by Guy Lawson
As Packouz inquired about terms, he recalled, the Chinese delegate seemed to have a vague inkling about a new American ban on certain weapons systems they produced. But he was shocked when Packouz explained that it appeared the ban applied to the purchase of all Chinese munitions. For the US government and its contractors, doing business with a “Chinese military company” was now illegal, Packouz said.
“Do you know if your company is considered a ‘military’ company?” Packouz asked the Norinco executive.
“Military company?” he asked. “We manufacture military equipment, so of course we military company.”
“Is it a private company or a state company?”
“In China ownership not so simple. It sometime secret who own company. Could be advantage to be public or be private. This information not public.”
“I can’t buy from you if you’re a government company,” Packouz said.
“This not fair! In China, company can be private one day, state-controlled the next. What difference it make?”
“We have to follow American law.”
“But it make no sense for China-type business.”
Packouz sighed and took the Chinese catalogs and moved on. He didn’t possess a law degree, or a diploma from the Pentagon’s Defense Acquisition University. His training reading the Talmud or learning massage hadn’t prepared him to parse poorly defined terms in obscure defense regulations.
The Russian pavilion was nearby. With an exhibit covering more than an acre, the Russian company Rosoboron was selling everything from the latest iteration of the Kalashnikov to the Antey-2500 long-range surface-to-air missile and a line of non-nuclear submarines. When Packouz approached one of the hard-looking military types manning the exhibit, the Russian didn’t want to talk to a kid muttering about buying 100 million rounds of AK-47 ammo. Packouz showed the Russians the contract and asked to meet his boss. The man waved him off.
Packouz persisted and persisted, circling back to the Russian exhibit every day. Finally, on the fourth day of IDEX, as the show was drawing to a close, he was granted an audience with a deputy director of Rosoboron. The Russian was overweight, in his sixties, with thick, square glasses and a five-o’clock shadow. To Packouz, he looked like a KGB villain from a James Bond movie. He listened as Packouz spun his tale about the giant Afghanistan deal, eyebrows raised skeptically. What Packouz was saying sounded insane. It didn’t seem plausible that the US Army would rely on an overeager naïf to supply hundreds of millions of dollars’ worth of ammunition to Afghanistan. The Russians had been about to bid on the contract when the Pentagon suddenly and arbitrarily announced its ban. Standing before the Russian was a kid who plainly was unqualified to handle such a momentous contract. Was this a joke?
The Russian kept surveying the exhibition center, looking to see if he was being videotaped or watched—if he was the subject of a prank, or a sting.
Exasperated, Packouz handed over the list of ammo and the quantities. The director appraised the list and looked at Packouz skeptically.
“I’m serious,” Packouz insisted. “My company has the whole contract.”
“We have very good interest in this business,” the Russian finally said. “You know we are only company in world who can provide everything.”
“I’m aware of that. That’s why we want to do business with you.”
“Da. But as you know, there is problem. State Department has blacklist us. I don’t understand your government. One month is okay to do business. Next month is not okay. This is very political. Pentagon want leverage with Kremlin to get better price.”
“We can’t do business with you directly,” Packouz said. “But what if you sold the ammunition to another company, then we bought it from them? If you can help us do business with another Russian company, then we can buy from them. As long as they aren’t a government business.”
“Let me talk to my people,” the Russian said, taking one of Packouz’s freshly printed cards.
Packouz would never again hear from the Russian—the significance of which would only be revealed in time.
/ / / / /
Task Order 002 arrived at AEY’s headquarters in Miami on March 9, 2007: 1.1 million GP-30 grenades, nearly 100 million rounds of AK-47 ammo, and on and on. The total value was $48,717,652.70. There was no doubt anymore: AEY really had won the contract. The dudes really were the sole suppliers for the Afghan National Army and police. It was one thing for Diveroli to win scores of small contracts in Iraq, but an entirely different matter for the Pentagon to entrust a significant portion of the fate of a nation to a couple of young stoners—no matter how smart and adept they were.
Packouz’s sense of elation was overwhelming. He decided it was time to upgrade his life. He was sick of living like a penniless masseur.
