Deception plagues disabled veteran program


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State contracts go to front companies, nonresidents.
By John Hill -- Bee Capitol Bureau
Published 2:15 a.m. PDT Sunday, May 4, 2003
A program that earmarks state contract money for California's disabled veterans is exploited by out-of-state operators who get in through loose residency requirements and by companies in which veterans appear to be little more than figureheads, a Bee investigation found.
State law sets a goal of spending 3 percent of contract dollars with businesses owned and operated by disabled veterans.

Some disabled veterans say the program has become rife with abuse. Complaints focus on the Department of Forestry and Fire Protection, which each year pays about $15 million to lease firefighting equipment from private companies, giving preference in certain circumstances to those owned by disabled veterans.

A Bee investigation of these complaints found:

* Non-veteran businesses that formerly provided firefighting equipment to the Department of Forestry and Fire Protection now lease it to companies that claim to be owned and operated by veterans, which in turn lease it to the state.

Several of these disabled veteran businesses are hard to distinguish from the companies that lease them equipment. They share phone numbers, fax numbers and business addresses.

In one case, the disabled veteran business owner is an employee of the man who leases him the equipment. The veteran's application for state certification was faxed from his boss's business.

* Out-of-state companies can get into the program easily, despite a requirement that participating veterans be California residents. In contrast to the requirements of other state operations like Medi-Cal and public colleges, residency can be established simply by listing a California address.

One veteran arrived in California in a travel trailer and rented a small office space at a used car lot in Redding. He listed that as his home address.

Another came from Oregon and rented an apartment in Anderson, just south of Redding, for three months to establish residency. But after the fire season, he returned to Oregon.

* The Department of Forestry and Fire Protection continues to do business with a company that was kicked out of the program after it misrepresented itself as a disabled veteran enterprise. The company's state certification as a disabled veteran business was stripped when an investigation found that the man listed as owner was homeless and mentally disturbed and knew little about the firefighting operation. Later, the minority-share owner of the company, a non-veteran, brought in another veteran as president and majority owner and the company was recertified. In 2001 and 2002, the state paid the company $263,864 for providing firefighting equipment and crews, according to figures from the State Controller's Office.

"This program was made to help disabled veterans, not to help front companies get undue advantage," said Allen Amaro, a member of Veterans For Better Government, a group that has complained about perceived abuses.

In 1989, the Legislature passed a law that said 3 percent of state contract money should go to businesses owned and operated by disabled veterans. The program was intended to give people injured in military service a way to make a living.

After 12 years of spotty compliance by state agencies, Gov. Gray Davis ordered them to either meet the goal or explain why they had failed.

"When Californians leave the service, California should not leave them," the governor said in a press release in 2001 addressing the future of the Disabled Veteran Business Enterprise Program.

But some disabled veterans say Davis' order has had an unintended effect: In their effort to comply, state agencies are spending contract dollars on businesses in which the veteran is a figurehead rather than cultivating ones legitimately owned and operated by disabled veterans.

Amaro, himself a disabled veteran business owner, blamed the General Services and Forestry departments for failing to police the program. The breakdown could lead to the demise of a worthy effort, he said.

Amaro's group sent a letter to Senate President Pro Tem John Burton, D-San Francisco, calling attention to "front companies" doing business with the Department of Forestry.

Burton in February asked the Department of General Services, responsible for certifying companies as disabled veteran business enterprises, to investigate.

Burton wrote that he was interested in the complaints about widespread fraud "as an increasing number of stories about this matter have been circulating in the Capitol."

The Bee began its own inquiry, comparing addresses and phone numbers on certification applications to those in public databases for other, non-veteran businesses. The Bee also reviewed lease agreements between the businesses and the Department of Forestry and the U.S. Forest Service, motor vehicle registrations, voter rolls, property records and a variety of other documents.

Pat Jones, chief of the Office of Small Business and Disabled Veteran Certification of the Department of General Services, declined to discuss specific companies owned by disabled veterans. While Jones said there is nothing wrong with a veteran company leasing equipment, she acknowledged apparent problems among the Department of Forestry vendors.

"There are some real peculiar things going on, I think, with some of the suppliers that are contracting with Forestry and this heavy equipment ... . There seem to be some relationships with these DVBEs (disabled veteran business enterprises) and a partner that owns the equipment ... and that's the sort of thing we're looking really closely at right now."

