by Guy Lawson
Sitting in AEY’s tiny office, Packouz and Diveroli put the airfreight and cost of the AK-47 ammo into a spreadsheet they called the Final Afghan Price Matrix. They’d priced out all of the elements—howitzer shells, Mossberg riot-shotgun ammo, grenades, T-62 tank rounds, and so on. But their numbers disguised the uncertainty lurking beneath the surface. Like Thomet’s price for 122 mm HE shells. New, the shells cost $240, but Thomet said he could get 80,000 surplus shells for only $60 each. The cheaper shells were enough to cover what the contract required for the first year of the two-year deal. But Thomet didn’t have a large enough cache to satisfy the demand for another 150,000 in the second year of the contract.
Trying to trim every dollar possible, Diveroli decided to use the lower price on the 120 mm shells for both years, reasoning that he could bid millions less for the overall contract that way. If he wasn’t able to supply the shells in the second year at the lower price—well, they’d drive off that bridge when they got to it.
The deadline had arrived. The final number was Diveroli’s decision. He paced day and night, a cloud over his head as he smoked joint after joint, muttering, worrying, cursing.
Diveroli was conflicted about whether to use a 9 percent or a 10 percent profit margin. The difference between the two percentage points was around $3 million in profit. He figured everyone else was going to go with 10 percent. But he didn’t know the prices the other bidders had been able to find.
“How could we be sure our prices were better than what others had been able to source?” Packouz recalled. “Diveroli was worried that another bidder had figured out his 9 percent trick and would use it, too. So maybe he should go with 8 percent. But then he might be leaving money on the table—God forbid!”
On the day the bid was due, Diveroli was frantic. He needed to make up his mind. He took a deep breath and decided to be aggressive. Eight percent it was. Fortune favors the brave. He wrote the number in: $290,544,398.
Time was up. The final bid had to be submitted by mail, postmarked to show it had been sent on time. The two friends leaped into Diveroli’s car and sped through the streets of Miami Beach, making it to the post office with only minutes to spare.
Packouz and Diveroli didn’t spend the weeks that followed worrying about the Afghanistan contract. Fretting about the outcome was pointless, Diveroli explained, as he started searching for new solicitations the next day. Packouz was exhausted by the work he’d put into the bid. But he could see that his efforts were paying off. He’d developed contacts with arms manufacturers all over the former Communist world. He was beginning to truly grasp Diveroli’s business model—how it was possible to be daring on FedBizOpps.
Diveroli and Packouz held AEY’s annual board of directors meeting as the end of 2006 neared—an event consisting of the two of them sitting at a desk together. The minutes recorded their desire to continue to pursue “major contracts,” like the Afghanistan deal. The company would move to a larger office, but they would keep staffing to a minimum, and, instead, “hire independent contractors and consultants to work on assignments for a limited duration, thus keeping costs down and profits up.”
The pair had cause to be optimistic. The early signs on the Afghanistan solicitation were promising, if somewhat mixed. AEY was clearly in the running, but the Army was suspicious about AEY’s pricing on the 122 mm HE shells. Diveroli had deliberately underpriced the shells to present an artificially low bid. The practice was known as “buying in” in the defense-contracting industry, shorthand for getting the government to sign a contract and then gradually altering the terms in your favor. Purposefully underpricing a contract and then encountering massive cost overruns was known as “gold plating” and was a routine way large companies rigged the system.
The Army sent an e-mail asking AEY to double-check the 122 mm shells quote as it seemed unreasonably low. Packouz and Diveroli freaked out: Did the Pentagon know what they’d done? They decided to revise the estimate to include the higher price for the second year.
“We should have used new production pricing for the second year since there is no assurance that surplus goods will still be available in a year’s time,” AEY wrote. “Our revised pricing is included. We could withdraw our bid, or continue forward as revised. This would be your call, if the bid is still interesting to you.”
The new number was $298,004,398—an increase of $8 million.
