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S. HRG. 111–392 

WASTE, FRAUD, AND ABUSE 

IN THE SBIR PROGRAM 

HEARING 

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

AUGUST 6, 2009 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JOHN D. ROCKEFELLER IV, West Virginia, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

TOM UDALL, New Mexico 

MARK WARNER, Virginia 

MARK BEGICH, Alaska 

KAY BAILEY HUTCHISON, Texas, Ranking 

OLYMPIA J. SNOWE, Maine 

JOHN ENSIGN, Nevada 

JIM DEMINT, South Carolina 

JOHN THUNE, South Dakota 

ROGER F. WICKER, Mississippi 

JOHNNY ISAKSON, Georgia 

DAVID VITTER, Louisiana 

SAM BROWNBACK, Kansas 

MEL MARTINEZ, Florida 

MIKE JOHANNS, Nebraska 

ELLEN L. DONESKI, Staff Director 

JAMES REID, Deputy Staff Director 

BRUCE H. ANDREWS, General Counsel 

CHRISTINE D. KURTH, Republican Staff Director and General Counsel 

BRIAN M. HENDRICKS, Republican Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on August 6, 2009 ............................................................................. 1 

Statement of Senator Rockefeller ........................................................................... 1 

Prepared statement .......................................................................................... 24 

Statement of Senator McCaskill ............................................................................. 25 

WITNESSES

Alfred J. Longhi, Jr., Former Vice President, Lithium Power Technologies ...... 1 

Prepared statement .......................................................................................... 3 

Thomas J. Howard, Acting Inspector General, NASA .......................................... 5 

Prepared statement .......................................................................................... 6 

Allison C. Lerner, Inspector General, National Science Foundation ................... 11 

Prepared statement .......................................................................................... 13 

Patricia A. Dalton, Managing Director, Natural Resources and Environment, 

U.S. Government Accountability Office .............................................................. 16 

Prepared statement .......................................................................................... 18 

APPENDIX

Report from Senate Commerce Committee Staff on ‘‘Cases of SBIR Waste, 

Fraud and Abuse’’ ................................................................................................ 39 

Response to written questions submitted by Hon. Tom Udall to Thomas 

J. Howard and Allison C. Lerner ........................................................................ 44 

(1) 

WASTE, FRAUD, AND ABUSE 

IN THE SBIR PROGRAM 

THURSDAY, AUGUST 6, 2009 

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Committee met, pursuant to notice, at 2:30 p.m. in room 

SR–253, Russell Senate Office Building, Hon. John D. Rockefeller 

IV, Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 

U.S. SENATOR FROM WEST VIRGINIA 

The CHAIRMAN. This hearing will come to order. I should point 

out that we have a vote on our new nominee for Supreme Court 

at 3 p.m., which absolutely messes all of your schedules up, but 

we’ll make it work. 

What I’m going to do, and I’ll suggest to the Ranking Member 

when she—when she comes, that we forego our opening statements, in which I try to set the scene, and go directly to you so 

that you don’t feel left out in the cold while we’re speaking and 

you’re sitting, and then we leave, and then wondering if you’ll ever 

see us again. You will. We’ll go down and vote. We have to vote 

from our seats because it’s a very formal-type vote. 

And, so, I would start out with you, sir, Mr. Longhi. 

STATEMENT OF ALFRED J. LONGHI, JR., 

FORMER VICE PRESIDENT, LITHIUM POWER TECHNOLOGIES 

Mr. LONGHI. Thank you. Good afternoon, Chairman Rockefeller 

and distinguished Committee Members. It is both an honor and 

privilege to be able to make a statement today to the Senate Committee regarding the ease with which fraud can be conducted 

against the Small Business Innovation Research Program. 

The CHAIRMAN. I have so many nice things to say about you, and 

I just hate waiting. But, I’ll just have to. 

Mr. LONGHI. Thank you. Thank you for your kind words. 

My name is Alfred J. Longhi, Jr., and I’m the former Vice President of Lithium Power Technologies and a witness to SBIR fraud. 

Due to being a father, a husband, and a patriotic citizen, I had no 

choice but to lead by example and reveal this fraud, even though 

there may have been and still may be severe consequences for my 

family. 

I began documenting fraud by my employer, brought it to the 

government, and at the government’s request, worn an undercover 

wire to record conversations. These actions and others placed my 

2 

family at physical and financial risk, but were necessary to reinforce the teachings to our children by my wife and I, on love of 

country, and always striving to do the right thing. 

In 2002, I filed a False Claims Act qui tam case in the Southern 

District of Texas, where working closely with the government, we 

obtained a summary judgment of a little bit over $5 million against 

Lithium Power. This judgment was recently affirmed in entirety by 

the Fifth Circuit of Appeals. 

To date, 8 years of my life have been dedicated to shining the 

light on SBIR fraud, with the Department of Justice and the Federal Court System as my ally. 

I personally witnessed over 12 different types of technical research fraud against the United States Army, NASA, the United 

States Air Force, the Bureau of Missile Defense, the Office of the 

Secretary of Defense, and similar allegations involving the National Institute of Standards and Technologies and the Department 

of Energy. 

Lithium Power Technologies, referred to as LPT, was founded by 

Dr. Mohammed Zafar Munshi in 1998, with the goal of developing 

and manufacturing the holy grail of lithium batteries. Dr. Munshi 

persuasively convinced a group of investors, myself included, that 

he had the technology to revolutionize the battery industry. As a 

true believer in Dr. Munshi’s ability, I willingly invested an 

amount of money that, given my personal net worth, was a massive 

investment for my family, and myself, and even involved a mortgage on my home. Buoyed by Dr. Munshi’s success with obtaining 

6 different SBIR grants within the first 20 months of business, it 

totalling over $2 million. I resigned from my long-term employer 

and moved from New York to Texas to join LPT to help grow the 

business. 

During the next 30 months of my employment, Dr. Munshi 

quickly acquired additional SBIR contracts and three, related 

NASA and NIST contracts that totaled just shy of $7.5 million. 

This grand total of 26 government research contracts—23 of these 

were SBIR grants—coupled with Dr. Munshi’s smoke and mirrors 

research, became the recipe for turning LPT into an SBIR mill that 

methodically stole government funds. Just one morally bankrupt 

man that had quickly learned how to scam the system in just his 

first 24 months of business was responsible for this shocking fraud. 

To certain types of individuals, the ease that research fraud can 

be conducted with SBIR funds becomes an addictive alternative to 

the hard work of commercializing actual research. Submitted with 

this testimony is Federal court documentation that shows how Dr. 

Munshi fraudulently induced SBIR reviewers to grant phase one 

and phase two proposals. I also allege many other types of SBIR 

fraud that the court was asked not to rule on because the fraudulent inducement judgment won by the government was sufficient to 

put Dr. Munshi and LPT out of business. 

A few of these other areas of fraud were a duplication of phase 

one and phase two proposals, duplication in phase one and phase 

two contracts after funding within the performance reports, different guidelines used by the various SBIR agencies to fund the 

proposals. 

3 

Of particular note, is the attached deposition by former MDA 

SBIR director, Jeff Bond. He did not think it was relevant or material for funding that Lithium Power lied to the government in its 

SBIR proposals. 

Another was subcontracting SBIR work out to another company 

without the government’s knowledge. It would get the contract, and 

then hire another firm to do it, and then pass it on as its own 

cross-charging labor and materials used to complete commercial 

work to SBIR contracts. 

This brings me to my purpose for testifying here today. 

In the last eight years, I lost a lot of money and a lot of time 

in trying to highlight the weaknesses within the SBIR Funding 

System. I implore you to change SBIR Oversight Systems in ways 

to prevent these kinds of frauds from happening in the future. At 

the very least, outsourcing a company to mine data for research duplication within incoming phase one and phase two proposals. And 

within funded final reports of proposals. I truly believe in the concept of SBIR Program, to see it potentially groom new research to 

yield technology that will eventually be commercialized. 

Technological advances in energy, medical, defense, and many 

other areas have been and always will be one of the fundamental 

strengths of our country. The answer is not to cut back on SBIR 

funding, but to create policies, oversight and management systems, 

and outsource technical fraud detection to ensure that funding is 

not fraudulently obtained or used. Implementing these corrective 

steps now will save our country hundreds of millions of dollars in 

the future. 

So, in closing, thank you for your time. I would be happy to answer questions and work with the Committee to reduce the program’s exposure to this type of technical research fraud. 

[The prepared statement of Mr. Longhi follows:] 

PREPARED STATEMENT OF ALFRED J. LONGHI, JR., FORMER VICE PRESIDENT, 

LITHIUM POWER TECHNOLOGIES

Good afternoon Chairman Rockefeller and distinguished Committee Members. It 

is both an honor and a privilege to be able to present a statement today to the Senate Committee on Commerce, Science, and Transportation, regarding the ease with 

which fraud can be conducted against the $2 billion a year Small Business Innovation Research Program. 

My name is Alfred Longhi Jr, and I am the former Vice President of Lithium 

Power Technologies and a witness to SBIR Fraud. Due to being a father, husband, 

and patriotic citizen, I had no choice but to lead by example and reveal this fraud 

even though there may have been, and still be, severe consequences for my family. 

I began documenting fraud by my employer, reported it to the government and, at 

the government’s request, wore an undercover wire to record conversations. These 

actions and others, placed my family at physical and financial risk, but were necessary to reinforce the teachings to our children by my wife and I on love of country 

and always striving to ‘‘do the right thing.’’ In 2002, I filed a False Claims Act qui 

tam case in the Southern District of Texas, where working closely with the government, we obtained a summary judgment of over $5 million, a judgment that was 

recently affirmed in its entirety by the Fifth Circuit Court of Appeals. To date, 8 

years of my life have been dedicated to shining the light on SBIR fraud with the 

Department of Justice and Federal Court System as my ally. 

I witnessed over a dozen different ways in which technical research fraud was 

used to acquire funds from the United States ARMY, NASA, United States Air 

Force, Ballistic Missile Defense Organization (Formerly the BMDO now the MDA), 

and the Office of the Secretary of Defense (OSD), along with allegations of the same 

involving NIST (National Institute of Standards and Technology) and the Department of Energy (DOE). 

4 

Lithium Power Technologies, referred to as LPT, was founded by Dr. Mohammed 

Zafar Munshi in 1998 with the goal of developing and manufacturing the ‘‘Holy 

Grail’’ of lithium batteries. Dr. Munshi persuasively convinced a group of investors, 

myself included, that he had the technology to revolutionize the battery industry. 

As a true believer in Dr. Munshi’s ability, I willingly invested an amount of money 

that, given my personal net worth, was a massive investment for myself and my 

family, even involving a mortgage on my home. Buoyed by Dr. Munshi’s success 

with obtaining six different SBIR grants, totaling over $2 million dollars in just the 

first 20 months of business, I resigned from my long-term employer and moved from 

New York to Texas to join L PT to help grow the business. 

During the next 30 months of my employment, Dr. Munshi quickly acquired additional SBIR contracts and three related NASA and NIST grants that totaled almost 

$7.5 million dollars. This grand total of 26 Government Research Contracts (23 of 

them SBIR), coupled with Dr. Munshi’s ‘‘smoke and mirrors’’ research; became the 

recipe for turning LPT into a ‘‘SBIR Mill’’ that methodically stole Government 

funds. A single morally bankrupt man that had quickly learned how to ‘‘scam’’ the 

SBIR system in just his first 24 months of business conducted this shocking fraud! 

To certain types of individuals, the ease that research fraud can be conducted with 

SBIR Funds becomes addictive and an alternative to the hard work of commercializing actual research. 

Submitted with this testimony is Federal Court documentation that shows how 

Dr. Mohammed Munshi fraudulently induced SBIR reviewers in a variety of ways 

to grant the Phase I and Phase II Awards. In addition, I also alleged many other 

types of SBIR fraud that the court was asked not to rule on because the fraudulent 

inducement judgment won by the Government was sufficient to put D r. Munshi and 

L PT out of business. Specifically these other areas were: 

• Duplication in Phase I and Phase II proposals PRIOR to funding. 

• Duplication in Phase I and Phase II Contracts AFTER Funding within performance reports. 

• Invoicing the Government for the same equipment and materials under different SBIR grants. 

• Different Guidelines used to Grant awards by the various SBIR Agencies. Of 

particular note here is the attached deposition by the former MDA SBI R Director Jeff Bond who did not think it was relevant or material that Lithium Power 

lied to the government in its SBIR proposals! 