Without a thorough investigation, she said, it's impossible to say whether the companies should be kicked out of the program. Jones' office is sending out letters -at a rate of about five per month -asking the veteran businesses to explain their connections to non-veteran companies or other questionable situations.

Jones said she believes the problems are most prevalent among businesses that work for the Department of Forestry. But Jones' office has decertified 32 companies of all types since 2000, in a statewide pool of 952. And The Bee examined one case outside the Forestry Department that raised similar questions about connections between the veteran business and another company.

To get certified, disabled veterans must fill out a two-page application asking for basic information such as addresses and phone numbers and the names of anyone besides the veteran who owns stock or serves as an officer in the company. The applicant must check boxes indicating who handles various duties.

The veteran also must provide a business license, various corporate records and a letter from the U.S. Department of Veterans Affairs attesting to a service-connected disability.

The aim is to ensure that a veteran owns at least 51 percent of the business, and that disabled veterans manage and control the day-to-day operations.

Once a business has been certified, state offices can contract with it and count the expenditure toward its 3 percent goal.

After years of failing to meet that goal, departments claim they recently have made progress. In the 2001-02 fiscal year, 2.8 percent of $5 billion in contract dollars went to disabled veteran businesses -up from 1.8 percent the year before.

The Department of Forestry says it assumes companies certified by the Department of General Services are bona fide. Forestry's main concern is that the company controls the firefighting equipment that the state will call on when fires break out, said Cindy Shamrock, Forestry's deputy director of management services.

This could be shown by a pink slip or bill of sale. Or it might be a lease agreement demonstrating that the business has "complete control of the equipment during the period of the lease," Shamrock said.

For the first 24 hours after a wildfire breaks out, Forestry calls equipment contractors who can get there fastest. After that, it switches to a list of disabled veteran businesses able to get their equipment to the fire within 12 hours. This preference for disabled veteran businesses was put in place in 1997.

Other, non-veteran businesses that had previously worked for the state "started looking around and saying, 'How can I get into that game?'" said Dan Lang, chief of fleet administration for the Department of Forestry.

The answer, Lang said, was leasing the equipment to a disabled veteran business.

"There's nothing illegal about it," he said.

A company called Steve Hudson DVBE is an example of a business that leases equipment from a non-veteran operation that formerly worked directly for the state.

Steve Hudson, a Vietnam veteran, sought certification in 2001. He listed his home address in Red Bluff as the principal office, and also gave his home phone number as a contact.

Hudson declared in his application that he was the 100 percent owner of the company. He stated that he was in charge of negotiating contracts and handling financial agreements. He said that he managed the work force, purchased and maintained equipment, and maintained the office or yard facilities.

In an interview, Hudson, a shop manager for Ben's Truck Repair in Red Bluff, said that he leases all the equipment from another business owned by his boss, Ben Sale. Ben's Truck and Equipment is at the same site. The equipment includes 10 bulldozers, four water tenders, six excavators and a variety of other heavy machinery.

"I don't basically own anything," Hudson said. "I lease it and lease it back" to the state through an equipment rental agreement.

Sale also provides the crew, fuel and maintenance of the equipment, Hudson said. Although Hudson sometimes goes out on fires, he said his duties consist mainly of dispatching -in other words, hiring his boss Sale to do the work. The veteran owner said he gets 5 percent of the gross income.

"If I was doing more, I'd get paid more," he said.

Hudson said that both he and Sale attend a conference with Forestry officials after a fire to settle the finances.

The Bee found conflicting information about which company has control over the equipment. The machinery Hudson's company offers to the state is also signed up with the U.S. Forest Service, which keeps its own list of firefighting equipment for hire. But with the federal agency, the equipment is under the name of Sale's businesses instead of Hudson's.

Hudson said if this equipment is being used on a Forest Service job, "then naturally, I can't have it."

Sale said it's the other way around.

"If he's not using that equipment, then I can use it on a Forest Service contract ..., " Sale said. "He's in the No. 1 position."

In either case, when the state wants the disabled veteran company to provide firefighting equipment, it calls the telephone number for Ben's.

Hudson's company was paid $419,000 by the Department of Forestry in 2001 and 2002. The department could count that amount toward its 3 percent goal.

