QUESTIONS RAISED on loan for seller of military gear.
Firm previously scrutinized over status as small business
A military equipment supplier that has been accused of fraudulently misrepresenting its size in order to benefit from privileges associated with being a small business has received a Paycheck Protection Program loan worth at least $2 million, public records show.
Atlantic Diving Supply, a Virginia Beach, Va.-based reseller of specialized military gear, is the latest organization whose receipt of a taxpayer-backed loan through the Paycheck Protection Program has raised questions about a program launched in early April to help sustain employment at small companies through the economic crisis.
In late April, the Treasury Department retroactively clarified its rules after wellknown restaurant chains, car dealerships and hotel companies reported receiving Paycheck Protection Program loans. Several of them returned the loan funds after public uproar; others kept the money. The Small Business Administration has said it will audit all loans through the program above $2 million to determine whether the recipients were eligible.
Representatives from the Small Business Administration and Atlantic Diving Supply did not comment on the company’s receipt of loans.
The company’s legal issues are detailed extensively in a report released Monday by the nonprofit Project on Government Oversight. A review of business data by the group and the nonprofit Anti-Corruption Data Collective concluded that Atlantic Diving Supply was one of at least 27 Paycheck Protection Program recipients with estimated annual sales of more than $1 billion in 2019. Another 2,068 loan recipients cleared $100 million in sales last year, according to the analysis.
Nick Schwellenbach, a senior investigator at the Project on Government Oversight, questioned whether it’s appropriate for Atlantic Diving Supply to receive small-business coronavirus loans. Schwellenbach’s investigation also found that two other firms said to be tied to Atlantic Diving Supply — including one that was named in a settlement with the Department of Justice — separately received smaller Paycheck Protection Program loans.
“It’s important that taxpayer funding reserved for genuine small businesses isn’t siphoned off by companies that are not eligible,” Schwellenbach said. “As a top government contractor with revenues well over a billion dollars a year, it strains credibility that Atlantic Diving Supply is a real small business, especially given several recent settlements and law enforcement outcomes related to their alleged small-business contracting fraud.”
Although it received a favorable ruling from the Small Business Administration as recently as November, Atlantic Diving Supply’s small-business credentials have long been called into question.
Atlantic Diving Supply started as a small, family-owned shop focused on the military diving community in Virginia Beach, which includes the Navy SEALs. It was transformed under the leadership of long-time chief executive Luke Hillier, winning its first major government contract in 2000. It grew quickly to meet an insatiable demand for military gear of all sorts in the years after 9/11.
That fast growth became permanent business as the U.S. military presence in Iraq, Afghanistan and elsewhere dragged on for nearly two decades.
At one point, Atlantic Diving Supply filed papers to go public, something that is usually the purview of large corporations. In 2015, it purchased Theodore Wille International, a military food and equipment supplier with offices in seven countries.
Its business has remained healthy despite recent troop reductions. Atlantic Diving Supply received more than $3 billion in unclassified government contract dollars in 2019, procurement records show. That’s more than some wellknown, large government contractors, including Bechtel, KBR and CACI. Atlantic Diving Supply has already cleared $1 billion in federal contract receipts in 2020 despite the economic crisis.
As it has grown, Atlantic Diving Supply’s continued status as a small business has been critical to its participation in the Defense Department’s Tailored Logistics Support, a lucrative military supply line that is largely restricted to Small Business Administration-approved small and disadvantaged businesses.
In recent years, Atlantic Diving Supply’s official headcount has teetered close to the agency’s 500-employee limit for small-company designation, and the company has fought off repeated challenges to its status. If Atlantic Diving Supply were declared “no longer small,” it would not only be ineligible for Small Business Administration coronavirus assistance, but it would also be forbidden from competing on small-business setaside contracts that drive its business.
In 2017, Atlantic Diving Supply settled federal allegations that it used a network of allegedly affiliated companies to rig bids and fraudulently misrepresent its size. The Justice Department called the $16 million settlement “one of the largest recoveries involving alleged fraud in connection with small business contracting eligibility.”
Hillier, who has moved on from the CEO role but remained the company’s chairman as of July 20, according to a company filing, separately paid $20 million to settle federal allegations that he “violated the False Claims Act by fraudulently obtaining federal set-aside contracts reserved for small businesses that his company was ineligible to receive.” The settlements resulted from a lawsuit brought by whistleblowers.
Two of the alleged affiliate businesses — Karda Systems and SEK Solutions — were named in a related case in which Ron Villanueva, a former state lawmaker from Virginia Beach, pleaded guilty to federal charges that he conspired to defraud the United States. Villanueva admitted that he and a friend pretended both companies were run by people who qualified for particular grants and drafted a misleading letter to the Small Business Administration that mischaracterized the degree to which one firm relied on other suppliers.
Atlantic Diving Supply briefly lost its small-business designation as a result of those allegations when a Defense Department contracting officer, concerned by Atlantic Diving Supply’s settlement, requested a formal Small Business Administration review of the company’s size status and its degree of affiliation with other companies named in the whistleblower lawsuit, according to documents obtained by The Washington Post.
That review determined that Atlantic Diving Supply was “other than small,” which temporarily blocked the company from bidding on setaside contracts. But Atlantic Diving Supply successfully appealed that ruling, which was reversed because it relied on old financial records.
Today, the company continues to receive federal contracts designated for small firms. Because the settlements arrived at by Atlantic Diving Supply and Hillier did not include a determination of liability, the company has been allowed to keep benefiting from various small-business programs. Its most recent size determination was finalized in November 2019.