by Guy Lawson
If the Army had done even rudimentary due diligence on AEY, the company would’ve been ruled out of contention long ago. Although the dudes didn’t know it, AEY and Diveroli had been placed on the State Department’s watch list a year earlier, when he’d flown back from an arms show in Paris. But the entry didn’t mean that AEY had done anything against the law.
“There appear to be several suspicious characteristics of this company,” the State Department’s classified profile of AEY reported, “including the fact that Diveroli is only twenty-one years old and has brokered or completed several multimillion-dollar deals involving fully and semi-automatic rifles. Future license applications involving Diveroli and/or his company should be carefully scrutinized.”
But the Army didn’t consult the watch list, because it didn’t have to—by design. Then there were the accounting practices of AEY. If the Army had inquired, it would have been discovered that the dudes essentially had no bookkeeping or record-keeping systems. From the beginning, Diveroli had operated by the seat of his pants. When checks came in, he put the money in AEY’s various accounts—the locations and amounts in these accounts were top secret. When he spent money—on office supplies, on weed, on body shots at hot spots like Skybar or B.E.D.—he spent AEY’s money. The company had no protocols to ensure it was keeping its affairs in order. The possibility of attracting the attention of the Internal Revenue Service terrified Diveroli, Packouz could see.
Before AEY had been awarded the contract, it had been audited by the Army to make sure it had the financial wherewithal to sustain the contract on the government’s net-thirty-day terms. Reams of documents had been produced by Diveroli and Packouz, many of them exaggerated to show that AEY had far more money than it actually did. None of the ledger high jinks had been detected.
AEY’s patchy record of performance in Iraq hadn’t alerted the Army either. Night-vision goggles, mounts for gun scopes, ammunition—AEY’s goods had sometimes been of poor quality or been delivered late, or Diveroli had used bait-and-switch tactics, substituting an inferior brand for the one the contract specified. The “source selection team” assessing AEY’s abilities had determined that the company should be rated “unsatisfactory.” This should have ruled AEY out of the running. But days before the contract was awarded the official who oversaw the contract had changed the rating to “good.” The official hadn’t bothered to closely examine AEY’s past performance, not through negligence but because the system didn’t require tiresome attention to detail. The contract was being run from the offices of the Sustainment Command in Illinois, a million miles from the war. American and Afghan soldiers in the war zone would have to live with the consequences of a decision made in a distant armory.
The process was not only emblematic of the entire procurement procedure, but also the war itself. Somehow the US government was simultaneously squandering billions and shortchanging the war in Afghanistan. AEY had won the contract because it had the lowest price, although two other bidders were within 2 percent of the total evaluated price AEY came up with. Price was only one criterion the Army was supposed to consider. The only competitor with an overall rating higher than AEY’s had bid 80 percent more than AEY—more than $500 million. The Army had seen no reason to pay such a vast premium, given that AEY’s evaluation was only slightly lower.
“Our competitors had bloated budgets and big staffs,” Packouz recalled. “We were lean and mean. The Army wanted to do Afghanistan on the cheap, and we were the cheapest.”
But Diveroli wasn’t content with his generous profit margins, which promised to make AEY at least $30 million. All of the ammunition AEY was buying had to be paid for up front, and the government wouldn’t pay the dudes until thirty days after delivery of each shipment. Because of the size of the contract, Diveroli would have to commit all of his money and also borrow millions from the Utah businessman Ralph Merrill. To finance the deal they’d also likely need to get a loan from a bank. So Diveroli decided the company should apply for “progress payments,” which would enable AEY to be paid more quickly by the government—and thus avoid onerous financing costs. To receive these preferential terms from the Army, the company had to undergo a financial inspection. Diveroli decided to risk this further scrutiny.
To prepare, Diveroli and Packouz wrote biographies of themselves to provide to the Army’s officials. Packouz was modest. Diveroli less so. “Efraim has built a stellar reputation for very competitive, on-time, smooth, and successful deliveries,” Diveroli said of himself. “Efraim has proven himself to be a professional, savvy, and knowledgeable businessman, with legendary skills in negotiation and business strategy. His passion and skill have enabled him to build AEY into a multimillion-dollar defense-contracting firm of worldwide renown. He plans to continue building AEY into a lasting and respected institution.”