The sly deception worked. In the weeks that followed, the Army had a series of picayune questions and concerns. The dudes sent a letter listing the suppliers they’d worked with—an impressive array of munitions companies in the former Yugoslavia and Romania and Bulgaria and Albania. They said they couldn’t disclose the precise nature of the transactions they’d completed because of nondisclosure agreements. “Confidentiality is a common inclusion in most contracts of this kind,” they wrote. “We wish to express our confidence that with our resources and expertise, in addition to our valued suppliers, and the strong relationships we have with these companies, we can fulfill all aspects of this ammunition tender in a seamless and timely manner.”
Two months had passed and waiting was now excruciating. Packouz tried not to think about the fortune he stood to make from the Afghan deal. If they won the contract, he figured he’d make $8 million personally. The money was more than enough to enable him to record the album of songs he was completing. He’d be able to hire top session musicians and a high-end producer. The record would be slick, professional, sure to attract the attention of a major label. Packouz was going to back his dream by investing $1 million of his own money in promotion. Within a year or two, he’d be rich and he’d be famous.
Trying not to obsess over the outcome, Packouz and Diveroli attended a trade show in Florida for companies specializing in electronic surveillance. Walking the aisles, they ran into a senior procurement executive for General Dynamics, the giant arms company. Joe Pileggi was middle-aged, stocky, with close-cropped, graying black hair. Despite the vast disparity in size with AEY, General Dynamics was a rival for the Afghan contract, the dudes knew, which should have made both sides wary. But Pileggi was friendly, acting as if they were colleagues, not brutal competitors. Pileggi asked if they had a minute to talk. They all took a booth in the food court.
“You guys sure seem pretty busy,” Pileggi said, as Packouz recounted.
“We work hard,” Diveroli said.
“We’re kinda like you guys,” Pileggi said. “General Dynamics is huge, but we’ve only got twenty-five guys in our department. We do foreign sourcing and logistics. But we have the General Dynamics name behind us, which helps a lot.”
“We’re just two guys,” Diveroli said, staring blankly.
Everyone else at the trade show was middle-aged, nearly all ex-military or law enforcement, and in that circumstance Diveroli and Packouz looked comically out of place.
“You’re making quite a splash in the industry. A lot of guys at the office won’t believe how young you guys are when I tell them.”
“We’re old at heart,” said Diveroli. “How can we help you, sir?”
“I know we bid on some of the same contracts. But that doesn’t mean we can’t do business.”
“What do you got, what do you want?” Diveroli asked.
“Small ammo,” Pileggi said. “Large-caliber munitions. Let’s compare prices. Maybe we’ll work something out.”
“So I know you guys bid on the Afghan contract,” Diveroli said, a sneaky grin forming on his face. “How you feeling about that?”
“We worked hard on that. Lots of man-hours. Tight margins—pretty damn tight, I’ll tell you. So we’re fairly confident. I’ve got to admit, it would kill me if we lost a contract that big. We really gave it our all.”
“Yeah, us, too,” Diveroli said. “Now if you’ll excuse us, we’ve got another meeting.”
The pair left abruptly.
“Another meeting?” Packouz asked.
“He’s just wasting our time,” Diveroli said. “He
was fishing for information on what we bid on the Afghan deal—trying to hear our prices. How obvious can you get? Fuck him. He thinks he’s hot shit because he works for General fucking Dynamics. But you see how he’s scared shitless of us? He knows we’re going to eat them alive.”
“We’re going to eat General Dynamics alive?” Packouz asked, incredulous.
“You and me, buddy, we’re going places,” Diveroli said, strutting past a booth displaying high-tech surveillance cameras.
December 20, 2006, was Efraim Diveroli’s twenty-first birthday. The gunrunner was finally old enough to legally drink alcohol. Of course, he’d been sneaking into bars for years, always equipped with excellent fake ID. But now that he was of age the dudes decided to hit the clubs to celebrate legitimately. Diveroli’s apartment building had valet parking, but he was on poor terms with the man tasked with fetching cars. When they reached the parking lot, Diveroli decided he wanted to get his car himself, instead of dealing with the middle-aged Cuban valet, who obviously didn’t like Diveroli and his brash manners. Diveroli had already snorted a few lines of coke, so he was feeling feisty. He sneaked into the valet’s cubby and snatched his keys. As he turned to leave, he saw the valet coming toward him at a run.