• Lack of communication between different SBIR Agencies on similar research 

topics awarded to the same company. 

• Time Sheet Fraud. 

• Subcontracting SBIR work out to another company—without the Government’s 

knowledge. 

• Cross charging labor and materials used to complete commercial work to government-funded SBIR contracts. 

• Steering new SBIR research topics toward topics previously funded and granted 

by other SBIR agencies to facilitate research recycling. 

• Lack of government oversight—government seldom tested or verified reported 

research performance claims. 

So this brings me to my purpose for testifying here today. In the last 8 years, I 

lost a lot of money and lot of time in always trying to highlight the weaknesses 

within the SBIR funding system. I implore you to change SBIR oversight systems 

in ways to prevent these kinds of frauds from happening in the future. At the very 

least, outsource a company to ‘‘mine’’ data for research duplication within incoming 

Phase I & II proposals, along with the final technical reports for funded proposals. 

I truly believe in the concept of the SBIR program to seed and potentially groom 

new research to yield technology that will eventually be commercialized. Technological advances in energy, medical, defense and many other areas have been and 

will continue to be one of the fundamental strengths of our country. The answer is 

not to cut back on SBIR funding, but to create policies, oversight management systems, and outsource technical fraud detection to insure that funding is not fraudulently obtained or used. Implementing these corrective steps now will save our country hundreds of millions dollars in the future. 

Thank you for the chance to present this statement. I would be happy to answer 

questions and participate with the Committee staff to reduce the SBIR Program’s 

exposure to this type of technical research fraud. 

5 

The CHAIRMAN. Thank you, sir, very, very much. 

And now, Mr. Thomas Howard, who is the Acting Inspector General of NASA. 

And, might I just say, I don’t see a lot of people up here on the 

dais. I think what’s happened is that they know there’s a 3 p.m. 

vote, which is, as I say, a very formal vote. Everybody in their seat 

on time, then you stand up to vote. You know, it’s very—very formal. My guess is they just figured that we wouldn’t proceed with 

the hearing, but one thing I’ll guarantee you: they’ve all read your 

testimony. They have all read your testimony. 

Mr. LONGHI. Thank you. 

The CHAIRMAN. In fact, you didn’t even have—you were sort of— 

you were just giving it. 

Please, sir. 

STATEMENT OF THOMAS J. HOWARD, 

ACTING INSPECTOR GENERAL, NASA 

Mr. HOWARD. Thank you, Mr. Chairman. 

To those of us in the IG community, people like Mr. Longhi are 

critical to our ability to be able to do our work, and we appreciate 

what he’s done. 

Thanks for the opportunity to talk about our work on the SBIR 

Program. NASA’s is one of the largest programs in the Federal 

Government, averaging about $105 million annually over the last 

5 years. It’s popular and it’s competitive. Last year, NASA awarded 

about 500 contracts. It had over 1,600 proposals, so, less than 1 in 

3 of those who were interested in obtaining contracts did so. 

Our office has been involved in audit and oversight activity of the 

SBIR Program since its inception. We’ve identified instances of 

fraud, waste, and abuse, and we’ve identified opportunities to improve the internal control structure. 

Currently, we have five, ongoing investigations. We’ve closed 

eight investigations that have resulted in a conviction, a civil judgment, or some other corrective action. Both our ongoing and completed work has shown a pattern of program participants who have 

provided duplicate deliverables to multiple agencies, participants 

who have offered proposals to do separate work, but then provided 

identical deliverables to multiple Federal agencies, and we’ve had 

a variety of misrepresentations by program participants, particularly dealing with the role of the principal investigator, who was 

to conduct the research. 

Some examples of fraudulent cases involve one where a U.S. District Court ordered a contractor to pay $5 million in damages for 

making false representations. 

Another investigation confirmed that a contractor submitted research that was recycled or used on previous contracts. The company’s president was sentenced to one year home confinement, 5 

years probation, and agreed to pay a $1.4 million settlement. 

In some of our ongoing cases, we have misrepresentations of eligibility. 

In one case, a contractor allegedly purported to be an Americanowned company, when it was not. 

In another case, a company purported that it had the capability 

to do in-house research, when it did not. 

6 

And, in the last case, a company purported to be a small business, when it was not. 

These examples of cases that we’ve been involved in only touch 

on the surface of our work. 

As early as 1992, we reported on similar violations in the SBIR 

Program, and we made recommendations for NASA to take corrective action to ensure that it was in compliance with program requirements. 

More recently, in 2004 and 2005, we alerted NASA that the program remained vulnerable to fraud, waste, and abuse. We made 

specific recommendations to tighten contractor certification requirements and to improve the Agency’s oversight process. 

NASA has been receptive to our recommendations and has, in 

fact, implemented corrective action. Yet, in the cases that we are 

conducting today, we still see the same violations that we saw as 

early as 1992. 

We believe that strong controls are critical to improving the 

SBIR Program, so, we have initiated a comprehensive audit of 

NASA’s management of the program. We will focus specifically on 

assessing the adequacy of the internal control structure for evaluating and selecting proposals, for making contract awards, and for 

conducting oversight. We also intend to assess the extent of fraud, 

waste, and abuse in the program using data mining techniques. 

We expect that our work will lead to recommendations to improve the policies governing NASA’s program and to improve its internal controls. We will also continue to work with the Department 

of Justice to hold accountable those who would do harm to NASA 

through fraud, waste, or abuse. 

This concludes my remarks, and I’m available to answer any 

questions you have. Thank you. 

[The prepared statement of Mr. Howard follows:] 

PREPARED STATEMENT OF THOMAS J. HOWARD, ACTING INSPECTOR GENERAL, NASA 

Chairman Rockefeller and Members of the Committee: 

Thank you for the opportunity to discuss the Office of Inspector General’s work 

addressing fraud, waste, and abuse in the Small Business Innovation Research 

(SBIR) Program of the National Aeronautics and Space Administration (NASA). 

Over the last 5 years, with an average of more than $105 million in annual 

awards, NASA’s SBIR Program is one of the largest in the Federal Government, 

providing substantial support for small business participation in research and development activities. A recent assessment by the National Research Council of the National Academies concluded, ‘‘The NASA SBIR Program is making significant 

progress in achieving the congressional goals for the Program.’’ 

While SBIR plays an important role in NASA’s research activities, our work has 

identified instances of fraud, waste, and abuse by Program participants that bring 

into question the effectiveness of the Program’s internal controls. Specifically, of the 

SBIR 46 investigations we have closed since 2001, eight or 17 percent have resulted 

in criminal convictions, civil judgments, or administrative corrective action. Currently, we have five open investigations involving allegations of potential fraud, 

waste, or abuse in the SBIR Program. 

Our investigative and audit work has shown that some SBIR contractors 

• submitted duplicate proposals to different Federal agencies and received multiple awards for essentially the same work, 

• submitted different proposals to multiple Federal agencies but provided duplicate deliverables based on the same research, 

• failed to comply with subcontracting limitations, and 

7 

• identified principal investigators who were not primarily employed by the small 

business concern or who failed to perform a substantial portion of the research 

work contracted by NASA. 

We identified many of these violations as early as 1992, and while NASA has 

taken corrective action to improve internal controls in the SBIR Program, we continue to identify the same violations in recent and ongoing investigations. Accordingly, we are initiating a comprehensive audit of NASA’s management of the SBIR 

Program. We will focus specifically on assessing the adequacy and implementation 

of the Program’s internal controls and the extent of fraud, waste, and abuse by Program participants. 

We anticipate that our work will identify opportunities to improve SBIR policies 

and enhance the Program’s internal control structure. We will also continue to work 

with the Department of Justice to hold accountable those SBIR Program participants who attempt to harm NASA through fraud, waste, and abuse. 

Background of SBIR Program 

In 1982, Congress established the SBIR Program to provide increased opportunities for small businesses to participate in research and development (R&D), to increase employment, and to improve U.S. competitiveness. The Program’s specific objectives were to: (1) stimulate U.S. technological innovation, (2) use small businesses 

to meet Federal R&D needs, (3) increase private-sector commercialization of innovations derived from Federal R&D, and (4) foster participation by socially disadvantaged businesses. 

NASA’s SBIR Program receives overall policy direction from the Office of Innovative Partnerships Program. The SBIR Program Management Office at the Ames Research Center manages the Program using staff from NASA Mission Directorates 

and Centers. All NASA Centers actively participate in the SBIR Program to support 

the objective of infusing SBIR technology into Center programs and projects. 

NASA allocates 2.5 percent of its annual extramural R&D budget for SBIR 

awards. NASA’s annual solicitation for proposals includes R&D topics that NASA’s 

Mission Directorates have identified as high priority needs for their programs and 

projects. For 2008, NASA received 1,662 proposals and selected 493 proposals for 

SBIR contracts. 

NASA Office of Inspector General (OIG) Oversight of the SBIR Program 

NASA OIG has been actively involved in investigative and audit work relating to 

NASA’s SBIR Program, which resulted in criminal penalties, civil recoveries, and 

detailed program recommendations to improve NASA’s internal controls over the 

Program. We currently have five open investigations involving allegations of potential fraud, waste, or abuse in the SBIR Program and are also initiating a comprehensive audit of the Program. 

Since 2001, we have closed 46 investigations relating to the SBIR Program. Of 

those closed cases, 38 involved matters where the allegations were unsubstantiated 

or the facts we developed were declined for prosecution. The other eight closed investigations—17 percent—identified problems that resulted in criminal convictions, 

civil judgments, or administrative corrective action. The following closed cases generally illustrate the types of activity we found: 

• NASA SBIR contractors improperly submitted the same or related proposals to 

multiple Federal agencies, resulting in multiple payments for that same proposal. In one case, the 5th Circuit Court of Appeals recently affirmed a U.S. 

District Court decision, under the False Claims Act, ordering Lithium Power 

Technologies, Inc., to pay approximately $5 million in damages for making numerous false SBIR representations, including nondisclosure of related proposals 

to another agency, in the proposal phase of four Federal SBIR contracts. Lithium Power Technologies, Inc., has also been debarred from Government contracts until March 2018. In a separate case, Lasergenics, Inc., agreed to pay 

$25,000 in a Federal civil settlement in response to allegations of submitting 

identical SBIR proposals to NASA and the National Science Foundation. 

• NASA SBIR contractors provided duplicate deliverables to multiple agencies, resulting in the contractors receiving multiple payments for the same work product. For example, a NASA OIG investigation revealed that ML Energia, Inc., 

used the SBIR Program to defraud a number of Federal agencies by submitting 

false certifications in SBIR proposals, to include representations that the company would not duplicate its research. The investigation also confirmed that ML 

Energia submitted research that was ‘‘recycled’’ or performed under previous 

contracts. A U.S. District Court convicted the president of ML Energia of mail 

fraud and tax evasion, sentencing him to 12-months home confinement and 5 

8 

years probation. He was also ordered to pay a civil payment of $1.4 million and 

a $20,000 fine. In a separate case, we investigated allegations that Luna Innovations, Inc., submitted duplicate reports and proposals to various Federal 

agencies, including NASA. After negotiations with the Department of Justice, 

Luna agreed to a civil settlement in which it agreed to pay $165,333 to resolve 

claims regarding SBIR without admission of liability. 

• One NASA SBIR contractor misrepresented the role of its principal investigator. 

Under the SBIR Program, the principal investigator is the person designated 

by the applicant to provide the scientific and technical direction to a project 

supported by the funding agreement. Our investigation of Glimmerglass Science 

and Technology found multiple SBIR Program violations because its principal 

investigator was not primarily employed by the contractor and he also failed to 

perform a substantial portion of the research work. 

• NASA SBIR contractors mischarged their SBIR contracts. For example, a NASA 

OIG investigation of Nanomaterials Research Corporation found that the company willfully diverted, concealed, and illegally used various SBIR funds from 

multiple Federal agencies. The corporation pled guilty in U.S. District Court to 

making false statements about their SB I R contract. The Court sentenced the 

corporation to pay a fine of $10,000, probation for 36 months, and pay restitution of $540,000. In a separate cost-mischarging case, ISX Corporation was alleged to have applied cost overruns on SBIR fixed-priced contracts to a NASA 

cost-plus contract. The ISX Corporation agreed to pay $100,000 as an administrative settlement of its unallowable costs. Finally, a NASA OIG investigation 

found that Arnav Systems, Inc., did not provide accurate labor rates in its proposed labor costs for a SBIR contract award. Ultimately, Arnav agreed to pay 

$93,970 to settle the matter, without admission of liability. 

