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The Pentagon's DARPA Director, Regina Dugan, insists she's done nothing wrong in allowing a subordinate to award millions of dollars in government contracts to RedXDefense, a family firm that Ms. Dugan holds stock in.  (Source: Wired)

RedXDefense is designing the "XPAK", a portable fluorescent light-based explosives detector, which tries to catch terrorists red-handed. Now it may have been caught red-handed.  (Source: RedXDefense)

Defense auditors have vowed to scrutinize every contract awarded under Ms. Dugan's relaxed ethics rules.  (Source: TaxFacts)

DARPA’s Experimental Crowd-derived Combat Support Vehicle (XC2V)
The head of DARPA gave millions in contracts to a family firm

It took Regina E. Dugan nearly 15 years to rise through the ranks to become director of the Defense Advanced Research Projects Agency (DARPA).  Starting as a DARPA manager in 1996, she assumed a variety of roles over the next decade and a half.  But now her climb to the top has been endangered by a financial scandal that has all the workings of a blockbuster -- allegations of nepotism, government corruption, and ethics violations.

I. Family Ties and Corruption Allegations Plague New Obama's DARPA Director

The scandal and active government investigations stem from a small defense contractor, RedXDefense, LLC, which Ms. Dugan launched in 2005.  Serving as President and CEO, she decided in 2009 to depart when she was offered the position of DARPA director.

The position seemed awfully attractive, after all Ms. Dugan had a long history with DARPA and DARPA gets the coolest tech toys -- from flying humvees to unmanned ocean frigates.

When she left RedXDefense, most expected she would cut all financial ties to the company.  After all, the previous Bush administration's DARPA director, Tony Tether, reportedly had strict policies when it came to fiscal accountability.  States a former DARPA program manager in an interview with Wired, "With Tony, there wasn’t a little line. There was a valley. You either sell your stock [in your old firm], or there's the door.  With Regina, things were very different."

Another ex-DARPA employee warns, "You could pull a lot of money out of that place if you really wanted to. There really isn't any due diligence there."

RedXDefense recently earned a $1.7M USD payday in research contracts -- a small, but notable chunk of DARPA's $3B USD annual budget.  Meanwhile Ms. Dugan still holds over $15,000 USD in private shares of RedXDefense and is owed a loan of $250,000 USD from RedXDefense.  Her former employers new boss is a familiar face, as well -- her father.

Ms. Dugan claims the awards to RedXDefense were fair, as she recused herself of the decision.  But there's concern that the way Ms. Dugan has redefined ethics rules at the firm may allow for abuse.

II. Regina Dugan Conveniently Redefines DARPA's Ethics Guidelines

Here's how it works.  

Under Tony Tether’s reign of DARPA, if you had stock with a company or used to work for a company/university seeking a DARPA bid, that firm was automatically disqualified from the contract if there were any other competitive bids.  Even if the former employer was the only bidder, the ex-employee still had to sell their stock options, before any award could be made.

Critics were unhappy with this policy, as they said that if employees took a research sabbatical at DARPA, it automatically precluded them from potentially hundreds of millions of dollars of DARPA contracts.

The critics were pleased when Ms. Dugan took office and redefined DARPA's ethics policy.  Under her rules, program managers no longer had to sell their stock if a former employer received a contract.  The only remaining restriction was that the former employee had to recuse himself or herself, designating a suitable alternative project manager to lead the effort.

DARPA deputy director Ken Gabriel called the rules "more realistic", and agency spokesperson Eric Mazzacone bragged, "These policies and practices are in place so that qualified people can come to government service and to ensure that all organizations have access to fair and open competition; neither favored nor disfavored."

But the new rules open a peculiar door, which Ms. Dugan appears to have crossed through.  She passed the decision on whether to award a contract to her family firm to a subordinate, someone whose job is dependent on her approval.

Nick Schwellenbach, director of investigations at the Project on Government Oversight comments, "If I was a DARPA employee. I wouldn’t want to be in a position of depriving my boss' family members of a large contract."

III. The Sheriff Steps In

The incident has stirred up the whole beehive, though, and now the full scrutiny of government auditors is bearing down on DARPA.  The Pentagon's Inspector General (IG) has launched a major investigation, not only into the RedXDefense contract, but every other DARPA contract approved during Ms. Dugan's two-year tenure as DARPA chief.

One of the targets of the probe is airship builder Aeros, who counts Tony Tether as a member of its board of advisors.  The irony here is that under Mr. Tether's rules that relationship would likely have precluded Aeros from the contract, but Mr. Tether appears to be happily taking advantage of the new rules, now that he's gone.

The IG writes, "The current audit will 'determine the adequacy of DARPA's selection, award, and administration of contracts and grants awarded in FY 2010 and FY 2011 for research and development projects.'"

Meanwhile, the IG is launching a separate inquiry that specifically targets Ms. Dugan and RedXDefense.  In a letter sent to the Project on Government Oversight the IG describes the investigation as a probe into "Regina Dugan's continued financial and familial relations with DARPA contractor RedXDefense."

At this point it's all allegations, but there seems a strong possibility that RedXDefense may find some of its contracts disappearing.

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Middle Ground Needed
By vanka on 8/17/2011 6:53:50 PM , Rating: 2
While reading this article I had to shake my head in amazement several times at both of the described policies. On one hand there is the draconian policy with no compromise while on the other is one that virtually invites abuse. A middle ground between the two is definitely needed.

Here are the problems that I see with Mr. Tether's policy:

1. Unfairness and counterproductive policy of disqualifying a company due to ties to DARPA employee(s): This policy is completely unfair to the bidding company; while the possibility does exist that the employee (either of their own volition or through the urging of higher management) joined DARPA for the sole purpose of ensuring that a contract is granted, I very much doubt that this is a common occurrence. Should a company be disqualified because a former employee, shareholder, or etc happens to work there? In my opinion it unfairly penalizes this company and gives an unfair advantage to all the other bidders.
In addition, this is counterproductive. Let's assume there are two companies (A & B) bidding on a contract; company A usually prices their product/service 5% lower than B, but then they become aware that B has ties to someone in DARPA. What do they do? They are aware of the policy that disqualifies B if another competitive bid is submitted; so they are effectively are the sole bidder. Now the policy does stipulate that the bid must be "competitive" so they can't just double their prices; so they decide to bid 5% higher than B - still in the same ballpark and competitive. The result of this policy is that in this scenario DARPA (and the taxpayers) are paying 10% more than if B were not disqualified out of hand. With this policy, in virtually every scenario DARPA will end up paying more if the other bidders are aware of any ties between a fellow bidder and a DARPA employee.

2. Unfairness in forcing employees to divest themselves of their investments: The policy that employees must sell their stock in order for the bidding company submitted the only competitive bid is absurd. First of all, they are the only competitive bid; the others either choose not to submit a bid or were not competitive. They are receiving the contract due to their bid not because of any connections to employees - this is exactly how it's supposed to be. Forcing an employee to give up their stocks/investments in a company that they may have some personal/emotional attachment to just seems wrong; especially if they haven't done anything to influence the process. Note, laws about insider trading still apply here.

Mrs. Dugan's policy while giving more flexibility just leaves a wide-open door for corruption. As is mentioned in the article, the policy of placing a subordinate in charge of the project when you have a connection to the bidder virtually ensures that the higher up's company will be selected.

There has to be a sane and fair policy that can be implemented that would address all issues. Thoughts?

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