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How a contracting official scammed more than $30M

Apr. 1, 2013 - 05:06AM   |  
By JIM McELHATTON   |   Comments
The Alexandria, Va., home of Kerry Khan, an ex-Army Corps of Engineers contracting official whom prosecutors call the mastermind of the biggest bid-rigging scheme in government history.
The Alexandria, Va., home of Kerry Khan, an ex-Army Corps of Engineers contracting official whom prosecutors call the mastermind of the biggest bid-rigging scheme in government history. (Thomas Brown / Staff)


Until recently, Army Corps of Engineers program manager Kerry Khan had millions of dollars, mistresses in three states and a taste for high-end cars and liquor, according to court records.

He was, as prosecutors put it, the mastermind of the largest bid-rigging scam in the history of federal contracting.

Two summers ago, Khan got a scare — federal agents paid a visit to his opulent Alexandria, Va., home — and he considered retiring after nearly two decades in the federal government.

But he opted against quitting his job because he was worried that he would lose his accrued annual leave, according to one investigator in the case.

Khan, 55, now has far bigger worries.

After pleading guilty in May 2012 to bribery and bid-rigging, among other charges, Khan is awaiting sentencing in July. Under federal guidelines, he could expect at least 21 years in prison. However, citing “substantial assistance” from Khan after his arrest, prosecutors are recommending he serve less — a little more than 15 years — and pay $32.5 million in restitution. An attorney for Khan, who is seeking no more than a decade in prison for his client, declined to comment.

Sentencing memos and other documents, as well as recent charges filed against other contractors, provide fresh details about the unprecedented corruption scandal in Army Corps offices where Khan worked, just around the corner from the FBI’s Washington field office.

In all, Khan and his associates had illegally pocketed more than $30 million in kickbacks and bribes over almost five years. When authorities finally arrested Khan in October 2011, he had been planning an even bigger scheme to steer a nearly $1 billion federal contract.

“It came to law enforcement’s attention, and we moved pretty quickly,” U.S. Attorney for the District of Columbia Ronald C. Machen Jr. said in a recent interview in his downtown Washington office.

Machen declined to say how law enforcement officials were tipped off, saying he didn’t want to disclose “methods and means.” He also said the investigation, which involves several law enforcement agencies, remains active.

While authorities portray Khan as the ringleader, they say he had lots of help.

‘Khan Incorporated’

One of those helpers was Michael Alexander, a program manager who worked with Khan at the Army Corps. By most appearances, Alexander had done just about everything right in his career and personal life. He was a Boy Scout leader, a retired colonel and an Army War College graduate hailed for his “unquestionable loyalty” in one 2008 performance review, court papers show.

At the Army Corps of Engineers, he managed the field force engineering program, overseeing a more than $50 million annual budget to provide engineering support for military and relief operations around the world.

But even as he received the prestigious Legion of Merit award in summer 2009, Alexander already had been working with Khan to steer Army Corps contracts to favored contractors in exchange for kickbacks, including to one company where Alexander hoped to get a job.

Alexander, recently sentenced to six years in federal prison, is just one of a dozen people who have pleaded guilty in the case. His lawyer declined to comment but in court papers called Alexander a “proud man, a family man, until his recent very public breakdown.”

In March, prosecutors filed bribery charges against a company called Nova DataCom and its president, Min Jung Cho. Both are expected to plead guilty, according to papers filed in U.S. District Court in Washington.

Barbara Ann Van Gelder, an attorney for Cho and Nova DataCom, said neither she nor her clients would comment. The company’s chief technology officer, Alex Cho, also is awaiting sentencing. Court records show he helped investigators by wearing a hidden recording device during the probe’s undercover stages.

Other contractors — some real, others little more than front organizations — were involved, too, according to court records. Harold Babb, former director of contracts for Eyak Technology, has received more than seven years in prison for his dealings with Nova DataCom and Khan.

Here is how it generally worked: Contractors involved in the scheme submitted bogus invoices, which the Army Corps — with Khan’s help — paid out. In exchange, the money from those invoices went to payoffs and kickbacks through various businesses, records show.

The kickback scheme involved a big Army Corps contract known as TIGER, for Technology for Infrastructure, Geospatial and Environmental Requirements. Until their arrests in fall 2011, Khan and others planned to steer another nearly $1 billion contract known as CORES, for Contingency Operations Readiness Engineering and Support, prosecutors said.