“Get out of there!” the valet shouted.
“I just want my keys,” Diveroli said.
“You can’t go in there,” the valet yelled, trying to grab the keys back.
Diveroli and the valet began to argue. A security guard on duty came over, drawn by the screaming. When Diveroli looked away for a second, the valet punched him in the head. Diveroli turned and the valet punched him again as the pair began to wrestle and choke each other. Packouz instinctively grabbed the valet. The security guard pulled Diveroli off the valet.
Panting and bent over to catch his breath, Diveroli was a mess, his shirt torn apart, his face swollen. “I’m calling the cops,” he screamed at the valet. “I’m getting you arrested. I’m getting you deported.”
Diveroli and Packouz went back up to Diveroli’s apartment and called the police. Diveroli said he’d been attacked and wanted to press charges. Hanging up, he remembered that he was carrying a packet of cocaine for the night’s festivities. He told Packouz he couldn’t have the drug on him when he talked to the police. He asked Packouz to hold the coke.
“I was stupid enough to take it,” Packouz recalled. “I stuck it in my sock to be safe. When we got downstairs, there were three cruisers with their lights on in front of the building. They came over and put us both under arrest. We couldn’t believe it.”
The Miami Beach police began to question Diveroli and Packouz. When they took Diveroli’s wallet, they discovered that he was carrying fake ID showing that he was older than his true age. Diveroli, eager to disassociate himself from the ID, told the police he was officially twenty-one years old, so it was no longer relevant. The police thought otherwise. Instead of filing a victim statement, as he’d anticipated, Diveroli was charged with carrying a false identification. Both Packouz and Diveroli were also placed under arrest for the altercation with the valet. Driving in the cruiser to the police station, Packouz remembered he had Diveroli’s cocaine in his sock.
Packouz and Diveroli were put in different holding cells. When Packouz was searched, the officer told him to take off his shoes and socks but failed to notice the baggie of cocaine—a complete fluke.
“I was scared shitless,” Packouz recalled. “It was a miracle, but he didn’t find the baggie crumpled up inside my sock.”
Afterward, Diveroli didn’t apologize to Packouz about the fight or the cocaine. He was angry at the valet and the security guard and the police, as if he were the victim, ignoring what Packouz had been through.
“I didn’t bother telling him how I felt—how I could have been caught with his coke,” Packouz said. “I knew he didn’t care. I knew I was being forewarned. Things could go wrong very quickly with Efraim. But I was blinded by the possibility of getting rich. I was waiting to see if the Afghanistan contract came through. I’d been bitten by the money bug. I had it bad.”
* * *
I. Leaked cables in 2011 would reveal the fragility of the ban on China: http://euobserver.com/china/32658.
II. William D. Hartung, Prophets of War (Nation, 2011), 7.
III. Avivi had been the military attaché to Israel’s embassy in Switzerland. To gain access to Israel’s lucrative arms business, Thomet recruited Avivi by giving him an expensive Land Rover and making payments that would later end in the war hero’s conviction in an Israeli court.
Chapter Five
TASK ORDER 001
On January 26, 2007, David Packouz was parking his Mazda Protégé in the lot of his dive apartment building when his cell phone rang.
“Dude, I have good news and I have bad news,” Efraim Diveroli said. “What do you want first?”
“What’s the bad news?”
“Our first order is only for $680,000.”
“So we won the contract?” Packouz asked in disbelief.
“Fuck yeah.”