The five open investigations involve similar issues: 

• In one investigation, a NASA SBIR contractor is alleged to have submitted duplicate SBIR proposals and deliverables to multiple agencies. Further, the contractor allegedly submitted false certifications that the company possessed the 

required research capability, performed the research effort, and achieved the results delivered to the Government. 

• In three other investigations, NASA contractors allegedly violated their SBIR 

requirements by submitting false certifications as to their SBIR eligibility. In 

one case, a contractor may have falsely certified that it was an American-owned 

company when it was not. In another case, a contractor may have falsely certified that it was performing in-house research when it did not have that capability. In the third case, a contractor may have falsely certified that it met the 

SBIR requirements for a small business classification when it did not. 

• In February 2009, NASA OIG and the Federal Bureau of Investigation executed 

Federal seizure warrants at a major university as well as at the home and offices of a NASA SBIR contractor, New Era Technology (NETECH). These warrants were based on probable cause that a university professor, who also was 

a principal NETECH officer, along with his family members, submitted multiple 

fraudulent SBIR proposals to NASA in order to receive the maximum SBIR 

funding for proposed research contracts. Further, the evidence indicates that 

NETECH may have submitted false invoices to NASA in order to conceal the 

improper use of SBIR funds, which allegedly included improper diversion of 

SBIR funds into the personal bank accounts of the professor and his family 

members. Documents in the public record indicate that those involved may have 

violated a variety of Federal statutes, to include theft of public money, mail or 

wire fraud, and money laundering. 

These investigations illustrate only part of our longstanding work in this area. 

Our Office of Audits has also focused attention on the Program, which resulted in 

specific recommendations to improve NASA’s oversight of the SBIR Program. 

In a very early audit of the SBIR Program (HQ–91–009, September 8, 1992), we 

identified several weaknesses within the SBIR Program’s policies and procedures. 

Specifically, we found that there was insufficient monitoring and tracking of SBIR 

awards; we also found that NASA and other agencies were providing duplicate funding for the same R&D efforts. Additionally, we found that principal investigators 

were not primarily employed by the small business concern, in violation of Program 

requirements, and that SBIR projects did not always meet SBA-established time 

frames. 

In April 2004, our Offices of Audits and Investigations issued a ‘‘Management 

Alert—Concerns Relating to NASA SBIR Contracts.’’ The report informed NASA 

9 

1GAO provided testimony to the Subcommittee on Environment, Technology, and Standards, 

Committee on Science, House of Representatives. 

senior management of SBIR-related problems with multiple awards for the same 

work, duplicate deliverables under multiple contracts, and violations of SBIR Program limits on contract effort by subcontractors and principal investigators. The report attributed the problems to weak contractor certification requirements and ineffective contract oversight. 

In response to the Conference Report (House Report 108–792) that accompanied 

the Fiscal Year (FY) 2005 Consolidated Appropriations Act, 2005, Public Law 108– 

44, we reported that our audit and investigative work uncovered a number of trouble areas in NASA’s acquisition and contracting processes. As detailed in our December 5, 2005, report, these areas of weakness included 

• lack of a reliable financial management system to track contract spending, 

• inadequate control over Government property held by contractors, 

• single-bidder contracts with undefined and changing contract requirements, 

• lack of transparency to subcontractors working on NASA programs, 

• procurement process abuses by NASA employees and contractors, and 

• significant cost overruns in some Agency programs. 

In addition to identifying the above weaknesses, we reiterated that the 

vulnerabilities within the SBIR Program identified in our April 2004 report were 

unresolved leaving the Agency vulnerable to fraud, waste, and abuse. Both reports 

recommended that 

• prior to making final payment to SBIR contractors, NASA should require contractors to complete and submit a recertification of compliance with Program requirements, and 

• NASA’s Office of Procurement should issue periodic notices to the SBIR procurement and technical community to emphasize the importance of effective administration and technical oversight of the Agency’s SBIR contracts. 

NASA concurred with our recommendations and revised the NASA Federal Acquisition Regulation Supplement in October 2006 to require that, prior to receiving 

final payment, SBIR contractors must recertify that work performed had not been 

proposed for funding to another Federal agency; no other Federal funding has been 

received for equivalent work; deliverables submitted have not been submitted as 

deliverables under another Federal award; subcontracting limitations had not been 

exceeded; and the primary employment of the principal investigator was with the 

contractor. The Agency also agreed to issue periodic notices to the NASA SBIR procurement and technical community to emphasize the importance of effective administration and technical oversight of the Agency’s SBIR contracts. 

SBIR Program Issues Identified by Other Agencies 

Past reports and testimony by the Government Accountability Office (GAO) and 

Department of Energy indicate similar issues with other agencies’ SBIR Programs. 

GAO reported in ‘‘Federal Research: Interim Report on the Small Business Innovation Research Program’’ (GAO/RCED95–59, March 8, 1995) that contractors received 

duplicate funding for similar SBIR research proposals. GAO attributed duplicate 

funding to false contractor certifications, lack of a consistent definition for ‘‘similar’’ 

research, and lack of interagency sharing of data on SBIR awards. GAO recommended that the Small Business Administration take corrective action to improve 

interagency coordination and to reduce the risk of funding duplicate research. GAO 

also provided congressional testimony on June 28, 2005,1 ‘‘Federal Research: Observations on the SBIR Program’’ (GAO–05–86’T), highlighting the challenge of assessing the performance of the SBIR Program. 

Energy’s OIG reported in ‘‘Management Controls over Monitoring and Closeout of 

SBIR Phase II Grants’’ (OAS–M–08–09, July 2008) that agency officials gave insufficient attention to SBIR costs during post-award reviews. The report identified nearly $800,000 in questionable or unsupported costs charged to SBIR awards that officials had not verified. Energy’s OIG attributed the problems to infrequent postaward desk reviews or audits of SBIR costs. The report recommended that agency 

officials randomly select SBIR Phase II awards for post-award audit. 

Internal Controls and NASA OIG’s Current Audit of NASA’s SBIR Program 

Over the last decade, we have been involved in a number of activities to assess 

the overall internal control systems NASA has in place to ensure effective oversight 

of its contractors. We believe there is much to be gained through these activities, 

10 

in terms of developing safeguards and improving policies. In particular, we have 

been involved in initiatives to implement Office of Management and Budget Circular 

A–123, ‘‘Management’s Responsibility for Internal Control,’’ and to address fraud 

against NASA. 

For example, NASA established the Acquisition Integrity Program (AIP) in December 2006. The Program is a collaborative effort among NASA’s Offices of General 

Counsel, Chief Financial Officer, Procurement, and the OIG. AIP provides a centralized and coordinated approach to address fraud and corruption throughout the acquisition process and to ensure the Agency integrity and public trust. The vision of 

AIP is to promote transparency, accountability, and integrity throughout the NASA 

acquisition process. The Program serves as a mechanism to identify irresponsible 

contractors for suspension, debarment, or pursuit of remediation. The Program also 

minimizes vulnerabilities through increased understanding of fraud, waste, and 

abuse in the contracting environment by implementing a comprehensive ‘‘fraud 

awareness’’ training program at all NASA Centers and at NASA Headquarters. The 

most recent training phase (Spring 2009), which included OIG personnel as presenters, targeted NASA’s contracting officers and contracting officer’s technical representatives. 

While NASA is working to improve its internal control environment and fraud 

awareness, the OIG remains vigilant in our mandate to identify and prevent fraud, 

waste, and abuse. Notably, the issues we identified in our work as early as 1992, 

and more recently in 2004 to 2005, are essentially the same violations underpinning 

the five investigations we are conducting in 2009. Strong controls are essential to 

reducing the risk of improper activity within NASA’s SBIR Program; therefore, we 

are initiating a comprehensive review of NASA’s internal controls for the SBIR Program. 

Specifically, we will determine whether management developed and implemented 

effective internal controls to evaluate and select proposals, award contracts, and 

perform post-award administration. Additionally, we will assess the extent of fraud, 

waste, and abuse in the Program. Our methodology will be to 

1. gain a thorough understanding of the SBIR Program’s organization, operation, and relevant system of internal control; 

2. based on that understanding, and any needed additional review and analysis, 

make a preliminary assessment of the adequacy of the design of the system of 

internal control; 

3. test the effectiveness of internal control using statistical sampling; and 

4. use data mining to detect instances of potentially fraudulent, improper, or 

abusive transactions to illustrate the effects of breakdowns in internal control. 

We anticipate that our work will identify opportunities to improve SBIR policies 

and enhance the Program’s internal control structure. We will also continue to work 

with the Department of Justice to hold accountable those SBIR Program participants who attempt to harm NASA through fraud, waste, and abuse. 

Thank you for the opportunity to participate in this important dialogue. I would 

be happy to answer any questions you may have. 

The CHAIRMAN. Thank you very much, Mr. Howard. 

I’m not going to take the chance. Well, Allison Lerner, you just 

have to forgive me for the moment. I will be back. It doesn’t take 

very long to vote, but then they have to tally the vote and they 

have to give it, obviously, and, so, I just don’t want to take the 

chance of letting you start and then having to walk out. 

Ms. LERNER. Not a problem. 

The CHAIRMAN. You’re not offended? 

Ms. LERNER. Not at all. 

The CHAIRMAN. We’ll come back. 

Ms. LERNER. You have to have a thick skin in my line of work. 

The CHAIRMAN. OK, all right. All right, well, we’re temporarily 

in recess then. 

Ms. LERNER. Thank you. 

[Recess.] 

The CHAIRMAN. Senator McCaskill, when—oh, we resume. 

11 

What we did, we started at 2:30, and it was my feeling that most 

people wouldn’t feel that—but I didn’t want to keep them waiting, 

so, I asked them to give their statements, two of them, and we’re 

now going to start the third. And then I will give my opening statements, and then you may have some comments you want to make. 

All right. Allison Lerner, are you still there? 

Ms. LERNER. I’m still here. 

The CHAIRMAN. Alert? 

Ms. LERNER. Here. 

The CHAIRMAN. You’re the Inspector General of the National 

Science Foundation. 

Ms. LERNER. Yes. 

The CHAIRMAN. One of my favorite government agencies. 

Ms. LERNER. I’m glad to hear that. One of mine, too. 

STATEMENT OF ALLISON C. LERNER, INSPECTOR GENERAL, 

NATIONAL SCIENCE FOUNDATION 

Ms. LERNER. Mr. Chairman and Members of the Committee, I 

appreciate the opportunity to discuss my office’s work related to 

the SBIR Program at NSF. 

Since 1990, NSF has awarded more than 6,600 phase one and phase two SBIR awards, totaling more than $1.1 billion. The vast 

majority of companies receiving these awards spend the funds 

properly and report results accurately to the agency. However, 

since the program began, my office has opened 64 investigations involving SBIR companies. Of those cases, 16 have resulted in criminal, civil, or administrative action, and 5 are still open. 

While these numbers are not large, it’s likely that they do not 

reflect the full extent of fraud due to underreporting and other 

issues that I’ll discuss. 

I want to emphasize that NSF’s SBIR Program staff strongly 

supports my office’s efforts to prevent, detect, and prosecute fraud. 

SBIR Program officers regularly inform us when they receive allegations of wrongdoing or become aware of information that indicates a possible problem, and these valuable leads have been the 

source of many of our successful investigations. 

Mr. Chairman, as requested by the Committee, I’ll summarize 

the primary types of fraud we have found in NSF’s SBIR Program, 

and I’ll discuss the processes that my offices and NSF have developed, which have enabled us to prevent and, when necessary, prosecute SBIR fraud. I’ll conclude by noting some problems we’ve encountered in investigating this type of fraud. 

The primary type of fraudulent activity we find involves duplicative funding in which companies obtain multiple SBIR awards from 

multiple SBIR agencies for the same or overlapping work. At NSF, 

companies must disclose multiple SBIR submissions and the agency’s proposal preparation guidance makes it clear to potential recipients that receiving duplicate funding for the same or overlapping research is prohibited. We’ve investigated approximately 34 

cases of alleged duplicative funding and substantiated the charge 

in 10 instances. 

Examples include a case in which a recipient used SBIR funds 

to pay for renovations to his home and to overpay vendors so he 

could pocket the reimbursements. Ultimately, that individual pled 

12 

guilty to mail fraud and tax evasion, and paid $1.4 million in restitution, civil damages, taxes, and penalties. 

