Native corp.’s subsidiaries threatened with 8(a) ban
| Jan 14, 2010The feud has spawned a trio of lawsuits in Nome and Virginia that include allegations a former lead consultant for Sitnasuak Native Corp. broke the law by milking a federal program that allows Alaska Native corporations to go after government contracts, often without competition. Nome-based Sitnasuak is the largest of 16 Native corporations in the Bering Strait region. It seeks to recover more than $15 million for its approximately 2,780 shareholders.
Established under the Alaska Native Claims Settlement Act in 1971, Sitnasuak and its subsidiaries manage land and apartment buildings, and fuel storage and delivery in Alaska. But a large chunk of the company's revenue comes from subsidiaries involved in what are called 8(a) contracts with the federal government. Critics claim Alaska Native corporations receive unfair advantage through the Small Business Administration's 8(a) program
A complex contract dispute
Sitnasuak's troubles center around James Nunes, a non-Native consultant, and former Sitnasuak board president Robbie Fagerstrom. The corporation tapped Nunes several years ago to go after contracts available under the 8(a) program. Nunes was hired, in part, to build relationships to seek defense contracts and boost sales for two Sitnasuak 8(a) subsidiaries that manufacture military apparel -- SNC Telecommunications LLC and API LLC. As Sitnasuak's board president and chief executive at the time, Fagerstrom worked closely with Nunes to go after the defense contracts.
Sitnasuak argues in court filings that $13 million was wrongfully diverted from a subcontractor to Nunes' consulting firm and that he and Fagerstrom together received more than $2 million in overpaid compensation. Sitnasuak also claims Nunes placed the company's 8(a) government contracts in peril by failing to obtain permission to allow a non-8(a) contractor to manage the daily operations.
In spring 2009, Fagerstrom, who had served the corporation in various leadership positions for 33 years, was forced to resign from Sitnasuak as president and CEO, but remained on the board of directors. The day after he resigned, he got a severance package and began a $158,000-a-year job as SNC Telecommunications' chief executive. The next month, he was voted off of Sitnasuak's board, and the new board of directors fired him from the telecommunication's subsidiary.
Fagerstrom is suing for breach of contract, seeking about $500,000, said Bill Evans, Fagerstrom's lawyer. Sitnasuak claims its telecommunications subsidiary never would have hired Fagerstrom as CEO had it known he had just been forced out of his leadership roles within the corporation, and that Fagerstrom committed fraud by allowing himself to be hired without disclosing his embattled position.
Nunes is also suing Sitnasuak for breach of contract, said David Greenspan, his lawyer. Nunes began consulting with Sitnasuak subsidiaries in 2004 to help them tap the military market via the SBA's 8(a) program. Through his companies Insight Consulting Group and Insight Holdings Group, Nunes was contracted to provide management and sales services for SNC Telecommunications and API, cultivating opportunities to provide apparel for military personnel, including flame-resistant nylon.
It was a lucrative arrangement for Nunes. One contract called for Nunes to earn 40 percent of SNC Telecommunication's profits in the years 2009 and 2010. According to Fagerstrom's attorney, the company was poised to generate $200 million in revenue in 2009, turning a profit of $12 million to $15 million. Fagerstrom and Nunes argue their contracts should stand because they were crafted to cover them in the event either side terminated the relationship.
The corporation has countersued, citing the roles Fagerstrom and Nunes played in alleged reckless and unapproved business deals, as well as payments of inflated and unwarranted bonuses to themselves. Sitnasuak claims Nunes got away with more than $2 million in overinflated wages and $13 million in fabric rebates from a manufacturing subcontractor that should have gone to SNC Telecommunications. The rebate program was payback for SNC Telecommunications' role in persuading Congress to vote for the use of a less expensive, flame-retardant nylon to manufacture military clothing.
SBA reviewing Sitnasuak's subsidiaries
Sitnasuak leaders also claim contracts were wrongfully approved under Fagerstrom's watch, and that drastic action was required to thwart eviction from the SBA's 8(a) defense-contracting program, the very program that had allowed the companies to prosper.
In August and September, the SBA sent Sitnasuak letters identifying problems with Nunes' contracts, including lack of notification that he, as an outside consultant, was overseeing day-to-day operations, an arrangement that requires preapproval by the SBA. Sitnasuak claims Nunes didn't seek the necessary pre-approvals, and the September SBA letter threatened Sitnasuak with termination from the 8(a) program if it did not end those contracts. The same letter put Sitnasuak on notice that as of Sept. 10, 2009, the firms involved "will not be eligible for any new 8(a) contracts."