An upscale Italian restaurant in South Beach was the site for their celebration. Multiple bottles of Cristal were consumed as they toasted their incredible good fortune. The two friends, already stoned from the joint they’d smoked on the way to dinner, were now responsible for one of the central elements of the Bush administration’s foreign policy. Packouz’s cell phone rang: a massage client wanting to make an appointment. Packouz told her he’d retired as a masseur. As they ate, they passed Diveroli’s plastic cocaine bullet back and forth under the table, using their linen napkins to pretend to blow their noses as they wiped away the residual white powder.
“You and me, buddy,” Diveroli said. “You and me are going to take over this industry. I see AEY being a ten-billion-dollar company in a few years. Those fat cats in boardrooms running Fortune 500 companies are worried about their stock price. They have no idea what’s about to hit them.”
“General Dynamics isn’t going to be too happy right now,” Packouz agreed.
Diveroli grinned at the thought of two dozen corporate employees twisting in the wind while two kids outwitted them. They both knew many hurdles had to be overcome. The first was confirming that AEY had really won the entire contract. The year before, when Diveroli had “won” a contract in Iraq supposedly worth $50 million, he’d gone on a jag rejoicing in his triumph. But the next day he’d discovered he was only one of five companies that had qualified to bid on scores of much smaller contracts that were being put out for mini-competes. He’d done well in the mini-competes, frequently beating the larger companies he was vying with. But the experience had taught him not to get too excited too quickly.
Then there was the size of the first task order. More than $600,000 in grenades was a big sum, it might seem. But in the context of a $298 million contract it was suspiciously small. Was the government testing AEY? Was the order for grenades a way for the Army to see if AEY could actually deliver? The spring fighting season was looming, with the US deploying a small number of forces to counter the anticipated spring offensive from the Taliban, but the surge of troops into Iraq had made arming the Afghans even more crucial. In the headlines, a new candidate for president named Barack Obama was claiming that the Bush administration had failed to pay sufficient attention to Afghanistan—a contention underscored by daily reports of bombings, skirmishes, and casualties in the rapidly deteriorating offensive against the Taliban called Operation Mountain Fury.
Arranging a line of coke on the dashboard of his new Audi in the parking lot after dinner, AEY’s president reminded his colleague of their precarious position. “You’ve got the bitch’s panties off,” Diveroli said, affecting his best movie-star swagger. “But you haven’t fucked her yet.”
The days that followed were euphoric—and terrifying. The fear that they’d make a mistake and lose the contract crowded their thoughts, just as the calculation of their coming riches quickened their pulses. The notion that they’d
do something to blow the deal wasn’t fanciful. For all their precocious skills, the dudes were prone to be precisely that: dudes. This propensity was on display in the e-mail Packouz drafted to the Pentagon’s defense attaché in Skopje, Macedonia. It was part of a larger effort to enlist the assistance of American soldiers stationed in countries throughout the former Communist Bloc. Packouz reasoned that American-embassy officials in countries that were now friendly with the United States would know details about these countries’ stockpiles of surplus ammunition.
Like some others, Colonel Chris Benya had agreed to help AEY source ammo in Macedonia; assisting the company was effectively assisting the US military, after all. Packouz imagined himself to be efficiently conducting business as he sent Benya an e-mail outlining the ammo AEY wanted to acquire; finance would be provided by the “Banc of America,” Packouz wrote. The message looked amateurish to Benya—maybe even fraudulent.
“I was contacted today by David Packouz of AEY,” Benya wrote to the Army’s procurement representative in Rock Island, Illinois—the agency in charge of AEY’s contract. “There are many alarm bells going off based on what he sent. The attached documents had many errors, including misspelling ‘Banc of America’ on the letterhead and the use of different typesets on the alleged contract. I also found it strange that the company does not have a corporate e-mail address and seems to use Gmail. Bottom line is none of this seems to add up.”
Packouz had the spelling correct, but Benya was right: giving two stoners from Miami Beach the contract to supply ammunition to the Afghan National Army didn’t add up.
But Benya’s suspicions didn’t give anyone in the Army pause. “The contract with AEY is legitimate,” replied Rock Island.