Packouz had yet to receive a dime from Diveroli, but he sold his beater Mazda and bought a late-model blue Audi A4. He moved from his tiny efficiency studio into a nice one-bedroom in the Flamingo—the swinging South Beach condo where he’d long given massages to the residents and met the mother of his child. Diveroli had moved there a few months earlier. Packouz’s new pad overlooked the pool, where attractive young women could be seen lounging in the hot tub at all hours. Their dope dealer, Raoul, also lived in the building, providing unbeatable convenience.
Packouz went online and bought a Volcano vaporizer, a smoke-free pot-smoking device that heated the marijuana and turned the cannabis oil into a vapor. The Volcano meant he didn’t have to actually smoke the pot, avoiding toxins and carcinogens. With the amount of weed he was consuming, Packouz considered it an important investment in his health. The stainless-steel device took pride of place on his new living-room table—the crisp, clean high a manifestation of his state of mind.
The Flamingo was a constant party, Packouz discovered, a swirling, sexually supercharged South Beach scene. The marketing slogan for the building was “South Beach revolves around us,” and it was true: at all hours of the day, people were drinking, dancing, making out in the Jacuzzi.
“Sometimes more than just making out,” Packouz recalled. “Outside my balcony there were always a few women sunbathing topless.”
Packouz and Diveroli went to a lot of parties in the building. Most of the other tenants worked in fashion, if they were women; the men tended to be young stockbrokers and lawyers. When people asked what the pair did for a living, they would talk about being international arms dealers. They’d say that they were responsible for all the bullets in the Afghan war.
“They’d think we were lying, but it was the truth,” Packouz said. “It was heaven. It was wild. We felt like we were on top of the world.”
The pair would often toke up and go to the American Gun Range, the only firing range in Miami that would let them fire the automatic Uzis and MP5s Diveroli had collected.
“When we let go with our machine guns,” Packouz recalled, “all the shooters would stop and look at us like, ‘What the fuck was that?’ Everyone else had pistols going pop pop. Diveroli’s MP5 would go tututututu, like a dog’s bark. We loved it.”
With the business growing so radically, Diveroli began to approach the other kids in their posse to recruit them to work for AEY. One of the first he approached was Alex Podrizki, Packouz’s best friend, who was then a student at college. Podrizki deflected Diveroli.
“I wasn’t interested,” Podrizki recalled. “After he’d come back from LA—after he told us that his uncle had fucked him out of a lot of money—Efraim changed. He was controlling, always trying to get everyone to work for him. He wasn’t funny anymore. He tried to get me to work with him a few times but I said no.”
It seemed to Packouz and Podrizki that Diveroli’s greatest ambition—apart from vast riches, a private jet, and a reputation as a ruthless arms dealer—was to have all his friends working for him. It was partly a power trip, they thought, but it was also how Diveroli blended business and personal life into a monomaniacal vision.
Seeking m
ore help around the office, Packouz and Diveroli put up an ad on Craigslist. A random assortment of applicants turned up for interviews: young Hispanic women, African-American men, Asian college students, Haitian and Cuban refugees without immigration papers. The interviews were unorthodox, with Diveroli offering an extended speech on what he expected from his employees:
“The most important thing is hard work. I’m not promising it’s going to be easy. Look at me. I’m barely twenty-one years old and I’m a multi-fucking-millionaire. You know how I got this way? By hard fucking work, that’s how. If you listen to me and do what I say, you’ll make a lot of fucking money.” Diveroli would pause and gesture at Packouz, talking on the phone. “Look at him. I brought him into the business a year ago, and now he’s managing one of the largest small-arms munitions purchases in history. He’s about to be very rich. That can be you. But you gotta do what he does. You gotta be faster, smarter, better than all the schmucks out there. It’s a dog-eat-dog world. So are you going to be the alpha dog? Or are you going to be eaten?”
