Originally published at Naples Daily News.
Alexandra Glorioso , alexandra.glorioso@naplesnews.com; 239-435-34422:54 p.m. ET July 23, 2016
A subsidiary of congressional candidate Francis Rooney's national construction and real estate company received federal contracts meant for small businesses that it didn't qualify for, federal contract data show.
The Tulsa, Oklahoma-based equipment business, OAI Electronics Inc., received $8.8 million in federal contracts since 1996, including at least $2 million identified in federal spending data for contracts meant to help small businesses, according to federal contract records. OAI, however, did not qualify until at least 2013 as a small business because it was part of Rooney Holdings, which bought it out of bankruptcy in a federal case closed in 1994, records show.
Rooney's daughter, Kathleen Rooney, took over OAI in 2012 and restructured it as a woman-owned small business based in a disadvantaged area, receiving special certification from the U.S. Small Business Administration. That move made it eligible for contracts from federal agencies looking to give work to qualified small businesses.
But that designation is questionable, according to one expert, because of Kathleen Rooney's work with Rooney Holdings, an investment company known for its construction and real estate businesses that generates more than $1 billion a year in revenue. Rooney Holdings still owns 49 percent of OAI, Kathleen Rooney is an equal owner with her father and other family members of Rooney Holdings, and she sits on the boards of both OAI and Rooney Holdings.
It's not clear how many of the federal small business contracts, awarded over more than 20 years, went to Rooney's subsidiary. Rooney and his companies' leaders say they did not intentionally break any rules.
"It certainly wasn't any big, intentional deal to act like we are a small business when we were not," Rooney said. “We had no control over how the government classified the contract after we bought the company, but they certainly knew" OAI did not qualify as a small business.
Rooney, now running for the Southwest Florida congressional seat that U.S. Rep. Curt Clawson is leaving, is campaigning against inefficiencies and waste in the federal government. The federal award of the small business contracts came under a troubled U.S. Small Business Administration program that has come under scrutiny for mismanaging the government's effort to help independent small businesses.
The federal contracting process is flawed and has handed out many awards to companies that didn't qualify, said University of Baltimore law professor Charles Tiefer, who teaches contract law and specializes in government contracting. But businesses that benefit also must take responsibility, he said.
“The government has a very weak system for checking bona fide small businesses. The government gets fooled all the time. Period. But that doesn’t mean the contractor gets off the hook,” said Tiefer.
OAI most recently received a federal contract as a small business based in a disadvantaged area in 2015, totaling $119,352 from the U.S. Defense Logistics Agency, according to federal contract data. It first began receiving the federal work under Rooney Holdings in 1992.
But how many it received in between is unclear because many of the contract documents are no longer available or have been destroyed by the federal government over the past two decades. And Rooney and his company executives could not locate many of them because, they said, the documents likely have been destroyed over time as well.
The government's Federal Procurement Data System and FedBizOpps websites offer some information, although not complete. The Naples Daily News identified contracts awarded to OAI through the federal sites and private sites offering access to archived contract data.
OAI began making parts for the government as early as 1992, after Rooney Holdings acquired the small Oklahoma company, contract data show. While it's not clear if the 1992 contract was granted to OAI under a small business designation, OAI was identified as a qualified small business eligible for federal contracts as early as 1996, the data show.
OAI continued receiving the special small business set-aside contracts, totaling at least $2 million from 1996 to 2009, according to federal contract data.
Much of the federal work meant for small businesses that went to OAI between 2005 and 2008 -- $522,210 -- was awarded through three federal contracts with the Defense Logistics Agency, including contracts to make microcircuits and radio antennas, according to the contract data.
In 2009 after those three contracts expired, OAI sought and won a contract under a preferred small business designation for $60,390 to provide an antenna assembly for the Defense Logistics Agency, according to the federal government's contract data site, FedBizOpps.
As OAI was winning these small business contracts, Forbes reported in 2008 that Rooney Holdings was one of the country’s largest private companies with just over a billion dollars in revenue and over 2,000 employees.
When presented with the Daily News reporting, OAI and Rooney Holdings executives confirmed that OAI had received small business contracts that it didn't qualify for after Rooney Holdings acquired the company. Kevin Moore, Rooney Holdings president and an OAI board member, said he asked for a thorough review of federal contracts and learned that OAI received small business contracts.
"The small business stuff was there, no denying that," Moore said.
But he and Rooney argue there was never any effort to mislead the government or act maliciously.
“We know we are not a small business,” Moore said, noting that OAI had handled other federal contracts that were not awarded through any special small business designation.
“There was no focused effort to chase this stuff,” he said. “We obviously made a few mistakes here, I guess."