The reality was less grand. AEY’s books were a mess, as Ralph Merrill knew, and the Army would be sending a team to Florida to examine AEY’s records. To help the dudes, Merrill sent his personal accountant from Salt Lake City to Miami to introduce them to elementary bookkeeping software in an attempt to make AEY’s accounts presentable.
On the day of the inspection, Packouz and Diveroli made it a point not to smoke a joint first thing in the morning, as was their custom. They wanted to be sharp. Both dressed in their best button-down shirts and business shoes as they nervously braced for the encounter.
They needn’t have worried. The Army’s team consisted of half a dozen matronly women dressed in frumpy skirts and sensible shoes. To Packouz they looked like grandmothers, not fierce auditors. Diveroli was a master at ingratiating himself with older women as a goofy but lovable kid.
“If it wasn’t absolutely illegal,” Diveroli announced, surveying the conference room, “I would love to buy you all diamonds.”
The women smiled. Formalities were attended to. The women said that the ammo AEY was acquiring had to be safe, it had to work, and it had to be delivered on time. No problem, Diveroli assured them. Diveroli said AEY would send a representative to each country to see that the ammo had been stored and preserved properly, particularly against moisture damage. AEY would test-fire the ammo to make sure it worked.
While Diveroli charmed the women, Packouz sat silently—a bald-headed, blue-eyed specter.
“What does David do?” one of the women finally asked. “What’s his role?”
“David is our international man of mystery,” Diveroli said. “He’s the guy who makes the magic happen for us in some pretty unmagical places. If you need to move some kind of product”—Diveroli didn’t specify arms, but the euphemism for arms was understood—“from one godforsaken country to another godforsaken country, David is your man.”
Packouz remained poker-faced. As the meeting adjourned, the dudes were triumphant. Rolling a spliff in Diveroli’s car, they agreed they’d aced the test.
Days later, bad news arrived. If AEY was to receive progress payments, the Army wanted to see the company’s tax returns. For Diveroli, this was verboten. No subject was more sensitive to the young gunrunner than taxes and his relations with the IRS—or, as he referred to the agency, “the three-letter word.”
Finance would have to be done conventionally. Diveroli had to risk his own money, as well as take a loan from Ralph Merrill. AEY also established a “factoring agreement” with Wells Fargo. Instead of waiting for payment from the government, AEY would sell its receivables to Wells Fargo at a discount. AEY would get paid quickly enough to satisfy its suppliers, and in return the bank clipped a piece of the profit from the deal. The arrangement wasn’t ideal, but it provided a steady and reliable source of funds—as long as Diveroli was content with the profit margin, an issue that continued to be his Achilles’ heel.
It was now February, time to perform—time to enter into contracts with suppliers and start the deliveries. The quotes they’d used for the bid were still available. But now that they’d actually won the contract—instead of lying about having won th
e deal to get good quotes—Diveroli and Packouz were sure they could command better prices than the ones they’d used for the bid.
The first delivery was slated to be 40 mm underbarrel grenades designed to attach to a Soviet Bloc rifle. For the bid, AEY had used prices from Yugoimport, one of Thomet’s Serbian connections. Now Diveroli wanted to cut Thomet out—or get the Serbs to lower their price. Working the Internet, Packouz found a company named Arcus, in Bulgaria, that was willing to sell the grenades at fifty cents less per unit than Yugoimport. The difference meant nearly a million dollars more in profit.
Diveroli e-mailed the Serbs, describing the lower price from the Bulgarians and demanding they meet or beat it. The Serbs were not pleased. The Serbian tough guy who ran the company had, understandably, assumed that the quote he’d offered would be honored. But the dudes had no intention of doing anything other than making the most money possible. The Serb called as soon as he received AEY’s demand.
“You buy from us,” the Serb told Diveroli. “We do business long time. We good partners.”