We’ve also investigated cases involving research misconduct in 

which data results for phase one awards were fabricated, falsified, 

or plagiarized in order to obtain phase two funding. 

In one such case, a professor plagiarized a phase one report in 

order to receive a phase two award for a non-existent company. He 

pled guilty to false statements, and paid $214,000 in restitution 

and fines. 

As a result of our investigations, my office has identified two best 

practices that are valuable tools in preventing and prosecuting 

SBIR fraud—required certifications and disclosures and mandatory 

attendance at awardee briefings. 

In 1994, as a result of problems we’d noted in our investigations 

at that point of SBIR recipients, we made a number of recommendations to NSF to strengthen SBIR disclosures and certifications. As a result of those recommendations, which NSF accepted, the agency now requires proposers and awardees to make enhanced disclosures and certifications throughout the lifecycle of 

each SBIR award. This process helps prevent fraud in the first 

place and enhances our ability to prosecute it when it does occur, 

and we would recommend it to all SBIR agencies. 

NSF also requires companies that receive phase one awards to 

attend a workshop to help them comply with the NSF requirements, and, for over 10 years, this workshop has included a briefing by my office that makes it clear to awardees that violations of 

program requirements constitute wrongdoing that can result in significant criminal, civil, and administrative consequences. 

In fact, when I spoke with a program officer at NSF before coming here, she indicated that when my staffer gives that briefing, 

you can hear a pin drop because people really do pay attention and 

listen to understand the ramifications of false certifications. 

These briefings also facilitate prosecution, as they make it quite 

difficult for an awardee to plead ignorance of NSF’s SBIR requirements and the consequences of violating them. 

In addition to these best practices, we’ve identified two challenges to investing SBIR fraud—deficiencies in databases of SBIR 

awards and the lack of strong disclosures and certifications at some 

Federal agencies. 

With regard to the first, NSF maintains comprehensive, internal 

databases from which program officers and my staff can easily obtain complete information about proposals submitted and awards 

made. Unfortunately, there’s currently no efficient means for us to 

obtain such information from other SBIR agencies, and this lack of 

access to that information poses a programmatic and investigative 

challenge to determining whether you have instances of duplicative 

funding. 

With regard to the second investigative challenge, not all SBIR 

agencies require the number and frequency of disclosures and certifications that NSF does, and their absence can impair those agencies’ ability to prosecute fraud. 

In closing, Mr. Chairman, with the support of NSF, my office has 

instituted processes that enhance our ability to prevent, detect, and 

prosecute SBIR fraud, and we will continue to work with the agenVerDate Nov 24 2008 09:44 May 03, 2010 Jkt 052753 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\52753.TXT SCOM1 PsN: JACKIE
13 

cy to prevent unscrupulous companies from defrauding this valuable program. 

Thank you, and I’d be happy to answer any questions. 

[The prepared statement of Ms. Lerner follows:] 

PREPARED STATEMENT OF ALLISON C. LERNER, INSPECTOR GENERAL, 

NATIONAL SCIENCE FOUNDATION

Mr. Chairman and Members of the Committee, I appreciate this opportunity to 

discuss my office’s work related to the Small Business Innovation Research (SBIR) 

program at the National Science Foundation. 

Background 

The Small Business Innovation Development Act of 1982 created the Small Business Innovation Research (SBIR) program to stimulate technological innovation; use 

small businesses to meet Federal research and development needs; foster and encourage participation by minority and disadvantaged persons in technological innovation; and increase private sector commercialization innovations derived from Federal research and development. Under the SBIR program, the National Science 

Foundation (NSF) and ten other Federal agencies currently allocate 2.5 percent of 

their extramural R&D budgets for awards to small businesses. 

Each SBIR agency uses the program to address the unique needs of its mission. 

At NSF, the primary objective of the SBIR program is to increase the incentive and 

opportunity for small firms to undertake cutting-edge, high-risk, high-quality scientific, engineering, or education research that would have a high potential economic payoff if the research is successful. The SBIR program is part of NSF’s Engineering Directorate, and the ultimate goal of each project is a commercially viable 

product, process, device, or system. The program is funded by the government in 

two phases, followed by a privately-funded third phase. Phase I is a 6-month grant 

to assess an idea’s feasibility, currently supported by NSF up to $150,000. If the 

Phase I project is successful, the company can apply for a Phase II award, which 

runs for up to 2 years and is funded up to $750,000. 

Since 1990, NSF has awarded more than 6,600 Phase I and Phase II SBIR awards 

totaling more than $1.1 billion. The vast majority of the companies receiving SBIR 

awards spend their SBIR funds properly to carry out the research they proposed to 

do, and they report accurately to the agency about the results they obtained under 

the SBIR award. However, since my office’s inception, we have conducted a number 

of investigations of companies that have allegedly committed fraud involving their 

SBIR awards. 

Specifically, since 1989 we have opened 64 cases involving SBIR companies. Of 

those 64 cases, 16 have resulted in significant criminal, civil, or administrative action to date, and 5 are currently under investigation. While these numbers are not 

large, it is likely that they do not reflect the full extent of fraud in the program 

due to under-reporting and other issues which I will discuss later in my statement. 

It is important to note that NSF’s SBIR program staff has strongly supported my 

office’s efforts to prevent, detect, and prosecute fraud in the SBIR program. SBIR 

program officers regularly inform my office when they receive allegations of wrongdoing or become aware of information that indicates a possible problem within the 

program, and those valuable leads have been the source of many of our successful 

investigations. 

As requested by the Committee, the following summarizes the types of fraudulent 

activity our office has found in NSF’s SBIR program. I will also discuss processes 

that my office has developed and NSF has implemented that have enabled us to prevent and, if necessary, prosecute fraud in the SBIR program. Finally, I will conclude 

by noting some problems my office has encountered in investigating this type of 

fraud. 

Types of Fraudulent Activity in the National Science Foundation’s SBIR 

Program 

The primary type of fraudulent activity we encounter in the SBIR program involves duplicative funding, which results in false statements, false claims, and 

criminal misuse of grant funds. We have also investigated cases in which research 

misconduct has resulted in fraud against the SBIR program. I will briefly describe 

our work in these areas. 

14 

Duplicative Funding 

Duplicative funding, in which companies obtain payments from multiple SBIR 

agencies for the same work, is the most frequent violation we have found in NSF’s 

SBIR program. This problem arises because, in order to maximize their opportunities for receiving SBIR funding for their proposals, companies may submit the same 

proposal to more than one of the eleven Federal agencies that have SBIR programs. 

At NSF, these multiple submissions must be disclosed, and it is a violation of program policy for companies to accept funding from multiple agencies for the same 

work. NSF’s proposal preparation guidance makes it clear to potential recipients 

that receiving duplicate SBIR funding for the same or overlapping research is prohibited, and the NSF program announcement clearly states that: 

NSF will not make awards that duplicate research funded or expected to be 

funded by other agencies. . . . If a proposer fails to disclose equivalent or overlapping proposals . . ., the proposer could be liable for administrative, civil or 

criminal sanctions. 

Since its inception, my office has investigated approximately 34 cases of alleged 

duplicative funding. We have substantiated the charge in 10 cases. Examples of our 

work in this area include a case in which, in addition to receiving duplicate funding 

from NSF’s and other agencies’ SBIR programs, the recipient used the SBIR funds 

to pay for renovations to his home and to overpay vendors so he could pocket the 

reimbursements. Ultimately, he paid $1.4 million in restitution, civil damages, 

taxes, and penalties, and pled guilty to mail fraud and tax evasion to resolve these 

charges. 

A second such case involved two companies with the same owner that received 

duplicate SBIR awards from several agencies for the same work. The companies 

paid $3.45 million in restitution and civil damages, and open SBIR awards to the 

companies totaling $909,000 were terminated. 

Finally, we also investigated a case in which the company received funding from 

NSF and other Federal agencies for duplicate research. The defendants were accused of knowingly and repeatedly applying for and receiving SBIR grants from 

agencies for research that had already been completed under grants awarded to 

other agencies. They were also accused of charging the government for the cost of 

engineering work that was not performed. As a result of our investigation, $530,000 

of the company’s and the owner’s bank accounts and assets, which had been frozen 

during the investigation, were paid to the Federal Government, and $1.4 million in 

open SBIR awards were terminated. 

Research Misconduct 

We have also encountered situations where research misconduct under some of 

NSF’s SBIR awards resulted in the program being defrauded. Research misconduct 

occurs when data or results are fabricated, falsified, or plagiarized. We have found 

some instances where companies fabricated, falsified, or plagiarized their Phase I 

final reports in order to obtain Phase II funding. Such misconduct in research 

amounts to fraud against the SBIR program because in order to obtain Phase II 

funding, the company’s Phase I project must be successful. 

In one such case we investigated, a university professor obtained an NSF Phase 

I award for a proposal he submitted in his wife’s name on behalf of a non-existent 

company she allegedly owned. The professor converted all of the Phase I funds to 

his personal use, and then plagiarized the final Phase I report from a former student’s thesis. On the basis of that report, the nonexistent company received a Phase 

II award. As a result of our investigation, the professor pled guilty to making false 

statements, and he and his wife paid $214,000 in restitution and fines. 

Best Practices 

As a result of our investigations involving SBIR program fraud, my office has 

identified two best practices that are valuable tools in preventing and prosecuting 

such fraud. A summary of these practices—required disclosures and certifications 

and mandatory attendance at awardee briefings—follows. 

Required Disclosures and Certifications 

In 1994, as a result of problems we had noted in our investigations involving 

SBIR recipients, our office made several recommendations intended to improve administration of NSF’s SBIR program. The majority of those recommendations focused on strengthening existing disclosures and certifications, and on adding such 

disclosures and associated certifications in areas that had previously had no such 

coverage. NSF accepted all of these recommendations, and the resulting disclosures 

and certifications have helped the agency deter fraud at the outset, by making clear 

15 

what the agency’s expectations are. They have also helped us prosecute cases of 

fraud, as they make it clear to recipients that the provision of false information is 

a criminal offense. 

Pursuant to our recommendations, NSF requires proposers seeking SBIR funding 

to disclose if the proposal has been submitted to another agency and to state that: 

(1) the company is a small business; (2) the company will perform at least twothirds of the work under Phase I or at least half under Phase II ; and (3) the Principal Investigator will be primarily employed by the company during the term of the 

award. The authorized organizational representative is then required to sign the following certification (referred to as a ‘‘1001 certification’’): 

I understand that the willful provision of false information or concealing a material fact in this report or any other communication submitted to NSF is a 

criminal offense (U.S. Code, Title 18, Section 1001). 

When an SBIR proposal is awarded, before the company can receive its first payment, NSF requires SBIR recipients to disclose whether: 

1. the principal investigator and the small business firm have accepted funding 

for the same or overlapping work except as stated in the underlying proposal, 

2. all proposals describing the same or overlapping work have been withdrawn 

from other agencies, 

3. the primary employment of the principal investigator is with the firm at the 

time of the award and will continue during the conduct of the research, and 

4. the grantee is a small business. 

After making these disclosures, the authorized company officer is required to sign 

a 1001 certification. 

Finally, SBIR awardees are required to submit reports to NSF about their 

projects’ accomplishments to receive interim and final payments. Phase I awardees 

submit a final report when the project is over, and Phase II awardees submit interim reports every 6 months and a final report at the end. NSF requires SBIR recipients submitting such reports to disclose whether: (1) the Principal Investigator 

is primarily employed by the company; (2) the work under the project has not been 

submitted for funding to another Federal agency and has not been funded under 

any other Federal award; (3) the work for which payment is requested was performed in accordance with the award terms and conditions; (4) the statements in 

the report (excluding scientific hypotheses and scientific opinions) are true and complete; and (5) the text and graphics in the report are the original work of the company followed by a 1001 certification. 

In all instances, the disclosures and certifications relate to requirements of NSF’s 

SBIR program. If the company fails to make these disclosures or provide the required certifications, it will not receive an award or be paid. If the certifications are 

false, the company and its officers can more readily be prosecuted for providing material false information to the Federal Government because, as previously noted, the 

company has attested that it is aware that providing such false information is a violation of Federal law. 

Mandatory Attendance at Awardee Briefings 

NSF requires all companies that receive Phase I awards to attend an SBIR Phase 

I workshop, which includes presentations on a variety of topics to help awardees 

comply with NSF requirements and successfully commercialize the results of their 

research. All Phase I award recipients must attend these workshops, and NSF retains attendance records. 

