’s regional administrator for the West. “The program was intended to open opportunities to minority firms, and that is what it is doing.”

Hank Wilfong, the Reagan Administration’s 8a chief and now president of the National Association of Small Disadvantaged Businesses, said: “We would be up (a) creek if we didn’t have the 8a program. But overall, the SBA has not been doing the kind of job it should be doing.”

The Pentagon and the SBA have failed to achieve a target set by Congress in the 1980s that minority firms eventually get 5% of Pentagon business. In 1990, the Pentagon reached 3.4%, but at the current rate of progress it will take 84 years to meet the goal.

Jan Wolfe, the SBA’s current 8a chief, said Federal Data’s case is not typical. But the agency has never tabulated the failure rate of 8a firms and can offer little statistical evidence that the program is working.

An informal survey by The Times of a “current” SBA list of 8a firms in the West indicated that 22% could no longer be contacted or were no longer operating, based on a random sample of 27 firms.

“We have never been able to measure the program effectively,” said Derek J. Vander Schaaff, the Pentagon’s deputy inspector general. “There is an automatic reaction that small business is good, and we spend a lot of money to make it better. But I wonder whether that money is cost-effective or whether we are really helping small businesses by nursing them along. We really don’t have any idea.”

Although spending on the 8a program is generous, critics say many firms are chronically cash short. A look at Federal Data’s bankruptcy filing shows that its bills frequently went unpaid, creating widespread animosity.

“Jerry leaves a continuous wake of disaster behind him,” said Stanley Fowler, the former director of engineering at Federal Data. The firm owes Fowler $35,721 in back wages, from a period in which Ramirez persuaded Fowler to work without pay or risk being fired.

“You might wonder why anybody would do these things--working without any pay--but you would have to know Jerry Ramirez. He could convince you to do anything,” Fowler said.

Barry Arenson, the former technical director of the firm’s San Diego division, is owed $15,144 for company expenses he personally covered. Arenson said he was fired after refusing to sign falsified time cards for Navy work. The Naval Investigative Service is looking into the allegations.

“This man is a public menace,” Arenson said. “The problem is that he has no business ethics. When he got his 8a status and his SBA loans, there was never any effort to monitor him.”

A review of the 8a program by the National Academy of Public Administration, an independent think tank, last February found that the SBA conducts fewer than five audits annually of the 3,600 firms in the program.

And the SBA’s loans, including those to minority firms, “have for all practical purposes gone unaudited,” the reviewers said. The study reported that the SBA’s inspector general also believed that more auditing was required.

Federal Data owes the SBA $205,761 for a longstanding loan.

Ramirez denied that the unpaid bills were part of an effort to cheat anybody. Employees agreed to work without pay voluntarily and spent money without authorization, Ramirez said. Still, he admits to making bad business decisions--including not paying the IRS.

“We know Barry and Stan called the inspector general,” Ramirez said. “We are waiting for the IG to call us so we can give him our data. We have done everything legally.”

Ramirez said that he sacrificed personally and that his wife, Mercedes Alonso, took on $45,000 of credit card debt to help keep the company afloat. During Christmas, 1987, Ramirez recalled, they cashed in their individual retirement accounts to meet the payroll. And he earned so little in 1988, he did not file a federal tax return, he said.

As for Arenson’s allegation about time cards, Ramirez said that Arenson was laid off rather than fired and that nobody asked Arenson to sign improper time cards.

Ramirez asserts that he has no hidden wealth. He lives in a rent-controlled apartment on the Santa Monica coast. His office near Los Angeles International Airport is virtually empty except for two computers and some jumbled boxes of equipment.

“The bottom line is that there was a lot of ineptitude in the ownership of the company and an inappropriately small amount of oversight by the SBA,” said Dean Gittleson, a consultant who is owed $21,650 by Federal Data. “I tried to untangle the morass of no accounting system. But nobody there had a dishonest bone in their body.”

Federal Data, however, was not the first business venture Ramirez started that ended in litigation.

“Jerry Ramirez was the disaster in my life,” said Peb Edwards, a former partner of Ramirez’s in Federal Integrated Systems, which sold “Commander” computers to the Air Force Space Division in El Segundo in the early 1980s. “I don’t know how he gets the government to go along with his schemes.”

Edwards sued Ramirez in Superior Court for breach of contract and civil fraud, alleging that Ramirez formed Federal Data behind his back and took business away from Federal Integrated Systems, according to Edwards’ attorney, Steven Zwick. The case was settled last year for $8,000, Zwick said.

Ramirez denies Edwards’ claims and says the settlement covered little more than Edwards’ legal expenses.

Fred Bird, another former partner, said he lost tens of thousands of dollars in Federal Integrated Systems. “We took a bath,” Bird said. “A lot of this stuff I have forgotten because it is more healthy to forget. I was fairly naive about what I was getting into.”

In the current U.S. Bankruptcy Court action, the financial damage extends well past Federal Data employees. Small and large subcontractors as well were caught. In a Chapter 11 filing in Los Angeles, Ramirez listed debts of $1.1 million and assets of just $59,500, including an old Chevy truck worth $300.

The Grand Hotel, a 60-room hotel in San Pedro, was stiffed for $33,137 on rooms provided for Federal Data employees working at the Long Beach Naval Station. “Since they were a contractor, I figured that if the government paid them that they would pay us,” said Bertha Huang, owner.

