By Byrhonda Lyons and Laurel Rosenhall, CalMatters
A medical equipment supplier that was once raided by the FBI. A business executive fined for making false or misleading statements in financial reports. A corporation fined for Medicaid fraud. At least two companies that had existed less than a week.
These are among the hundreds of vendors the state of California has contracted with, or nearly gone into business with, as government officials rushed to prepare for the coronavirus pandemic.
While normal bidding and vetting procedures have been suspended during the state of emergency, California has entered into roughly $3 billion worth of no-bid contracts for masks, ventilators, call-center workers and other supplies and services to respond to the health crisis, the state’s procurement database shows. Some of the vendors are established companies the state has been doing business with for a long time, but others are newcomers that launched amid a chaotic quest for medical supplies. The nationwide scramble kicked off in March when President Donald Trump told governors that states were on their own to secure equipment necessary to manage the pandemic.
Some of the contracts topped out at a half-billion dollars. And in a few instances, readily available public records and some Googling should have raised potential red flags.
“Unfortunately, there was a big rush” for equipment around the world, said Francesco Decarolis, an economist at Bocconi University in Milan, Italy, and former Stanford assistant professor with expertise in U.S. procurement policy.
“There was fear of not doing things in time, and under emergency situations normal procedures are bypassed, and it’s very hard to ensure that things run smoothly. This is a wake-up call.”
Gov. Gavin Newsom said the state hasn’t lost a penny — though a series of deals that collapsed or stalled have delayed California’s effort to obtain a huge volume of N95 masks. In one case, the state yanked its money back after bankers raised suspicions about a $456.9 million wire transfer to a company called Blue Flame, an intended down payment for 100 million N95 masks, as first reported by CalMatters. The payment and swift reversal were detailed in records obtained from the state Treasurer’s Office.
A subsequent deal to buy N95 masks from a company called BYD was delayed because federal health officials did not initially certify the masks. After the company missed two deadlines to earn certification, the state extended the contract again last week. The federal occupational safety agency certified the masks Monday, Newsom announced, adding that the company would begin shipping the first of 150 million N95s to California later this week. BYD already refunded half of its initial $495 million payment after blowing an earlier certification deadline.
Asked last week about delays with the BYD transaction, Newsom said: “Under the contract, we pay for what we get. We don’t pay for things we don’t get.”
Newsom’s staff declined to answer a question from CalMatters about whether the governor was personally involved in approving any pandemic contracts.
Many of the statewide contracts for pandemic supplies flowed through the Department of General Services, the state’s so-called business manager. Department spokeswoman Monica Hassan said in an email that no purchase is made without approval from the department’s chief procurement officer. And “high dollar” orders are reviewed and discussed by additional DGS executives, she said.
Since the pandemic began, California officials have distributed 46 million N95 masks and 104 million procedure masks, according to state data.
Mark Ghilarducci, Newsom’s director of emergency services, has said the state improved its vetting process after the Blue Flame deal collapsed, and that law enforcement officials are now involved in reviewing potential vendors.
A review of purchase orders and no-bid contracts the state entered into for coronavirus supplies and services, each worth at least $10 million, shows California doing business — or on the brink of doing business — with a handful of vendors who have had brushes with the law or are simply untested.
A company called MedSupply America, for example, lists an Arizona address on its website but filed incorporation papers in Wyoming on April 14. The very same day, it landed a $10.6 million contract with the state of California. The state agreed to buy 3 million N95 medical masks from MedSupply, according to its contract, and the company planned to ship them all by the end of April.
But MedSupply America has had a hard time getting ahold of the coveted N95 masks, a company spokesman said. So while it’s hoping to deliver at least some of the N95s later this month, he said, it’s also trying to sell the state on a substitute mask it’s marketing.
“We will be selling (the N95s) as we can acquire them,” said Kenn Lindh, director of marketing for MedSupply America. “We are really pushing them to our mask because it’s a 30-day mask.”
Branded as “InvisiSmart,” the mask can be reused for up to 30 days, Lindh said, during which the “InvisiSmart” logo fades until it becomes invisible, signaling the mask is no longer effective. It’s a pleated surgical-style mask covered with what Lindh described as an antimicrobial titanium dioxide coating that kills the coronavirus on contact.
“Anything that gets near your face, it kills the virus,” he said.
He acknowledged that California hasn’t yet agreed to buy the InvisiSmart masks, although he’s preparing samples for state officials to evaluate.
