- Associated Press - Saturday, March 1, 2014

WASHINGTON (AP) - Yuri Borisov’s performance on a lucrative U.S. military contract was dismal - cost overruns, blown deadlines, forged paperwork.

Yet that didn’t keep the Russian entrepreneur from winning more business with the Department of Defense, according to interviews and documents obtained by The Associated Press.

Borisov, who specializes in refurbishing Russian Mi-17 helicopters, had an ally in Bert Vergez, an Army colonel who ran an obscure defense acquisition office in Huntsville, Ala.

When Borisov insisted on being paid millions of dollars extra for overhaul work his companies were late on, Vergez supported him.

When Borisov sought a new multimillion helicopter overhaul contract, it was Vergez’s office that approved the deal.

Even when auditors from the Pentagon inspector general’s office were uncovering signs of illegal activity, it was Vergez who pitched a plan to install new engines on Mi-17s bound for Afghanistan - an arrangement that promised millions of dollars in revenue for Borisov.

The relationship between the two men is at the heart of a criminal investigation into why the Huntsville office Vergez once commanded kept dealing with Borisov despite an alarming catalog of problems.

The case is a glimpse into the labyrinth of military procurement, where even today, Borisov’s companies, AviaBaltika Aviation and Saint Petersburg Aircraft Repair Company, remain technically eligible for federal contracts. The inspector general’s audit recommended that the Army take steps to debar or suspend the companies, but no such action has been taken more than a year later.

“I am deeply concerned by the Department of Defense’s stubborn refusal to stop contracting with firms that stand accused of defrauding the U.S. government,” said Sen. John Cornyn of Texas, the Senate’s second-ranking Republican. “If the Pentagon fails to take the formal steps to bar these firms from future contracts, the real victim will be the American taxpayer.”

The FBI and Defense Criminal Investigative Service are leading the inquiry. Representatives for both agencies declined comment.

Vergez, who retired from the military in November 2012, and Borisov did not return phone calls seeking comment for this story.

It’s unclear when the two men met.

Vergez, 48, spent 25 years in uniform.

He graduated in 1987 from Norwich University, a private military school in Vermont, and earned a master’s degree from the Florida Institute of Technology. In the Army, Vergez flew Apache and Cobra attack helicopters. He deployed to Albania in 1999 and later served a tour in Iraq, his service record states. In 2001, Vergez was assigned to the Army command in Hunstville that manages the service’s aviation budget.

Borisov, 57, served in the Soviet military for 10 years and launched his aviation companies in the early 1990s. AviaBaltika is based in Kaunas, Lithuania. Saint Petersburg Aircraft Repair Company, better known as SPARC, is headquartered in Russia.

In Lithuania, Borisov is well known for his flamboyant lifestyle and a scandal that led to the impeachment in 2004 of Lithuania’s president, Rolandas Paksas. Borisov was the top financial backer of Paksas’s election campaign. He contributed $400,000.

The president’s troubles began after police alleged that Borisov was in cahoots with the Russian mafia. Paksas’s political career fell apart after telephone calls secretly recorded by the state security department became public during the Lithuanian parliament’s impeachment proceedings. In one, Borisov is allegedly caught speaking with reputed Russian mob bosses.

Borisov and Paksas denied all the accusations. No charges were filed against Borisov, but the U.S. Embassy in Vilnius, Lithuania’s capital, kept a close eye on him. When AviaBaltika applied to the Lithuanian government in 2005 for a license to train Iranian helicopter pilots, Tom Kelly, then the embassy’s deputy chief of mission, alerted State Department officials in Washington.

Kelly called AviaBaltika “infamous” in a cable published by the Wikileaks website. The Lithuanian government, Kelly wrote, understood the license request “is likely to set off alarms in Washington, and wants to make sure we have a chance to affect” the decision. The U.S. recommended the request be denied. It was.

But warnings about Borisov’s companies appear to have slipped through the cracks. By 2008, AviaBaltika and SPARC were part of an umbrella contract to support U.S. counterterrorism activities held by defense industry giant Northrop Grumman and managed by a Navy office in Dahlgren, Va.

AviaBaltika and SPARC were tasked with overhauling 10 Mi-17 helicopters, part of the U.S. strategy to defeat al-Qaida and other extremist groups. The Pentagon acquired dozens of new and used Mi-17s to give to Iraq, Afghanistan, Pakistan and other countries in its fight against terrorism.

But Avia Baltika and SPARC ran into trouble.

A $38 million job to refurbish the 10 Mi-17s ballooned to more than $64 million and delivery dates were badly missed, according to the Pentagon inspector general’s audit of the work done by Borisov’s companies.

Jonas Bazaras, AviaBaltika’s commercial director, said in an email that the audit’s findings “are not consistent with the reality,” but declined to comment further.

Two of the choppers were 20 months behind schedule, the audit said. Eight others for Pakistan’s air force missed their deadline by a year.

Yet U.S. government contracting officers kept paying the bills for what auditors described as unquestioned and unnecessary costs. AviaBaltika and SPARC charged exorbitant rates for helicopter replacement parts. For example, a storage battery cost just over $13,000, 500 percent more than the going rate from other companies. AviaBaltika wanted $20,000 for a landing light, nearly double the market cost.

It was virtually impossible to assure the overhauls were being done properly because quality control inspectors from the U.S. government and Northrop Grumman were repeatedly refused access to SPARC’s facilities in Russia.

