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 email 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.
On March 27, 2008, a front-page story in the New York Times appeared with a photograph of ammo AEY shipped to Afghanistan.
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.
Guy Lawson is a New York Times bestselling author and a contributing editor at Rolling Stone. His work has appeared in the New York Times, GQ, and Harper's. He'd love you to like him on Facebook.
Copyright © 2015 by Guy Lawson. From the forthcoming book Arms and the Dudes: How Three Stoners from Miami Beach Became the Most Unlikely Gunrunners in History, to be published by Simon & Schuster, Inc. Printed by permission. Buy the book here.