Rooney said he believes the government shares some of the blame, because it was clear when OAI was acquired by his mammoth Rooney Holdings that the electronics equipment business was not eligible for special small business contracts. He said he believed OAI was receiving some of the federal work because it was considered a sole-source provider of some of the material.
"I would say on this paperwork stuff, our guys, some of our paperwork wasn't as complete as it should have been," Rooney said. "But the government wanted the radios so bad. So I don't know what the government did and didn't do."
OAI was receiving small business contracts before Rooney Holdings bought it.
During a time when military contracts were abundant under the Reagan administration, the small business started in the southeast Oklahoma town of Hartshorne won a $16 million military contract to make radios, according to news accounts from 1988. The company, known as Oklahoma Aerotronics Inc. at the time, qualified for a series of “set asides” under a federal program that guaranteed contracts for small businesses to meet a goal of giving such companies 23 percent of all federal work.
In 1991, Aerotronics declared bankruptcy, and Rooney Holdings later bought it and changed the name to OAI Electronics Inc.
Rooney said in an interview the government was happy to have the Rooney Holdings subsidiary take over federal business from the bankrupt Oklahoma Aerotronics.
"They were ecstatic that someone with some capital bought it and could resume production," he said.
OAI began experiencing financial pressures in 2008, according to Tyler Reeder, the company’s general manager. The market had crashed and Reeder said a lot of manufacturing work in the area was going to China, South Korea and Taiwan. The federal small business contracts OAI was receiving were expiring.
In 2010, the company went on to produce more antennas for the government but OAI received one of those contracts through a competitive bid process, not the small business awards that are less competitive, according to contract data from Fedmine.
Reeder said Rooney and others decided to restructure the company in 2012, giving majority ownership to Kathleen Rooney in order to become eligible for more small business set aside contracts and to serve as a subcontractor for bigger companies serving the U.S. Department of Defense. Reeder called it a “strategic move,” although Rooney Holdings continued to own 49 percent of the company.
Rooney said his daughter "wanted to get into a business and it's a great business and most of our customers were urging us to go back to" federal small business contracts, Rooney said.
The company is now registered as small business, woman-owned, and HubZone certified, or a business based in a disadvantaged area, Moore said.
Kathleen Rooney, who has an MBA from Georgetown University and lives in the Washington, D.C. area, works at Rooney Properties there. She said she spends "a few hours a week on the electronics company" in Oklahoma. "Thankfully, Tyler is a capable and hardworking guy and is running with the strategy we put into place."
She said part of her plan when she took over OAI was to diversify its business, including creating subcontracting opportunities on federal jobs as a HubZone certified small business.
OAI Electronics is a small part of Rooney Holdings, with an average annual revenue of $12 million over the last 20 years, Moore said. An average of about $498,000 a year, or 4.1 percent, came from federal contracts, he said.
Rooney said his Rooney Holdings didn't buy OAI because it wanted access to government contracts.
"We bought the company to do something totally different," he said, noting they primarily serve the private sector in the oil and medical fields. "This government stuff is so small."
The Small Business Administration has specific rules in order to prevent parent companies from opening subsidiaries and giving them to their children to qualify for better contracts, said Tiefer. If there were no such rules, every Fortune 500 company would exploit the same loophole, he said.
"If they thought they could give half to their daughter and would still qualify, they would all do it. That would be an enormous loophole," Tiefer said.
According to the SBA, central to these rules is the question of control, and if the business is not truly independent and small, then it will not qualify.
“Individuals or firms that have identical (or substantially identical) business or economic interests may be treated as though they are affiliated unless they can demonstrate otherwise,” according to the SBA rules. "Family members, persons with common investments, or firms that are economically dependent through contractual (or other) relationships, are among those treated this way."
According to Moore, Rooney Holdings is equally owned by Francis Rooney, his wife and his three children. Rooney's family, including Kathleen Rooney, sits on Rooney Holdings’ board with Moore. OAI Electronics is 51 percent owned by Kathleen Rooney, and 49 percent owned by Rooney Holdings. Kathleen Rooney, Moore and Reeder sit on OAI Electronics’ board.
Rooney said he is confident OAI followed the rules to be labeled a small business eligible for set-aside contracts.
"The government knows everything about it. We are a totally open book with everybody. It's the only way to look yourself in the mirror," he said.
The SBA has struggled with its mission to help small businesses participate in federal contracts.
In 2005, the SBA’s Inspector General released a report saying that, “One of the most important challenges facing the Small Business Administration (SBA) and the entire federal government today is that large businesses are receiving small business procurement awards and agencies are receiving credit for these awards.”
And as recently as 2015, an analysis by a small business advocacy group, the American Small Business League, shows that 151 Fortune 500 companies not eligible for federal small business awards received the contracts anyway in 2015, including Verizon and Lockheed Martin.