More than a decade ago, the NSF SBIR program invited my office to join in the 

workshop and give a presentation on the work we do. The briefing presented by my 

staff makes it clear to awardees that violations of SBIR program requirements constitute wrongdoing, and outlines the specific criminal, civil, and administrative consequences of such wrongdoing. Further, we describe specific cases involving SBIR 

recipients we have investigated and that have been prosecuted. U.S. Attorneys who 

have prosecuted cases of fraud against SBIR have cited these briefings as an asset 

in prosecutive decisions. These briefings and the documentation of awardees’ attendance at them help ensure that no SBIR awardee can claim ignorance of NSF’s SBIR 

requirements and/or the consequences of violating these requirements. 

Programmatic and Investigative Challenges 

In addition to identifying best practices to deter and prevent SBIR program violations, my office has also identified two challenges to investigating such violations. 

Following is a summary of these challenges-deficiencies in databases of SBIR 

awards and lack of strong certifications by some Federal agencies. 

16 

Deficiencies in Databases 

NSF maintains comprehensive internal databases on its SBIR program from 

which NSF program officers and my office can easily obtain complete information 

about all SBIR proposals submitted to and awards issued by NSF. However, while 

we have full access to NSF SBIR proposal and award information, there is currently 

no convenient means for obtaining detailed information about SBIR proposals submitted to and awards received by companies from the other SBIR agencies. This 

lack of access presents a programmatic and investigative challenge to determining 

whether more than one Federal agency has paid for the same research. 

Currently, two Internet databases list SBIR awards to companies— 

USAspending.gov and SBA TECH-net. However, neither of these databases is complete, and neither provides sufficient detail to enable NSF’s SBIR program to determine whether another agency’s program had already paid for the same project. 

These limitations also make it more difficult for us, and other OIGs, to investigate 

SBIR cases, because of the significant effort required to obtain SBIR proposals and 

reports from other agencies. Ensuring that all SBIR agencies and their OIGs have 

electronic access to other agencies’ SBIR proposals and awards would facilitate efforts to prevent, detect, and prosecute fraud. 

Insufficient Disclosures and Certifications 

As previously noted, NSF requires SBIR proposers and awardees to certify to the 

accuracy of required disclosures and clearly informs those entities that providing 

false information via those disclosures is a crime. Not all SBIR funding agencies require the number and frequency of disclosures and certifications that NSF does, and 

their absence can impair the government’s ability to prosecute fraud in those programs. In one case our office investigated, the final report submitted to NSF contained fifteen tables and figures, twelve of which had been submitted as accomplishments in twenty previous reports to seven other SBIR agencies. However, since none 

of the other agencies required certifications about overlapping or duplicative work, 

defense counsel was able to argue persuasively that only the NSF funding should 

be repaid. 

Conclusion 

The SBIR program at NSF is a valuable tool for providing funds to small, hightech businesses conducting innovative research to advance NSF’s mission and to 

possibly lead to commercialization of new technologies. NSF has supported our office’s efforts to prevent and detect fraud in its SBIR program, and in conjunction 

with our office has instituted processes that enhance both its ability to prevent 

fraud and our office’s ability to prosecute fraud when it occurs. My office will continue to work in partnership with NSF to prevent unscrupulous companies from 

fraudulently obtaining SBIR funds and to investigate allegations of duplicative 

funding, research misconduct, and other fraud against this important program. Additionally, we will continue to recommend practices to strengthen the integrity of 

the SBIR program. 

This concludes my statement. I would be pleased to answer any questions you or 

other members may have. 

The CHAIRMAN. Thank you very much, Ms. Lerner. 

Ms. Dalton? 

STATEMENT OF PATRICIA A. DALTON, MANAGING DIRECTOR, 

NATURAL RESOURCES AND ENVIRONMENT, 

U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. DALTON. Thank you, Mr. Chairman, Members of the Committee. I’m pleased to be here today to discuss the SBIR Program. 

Over the life of the program, GAO has reviewed and reported on 

program implementation many times. We have generally found 

that the SBIR Program is achieving its goals, and agencies and 

companies have generally rated the program highly. However, 

we’ve also identified areas of serious weakness, and made recommendations that could strengthen the program. 

Some of the issues that we have identified include the following: 

First, risk of duplicate funding for similar or identical research 

projects by more than one agency. 

17 

In 1995, we identified factors that could contribute to this risk, 

including potential fraudulent evasion by companies applying for 

awards, the lack of a consistent definition for key terms, such as 

similar research, and the lack of interagency sharing of information 

on awards. Inconsistent interpretations of how to calculate extramural research budgets was also an issue. 

In 1998, we found that, while agency officials adhere to the SBIR 

Program and statutory funding requirements, they use different interpretations of how to calculate their extramural research budgets. As a result, some agencies were inappropriately including some 

expenses or excluding other expenses. 

Geographic concentration of awards was also an issue we identified. 

In 1999, we reported that companies in a small number of states 

had submitted the most proposals and won the majority of awards. 

In 2006, when we looked at the geographic concentration of 

awards made by DoD and NIH, we found that the SBIR awards 

continued to be concentrated in a handful of states, and about a 

third of the awards were made to firms in California and Massachusetts. 

Assessing the results of the SBIR Program was also an issue, 

particularly in assessing commercialization and the other SBIR 

goals. 

In several reviews, we have reported that assessing the performance of the program continues to be a challenge because of insufficient information on commercialization and other outcomes of funded projects. 

Another concern we have identified relates to how agencies determine and share information on a firm’s eligibility for SBIR. 

Since its inception, the program has relied primarily on self-certification by applicants to ensure that they meet the program’s eligibility requirements. 

In 2006, when we reviewed the processes used by SBA, DOD, 

and NIH, we found that this is still the case, and that the agency’s 

eligibility determinations focused primarily on the firm’s ownership, for profit status, and number of employees. 

When agency officials were unable to ensure the accuracy of an 

applicant’s information, they referred the matter to SBA. We found 

that after SBA makes the eligibility determination, it made information about ineligible firms available on its Web Site, but did not 

necessarily tie it to the SBIR Program. 

In addition, we found that once agencies received SBA’s decision, 

they may or may not have a process to share this information 

across their agencies. 

Many of the concerns we’ve identified with the program can be 

resolved in part through the collection of better data and the establishment of an interagency database. Such efforts would allow SBA 

and participating agencies to share information more effectively 

and enhance the efforts to monitor and evaluate the program. 

Recognizing the importance of such data collection efforts, in 

2000, the Congress mandated that SBA collect data from all participating agencies and develop a government use database by 

2001. However, when we looked at it in 2006, we reported that 

SBA was 5 years behind schedule in developing such a database, 

18 

1Pub. L. No. 97–219 (1982). 

and the information it was collecting was incomplete and consistent, thereby limiting the usefulness for program evaluations. 

But the database did not actually become operational until October 

of last year. 

According to an SBA official, the database has 2 years of new 

data in it. According to this official, the database also only accepts 

correctly-formatted information, and, therefore, it should address 

our concerns about inconsistency of information. 

However, we remain concerned about the completeness and accuracy of the historical data that are in the database. SBA told us 

in 2006 that they were not planning to correct the data that they 

had already received from agencies. 

Also, in recently looking at the government use portion of this 

database, which became operational last October, we could only 

find award information, not proposal information. Further, it did 

not contain information on commercialization and all the results of 

the program. 

In conclusion, Mr. Chairman, while the SBIR Program is generally recognized as successful, it has continued to suffer from longstanding evaluation and monitoring issues that are made more difficult because of insufficient, inaccurate, reliable, and comprehensive information about awards and applicants. While we are encouraged that SBA has developed a government use database, we 

remain concerned about the quality of the information in it. 

Mr. Chairman, this concludes my prepared remarks. I’d be happy 

to answer any questions of you and the Members of the Committee. 

[The prepared statement of Ms. Dalton follows:] 

PREPARED STATEMENT OF PATRICIA A. DALTON, MANAGING DIRECTOR, NATURAL

RESOURCES AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Mr. Chairman and Members of the Committee: 

We are pleased to be here today to testify on our past work on the Small Business 

Innovation Research (SBIR) program. As you know, to be competitive in the global 

economy, the United States relies heavily on innovation through research and development (R&D). Recognizing the potential of small businesses to be a source of significant innovation, the Congress passed the Small Business Innovation Development Act of 1982.1 The act established the SBIR program to stimulate technological 

innovation, use small businesses to meet Federal R&D needs, foster and encourage 

participation by minority and disadvantaged persons in technological innovation, 

and increase private sector commercialization of innovations derived from Federal 

R&D. The act provided for a three-phased program: phase I to determine the feasibility and scientific and technical merit of a proposed research idea; phase II to further develop the idea; and phase III to commercialize the resulting product or process with no further SBIR funding. Federal agencies that have budgets of $100 million for research conducted by others, called extramural research, are required to use 2.5 percent of these budgets to 

establish and operate an SBIR program. Currently, 11 Federal agencies participate 

in the SBIR program. Each agency manages its own program, including targeting 

research areas, reviewing proposed projects, and making research awards through 

grants, contracts, or cooperative agreements. The Small Business Administration 

(SBA) plays a central administrative role by, for example, issuing policy directives 

to the participating Federal agencies, collecting data from participating agencies on 

awards and recipients, and reporting program results annually to the Congress. In 

2005 awards from three agencies—the Department of Defense (DOD), National Institutes of Health (NIH), and National Aeronautics and Space Agency (NASA)—accounted for the majority of SBIR funds. From its inception in Fiscal Year 1983 

through Fiscal Year 2004, Federal agencies had awarded over $17 billion for more 

than 82,000 projects. 

19 

2Pub. L. No. 102–564 (1992). 

3Pub. L. No. 106–554, App. I, Tit. I (2000). 

4Throughout this statement we refer to this database as the government-use database. 

5 67 Fed. Reg. 60,072 (Sept. 24, 2002). 6GAO, Federal Research: Observations on the Small Business Innovation Research Program, 

GAO–05–861T (Washington, D.C.: June 28, 2005). 7GAO, Small Business Innovation Research: Information on Awards Made by NIH and DoD 

in Fiscal Years 2001 through 2004, GAO–06–565 (Washington, D.C.; April 14, 2006) and GAO, 

Small Business Innovation Research: Agencies Need to Strengthen Efforts to Improve the Completeness, Consistency, and Accuracy of Awards Data, GAO–07–38 (Washington, D.C.; October 

19, 2006). 

Since it was established in 1982, the SBIR program has been reauthorized and 

modified by the Congress at various times. For example, the Small Business Research and Development Enhancement Act of 1992 directed SBA and participating 

agencies to, among other things, emphasize the goal of increasing commercialization 

of research results and to improve the government’s dissemination of program-related data.2 As a result, agencies were required to include commercialization potential as a criterion for selecting award recipients. During this same period, SBA 

began to develop a publicly available database, known as Tech-Net, that contained 

information on all awards made through the SBIR program. The Tech-Net database 

is intended to be, among other things, an electronic gateway of technology information and resources for researchers, scientists, and government officials about federally funded, leading edge technology research. The Small Business Innovation Research Program Reauthorization Act of 2000 formalized this database by requiring 

SBA to develop, maintain, and make available to the public a searchable, up-to-date, 

electronic database that contained SBIR award information.3 The 2000 reauthorization act also required SBA to develop and maintain another restricted government 

database that would contain additional information on commercialization not contained in the public Tech-Net database, thereby allowing better evaluations of the 

SBIR program on an ongoing basis.4 This database was to be established by mid– 

2001 and made available only to government agencies and certain other authorized 

users. SBA has established, through a policy directive, a series of data elements for 

all the agencies to submit for its public Tech-Net database.5 The SBIR program is 

currently being considered by the Congress for reauthorization, and both the House 

and Senate have recently passed bills to reauthorize the program. 

In this context, you asked us to summarize the successes and challenges that our 

past work has identified about the SBIR program, summarize the concerns we have 

previously identified on SBA’s efforts to establish an interagency database that includes information on SBIR applicants and awards, and describe the process that 

agencies use to determine the eligibility of SBIR applicants for the program. This 

statement is based largely on our prior reviews of the SBIR program and contacts 

with SBA officials. Our work on the prior reviews was conducted in accordance with 

generally accepted government auditing standards. Those standards require that we 

plan and perform the audits to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence we obtained for those reviews provided a reasonable basis 

for our findings and conclusions based on our audit objectives. 