William Bain, then a senior manager at Northrop Grumman, wrote in a February 2010 memo that the access denial “clearly demonstrates that AviaBaltika and SPARC are totally unfit to be entrusted with business that can flow down to them on behalf of the U.S. government.”

Borisov’s companies ran afoul of the Russian government, too. The companies shipped two military choppers for repair work in Russia, but claimed the helicopters were commercial models because the companies were not authorized to perform overhauls on military aircraft.

A memo signed by Borisov’s son, Pavel, Avia Baltika’s president and financial director, stated the copters “belong to civilian category and have no restrictions for import and export to Russia.”

Russian authorities also determined the logbooks the companies provided for the Mi-17s “were not authentic,” the audit said. The Russian government considered the breach to be a serious matter and brought the illegal shipments to the attention of U.S. defense officials in late 2010.

A few months later, U.S. government management and oversight of the AviaBaltika and SPARC’s overhaul work shifted to an Army acquisition office in Huntsville headed by Vergez.

At about that same time, March 2011, Vergez’s name became connected to a house owned by Pavel Borisov in Huntsville’s exclusive Ledges neighborhood. Borisov sold the four-bedroom home at 3 Chittamwood Drive in June 2013 for $725,000, according to the Madison County, Ala., tax assessor’s office. It’s unclear whether Vergez ever lived there or why his name was registered at the address. Pavel Borisov did not respond to emails from AP.

The connection should have set off alarms inside the Army, said Neil Gordon of the Project on Government Oversight, an independent watchdog group in Washington. Military officers are supposed to avoid even the appearance of a conflict of interest.

“By allowing his name to be linked to property owned by an executive of a company with which the Army does business, Col. Vergez showed either a brazen disregard for contracting regulations or a serious lack of judgment,” Gordon said.

In his new post, Vergez supported AviaBaltika and SPARC’s bid for $11 million in additional compensation even though the auditors found no evidence a required cost analysis had ever been completed.

The companies argued that the delays in overhauling the helicopters were not their fault, but caused by another contractor’s failure to supply replacement parts. As a result, AviaBaltika and SPARC said they incurred expenses they should not have had to absorb, the records show.

They cited the costs of preparing for and attending meetings and writing letters to resolve the problems, noting labor rates between $250 and $650 an hour, which translated into annual salaries as high as $1.3 million a year. The inspector general’s audit called the rates unreasonable.

Ultimately, AviaBaltika and SPARC would receive just $1.2 million after Pentagon officials in Washington intervened and instructed Vergez’s office to make no further payments, according to a person familiar with the transaction but not authorized to be identified as the source of the information.

Despite that performance, in April 2011, AviaBaltika and SPARC won a contract to overhaul five more Mi-17s, the records show. The new work flowed to Borisov’s companies through a larger contract Vergez’s office had with Science and Engineering Services, Inc., a government contractor in Huntsville.

Nearly $14 million has been spent on the subcontract even though the helicopter overhauls have not been completed, according to an Army budget document.

Just before Vergez retired from the Army, he laid out a plan through which Science and Engineering Services would acquire new Ukranian-built engines for Mi-17s the U.S. was buying for Afghanistan. AviaBaltika was the licensed distributor for the Motor Sich engines in the U.S. and stood to earn millions of dollars.

“I trust that your team (AviaBaltika Ltd., JSC Motor Sich) is up to the challenge to bring this much needed engine capability” to Afghanistan, Vergez wrote in an August 2012 memo to Ralph Pallotta, chief operating officer at Science and Engineering Services.

But the plan stalled after Vergez retired. Only two engines have been acquired so far.

Science and Engineering Services has not been contacted by federal investigators and has no reason to believe it is the subject of any inquiry, Pallotta said.

Shortly after Vergez hung up his Army fatigues, he went to the work for the private equity firm Patriarch Partners as the senior vice president for commercial aerospace operations.

That move is under scrutiny too.

Patriarch is owned by Lynn Tilton, who bills herself as the business world’s turnaround queen. She buys struggling companies and attempts to make them profitable.

Among the properties in Patriarch’s portfolio is MD helicopters, a manufacturer of commercial and military rotorcraft in Mesa, Ariz. Vergez’s office had awarded MD Helicopters a contract in March 2011 potentially worth $186 million for copters to train Afghan air force pilots.

Most federal officials are bound by rules they must abide by when they leave government to take private sector jobs. That includes a one-year ban against receiving compensation from a contractor they had dealings with while employed by the government.

At Patriarch, Vergez not only reconnected with both Borisovs, he introduced them to Tilton at last year’s Paris Air Show, the global aviation industry’s preeminent networking event.

Vergez escorted her to a lunch at Borisov’s chalet on the grounds of the sprawling Le Bourget Exhibition Centre, according to a copy of Tilton’s itinerary.

They had dinner the following night at Le Copenhague, an elegant Scandinavian-themed restaurant on the Champs Elysees.

Patriarch spokesman Davidson Goldin declined to respond to questions about Vergez’s hiring or the Paris Air Show.


Associated Press writers Liudas Dapkus in Vilnius, Lithuania, Gary Peach in Riga, Latvia, and Associated Press researchers Judith Ausuebel and Rhonda Shafner in New York contributed to this report.


Follow Richard Lardner on Twitter: https://twitter.com/rplardner

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