“Jerry Ramirez wants to be a Fortune 500 company by Friday,” added Frank Bennett, the former corporate director of operations at Federal Data who is owed $7,316. “He wasted more money than you can imagine.”

Former employees said that Ramirez made unnecessary trips to Washington and that the firm’s apartment--in the defense industry enclave of Crystal City, Va.--itself was a needless expense for a small firm. In addition, former employees faulted Federal Data for buying a 1989 Jaguar for Ramirez’s wife with a check drawn on the company account.

Ramirez acknowledged that the down payment was made with a Federal Data check but said he later covered it with personal funds. The Virginia apartment was a business necessity, he insisted.

Although the 8a program is designed to aid minorities, major beneficiaries often include large corporations that perform work for the 8a firms and retired military officers whom the minority companies hire.

Federal Data, for example, employed a succession of former Air Force colonels, Navy commanders and defense civilians, most of whom were white males. Ramirez said he turned to them to break into the military’s “good-old-boys club.”

Today, he said, nine of his 18 employees--including himself and his wife--are minorities.

Ramirez also subcontracted work to non-minority companies, including Morrison Knudsen, the big engineering firm based in Boise, Ida. Such practices are clearly permitted under the 8a program because it helps minority firms and helps the Pentagon and SBA meet its goals.

If 8a firms have problems, meanwhile, the SBA and the Pentagon are reluctant to take action.

The Air Force, for example, never stepped in when Federal Data was having trouble performing the ballistic missile contract, which involved a study of basing nuclear missiles in deep silos. Instead, the service participated in an unusual scheme to allow Federal Data’s subcontractors to complete the project.

The trouble began in January, 1987, when Paul I. Nakayama, the firm’s key ballistic missile expert, resigned after learning that Federal Data was collecting from the Air Force but not paying its bills. “I was disillusioned by the whole thing,” he said.

Without Nakayama, Federal Data could not perform the contract. But Nakayama and Morrison Knudsen agreed to finish the project at a loss, saving Federal Data from a punitive cancellation.

The Air Force accepted the arrangement and was satisfied with the final study report, a service spokeswoman said.

But when the project was finished, the subcontractors alleged that they were cheated out of even the reduced payments they were owed.

“It was a shame because we tried to help him, and he stung us,” said Khosrow Badiozamani, a Morrison Knudsen official. “The (government) paid Federal Data, but no money was paid to Morrison Knudsen.”

Air Force funds that had been deposited in an escrow account were released to Federal Data rather than Morrison Knudsen or the other subcontractors, Badiozamani said. “We could never figure out how that happened,” he said.

Morrison Knudsen sued Federal Data and won a civil judgment but could not collect. It is owed $79,800.

Ramirez disputed Badiozamani’s account, saying he he never received any escrow funds. He added that he never contested Morrison Knudsen’s lawsuit because he lacked funds to defend himself.

After extricating itself from the troubled missile contract, Federal Data sought a contract with the Naval Electronics Engineering Systems Center at Vallejo. The contract, valued at up to $24 million over five years, promised to take Federal Data into the big time.

The SBA selected Federal Data to do the work in 1987, but the Navy balked. Navy officials were concerned about Federal Data’s capability and wanted to stick with their existing minority contractor, Superior Engineering of San Diego.

The Navy stalled for 27 months. Meanwhile, Federal Data turned to Rep. Hunter and Sen. Wilson, both of whom served on congressional armed services committees. Hunter wrote a letter in March, 1989, to Navy Secretary William L. Ball, asking him to help get the contract awarded. A similar letter was sent by Wilson, who had written another letter for Federal Data in 1985.

Ramirez and his wife were significant political contributors, given the size of their firm. From 1985 through 1988, the two contributed nearly $12,000 to Wilson, Hunter and other Republican officials.

Spokesmen for both politicians said that such letters are sent routinely as a service to constituents and that political contributions played no role in determining whether to send the letters.

“I can’t say the selection environment was absent of political influence,” said Glen Constantino, the SBA official who was directly responsible for Federal Data’s case. “Political influence was there. But I don’t know how much political arm-twisting went on.”

Still, Constantino added: “It is not unusual. It just comes with the territory.”

Critics say such congressional practices, although commonplace, are an essential ingredient in the waste and abuse that occurs in such federal programs as 8a.

“The idea that these (8a) contracts are being manipulated through political channels is 100% correct,” said Eugene J. Carroll, a retired rear admiral who is deputy director of the Center for Defense Information. “If for political reasons you impose on the Department of Defense, there is no chance to save money. I can’t even call such a program commendable when it has built into it the possibility of incompetence and malfeasance.”

The Navy finally issued the electronics contract to Federal Data, but under a formula that would transfer the work to the firm in 20% increments over five years. In the first year of the contract, however, the Navy issued only 7% of the 89,000 hours of shipboard work to Federal Data, Ramirez said. The balance went to Superior Engineering.

Capt. Peter S. Pierpont, commander of the Navy’s engineering center in Vallejo, said that Federal Data’s work has been satisfactory but that the Navy was “disappointed to hear they filed Chapter 11.”

Pierpont said the firm’s financial problems have affected the Navy “tangentially,” but he declined to elaborate. He added, “It was beyond any possibility for them to assume the full contract up front.”

Meanwhile, Federal Data is struggling, trying to perform the Navy work while it puts together a realistic financial recovery plan.

“It has been a nightmare,” Constantino said. “It has been a nightmare for Ramirez, but it has been a nightmare for us, trying to pick up the pieces.”