Summary 

Over the life of the SBIR program, we have reviewed and reported on its implementation many times. For example, between July 1985 and June 1999, we found 

that that the SBIR program is achieving its goals to enhance the role of small businesses in Federal R&D, stimulate commercialization of research results, and support the participation of small businesses owned by women and/or disadvantaged 

persons.6 Participating agencies and companies that we surveyed during our reviews generally rated the program highly. We also identified areas of weakness and 

made recommendations that could strengthen the program further. Many of our recommendations for program improvements have been either fully or partially addressed by the Congress when it reauthorized the program or by the agencies themselves. For example, in 2005, we noted one issue that continued to remain somewhat 

unresolved after almost two decades of program implementation—how to assess 

SBIR program’s performance—and we identified data and information gaps that 

make an assessment of the SBIR program a challenge. In 2006, we conducted two 

reviews of the SBIR program.7 The first review described how DOD, NIH, and SBA, 

verify the eligibility of SBIR applicants; and the second examined SBA’s and eight 

participating agencies’ efforts to collect data and establish a government-use dataVerDate Nov 24 2008 09:44 May 03, 2010 Jkt 052753 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\52753.TXT SCOM1 PsN: JACKIE
20 

base that would facilitate monitoring and evaluation of the program. In summary, 

we found the following: 

• SBA had not met the congressional mandate to develop and implement, by June 

2001, a government-use database for monitoring and evaluating the SBIR program. SBA officials told us that they had been unable to meet the requirement 

to implement such a database by 2001 because of management changes that 

had occurred at the agency and because of budgetary constraints, but expected 

to have it operational by early in Fiscal Year 2007. However, this database did 

not become operational until October 2008, according to an SBA official. 

• Although Federal agencies participating in the SBIR program annually submit 

a wide range of descriptive information to SBA about each award they make, 

they were not consistently providing the full range of required data elements. 

As a result, certain sections of the Tech-Net database needed for comprehensive 

program evaluation were incomplete. Agencies cited a variety of reasons for not 

providing all of the data elements, including frequent changes in SBA’s data requirements and differences in the types of data agencies collect versus the types 

of data that SBA outlined in its policy directive. 

• Some participating agencies are not submitting SBIR award data in the standard format established in SBA’s policy directive. For example, almost a quarter 

of the data provided by five participating agencies in 2004 and 2005 did not 

comply with SBA’s formatting guidance. In light of the problems we identified 

with the Tech-Net database and the implications for these errors to limit evaluations of the SBIR program, we recommended that SBA work with participating agencies to strengthen efforts to improve the quality of the data. According to an SBA official, as of October 2008, agencies can directly enter SBIR-related data into the Tech-Net database over the Internet in a way that does not 

accept incorrectly formatted data. 

• To determine a firm’s eligibility for the SBIR program, DOD, NIH, and SBA 

focus primarily on criteria relating to ownership, for-profit status, and the number of employees. The agencies primarily rely on the applicants’ self-certification 

of eligibility, although in some cases they may take additional steps to verify 

this information. When agency officials are unable to ensure the accuracy of an 

applicant’s information, they refer the matter to SBA. After SBA makes an eligibility determination, it makes information about ineligible firms available on 

its website, but it does not always indicate that the determination was for SBIR 

purposes. Once agencies receive SBA’s determination of eligibility, they may or 

may not have a process to share this information across the agency. 

Successes and Challenges of the SBIR Program 

Our reviews of the SBIR program between 1985 and 1999 found numerous examples of program successes such as the following: 

• Funding high-quality research. Throughout the life of the program, awards have 

been based on technical merit and are generally of good quality. 

• Encouraging widespread competition. The SBIR program successfully attracts 

many qualified companies, has had a high level of competition, consistently has 

had a high number of first-time participants, and attracts hundreds of new companies annually. 

• Providing effective outreach. SBIR agencies consistently reach out to foster participation by women-owned or socially and economically disadvantaged small 

businesses by participating in regional small business conferences and workshops targeting these types of small businesses. 

• Increasing successful commercialization. At various points in the life of the program we have reported that SBIR has succeeded in increasing private sector 

commercialization of innovations. 

• Helping to serve mission needs. SBIR has helped serve agencies’ missions and 

R&D needs, although we found that agencies differ in the emphasis they place 

on funding research to support their mission versus more generalized research. 

Our reviews of the SBIR program during that time have also identified a number 

of areas of weakness that, over time, have been either fully or partially addressed 

by the Congress in reauthorizing the program or by the agencies themselves. For 

example, 

21 

8GAO, Federal Research: Interim Report on the Small Business Innovation Research Program, 

GAO/RCED–95–59 (Washington, D.C.; March 8, 1995). 9GAO, Federal Research: Observations on the Small Business Innovation Research Program, 

GAO/RCED–98–132 (Washington, D.C.; April 17, 1998). 10GAO, Federal Research: Evaluation of Small Business Innovation Research Can be Strengthened, GAO/RCED99–114 (Washington, D.C.; June 4, 1999). 11GAO–06–565. 

• Duplicate funding. In 1995,8 we identified duplicate funding for similar, or even 

identical, research projects by more than one agency. A few companies received 

funding for the same proposals two, three, and even five times before agencies 

became aware of the duplication. Contributing factors included the fraudulent 

evasion of disclosure by companies applying for awards, the lack of a consistent 

definition for key terms such as ‘‘similar research,’’ and the lack of interagency 

sharing of data on awards. To address these concerns, we recommended that 

SBA take three actions: (1) determine if the certification form needed to be improved and make any necessary revisions, (2) develop definitions and guidelines 

for what constitutes ‘‘duplicative’’ research, and (3) provide interagency access 

to current information regarding SBIR awards In response to our recommendations, SBA strengthened the language agencies use in their application packages to clearly warn applicants about the illegality of entering into multiple 

agreements for essentially the same effort. In addition, SBA planned to develop 

Internet capabilities to provide SBIR data access for all of the agencies. 

• 1Inconsistent interpretations of extramural research budgets. In 1998,9 we 

found that while agency officials adhered to SBIR’s program and statutory funding requirements, they used differing interpretations of how to calculate their 

‘‘extramural research budgets.’’ As a result, some agencies were inappropriately 

including or excluding some types of expenses. We recommended that SBA provide additional guidance on how participating agencies were to calculate their 

extramural research budgets. The Congress addressed this program weakness 

in 2000, when it required that the agencies report annually to SBA on the 

methods used to calculate their extramural research budgets. 

• Geographical concentration of awards. In 1999,10 in response to Congressional 

concerns about the geographical concentration of SBIR awards, we reported that 

companies in a small number of states, especially California and Massachusetts, 

had submitted the most proposals and won the majority of awards. The distribution of awards generally followed the pattern of distribution of non-SBIR 

expenditures for R&D, venture capital investments, and academic research 

funds. We reported that some agencies had undertaken efforts to broaden the 

geographic distribution of awards. In the 2000 reauthorization of the program, 

the Congress directed the SBA Administrator to establish the Federal and State 

Technology (FAST) Partnership Program to help strengthen the technological 

competitiveness of small businesses, especially in those states that receive fewer 

SBIR grants. The FAST Program was not reauthorized when it expired in 2005. 

In 2006, when we looked at the geographical concentration of awards made by 

DOD and NIH, we found that while a firm in every state received at least one 

SBIR award from both agencies, SBIR awards continued to be concentrated in 

a handful of states and about one third of awards had been made to firms in 

California and Massachusetts.11

• Clarification on commercialization and other SBIR goals. Finally, in 2000, the 

Congress directed the SBA Administrator to require companies applying for a 

phase II award to include a commercialization plan with their SBIR proposals. 

This addressed our continuing concern that clarification was needed on the relative emphasis that agencies should give to a company’s commercialization 

record and SBIR’s other goals when evaluating proposals. In addition, in 2001, 

SBA initiated efforts to develop standard criteria for measuring commercial and 

other outcomes of the SBIR program and incorporate these criteria into its 

Tech-Net database. In Fiscal Year 2002, SBA further enhanced the reporting 

system to include commercialization results that would help establish an initial 

baseline rate of commercialization. In addition, small business firms participating in the SBIR program are required to provide information annually on 

sales and investments associated with their SBIR projects. 

SBIR Tech-Net Data base Limitations 

Many of the solutions cited above to improve and strengthen the SBIR program 

relied to some extent on the collection of data or the establishment of a governmentuse database, so that SBA and participating agencies could share information and 

22 

12GAO–07–38. 13GAO–07–38. 

enhance their efforts to monitor and evaluate the program. However, in 2006,12 we reported that SBA was 5 years behind schedule in complying with the congressional 

mandate to develop a government database that could facilitate agencies’ monitoring 

and evaluation of the program. We also reported that the information SBA was collecting for the database was incomplete and inconsistent, thereby limiting its usefulness for program evaluations. Specifically, we identified the following concerns with 

SBA’s data- gathering efforts: 

• SBA had not met its obligation to implement a restricted government-use database that would allow SBIR program evaluation as directed by the 2000 SBIR 

reauthorization act. As outlined in the legislation, SBA, in consultation with 

Federal agencies participating in the SBIR program, was to develop a secure 

database by June 2001 and maintain it for program evaluation purposes by the 

Federal Government and certain other entities. SBA planned to meet this requirement by expanding the existing Tech-Net database to include a restricted 

government-use section that would be accessible only to government agencies 

and other authorized users. In constructing the government-use section of the 

database, SBA planned to supplement data already gathered for the public-use 

section of the Tech- Net database with information from SBIR recipients and 

from participating agencies on commercialization outcomes for phase II SBIR 

awards. However, according to SBA officials, the agency was unable to meet the 

statutory requirement, primarily because of increased security and other information technology project requirements, agency management changes, and 

budgetary constraints. When we reported on this lack of compliance with the 

database mandate, SBA told us that it anticipated having the government-use 

section of the Tech-Net database operational early in Fiscal Year 2007. However, according to an SBA official, the database became operational in October 

2008, and agencies have begun to provide data on their SBIR programs using 

the Internet. 

• While Federal agencies participating in the SBIR program submitted a wide 

range of descriptive award information to SBA annually, these agencies did not 

consistently provide all of the required data elements. As outlined in SBA’s policy directive, each year, SBIR participating agencies are required to collect and 

maintain information from recipients and provide it to SBA so that it can be 

included in the Tech-Net database. Specifically, the policy directive established 

over 40 data elements for participating agencies to report for each SBIR award 

they make; a number of these elements are required. These data include awardspecific information, such as the date and amount of the award, an abstract of 

the project funded by the award, and a unique tracking number for each award. 

Participating agencies are also required to provide data about the award recipient, such as gender and socio-economic status, and information about the type 

of firms that received the awards, such as the number of employees and geographic location. Much of the data participating agencies collected are provided 

by the SBIR applicants when they apply for an award. Agencies provide additional information, such as the grant/contract number and the dollar amount of 

the award, after the award is made. For the most part, all of the agencies we 

reviewed in 2006 provided the majority of the data elements outlined in the policy directive. However, some of the agencies were not providing the full range 

of required data elements. As a result, SBA did not have complete information 

on the characteristics of all SBIR awards made by the agencies. SBA officials 

told us that agencies did not routinely provide all of the data elements outlined 

in the policy directive because either they did not capture the information in 

their agency databases or they were not requesting the information from the 

SBIR applicants. Officials at the participating agencies cited additional reasons 

for the incomplete data they provided to SBA. For example, some officials noted 

that SBA’s Tech-Net annual reporting requirements often change and others 

said that if the company or contact information changes and the SBIR recipient 

fails to provide updated information to the agency, the agency cannot provide 

this information to SBA. 

• Participating agencies were providing some data that are inconsistent with 

SBA’s formatting guidance, and while some of these inconsistencies were corrected by SBA’s quality assurance processes, others were not. In 2006,13 we determined that almost a quarter of the data provided by five of the eight agencies we reviewed was incorrectly formatted for one or more fields in the TechNet database. As a result, we concluded that these inconsistent or inaccurate 

23 

14GAO–06–565. 15GAO–06–565. 

data elements compromised the value of the database for program evaluation 

purposes. SBA’s quality assurance efforts focus on obtaining complete and accurate data for those fields essential to tracking specific awards, such as the 

tracking number and award amount, rather than on those fields that contain 

demographic information about the award recipient. We found that SBA electronically checked the data submitted by the participating agencies to locate 

and reformat inconsistencies, but it did not take steps to ensure that all agencyprovided data were accurate and complete. We also determined that inconsistencies or inaccuracies could arise in certain data fields because SBA interpreted 

the absence of certain data elements as a negative entry without confirming the 

accuracy of such an interpretation with the agency. As we reported in 2006, 

such inaccuracies and inconsistencies were a concern because information in the 

Tech-Net database would be used to populate the government-use section of the 

database that SBA was developing (as discussed above) to support SBIR program evaluations. However, at the time of our review, SBA had no plans to correct any of the errors or inconsistencies in the database that related to the historical data already collected. As a result, we concluded that the errors in the 

existing database would migrate to the government-use section of the database 

and would compromise the usefulness of the government-use database for program evaluation and monitoring purposes. 