Five other disabled veteran businesses examined by The Bee follow a similar pattern in part or in whole. They depend on leasing equipment from another non-veteran company, while sharing phone numbers or addresses with that same company. In many cases, the equipment listed with the state is under a different company's name with the U.S. Forest Service.

None of these facts, by themselves, disqualify companies from being disabled veteran businesses. But the circumstances reviewed by The Bee raise the question of whether the intent of the program -- having veterans control and manage companies -- is being met in these instances.

In his application to be certified by the state last year, disabled veteran Todd Gillam said he was the sole proprietor of Gillam Fire Support. He stated that he was in charge of all company duties, from managing the work force to maintaining the yard.

He listed a business address in Janesville, a tiny town southeast of Susanville.

But on the state's Web directory of disabled veteran businesses, and in the Department of Forestry's equipment rosters, a Willows address was listed. That address is a house owned by Ronald Kampschmidt, who said in an interview that he is Gillam's father-in-law.

The Web directory and the Forestry Department list also include a phone number for Gillam Fire Support that is identified in public databases and elsewhere as the number for Kampschmidt Trucking in Willows. That same number can be found on a fading yellow sign on a fence outside the Kampschmidt Trucking yard.

A call to the phone number was answered by Ronald Kampschmidt.

In an interview, Kampschmidt said he was the "operations guy" for his son-in-law.

"I just answer the phone and dispatch it for him," he said.

Kampschmidt said that Gillam has an exclusive lease to use Kampschmidt Trucking equipment.

"It's under contract with Todd, and he makes the call," he said.

The equipment Gillam offers the state is also signed up to fight fires with the U.S. Forest Service. But again, it's under different names: Kampschmidt Trucking, Gandy & Staley Oil Co., Inc. and Ronald Riisager of Chico. These three companies lease equipment and crews to Gillam for state jobs. The leases say that they are for Gillam's exclusive use during the fire season.

Gillam did not return several phone calls seeking comment. But in response to an inquiry from the state certification office, Gillam wrote in a letter last week that he has control over day-to-day operations.

He wrote that he signed the equipment rental agreement with the state and handles the banking and taxes, as well as preparing for the fire season and deciding whether to send out crews. He stated that he answers fire calls, or if he's out of cell phone range, his mother takes the call and acts as dispatcher. If he needs to, Gillam wrote, he goes out on fire calls himself.

After paying his expenses, he wrote, "I personally retain all remaining money."

His company was paid $104,786 by the Department of Forestry in 2002, according to the State Controller's Office.

Another company, Wallis Equipment, raises similar questions about the role of the veteran and connections to a non-veteran operation.

Veteran Stanton Wallis stated in his application that he would be the sole proprietor and 100 percent owner of Wallis Equipment, in charge of contracts, financial transactions and workers. Two other men who are not disabled veterans, Gary and David Soeth, would oversee purchases and maintenance of equipment and the office or yard, according to the application.

Wallis listed his home phone number as a contact on the application. But in the equipment agreement used by the state, David Soeth's number is given as the contact. On the application, Soeth's home -- a ranch tucked in the foothills of the Coastal Range west of Willows -- is given as the principal location of Wallis Equipment.

Wallis did not return several phone calls from The Bee.

"We lease the equipment to him," Soeth said in an interview. "We're the operators of the equipment."

Wallis uses a wheelchair and is unable to operate heavy machinery, Soeth said. But otherwise, "he runs the business. Everything goes to him. It's all in his name."

Soeth added that if the relationship is improper, the state should have said so.

"It's an opportunity for a disabled vet, to give him a better standard of living," he said.

In response to a recent inquiry from the state, Wallis stated that he dispatches firefighting equipment. He also provided a lease agreement with J.E. Soeth & Sons. That agreement stated that if Wallis' take amounts to more than 5 percent of the gross revenues, he must pay the excess to J.E. Soeth & Sons.

In addition to questions about control of the companies, The Bee also found instances in which loose residency requirements appear to hinder the state's intent to help Californians.

In other state operations, people who benefit from the program must produce evidence of their California residency. The University of California, for instance, grants in-state tuition only when students have shown an intent to settle in California by registering a car, getting a driver's license, paying income taxes in the state or registering to vote.

Medi-Cal requires recipients to sign a declaration of residency and produce evidence, such as a utility bill, a driver's license, a vehicle registration or voter registration.

It's much simpler to show residency for the Disabled Veteran Business Enterprise Program. Applicants must merely list a California address.

