San Diego Union Tribune

June 29, 2005

Cutoff of deal with feds leaves MZM out in cold
Documents on Cunningham home sale under subpoena

By Marcus Stern

WASHINGTON – Rounding out a calamitous fortnight for a highflying young defense contractor that had rocketed into the industry's top 100 companies in three years, MZM Inc. watched its most lucrative revenue source evaporate yesterday.

The government announced that it no longer would allow federal agencies to buy from MZM under a relatively obscure process that the company had used to attain tens of millions of dollars in defense contracts.

The sudden, unexpected cutoff of government purchases under MZM's $250 million blanket-purchase agreement is unrelated to the legal, political and corporate intrigue swirling around MZM's founder, Mitchell Wade, and his friend and benefactor, Rep. Randy "Duke" Cunningham, according to the defense-contracting agency that ordered it.

Instead, the cutoff stems from a change in the interpretation of an arcane rule governing competitiveness in contracting, said Mike Thiem, spokesman for the Defense Information Systems Agency. The agency oversees Defense Department procurement contracts.

Adding to the almost daily dose of bad news for MZM, Wade and Cunningham, a federal grand jury in San Diego subpoenaed documents from Cunningham in connection with Wade's controversial purchase and sale of the Republican congressman's Del Mar-area house and his purchase of a yacht Cunningham has used for more than a year as living quarters in Washington, D.C.

"My client has directed me to comply with the subpoena as expeditiously as possible, and he has instructed his staff to cooperate with these document requests," Lee Blalack, Cunningham's attorney, said in a statement released yesterday.

A subpoena also was issued to Elizabeth Todd, a Realtor with Willis Allen Co. in Del Mar. According to Cunningham, she played a role in the home sale by setting the now-controversial price and providing Wade a list of comparable home sales to justify that price.

"We will confirm she has received a subpoena for production of documents, and we are in the process of complying with the subpoena," said Patrick Hall, one of her attorneys.

The U.S. Attorney's Office began issuing subpoenas about 10 days ago, said sources familiar with the investigation who asked not to be identified because grand jury proceedings are secret.

While the controversy over the house sale has been a public-relations problem for MZM and its founder, the cutoff of its blanket-purchase agreement has far more immediate and tangible consequences. The government's decision puts an end to efforts by the company to secure any new business under the agreement, although ongoing projects can be completed.

Blanket-purchase agreements, which have come into broader use in recent years, have been praised for streamlining the procurement process but criticized for reducing accountability, competition and transparency.

The decision to cut off new contracts under MZM's purchase agreement has its roots in the origins of blanket-purchase agreements, which, like so much involving the company these days, seem suddenly mired in controversy.

In 2002, the Defense Information Systems Agency had sought proposals from two companies for a blanket-purchase agreement worth up to $250 million, but only MZM submitted a proposal. Under rules at the time, the award was considered competitive "because we had sought more than one proposal," according to a written statement from the agency.

But later in the year, Congress enacted the 2002 National Defense Authorization Act, which required at least three bidders on any contract. The general counsel of the DISA's partner agency, the Defense Information Technology Contracting Organization, reviewed MZM's agreement in light of the new requirement. It ruled that the provision should not be applied retroactively.

MZM took full advantage of the ruling, using its blanket-purchase agreement to sign a total of $163 million in contracts, including previously undisclosed deals this year that raised the total from more than $110 million in 2003 and 2004. MZM appeared on its way to fulfilling its contract limit of $250 million.

But that all ended with this week's cutoff, which came as a result of a recommendation by the Defense Department's inspector general. In a preliminary finding of an audit still under way, the inspector general reversed the previous decision on MZM's blanket-purchase agreement and said, in essence, that the requirement of three bidders should have been applied retroactively.

Two other companies, Stover & Associates and Keane Federal Systems, also were barred from receiving new contracts under their blanket-purchase agreements for the same reason, according to the DISA statement.

Details of the circumstances under which MZM was awarded the blanket-purchase agreement in 2002 were unavailable yesterday. Nor was there an explanation of why only MZM and one other company were invited to submit proposals for such a lucrative contract and why the other company never submitted one.

Blanket-purchase agreements provide government agencies with a more efficient way to buy goods and services from contractors. Originally, agencies used the procedure to simplify the routine ordering and reordering of inexpensive, everyday supplies.

But the federal government now allows agencies to use the agreements, after meeting certain qualifications, to buy far-more-sophisticated wares from technology companies. The deals can be worth hundreds of millions of dollars over several years.

While these agreements give contractors an inside track on selling their services to government agencies, they do not necessarily do away with competition. Competition frequently occurs, even with blanket-purchase agreements.

With its agreement in hand, MZM sought business from a range of defense intelligence agencies, including Counter Intelligence Field Activity, a highly secretive program created in 2002 by a Pentagon directive that focuses on gathering intelligence to avert attacks such as those of Sept. 11, 2001.

It also got contracts with the Army National Ground Intelligence Center in Charlottesville, Va., whose mission is to provide soldiers with reliable, real-time battlefield intelligence. It also got contracts with the Army Intelligence and Security Command at Fort Belvoir, Va., just outside Washington, which also provides battlefield intelligence.

MZM had been seeking additional contracts from defense intelligence agencies in Florida, Tennessee and elsewhere. But the decision by the Defense Information Systems Agency effectively brings those efforts to a halt.

The cutoff is yet another blow to MZM, which has been going through a period of corporate turmoil since Wade's purchase of Cunningham's house was disclosed June 12 in the Union-Tribune.

MZM formally announced yesterday that James King, a retired three-star general, would take over as CEO and president of MZM. He assumed the post after the resignation of Frank Bragg Jr., who held the title for only a few days. Wade had turned over management of the company to Bragg after the public controversy involving Cunningham began to mushroom.

King's top priority will be seeking a buyer for the beleaguered company, said sources who work or have worked for the company.

"MZM is exploring strategic alternatives that will enhance its ability to achieve these objectives," the company statement said.

Staff writer Kelly Thornton contributed to this report.

Marcus Stern:

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