‘This product makes some concerning claims’
An epidemiologist contacted by CalMatters urged the state to be cautious. “This product makes some concerning claims without any data or research to back it up,” Saskia Popescu, a senior infection prevention epidemiologist at George Mason University, said by email after reviewing the company’s website and a scientific study.
“A procedural mask has filters built into it to prevent microbes from getting in, so this attempt at making it microbe-resistant doesn’t make sense.”
She said a scientific study of a similar product — a titanium dioxide coating sprayed on hospital surfaces — found it had no effect in reducing the growth of microbes. The study, unrelated to COVID-19, was published in 2018 in the Journal of Hospital Infection.
Lindh said the company is working on getting certification from the U.S. Food and Drug Administration: “We want to have the best product available out there.”
MedSupply America isn’t the first brand-new company California has gone into business with in its quest to get masks. On March 26, the state wired $456.9 million to Blue Flame Medical — a company two political operatives had created just three days earlier, according to Delaware incorporation records. The state rushed to get its money back after bankers involved in the wire transfer alerted state officials that they thought the transaction might be fraudulent.
Since then, Congress has announced an inquiry into the company and the Washington Post reported that the federal Department of Justice opened a criminal investigation focused at least on Blue Flame’s failed deals with Maryland and California.
“Widespread shortages of (personal protective equipment) are putting both health care workers’ and patients’ lives at risk,” leaders of the House Committee on Energy and Commerce wrote in a May 18 letter to Blue Flame.
“The serious consequences stemming from PPE shortages are pushing states and localities to turn to new and unproven companies with limited experience in the medical supply industry to supply this critical medical equipment.”
Blue Flame has not yet responded to the letter, a committee spokesperson said, and the company’s attorney declined to comment for this article.
Among other California big-dollar mask deals that fell apart: a nearly $800 million contract with Bear Mountain Development Co. That company, run by former Alabama Attorney General Troy King, failed to deliver, the Los Angeles Times reported last month.
CalMatters discovered yet another failed attempt by the state of California to obtain millions of N95 masks from a vendor inexperienced in obtaining medical supplies. According to state documents, a $550 million purchase order prepared by the California Department of General Services outlined a deal with Syrup Ventures, a trade financing company. The business address is a 3,500-square-foot home in Houston belonging to Charles Leaver, who describes himself on LinkedIn as Syrup’s chairman and co-founder.
Had Syrup’s purchase order gone through, it would have been one of the state’s largest COVID-19-related contracts.
“We never had any official agreement,” Leaver told CalMatters. “There was a conditional agreement that was set up, but nothing was ever met and nothing was ever done.”
Syrup canceled the deal with California, a spokesperson for the Department of General Services said, because the vendor couldn’t deliver the goods.
It’s unclear whether California officials knew that in 2006, Leaver was assessed a $30,000 civil penalty in a Texas federal court after he and 12 others were sued by the U.S. Securities and Exchange Commission over an alleged stock manipulation scheme. The SEC had accused Leaver of making false or misleading statements in financial reports for a software company he once ran. Federal court documents show Leaver did not admit or deny the allegations in the SEC complaint.
“No charges were ever brought,” Leaver said. “I can serve on a board. And I can be a CEO of a public company.”
The quest for masks wasn’t the only thing attracting some unusual players to California’s system of government contracting. The state in April agreed to buy $139 million worth of ventilators and related equipment from Ashli Healthcare Inc., a medical supply company that was raided by the FBI in 2013.
Neither Ashli nor its owner, Heriberto Diaz of Bakersfield, were charged with any crime or assessed any penalties. In January 2018, the search warrant affidavit was suddenly unsealed in the Eastern District of California. The 111-page document signed by then FBI Special Agent Sharron M. Cannella cited probable cause to suspect Medicare fraud, saying the company “exhibited a significant spike in billing from 2010 through 2012” that included billing for more than 125 patients who were dead. Ashli’s Medicare billing increased more than 500 percent during that two-year period, according to figures from the affidavit.
The FBI agent’s affidavit alleged a kickback scheme between Ashli and several doctors who prescribed equipment such as ventilators, power wheelchairs and hospital beds that patients did not need or use.
“While Ashli may have conducted a small amount of legitimate business, given what appears to be a high volume of fraudulent billings by Ashli, it is not possible to distinguish fraudulent records from non-fraudulent ones prior to a search,” the affidavit states.