Disabled veteran John Beyersdorf gave a home address on Westside Road in Redding that is the site of Auto City, a used car lot. "We Finance $$$," says the banner outside.

Beyersdorf, a longtime resident of Washington, came to California in a travel trailer to set up a firefighting business, he said in an interview. He rented a small space at the car lot office, and parked his trailer elsewhere.

"I filled out my paperwork and did everything I thought was legally and ethically required, and I got my certification," he said.

Beyersdorf did not have a California driver's license and did not register vehicles at the Redding address, according to the Department of Motor Vehicles. Nor was he registered to vote in California.

Beyersdorf said he intended to find a permanent home between Red Bluff and Yreka. But when that didn't work out, he moved last October to Oregon, where he lives now.

He said he's since called the state to withdraw from the program. In any case, he added, it was a disappointment.

"We were called out on one lousy fire," he said.

Disabled veteran Grady Pratt moved to an apartment in Anderson for three months last year to establish California residency for the disabled veteran program, his business partner Gene Jungwirth said. Pratt could not be reached for comment.

Pratt does not have a California driver's license or vehicles registered at the Anderson address. Three days after the company was certified, he obtained a California identification card, which the Department of Motor Vehicles says does not require proof of residency.

Pratt does not own property in the state and is not registered to vote.

The company was incorporated in Oregon, and Pratt's disability letter from the U.S. Department of Veterans Affairs came from the Portland office.

After the fire season, the two owners returned to Oregon, Jungwirth said.

He said the state office that certifies disabled businesses knew that Pratt was moving here to get into the program.

"We talked that over with them," Jungwirth said. "They said that was fine."

In several of the applications reviewed by The Bee, Forestry wrote letters to the certification office asking it to speed up the process so that the disabled veteran businesses could sign up in time for the fire season.

The Department of Forestry struggled in recent years to reach the 3 percent goal but recently claims to have made progress.

In the 2000-01 fiscal year, the Department of Forestry spent only 1 percent of its $95 million contract dollars with disabled veteran businesses. The following year, it improved to 1.8 percent.

Despite the push to meet the goal, "we are in no way encouraging anybody to go out there and set up some kind of front," said Cindy Shamrock, Forestry's deputy director of management services.

But Pat Jones, the head of the certification office, said Forestry's policy may have unintentionally created an incentive to set up front companies.

When the Department of Forestry gave priority to disabled veteran companies, she said, "I think that had the inadvertent effect of creating these problems."

The certification office has since asked Forestry to help by observing the activity of its vendors for evidence that they're front companies.

Amaro, who wrote the letter to state Sen. Burton, said Forestry has ignored the problem.

"They know well that these companies are fronts," he said. "And they know that these companies they've dealt with a great number of years" are not owned and operated by veterans.

Amaro's group believes the abuses occur throughout state government. One other case examined by The Bee raises similar questions about the extent of the disabled veterans' involvement in transactions with the state.

State departments can claim credit toward the 3 percent goal by buying recycled printer cartridges from SDV-SCC, Inc., of San Mateo, a certified disabled veteran company.

The "Freedom Cartridge" is manufactured by a non-veteran company in Mountain View, American Transitech. The veteran company buys the cartridges from the manufacturer and resells to customers such as the state, owner Robert Ewing explained in response to an inquiry from the state last summer.

The state was satisfied with that explanation. But other information suggests that the nuts-and-bolts of the operation are handled by the manufacturer.

The Web site for the Freedom Cartridge is registered to a woman at American Transitech, the manufacturer. That same woman's business card gives her title as "customer service manager" for Freedom Cartridge. The phone and fax numbers on the business card and the Web site go to American Transitech.

Asked about the relationship, Ewing said in a voice mail to The Bee, "We do not discuss our suppliers or our customers."

Amaro said that for businesses of all kinds, it boils down to one motivation.

"There's a lot of money to be made," he said.

The Legislature is considering a bill to tighten the rules for veteran businesses. It would require the veteran to be more than just a figurehead and would impose new penalties on businesses that engaged in fraud.

The Department of General Services is drafting new regulations to crack down on front companies. The rules, for instance would require companies and their officers to provide tax returns upon request. Tax returns can help determine who really owns and controls a company.



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The Bee's John Hill can be reached at (916) 326-5543 or jhill@sacbee.com.


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