“I’d love to buy from you,” Diveroli replied, inviting Packouz to listen on the speakerphone as he often did, relishing the chance to perform for his friend. “But my hands are tied. I got a better price.”
“Price is already too low. You buy from us.”
“Listen, baby, we may have had sex, but we’re not married. I don’t run a charity. You either come down on price or we gotta buy somewhere else.”
Diveroli hung up and said to Packouz, “Can you believe that fucker? Who does he think he is? Does he think he can push us around? This is the USA. Nobody fucks with us. Get the Bulgarians on the line and let’s close this deal.”
Packouz dialed the director of the arms company in Sofia—a man who spoke good English. Diveroli wasn’t satisfied taking the lower price from the Bulgarians. He wanted to squeeze even more from the deal.
“Buddy, you and me, we’re going to do some big business,” Diveroli began. “We got a really bright future. Just one little thing. You gotta come down a little on price.”
“But we’re already lowest on market,” said the Bulgarian.
“I know that and I appreciate it. But I need a price that’s a dollar apiece lower.”
“Impossible. My board will never accept.”
“I’m counting on you to use your world-class powers of persuasion. I know this is rough, but it’s the only way. We got some bad quotes from some people who now can’t deliver. If we don’t deliver, the American government will cancel the whole contract and then the party’s over. Everybody loses.”
“How can I convince my board this is the truth?” the Arcus executive asked, implying that Diveroli was lying.
“I know you’re about to pull down your pants and you gotta make sure you’re not about to get fucked. I’m willing to pull my pants down here. I’m going to go against my company policy just this one time. I’m going to show you my government contract. The price the Army is paying me is on the contract. If I send you those documents, do you think the board will go to nineteen bucks a grenade?”
There was a long pause. “It is possible.”
“I will send the documents over right away,” Diveroli said, trying to contain his glee. Hanging up, he grinned and started to jump up and down, then fell to the floor and kicked his legs in the air in joy. “Who’s the fucking man!” Diveroli bellowed. “Who just negotiated one point one million dollars in extra profit in one phone call?”
Giddy, Diveroli leaped up and high-fived Packouz. “Now you’re going to modify the contract and put in a fake price that the government is paying us,” Diveroli instructed Packouz. “Put it like we’re only making three percent profit on the deal. But make sure the fake documents are fucking beautiful. We got millions riding on this.”
“Yes, sir,” said Packouz, awed by Diveroli’s gift for dissembling. “We’re going to have a twenty-five-percent profit margin on a twenty-six-million-dollar deal. Holy fuck, dude!”
“Stick with me, buddy. You and me, we’re going places.”
David Packouz felt his life changing quickly and in exciting ways. He tried not to calculate the money he was going to make, but it was hard to resist the temptation to imagine the life he’d soon be leading. He was going to be a millionaire many times over. But as his girlfriend’s pregnancy progressed, she began to despair of Packouz’s growing obsession with money. They’d finally broken up after weeks of fighting over his work schedule. She told him that he’d lost track of what mattered in life. Packouz believed he was building a secure financial future for his daughter—which had to take precedence over everything else, even his hope of becoming a rock star.
On February 9, 2007, his daughter, Amabelle, was born.
“I knew I had to get even more serious about business,” Packouz recalled. “It wasn’t a game anymore. I was a father now.”
Diveroli decided that Packouz would be primarily responsible for fulfilling the Afghan contract. Diveroli determined that the best use of his time was to search for even more contracts to bid on. Diveroli told his friend not to “waste” time babysitting his newborn daughter. “You got your whole life to spend with your kid,” Diveroli said. “Right now, we’ve got to make money.”
To help with the administration, AEY hired an office manager as well as two young Latina office assistants they’d found on Craigslist. But essentially Packouz was on his own with the Afghanistan deal, apart from Diveroli’s overbearing oversight and occasional troubleshooting. An undertaking like this would command dozens of skilled and experienced employees at a company like General Dynamics.
To find new sources for the Afghan deal, in mid-February Packouz flew to Abu Dhabi for IDEX, a munitions trade show in the Middle East that billed itself as the “most strategically important defense exhibition in the world.” He was carrying business cards with his new title: Vice President. To prepare for the trip, Packouz had purchased a silver aluminum briefcase and a pair of wraparound reflective sunglasses, to better look the part of a badass gunrunner.