Diaz did not return CalMatters’ calls for comment. In 2013, he released a statement saying he was confident the federal investigation would “reaffirm our ongoing ethical business practices.”
In the Sacramento-based Eastern District, the U.S. Attorney’s Office refused to move forward. The “investigation has since been closed and did not result in any indictments,” wrote Assistant U.S. Attorney Grant B. Rabenn on Jan. 10, 2018, while requesting that the court unseal documents in the case.
In 2015, two years after raiding Ashli Healthcare’s Bakersfield office and several other locations, FBI special agent Cannella was reprimanded in a scathing ruling in Texas by U.S. Magistrate Judge Robert F. Castaneda. The case, unrelated to Ashli Healthcare, involved her role as the lead investigator in a 2010 bank robbery case in El Paso. According to Judge Castaneda’s ruling, Canella’s “distortion of certain facts in her probable cause affidavit” led to false imprisonment of a robbery suspect. The suspect was eventually awarded $402,000 in damages. “The Court finds that SA Cannella’s conduct crossed the line from negligent to intentional misconduct, or at a minimum bad faith,” wrote Judge Castaneda on March 23, 2015.
According to her LinkedIn profile, special agent Cannella left the FBI in July 2013, a few months after the Ashli raid.
Cannella did not respond to calls and messages for comment. An FBI spokesperson in Washington, D.C., declined to comment on Cannella’s time as an agent and if any of her cases were tossed out because of Judge Castaneda’s ruling.
Diaz told The Sacramento Bee last month that Ashli had not yet been paid by the state for the ventilators, and wouldn’t be until the equipment was delivered.
Hassan, a Department of General Services spokeswoman, said the state did not know about the FBI raid on Ashli.
Asked whether the department has any plans to change its emergency contracting procedures, she said: “DGS enhanced its procurement process during this emergency response and continuously reevaluates its process in order to ensure the state gets the best products for the best price.”
One company that has been doing business with the state for many years got an additional $15.5 million contract to answer phone calls from Californians about COVID-19. Maximus — a Virginia-based company that runs call centers across the country to help people apply for government benefits — has entered into dozens of contracts with California going back to 2007, according to the state’s procurement database.
Medicaid fraud case
That year, it paid $30.5 million and admitted responsibility in settling a federal investigation into Medicaid fraud after it was accused of billing the government for more services than it actually provided. The company has faced other legal challenges over the years: In 2010, Maximus paid $2.5 million to settle a lawsuit by the state of Connecticut over a contract to revamp its criminal justice computer system. The company denied it had breached the contract and blamed the problem on a subcontractor. In 2017, it paid $1.5 million to settle a lawsuit by supervisors at its Idaho and Texas call centers, who alleged various labor violations, including that the company failed to pay overtime. Maximus did not agree with the allegations but said in court documentsthat it settled the case to “avoid further expense and risk associated with protracted litigation.”
More recently, NBC News and the Hattiesburg American newspaper reported workers at a Maximus call center in Mississippi have complained that the company failed to follow social distancing guidelines to stem the spread of the coronavirus — even as its workers were tasked with dispensing advice to callers about the importance of social distancing — and that the company lagged in providing masks to its workers and allowing them to work from home. Maximus employees have called attention to the issues as part of a broader effort to join the Communications Workers of America, as detailed on the labor union’s website.
The company’s contract with California, however, involves “an entirely work from home model, protecting our staff and helping employ residents who may have experienced job loss during the crisis,” Maximus CEO Bruce Caswell said on a quarterly earnings call last month.
California State Auditor Elaine Howle called out problems with the state’s use of no-bid contracts in a 2017 audit. Though the report didn’t specifically look at contracting during emergencies, it found that during a five-year period, key departments “did not provide adequate oversight of the billions of dollars that agencies awarded through noncompetitive contracts.”
Competitive bidding should be used whenever possible, the audit said, because its processes are designed to “eliminate favoritism, fraud, and corruption.” The audit recommended that the Legislature require state agencies to submit an annual report detailing all noncompetitive contracts they approve worth $1 million or more.
“In addition, the Legislature could require agencies to publicly justify their noncompetitive requests in Legislative hearings when it sees fit,” the audit recommends.
A 2018 bill that would have required annual reporting on no-bid contracts was killed by lawmakers before it could get a vote on the Assembly floor.
* CalMatters reporter Rachel Becker contributed to this article.
CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.