Most applicants sat dumbfounded. Some took the bait. Diveroli set them to work bidding on virtually every contract the Pentagon posted on FedBizOpps—everything from walkie-talkies to sniper sights—working entirely on commission. Instead of concentrating on the huge Afghan deal, and contenting himself with ensuring AEY did a stellar job and reaped millions in profits, Diveroli set out to win as many contracts as possible. But a pattern quickly emerged with the new hires. Most quit within days, repulsed by Diveroli’s screaming and ranting and raving. New ads were put up on Craigslist and new recruits were brought in, the company lurching from crisis to crisis. Diveroli was creating a “boiler room” atmosphere at AEY, though instead of pushing worthless penny stocks for commission, the new staff was bidding on federal contracts. AEY was the epitome of what the Bush administration had aimed to achieve by using private contractors—or it was a parody of that policy.
Packouz tried to ignore the commotion as he concentrated solely on the Afghan contract. He was indeed smart, adaptable, a fast learner. He was also out of his league. He’d never actually delivered a major deal for the US military overseas. Now he was tasked with single-handedly attempting to oversee the entire Afghan contract.
Signs that AEY was going to hit trouble were evident before the first shipment of grenades left Bulgaria for Kabul. Henri Thomet had given the dudes a “delivered” price for the ammo he was going to supply. This included a quote for airfreight. To calculate its bid, AEY had used Thomet’s price of $63,000 for each flight. But that quote was now obviously totally unrealistic. In the early months of 2007, oil prices were going through the roof, in part because of the uncertainty of America’s two faltering wars. When Packouz tried to charter flights, he discovered the real cost was more than $125,000 per flight.
“We’re fucked,” Diveroli wailed when Packouz told him the numbers. “We’re fucked! These numbers are totally unfuckingacceptable. You better fucking fix this. Get that Swiss motherfucker on the phone.”
When they tracked Thomet down, Diveroli insisted that he cover the difference between the price quoted and the current market cost. Thomet refused. A flurry of angry e-mails followed. Then Thomet vanished. For weeks he became impossible to reach. He didn’t return Diveroli’s e-mails or answer calls on his cell phone.
Diveroli and his ever-changing group of workers continued to bid on Iraq contracts, while Packouz chased the other parts of the Afghanistan contract. Weeks were passing—critical weeks, as AEY was expected to begin delivering in April and it was now March.
Time was of the essence because of the urgency of the demand for ammunition in the war zone. But there was also a bureaucratic reason for the hurried delivery schedule. The Afghan contract had been created by way of a little-known process called a “pseudo case.” Employing the pseudo case meant that the Pentagon was using money preauthorized by Congress without any specifications for how it was to be spent. This lack of oversight applied to Congress as well as the press, as few beat reporters covered arcane matters like small-arms procurement policy. Money designated under a pseudo case had to be spent within a specific time—in this case, two years. Given the vast scale of munitions called for in the contract, the Army was pressuring AEY to perform—and to perform immediately—otherwise the money would be lost.
As the end of March loomed, Thomet still wouldn’t answer his phone. Nor would he reply to e-mails. Diveroli and Packouz were panicking—yet again. Nearly two months had elapsed since they’d won the contract and deliveries were due. The Bulgarian grenades were sitting on pallets ready to go. AEY had to start making deliveries soon or risk losing the entire contract. Diveroli called his financier Ralph Merrill in Utah to plead with him to contact Thomet. Diveroli said that Thomet was treating him like a pesky kid—which, of course, he was.
Merrill agreed to try. He e-mailed Thomet and relayed Diveroli’s complaints. Merrill was friendly with Thomet; they’d done business together long before Diveroli came along. Phone calls followed. From their conversations, Merrill could tell that Thomet was distracted by personal issues and wasn’t paying close attention to business. Merrill urged Thomet to staff up, to hire enough people to handle the logistics of performing the Afghan contract. But Merrill realized that Thomet wasn’t interested in doing the bidding of AEY. The Afghan deal was AEY’s problem, not Thomet’s.
Merrill shared his impressions with Diveroli. AEY might have to deliver the ammo on its own, without Thomet’s promised assistance for the munitions he’d sourced. That included 100 million rounds of AK-47 ammo sitting in caves in Albania. Obviously AEY didn’t have the experience to take on such a logistical nightmare. But what other choice did it have?