On the plane Packouz met Jorge,I a young man from Guatemala who was attending the show on behalf of his family’s business, which supplied rich ranchers with the weapons to enforce their dictatorial rule over that country.
In Abu Dhabi, Packouz and Jorge went directly to the convention center, a gleaming new facility in the desert. IDEX was the largest arms show on the planet, bigger even than Eurosatory; the vast facilities accommodated fighter jets, tanks—every war machine imaginable. The opening reception was like the bar scene in the first Star Wars, it seemed to Packouz, a congregation of all manner of killer and conniver in the universe: sweaty Filipino generals, vain, ribbon-wearing Brazilian colonels, dim-witted upper-crust British officers. Then there were the weapons: armored vehicles, unmanned drone aircraft, precision-strike bunker busters. There were seminars and live-fire shows in front of the grandstand outside the pavilion, with mobile missile launchers and amphibious tanks emerging from the water.
Walking the show, Packouz no longer felt like a kid tourist gawking at the exhibits. The twenty-five-year-old with the silver briefcase may not have looked the part, but he had good reason to feel the strut of a gunrunner enter his stride.
“I was probably one of the biggest private arms dealers on the planet,” Packouz recalled. “It was bizarre. It was like Efraim had put me into the movie he was starring in. It was an out-of-body experience—strange but exhilarating.”
To help Packouz get oriented, Diveroli had given him the contact information for a Ukrainian arms broker named Vidak.II The youthful Packouz, the slick Jorge, and the heavyset Vidak stationed themselves near the bar for a cocktail reception. The emirate was a Muslim country, but booze was plentiful. As they surveyed the sheikhs and generalissimos, Jorge and Vidak fell into an in-depth debate about where the best prostitutes could be found—Thailand or Ukraine? Judging by the beautiful, gaudily dressed young women working the all-male crowd, Abu Dhabi had plenty of hookers,
too.
The next morning, Packouz woke in his hotel room so hungover he could barely lift his head. Something about drinking in the desert air made it doubly punishing, he was learning. But Packouz knew he needed to seize the day, regardless. At the show, he met up with Jorge, who told him about the three Chinese hookers he’d hired the night before. They were cheap, Jorge said. Why not have three?
China was on Packouz’s mind for other reasons. The dudes had been informed that they couldn’t source any of the weapons from China. But the ban was an obstacle to be overcome, they’d decided. As Packouz walked the show, an e-mail from Diveroli arrived, the whole message written in upper case: “MAKE GOOD CONNECTIONS WITH CHINESE AND EXPLORE ALL LEGAL POSSIBILITIES.”
The idea of buying Chinese ammo to ship to Afghanistan made perfect sense. As China was a neighbor, it would mean avoiding having to fly over a bunch of Eastern European countries, greatly simplifying logistics. Chinese ammunition had been purchased by the United States in the 1980s to arm Islamic insurgents in Afghanistan fighting the Soviet Union. The covert operation, famously depicted in Charlie Wilson’s War, was a strategic triumph and a prime example of the kind of sly intelligence that once ruled American procurement policy—and won wars.III “Just the thought of using Chinese Communist guns to kill Russians—just the irony of it,” one of the CIA agents who worked the case recalled. “Getting two guys on the same side fucking each other makes it easier for you to fuck both of them, and aside from just the general idea of fucking each other, their equipment was good—top-notch—and it was cheap.”IV
Packouz made his way to the booth for the Chinese arms company Norinco. The Chinese were proudly displaying their new eight-wheeled combat vehicle. Packouz handed a Chinese official his list of munitions for the Afghans. The man inspected the contract with interest. Norinco could supply nearly everything AEY was after and at competitive prices, the official said. For years, China had shipped vast quantities of AK-47 ammunition to the United States for the domestic market. Now the country was staking out a claim as the low-cost alternative to both American and Soviet Bloc weapons—and low cost interested the dudes above all else.