For now, Sitnasuak remains an 8(a) firm, although "they are currently under review by the SBA," SBA spokesman Jonathan Swain said in an e-mail, adding that reviews are routine and the SBA wouldn't comment further until the review is completed.
Nunes and Fagerstrom's attorneys deny all allegations of wrongdoing.
Fagerstrom "hasn't benefited at all from 30 years of running that corporation, and I think the people of Nome are aware of that," Evans said. "We'll be able to show that these allegations are just false."
Greenspan summarizes the legal entanglements as "a company trying to get out of its contractual obligations," and says he expects Nunes to prevail in court.
New 8(a) rules proposed
As the two sides fight it out in the courts, a larger battle looms for Alaska Native corporations like Sitnasuak. For years, critics have claimed Native corporations have received unfair advantages compared to other small businesses and that the SBA's 8(a) program lacks oversight.
The program creates preferences for economically disadvantaged small businesses. Alaska Native companies enjoy the lion's share -- 74 percent -- of federal 8(a) awards, according to a 2009 report by the U.S. Senate Subcommittee on Contracting Oversight. Native corporations can go after federal contracts without facing competition. They can also subcontract to larger companies that aren't Native-owned but have the expertise to fulfill the contracts. Critics argue this unique arrangement has generated billions of dollars in revenue for Native companies, giants in the sandbox winning government contracts with speed and ease while non-Native companies fight it out through competitive bids.
The SBA has called for its own rule changes. It proposes preventing large firms from partnering with Native corporations for noncompetitive bids, one of the most controversial provisions in the current program. The SBA also proposes that when joint ventures are created between Native corporations and partners, 40 percent of the work be done by the Native-owned 8(a) firm. The idea is to ensure that the economic development benefits the disadvantaged corporation and its shareholders as intended, rather than operating merely as a legal loophole through which to pass government awards to non-Native companies.
Trudy Sobocienski, Sitnasuak's current president and chief executive, would like to see the "bad actors" who take advantage of Native 8(a) relationships held more accountable, something to which she testified Thursday in Albuquerque, N.M., during a public hearing on the proposed changes.
"We believe that there are too many instances where a Native or other 8(a) firm enters in good faith into a business relationship with a non-8(a) firm that has no intention of (furthering) the goals of the 8(a) program or, even worse, has the direct intention of fraudulently manipulating the 8(a) for its own purposes," she said in her written comments at the meeting.
Contact Jill Burke at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Our corporate governance structures are dysfunctional and this is the result. Most of the problems are due to the way the entities that receive millions of dollars of government money are organized with inadequate systems of checks and balances. The results are inevitable and anywhere else, people would recognize that.
Ted Stevens created these unique organizations without the protections afforded by law to regular corporations. ANCSA corporations like Sitnasuak for example, aren't regulated by the SEC and are exempt from Sarbanes-Oxley protections. CDQ groups that have amassed net assets larger than the ANCSA corporations have even fewer stakeholder protections.
Passive, uneducated boards of directors hiring unqualified family members and cronies acting as executives and powerless stakeholders kept in the dark has been shown by experience to be a formula for wasting staggering amounts of money intended to benefit people living in poverty. We need to stop doing this except nobody has come up with a way that will work.
Nunes is not the problem here but a symptom; there are a multitude of opportunists just like him ready to step in to take his place at the trough when a space opens up.
It is a shame that Robby Fagerstrom's years of service will end in disgrace like this and it is even worse that the Sitnasuak shareholders are the ones who lose.
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For every one of these players that we know about there are ten more fighting to take their place. It is simply unfair to lay the responsibility of oversight of ANC's on their shareholders. What is really disgusting is that so many elected officials know exactly what is going on and instead of educating their constituents on these loopholes they manipulate the loopholes to profit from them personally. I keep hearing over and over again that this money goes directly to the native people - only there are never any examples. For the billions of dollars being earned on these contracts Alaska's villages should rival the swankiest winter resorts in Europe - only they look a lot more like the neglected and forgotten Indian reservations in the lower 48. Where is the money really going?
In fact, most of Alaska's elected officials shamelessly shill against any kind of oversight or accountability for this exclusive contracting preference - invoking the plight of Alaska's native peoples while doing so. This position is the minimum requirement to get elected - regardless of party affiliation.
You know who you are.
Next time you pocket that campaign donation, or take a bite from that gourmet meal bought by a pompous executive, take a moment to think about who isn't getting that money because you believe you deserve it more.