To address the concerns that we identified with regard to the quality of the data 

that SBA was collecting for the Tech-Net database, we recommended in our 2006 

report that SBA work with the participating agencies to strengthen the completeness, accuracy, and consistency of its data collection efforts. According to an SBA 

official, the database is currently operational and some agencies have entered data 

for Fiscal Years 2007 and 2008 over the Internet. Moreover, according to this official, the system is set up in such a way that it does not accept incorrectly formatted 

data. 

Agencies Focus on Select Awardee Eligibility Criteria 

In 2006,14 we also found that SBA and some participating agencies focused on a 

few select criteria for determining applicants’ eligibility for SBIR awards. Specifically, we reviewed DOD’s, NIH’s, and SBA’s processes to determine eligibility of applicants for the SBIR program and found that they focused largely on three SBIR 

criteria in their eligibility reviews—ownership, size in terms of the number of employees, and for-profit status of SBIR applicants. Although agency officials also told 

us that they consider information on the full range of criteria, such as whether the 

principal investigator is employed primarily by the applying firm, and the extent to 

which work on the project will be performed by others. 

Moreover, we found that both NIH and DOD largely relied on applicants to selfcertify that they met all of the SBIR eligibility criteria as part of their SBIR applications. For example, at NIH, applicants certified that they met the eligibility criteria 

by completing a verification statement when NIH notified them that their application had been selected for funding but before NIH made the award. The verification 

statement directs applicants to respond to a series of questions relating to for-profit 

status, ownership, number of employees, where the work would be performed, and 

the primary employment of the principal investigator, among others. Similarly, 

DOD’s cover sheet for each SBIR application directs applicants to certify that they 

met the program’s eligibility criteria. NIH and DOD would not fund applications if 

the questions on their agency’s verification statement or cover sheet were not answered. Both NIH and DOD also warned applicants of the civil and criminal penalties for making false, fictitious, or fraudulent statements. In some cases the agencies made additional efforts to ensure the accuracy of the information applicants 

provided when they observed certain discrepancies in the applications. 

In 2006,15 we reported that when officials at the agencies had unresolved concerns 

about the accuracy of an applicant’s eligibility information, they referred the matter 

to SBA to make an eligibility determination. We found that when SBA received a 

letter from the agency detailing its concerns, SBA officials contacted the applicants 

and asked them to re-certify their eligibility status and might request additional 

documentation on the criteria of concern. Upon making a determination of eligibility, SBA then notified the official at the inquiring agency, and the applicant, of 

its decision. 

Although, SBA made the information about firms it found ineligible publicly available on its Website so that all participating agencies and the public could access the 

24 

information, we found that it did not consistently include information on the 

Website identifying whether or not the determination was for the SBIR program. 

An SBA official told us the agency planned to include such information on its 

Website more systematically before the end of Fiscal Year 2006. Once the agencies 

received information about applicants’ eligibility they also had different approaches 

for retaining and sharing this information. For example, while both NIH and DOD 

noted the determination of ineligibility in the applicant’s file, NIH also centrally 

tracked ineligible firms and made this information available to all of its institutes 

and centers that make SBIR awards. In contrast, DOD did not have a centralized 

process to share the information across its awarding components, although DOD officials told us it was common practice for awarding components to share such information electronically. 

In conclusion, Mr. Chairman, while the SBIR program is generally recognized as 

a successful program that has encouraged innovation and helped Federal agencies 

achieve their R&D goals, it has continued to suffer from some long-standing evaluation and monitoring issues that are made more difficult because of a lack of accurate, reliable, and comprehensive information on SBIR applicants and awards. The 

Congress recognized the need for a comprehensive database in 2000 when it mandated that SBA develop a government-use database. Although SBA did not meet its 

statutorily mandated deadline of June 2001, the database has been operational 

since October 2008, and contains limited new information but may also contain inaccurate historical data. 

Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the Committee may have. 

The CHAIRMAN. Thank you very much, Ms. Dalton. 

I’ve changed my mind. Actually, I’m going to put my statement 

in the record. 

[The prepared statement of The Chairman follows:] 

PREPARED STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 

U.S. SENATOR FROM WEST VIRGINIA

One of my top priorities as chairman of the Commerce Committee is maintaining 

our country’s role as the global leader in technological innovation. 

It’s no secret that to maintain our leadership in the global economy, we must continually invest in new ideas. And our investment dollars have to come from both 

the private and public sectors. 

One of the Federal Government’s successful technology innovation programs is 

called the Small Business Innovation Research (SBIR) program, which supports scientists and entrepreneurs who have great ideas, but haven’t been able to develop 

their ideas far enough to attract the attention of private investors. 

This program has a good track record. A NASA SBIR contract led to the development of the water filtration system used on space missions. Another SBIR-funded 

project helped develop the de-icing systems used today on many of our aircraft. 

There are many more examples of innovative products and technologies that started 

as SBIR research proposals. 

I want to make it clear: I firmly believe that programs like SBIR are crucial to 

our country’s national security and our ability to compete in the global economy. I 

support investing in basic research and working with the private sector to develop 

new technologies. 

But here’s what I don’t support. I don’t support handing over Federal research 

dollars to businesses that have lied to the government about their qualifications or 

their research capabilities. And I don’t support funding businesses that are willing 

to accept taxpayer dollars for research they haven’t actually done. 

Unfortunately, today we are going to hear stories about this kind of conduct. We 

are going to hear that some of the businesses that won these awards didn’t do the 

work they promised. They committed fraud against the government plain and simple. 

We don’t expect that every research project we support will lead to the next 

breakthrough technology. But we do expect the people who receive these funds to 

use them carefully and honestly. It is that simple. 

The Federal Government’s scientific research dollars are scarce and precious. And 

so funding research is a zero-sum game: Every time NASA, or the Department of 

Defense, or the National Science Foundation awards money to a dishonest business, 

those agencies miss an opportunity to support an honest man or woman with an 

idea that might make our country safer or our economy stronger. 

25 

I want to welcome our witnesses and thank them for testifying today. I am looking forward to hearing from Mr. Al Longhi, a businessman who found himself involved in a small technology company that was ripping off the government. He did 

the right thing, not the easy thing, and he’s going to tell us his story. 

I would like to read one sentence from Mr. Longhi’s testimony, because I think 

it explains why today’s hearing is so important. He says: ‘‘Technological advances 

in energy, medical, defense and many other areas have been and will continue to be 

one of the fundamental strengths of our country.’’ 

I couldn’t agree with you more, Mr. Longhi. And so every research dollar we lose 

to waste, fraud and abuse turns one of our country’s great strengths into an enormous weakness. We can’t let it happen. 

I yield back the balance of my time. 

The CHAIRMAN. But simply want to—so that we can get to questioning. Senator McCaskill is still free to make a statement if she 

wants to. But I—I did want to say that a large part of that statement, Mr. Longhi, was in praise of you. 

Mr. LONGHI. Thank you. 

The CHAIRMAN. I don’t think most Americans have any idea. I 

mean, they read it in the newspapers, and somebody’s a whistleblower, and this is something that took place in 2002, when you 

first had to start dealing with this, and it has been a long time 

since then. You and your family—you indicated that you had mortgaged your house in order to be a part of this. 

Mr. LONGHI. Yes. 

The CHAIRMAN. Unfortunate adventure, but that was because 

you believed in something, and you believe in strengthening our 

country through technology and all the rest of it. 

So, I just—it just needs to be made very, very clear that people 

like you are not always commonly before us, and when you do come 

before us in the Congress, you make an enormous difference. And, 

so, all the nice things that could be said about you and just congratulating your courage need to be said. 

Mr. LONGHI. Thank you very much, sir. 

The CHAIRMAN. Senator McCaskill? 

STATEMENT OF HON. CLAIRE MCCASKILL, 

U.S. SENATOR FROM MISSOURI 

Senator MCCASKILL. Thank you, Mr. Chairman. I—I will not put 

a statement on the record at this time. I do have questions. 

I will just say that there’s something terribly wrong that so much 

of the accountability that happens in our government happens 

through whistleblowers. If it weren’t for whistleblowers and IGs, I 

can’t even imagine the stuff that would go on. And sometimes I get 

so discouraged because it feels like we are just chipping away at 

the tip of the iceberg. And I think we’ve got an iceberg here, and 

I think we’ve got to do more than chip away at it. 

And the most frustrating thing for me, Mr. Chairman, is this is 

not hard. This is just basic A, B, Cs of accountability. Check to 

make sure that they’re not turning in more than one application, 

and check when it’s over, and make sure you got what you paid for. 

This is not hard. And it’s very frustrating. 

So, as my 17-year-old would say, Mr. Longhi, I heart whistleblowers. 

[Laughter.] 

Senator MCCASKILL. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

26 

Mr. Longhi, it was in 2002, I believe, that you alerted the Federal Government that the company you worked for, Lithium Power 

Technologies, was defrauding the SBIR Program, and that’s correct, I assume. 

Mr. LONGHI. That is correct. 

The CHAIRMAN. What would have happened if you had not come 

forward with this information? 

Mr. LONGHI. The fraud would have gone undetected. The founder, Dr. Munshi, was fairly sophisticated, and he was clever in 

changing titles, changing a few things, even though if you really 

dug, if you had the ability between different SBIR agencies to compare documents, you would have found it, but that ability does not 

exist. And the fraud would have gone undetected. 

The CHAIRMAN. Why do you think it was that the Federal Government was unable to discover this? I mean, after all, you went 

to them in 2002. Why do you think the Federal Government has 

not reacted to this to the extent that is necessary? 

Mr. LONGHI. There’s very little communication between the different SBIR agencies. The United States Army does not know the 

extent of the projects that the United States Air Force is working 

on. The Ballistic Missile Defense Organization doesn’t know what 

the Army and the Air Force details are. Likewise, with NASA, you 

know, they all want in this case portable power. It’s key to—given 

the missile defense systems, any—any type of weapon system, you 

need better portable power, and they wanted it for their own, and 

I think there’s a little bit of, I don’t know, envy. If they learned 

that Dr. Munshi was working with the Army, they didn’t want to 

miss out, and they wanted in on it, too, but for their own specific 

needs. 

So, I think it came—comes back to communication. There is no 

mechanism. The contracting officers that oversee the—the grants, 

would—would surely want to stop the fraud. There’s—there’s no 

doubt about that. But they don’t have the time nor the tools or the 

resources to do that. 

The CHAIRMAN. I thank you, and I am reminded that I should— 

that we’re going to include the Committee’s report, which is entitled ‘‘Cases of SBIR Waste, Fraud, and Abuse’’ into the Committee 

record, and that will be done without objection. 

You worked with many people, and I have two questions. 

A lot more folks that worked there than just you had to know 

something was wrong. 

Why didn’t they do something? What were the pressures? 

And, second, why did Mr. Munshi believe that he could get away 

with this, other than the fact that he was, which probably answers 

my question, but I—I’d like to hear you phrase it. 

Mr. LONGHI. Both very good questions. I’m not sure I have the 

answers to either one. 

Other people did know of the duplication and fraud that was 

going on. There was one scientist that had stood up, Dr. Krishnan 

Menon, and confronted Dr. Munshi on that, and he was terminated. 

All the employees have families, they—during that time, 2001, 

2002, was a very difficult job market in—in America. They felt that 

if they lost this employment, that it’d probably be difficult to find 

27 

other employment. And I think that played a lot—a big part in 

them remaining quiet. You know, after they saw someone being 

terminated in front of their eyes for raising the issues. 

In regards to Dr. Munshi, I—I don’t know. I don’t know why he 

chose this route other than I know he enjoyed it. 

We—we have him on tape laughing about the Air Force Contracting Officer, Dr. David Ryan, not knowing about the duplicative 

NASA research. You know, this was—in some ways, he—he took 

pleasure from putting one over on the government, but I don’t 

know if that was the—you know, the sincere or the original motivation for it. 