Every day the Army pushed for a date certain that the shipments would begin. Every day Diveroli kept trying to get Thomet on the phone. Day and night, night and day, Diveroli called and called.
Thomet finally picked up. He was infuriatingly calm, even patronizing. He had no sense of the pressure AEY was under. The entire contract was in jeopardy, and Thomet didn’t seem to care. The skyrocketing airfreight prices weren’t his concern, he said. How could he have predicted the oil shortage and huge price increases? Besides, Thomet said, the price he’d quoted Diveroli wasn’t the final price—it was an estimate. Thomet was turning Diveroli’s trick against him, refusing to be bound by understandings reached during bidding.
This only made the young man angrier. “You have to cover the difference,” Diveroli insisted. “I’m going to lose money on the deal.”
“You don’t understand,” Thomet explained. “The quotes I sent you were for three hundred flights. The first order for the grenades in Bulgaria is only for two flights. When you book a large number of flights, we do what’s called a wet lease—that includes aircraft, crew, maintenance, insurance, all of it. A dry lease is for a short period of time. A wet lease is a long-term arrangement for a lot of flights. Everybody in the business knows the difference between wet and dry leases.”
Diveroli and Packouz had never heard the terms before. But it didn’t matter. Thomet was immovable. AEY had to be ready to charter dozens of flights to qualify for the cheaper rate. Diveroli decided the best solution was to play for time with the Army. The dudes needed to get the 100 million rounds of AK-47 ammo in Albania trucked to the airport, palletized, and loaded onto cargo planes. They needed to have enough shipments to qualify for a wet lease so as not to be murdered on airfreight.
The Army didn’t care about AEY’s profit margins—it expected the deliveries to be made as contracted. So Diveroli dissembled with the Army. He told the procurement officers in Rock Island that AEY couldn’t ship because of delays in governments’ issuing the export permits needed to move the ammo across national frontiers. It was a lie, but a necessary one to make the contract economically viable. Many administrative and logistical problems were besieging the dudes, but the main problem was AEY’s profit—or the lack of it due to airfreight prices.
“Bud
dy, we’re not donating this stuff to the government,” Diveroli said.
At the same time, Packouz was furiously trying to obtain the necessary permissions to fly over the countries between the Balkans and Afghanistan. The Stans, as Packouz called the countries—Turkmenistan, Kazakhstan, Uzbekistan, Tajikistan. Packouz was rapidly learning how difficult it was to deal with the governments in countries from the former Communist Bloc. The bureaucrats in the Stans seemed to be deliberately delaying approval to make life difficult for AEY—and thereby the United States.
“I would call the American military attachés in the embassies in those countries and say I was working on a vital mission in the global war on terror,” Packouz recalled. “I was careful to speak their language—‘Yes, sir,’ ‘No, sir’—like I had maybe been in the military myself. Sometimes I would joke with them. It was the dead of winter where they were, so I figured it had to be freezing in the Caucasus. I’d ask what the weather was like in Ashgabat or Bishkek. Then I’d say that I was calling from sunny Miami Beach and tell them what the temperature was. I tried to put them at ease, to get them to my side.
“I told them that it seemed like it was impossible to get the right approvals, no matter how many strings I pulled. The American officers told me off the record that they believed the Russians were getting their neighbors to drag their feet. The Russians were supposed to have had the contract in the first place, but they’d been banned. So the Russians were getting revenge. Putin was fucking with us. Week after week was passing, and we were getting seriously behind.”
In theory, AEY could have shared its woes with the Army—the oil prices, the flyover permissions, the evasive Swiss arms dealer, the Russian machinations. There were regulations that would have enabled the Army to increase the price for the Afghan contract. What was called an “equitable adjustment” made sense, as the changing circumstances were beyond AEY’s control, most especially the hike in airfreight prices. But to tell the Army about the troubles risked AEY’s losing the contract. To ask for a variance would be sending out a distress signal.
