SBA Suspends GTSI From Federal Contracting

The Small Business Administration suspended GTSI's federal contracting authority, alleging that the $762 million reseller, No. 82 on CRN's 2010 VAR500 list, violated rules intended to benefit small businesses.

The SBA served a notice of suspension to GTSI CEO Scott Friedlander on Oct. 1, saying that GTSI served as a subcontractor for the Department of Homeland Security's FirstSource contract, which is a "100 percent small-business set-aside" for companies with fewer than 150 employees, wrote Michael Chodos, an SBA suspension and debarment official, in the letter, which was faxed to GTSI and addressed to Friedlander.

"The evidence shows that GTSI's conduct and performance as a subcontractor on various FirstSource contracts would have made the prime contractor ineligible for award of those contracts. There is evidence that GTSI's prime contractors had little to no involvement in the performance of the contracts, in direct contravention of applicable laws and regulations regarding the award of small-business contracts," Chodos wrote.

The SBA also alleges that the evidence shows that GTSI "was an active participant in a scheme that resulted in contracts set aside for small businesses being awarded to ineligible contractors, and with contracts not being performed in accordance with applicable law, regulations and contract terms."

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GTSI actively engaged in conduct that masked its involvement as a subcontractor, alleges the SBA. Namely, GTSI represented itself as a prime contractor to third parties; had GTSI employees obtain e-mail addresses from the prime contractor so that they could appear to be employees of the prime contractor; prepared proposals and sent quotes to the government as if it were the prime responding to bid requests; and created invoices and placed the letterhead of the prime contractor on the invoice before submitting it to the government, alleges the SBA. The letter does not identify the prime contractors involved.

NEXT: Potential Buyer Withdraws Bid

"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's Office of Inspector General is actively investigating the actions of GTSI with regard to its conduct as a subcontractor on numerous contracts set aside for small business," wrote Chodos.

GTSI's shares fell 40 percent to $4.35 Monday after the suspension was made public. Wednesday morning, shares were trading at $4.01.

Meanwhile, Eyak Technology, an Alaska-based federal contractor that had made offers in September to buy GTSI for $7 per share and then $7.50 per share, said that it has now officially withdrawn its bid. On Sept. 30, before GTSI had been notified by the SBA, GTSI told Eyak that it was not interested in pursuing the proposal.

In an open letter from Friedlander to GTSI's employees and customers, he said the company can continue to work on existing contracts unless a particular agency directs otherwise. GTSI also released a statement saying it intends to work with the SBA to address the situation and allow GTSI to continue to serve federal customers.

"The results of the SBA's suspension and related investigation cannot be predicted with certainty, however, and such results could include administrative, civil or criminal liabilities -- including repayments, fines or penalties being imposed on GTSI -- or GTSI's debarment from future U.S. government contracting, any of which could have a material adverse effect on GTSI's going concern status, financial condition and results of operations," according to the GTSI statement.

NEXT: Thirty Days To Contest Suspension

In the open letter, Friedlander said that GTSI had not been contacted by the SBA regarding this matter prior to Oct. 1. GTSI has 30 days to contest the scope of the temporary suspension, according to GTSI.

GTSI, Herndon, Va., declined further comment on the matter.