Can GTSI stay in business?

The clock began ticking Oct. 1 for GTSI Corp. and its future.

GTSI is counting down the days until a hearing on charges that the company violated small-business contracting rules. The Small Business Administration suspended the company from future government contract work because of those charges.

The question is whether GTSI can resolve the problems and return to business as normal. The company will defend itself during a hearing that is supposed to occur within 30 days, and possible penalties against GTSI include:

• An order to repay the government.
• Fines.
• Debarment, which would likely put GTSI out of business.

So far, information related to the violation charges has been one-sided, with only SBA’s version of the incident available. Although GTSI has issued statements, company officials have not directly addressed the charges or presented their version of events.

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According to SBA, GTSI was a subcontractor to three small-business prime contractors on several contracts. GTSI then received the majority of work and funds spent on those contracts, in violation of government regulations. Some of the allegations involve the Homeland Security Department's FirstSource contract. SBA said GTSI had its prime contractors provide e-mail addresses to GTSI employees so that agencies would think correspondence was coming from the small business, not GTSI.

“This could be devastating for the company,” said Warren Suss, president of Suss Consulting. “They live and die by federal contracts. Being suspended from government contracts could be a crushing blow.”

GTSI released a statement that states that the company would take prompt action to work with SBA to resolve the situation so it could continue to serve government customers. However, the company warned that it could not predict the outcome of the suspension or SBA’s investigation. The results could be administrative, civil or criminal liabilities, "any of which could have a material adverse effect on GTSI's going-concern status, financial condition, and results of operations," the company said in its statement.

Industry observers say SBA's action is a rarity. The last similar incident was the suspension of IBM Corp. by the Environmental Protection Agency, but that situation involved one agency and one contract. SBA’s allegations involve the way GTSI operates across government.

“This and other evidence in the administrative record shows an ongoing scheme on the part of GTSI and others to accomplish the improper purposes referenced above,” SBA said in its letter to GTSI notifying it about the suspension.

GTSI executives will need to prove to SBA that they understand the problems and that they have taken care of them. And they will also need to convince SBA that the same misdeeds won’t happen again, said Larry Allen, president of the Coalition for Government Procurement.

Allen said GTSI will need to do a lot to convince SBA that it has solved the whole problem, including getting rid of a number of senior managers.

“This is going to be an uphill battle because the government has its documents” as proof because it’s gone so far as a suspension, said Theodore Watson, a government contracts attorney at Watson and Associates.

In its first statement, GTSI said it would fight the charges. The company also complained that it received no warning or other notification from SBA that the agency was investigating allegations. No agencies had complained to GTSI about its behavior, the company said.

Some observers were not surprised that GTSI became a target.

In a blog posting shortly after GTSI’s suspension, Guy Timberlake, a small-business advocate, wrote that GTSI was “called to the carpet by a DHS official for forgetting they were not the prime on FirstSource (a contract vehicle awarded to small businesses) or for their apparent less-than-honorable intentions after DHS called them out on their behavior related to the FirstSource contract.”

“On the one hand, it’s about time,” Timberlake said. “There’s nothing new about the allegations SBA made” that apply to the industry as a whole.

He said prime contractors have been using small businesses to win federal contracts for a long time. “They’re just the first ones to get caught in a very bright spotlight, that’s all.”

Several commenters on Washington Technology's website voiced similar sentiments. Some said a large business was overdue to get dinged for such actions; others said it was just business as usual and that GTSI did nothing wrong.

As a publicly traded company, GTSI saw its stock price plummet 40 percent, falling to $4.35 Oct. 4 from $7.25 Oct. 1.

The SBA allegations also led Eyak Technologies to withdraw its takeover bid of $7.50 per share. Eyak is one of the small businesses that GTSI is alleged to have used in its scheme. GTSI was trying to fight off Eyak's takeover attempt and remain an independent company.

Eyak said it wanted to review its bid to evaluate the effect of the SBA charges.

The allegations against GTSI coincide with an anti-contractor political climate, with several high-level initiatives under way to reduce the number of contractors that the government uses while increasing scrutiny of the work that contractors perform.

Members of Congress have expressed concerns about small-business issues. Sen. Claire McCaskill (D-Mo.), chairwoman of the Homeland Security and Governmental Affairs Committee's Contracting Oversight Subcommittee, held hearings last year to examine whether Alaska Native Corporations were posing as companies that simply passed work to subcontractors. Other lawmakers have introduced legislation to toughen the rules on pass-through companies.

SBA Administrator Karen Mills said she would work on those types of small-business problems after the Government Accountability Office found some small firms in SBA’s business development programs simply pass work on to other contractors.

Several agencies, such as the Defense Department, have issued rules about companies that do little more than send work to subcontractors.

Allen said those actions represent the overtone of the political environment in which GTSI must defend itself.

GTSI has two options now that SBA decided to block the large IT company from doing business with the government.

Company executives can hire lawyers to challenge SBA’s decision to show that the company did nothing wrong or, at least, that the allegations are a misunderstanding. Or they can plead their case to SBA’s suspension official, in hopes that he might lift the suspension.