During one of the early court hearings in the case, Michael Atkinson, an assistant U.S. attorney, said the operation centered on an informal holding company, which he called “Khan Incorporated.”

“Of course, the public did not know that it was investing in Khan Incorporated, since the money that was used to fund Khan Incorporated was stolen,” he said.

Among others who pleaded guilty were Khan’s brother, Nazim Khan, and son, Lee Khan.

Nazim Khan played a comparatively small but important role in the scheme’s early stages, records show. In late 2005, he was talking to a regular customer of his auto shop, Robert McKinney, who owned a company that was looking for federal contracting work, according to court papers.

In a small example of things to come, Kerry Khan helped steer contract work to McKinney’s company. But uneasy with the increasing kickback demands, McKinney later quit dealing with Khan when his contract ended, court papers show.

Cellphone discussions

By summer 2011, authorities had begun monitoring Khan’s cellphone. That is when they heard him discussing plans to make a $56,105 payment for a 2012 BMW 650i for a co-worker, who had agreed to chair a contract selection panel on a nearly $1 billion procurement Khan aimed to steer to Nova DataCom, according to records.

“You’re going to be happy, very happy with the payment,” Khan told his co-worker, who drove the car to work until it was seized Oct. 4, 2011.

The name of the employee is not divulged in court documents, and Army Corps officials declined to comment on specifics about the case.

Prosecutors recently disclosed another exchange in court papers that had little to do with bribery but which they included in a section of Khan’s sentencing memo on his character.

In late June 2011, prosecutors said, investigators were monitoring text and phone conversations between Khan and a man in the Philippines known only as “Arnee.” The two discussed, among other things, Khan’s plans to travel to the country to “engage in prostitution with a girl represented to him to be 15 years old,” according to the sentencing memo, which included a transcript of more than two dozen text messages.

Authorities said investigators didn’t want Khan going overseas, and they also didn’t want to blow their undercover operation.

Using a pretext, authorities said two investigators — one from the FBI, the other from the Defense Criminal Investigative Services — visited Khan at his house in Alexandria and convinced him to delay the trip. After the meeting, Khan changed his cellphone number, stopped communicating with Arnee and moved ahead with plans to leave his job at the Army Corps, according to prosecutors.

But in a newly filed affidavit, a special agent for the Small Business Administration’s Office of Inspector General said Khan changed his mind: “Khan ultimately decided against resigning from USACE because he learned that he would lose many of his benefits, including his accrued annual leave.”

Remorse, unanswered questions

In a statement, Khan expressed remorse about the massive bribery scheme.

“I cannot begin to tell you the embarrassment and shame I feel for being in the situation I put myself in,” Khan said in the statement, which was cited in his defense sentencing memo.

“After a lifetime as a hard worker and a family man, I am now a convicted felon. I have caused embarrassment and shame to my family, my friends, my country and to myself.”

Arguing for a sentence of no more than 10 years in prison, defense lawyers filed court papers citing letters from relatives showing a different side of Khan, whose sister called him a “loving and caring individual.”

But despite recent developments in the case, none of the newly filed documents shed light on one big unanswered question: How could such a scam have grown so big, so fast, without anyone noticing?

Machen declined to comment on specifics but said all contract fraud cases expose a lack of internal controls, and the Khan case is no different.

Machen’s office and other agencies are still working on the case. So far, authorities said they’ve seized or recovered about $7.5 million in bank accounts, 19 properties, six cars and jewelry.

Scott Amey, general counsel for the nonpartisan Project On Government Oversight, a watchdog group, said the case exposes a glaring lack of adequate administration and oversight of federal contracts.

“The government’s limited access to contractor cost or pricing data and failure to conduct robust audits are part of the problem,” he said.

“We have to provide one or both of those tools at the pre- and post-award stages to ensure that taxpayers are not fleeced.”

While Amey said he is troubled to see a reduced sentencing recommendation, “let’s hope that we have learned something and can identify similar behavior in other federal contracts.”

Meanwhile, Army Corps officials referred all questions about the case to the Justice Department, and they declined to say what, if any, post-scandal audits or reviews were conducted in the wake of the charges.

Nor would officials discuss any disciplinary actions.

In an email, Stuart Hazlett, director of contracting for the Army Corps since January 2012, directed questions to the Army Corps’ public affairs office.

Army Corps spokesman Doug Garman said the agency doesn’t comment on ongoing investigations. But, he added in an email, “The Army Corps of Engineers, based on information obtained from this case, is reviewing policy and procedures related to the acquisition process.”

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