The CHAIRMAN. My time is pretty much up, and I want to go on 

with you and others, but just to give you some sense that you’re 

not all alone in this, although maybe what I’m saying is that you 

are all alone, we are spending virtually all of our—at least I’m 

spending virtually all of my time in something called healthcare reform debates, and health care is 20 percent of the economy of the 

United States, which would be quite a lot of money. And there 

are—experts agree that there are about $700 billion that are being 

lost to or being spent in the health care system through waste, 

fraud, or abuse. And, so, as I listen to you, I wonder where all of 

those folks are. 

Senator McCaskill? 

Senator MCCASKILL. Thank you, Mr. Chairman. 

I was—Mr. Longhi, I—I have the documents that we will make 

part of the record, if there is no objection, Mr. Chairman, from your 

company, where, on May 1, 2002 and May 2, 2002, essentially, the 

same proposals were submitted to two different agencies for the 

same funding. 

[The information referred to follows:] 

SBIR Air Force Report, Page 5—Submitted May 1, 2002 

Table 2.—E-beam Deposition of Lithium Using Different Source Crucibles 

Run VVN1.380.1 VVN1.380.2 VVN1.381.1 VVN1.381.2 

Evaporation Technique E-beam E-beam E-beam E-beam 

Source Crucible/liner Baffle box Molybdenum 

boat 

Molybdenum 

boat 

Molybdenum 

boat 

Substrate Cu foil. Cu foil Cu foil Cufoil 

Substrate Thickness, um 19 19 19 19 

Substrate Width 55 55 55 55 

Test Duration, Min.s <1.00 1.30 4.29 6.20 

Density 1.06 1.06 1.06 1.06 

z-ratio 3.999 3.999 3.999 3.999 

Tooling Factor, % 110 110 110 110 

Deposition Thickness kA 0.112 1.071 2.043 13.50 

Deposition rate A/s N/a 11.9 7.59 35.5 

Ion Gauge Pressure, torr N/a N/a N/a N/a 

28 

SBIR NASA Report, Page 11—Submitted May 1, 2002 

Table 1.—E-beam Deposition of Lithium Using Different Source Crucibles 

Run VVN1.380.1 VVN1.380.2 VVN1.381.1 VVN1.381.2 

Evaporation E-beam E-beam E-beam E-beam 

Technique 

Source Crucible/ Baffle box Molybdenum Molybdenum Molybdenum 

liner boat boat boat 

Substrate Cu foil Cu foil Cu foil Cu foil 

Substrate 19 19 19 19 

Thickness, um 

Substrate 55 55 55 55 

Width 

Test Duration, <1.00 1.30 4.29 6.20 

Min.s 

Density 1.06 1.06 1.06 1.06 

z-ratio 3.999 3.999 3.999 3.999 

Tooling 110 110 110 110 

Factor, % 

Deposition 0.112 1.071 2.043 13.50 

Thickness kA 

Deposition Rate N/a 11.9 7.59 35.5 

A/s 

Ion Gauge N/a N/a N/a N/a 

Pressure, torr 

Lithium Power Technologies, Inc. 

SBIR Air Force Report, Page 5—Submitted May 1, 2002 

These three runs produced films that had total thickness of 16.61 kilo-angstroms 

of lithium. These films were dried for 24 hours in a vacuum oven. The films were 

then punched into 12.5 mm plates and were put back into the vacuum oven for additional drying. These plates would have been used for half-cell testing, but after 48 

hours in the oven, the plates had a black tarnish coating. It was clear that the 

plates were reacting with some elements in the vacuum oven. The conclusion was 

that the lithium plates were reacting with the solvent, specifically NMP, given off 

from the drying of the coated cathode and anode materials. Thus for future runs, 

the lithium plates should be isolated. 

SBIR NASA Report, Page 12—Submitted May 2, 2002 

These three runs produced films that had total thickness of 16.61 kilo-angstroms 

of lithium. These films were dried for 24 hours in a vacuum oven. The films were 

then punched into 12.5 mm plates and were put back into the vacuum oven for additional drying. These plates would have been used for half-cell testing, but after 48 

hours in the oven, the plates had a black tarnish coating. It was clear that the 

plates were reacting with some elements in the vacuum oven. The conclusion was 

that the lithium plates were reacting with the solvent, specifically NMP, given off 

from the drying of the coated cathode and anode materials. Thus for future runs, 

the lithium plates should be isolate. 

Senator MCCASKILL. Did you—at the point in time this happened, did—you actually confronted the boss, Mr. Munshi, about 

this? 

Mr. LONGHI. No, I had not. 

Senator MCCASKILL. OK, and, at some point in time, did you confront him that—that this was going on? 

Mr. LONGHI. No, I knew better. I—I would have been terminated. 

It—it’s—and to give you a little bit of background on that, he had 

earlier on in 2001, tried to conduct some workmen’s compensation 

insurance fraud, and I confronted him on that, and I was nearly 

terminated. 

Senator MCCASKILL. Has—has he gone to jail yet? 

Mr. LONGHI. No. 

29 

Senator MCCASKILL. Has he been prosecuted by anyone for either 

the worker’s compensation fraud or for this fraud? 

Mr. LONGHI. Only civilly on the SBIR fraud. 

Senator MCCASKILL. Let me ask the IGs. You know, I’ve read the 

Committee’s report, which, by the way, Mr. Chairman, is excellent 

work. Congratulations to your staff. It is—it would make any prosecutor proud, this report. Except for I want to hear all the results 

of this report that people are going to jail. 

You know, we spend a lot of money in this country putting people 

in jail that steal cars, and, you know, you can walk in a 7–11 and 

steal 5 sandwiches for your family and know that you’re going to— 

at least going to go to Municipal Court and be held accountable for 

what you do. 

These are really good thieves. Is they’re preying upon the incompetence of government to steal millions and millions of dollars from 

the taxpayer. 

Are you all aware, the IGs that have testified today, of people 

who have spent time behind bars for doing this? 

Mr. HOWARD. Behind bars, I’m not actually sure. 

Certainly, we have—one of the cases that I talked about earlier 

was a contractor that had recycled previous deliverables. He was 

convicted for tax evasion and wire fraud. He was sentenced to 12 

months home confinement and 5 years probation. And, in addition, 

he agreed to pay a civil settlement of $1.4 million. 

Senator MCCASKILL. How about you, Ms. Lerner? Are you aware 

of anybody—— 

Ms. LERNER. I’m not aware—— 

Senator MCCASKILL.—who’s gone to jail? 

Ms. LERNER.—of anyone serving any actual jail time, although, 

we have had successful civil recoveries along the lines that were 

mentioned by the gentleman from NASA. 

Senator MCCASKILL. You know, that’s part of the problem, is 

that there’s a sense that if you do things like this, you can pay people back, and you won’t be separated from your families, and you 

won’t go to prison, and it breaks my heart when I—I have some 

very extensive knowledge about the people who go to prison, and, 

you know, people who live in certain neighborhoods and who engage in certain illegal activity, their chances of going to prison are 

pretty darn good. People who put on a fake title or claim fake university affiliation and try to rip off the government for research 

dollars, their chances to go to prison are way too slim, and that’s 

one of the reasons why have a cavalier attitude about how easy it 

is to get away with this. 

Let me drill down just for a minute and see if either one of you 

or—or any of you on the panel can tell me, it’s my understanding 

that this problem was uncovered awhile ago, and that there was 

a great deal of sound and fury about these grants and—and possible fraud and waste and abuse in this program, and at that point 

in time, there was a requirement that SBA do a database that 

would allow everyone just to do something basic like hey, is he trying to—are they trying to get the same money out of you that 

they’re trying to get out of us? We’re not talking about 100,000 programs here; we’re talking about a manageable database. 

30 

I mean, we’re going to do a hearing on databases in the government because, you know, talk about databases gone wild, we’ve got 

databases gone wild in the U.S. Government. But this would be 

pretty straightforward and simple, and easily searchable, and it 

hasn’t been done. 

Now, I know that was at SBA that it was supposed to have been 

done, but do either of you have any input as to what has been the 

problem? 

I think that was a decade ago. Mr. Chairman, I think that Congress instructed them to do this. 

Mr. HOWARD. Close to it. I believe it was 2000, ma’am. 

Senator MCCASKILL. Yes, so, we’ve—we’ve gone 9 years, and now 

we’re back at another hearing, and nothing’s happened. 

Is—is—has there been any progress made that you’re aware of 

any type of just basic, you know, before you send out an award, you 

better check and make sure that they aren’t double-dipping? 

Mr. HOWARD. I’m told by my staff that both the NASA people 

who attempt to use the database and our staff, as well, find that 

it’s not useful and that they’re unable to do the kinds of things that 

were intended to be done with the database. 

Ms. LERNER. I hear the same thing. It contains a certain amount 

of information, but the critical information that we need, information as basic as if we find that they’ve received an award from another SBIR agency, who’s the agency contact, so that we can call 

them and get access to the proposals. It doesn’t have proposal information, it doesn’t have an agency contact information, and, so, 

we have to rely on backdoor channels to try and ferret out, how to 

get at the basic information that we need, and program officers 

face the same challenge in order to determine if we have duplicate 

funding. 

Senator MCCASKILL. Well, I—I—you know, it—it—I understand 

that it may not contain all the information needed, but it would 

seem to me that if you came across another proposal from the same 

entity, that we ought to be able to figure out how to pick up the 

phone and call someone and double-check it’s not the same proposal. 

Ms. DALTON. Senator, we looked at the government-use database 

that SBA claimed was operational. Going through that in preparation for this hearing, what we were finding was award information, 

but not proposal information. And that’s a key piece of information 

to know what these companies are proposing to and to see whether 

or not there are any similarities between them. 

We also found that it would contain the name of the company, 

but those names may not be unique. You know, you could have a 

company listed several times, but they used abbreviations, so, it 

would be identified separately as opposed to using a unique identifier, like a DUNS number or an EIN, which should be in the government-use database, not in the public-use database. It’s the government-use database that really needs to be accessible and easy 

to use and searchable so that all the agencies that are participating 

in this program can look at and use it before they make awards. 

Senator MCCASKILL. Well, I’m going to see if we can’t continue 

to put a lot of attention in this area at SBA and see if we can’t 

get that fixed. And I do think that there is merit in this program. 

31 

I’m aware that there are a couple of awards that have recently 

been given to two entities in Missouri that are both doing important research on alternative energy. In fact, a lot of the progress 

we had made on alternative energy—up until this presidency, we 

weren’t spending a significant amount of resources on our alternative energy; we are now, but a lot of the work, the early work 

that it was done on, biomass and many other things, to say nothing 

of what was going on with DoD and NASA has come through this 

program, so, I think it’s worth saving, but, Lord knows, we can do 

better than we’re doing. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator McCaskill. 

I—you know, there are all kinds of EPSCoR, if you’re familiar 

with the National Science Foundation, are fantastic programs, and 

they were developed to help smaller universities so that Harvard, 

Yale, Stanford, and Princeton didn’t get all the money. And, to 

that, I really say so what, I’m glad that’s going on. That’s simply 

a matter of a legislator—a couple of legislators sitting down and, 

with the head of NSF, which happened to be Erich Bloch at the 

time, who didn’t like the idea because he thought that if it wasn’t 

at Harvard, Yale, Stanford, or Princeton, there probably wasn’t 

going to be a result. But, anyway, we made him change his mind, 

and it’s been unbelievable the success that’s come from that. 

But what disturbs me a little bit in listening to—the three of— 

the last three of you—in front of me, not you, Mr. Longhi, is that 

there—that there are bits and pieces of reasons that you couldn’t 

do something. 

Now, I understand. I serve on the Intelligence Committee. I understand what stovepiping in is. What I have come to understand 

much more effectively is that stovepiping is—is not as frequent in 

the Intelligence Committee as it is in—in the government itself at 

large. That somehow you talk about, well, there was a little thing 

about radiation or—or people didn’t call each other or whatever. 

Data communication is—is just a part of what we do these days, 

it’s what’s going to—one of the things that will surely pass in the— 

in the healthcare bill. I sense a—to be honest with you, a little bit 

of ennui in your answers. That what will be, will be, what is, is 

what is. We deal with this as best as we can. 

So, I need to ask you: Do you have insufficient people to do what 

it is that you’re meant to be doing? Do you have insufficient money 

to do what it is? That you have bosses who are against you’re doing 

what you’re meant to be doing? Or what—what’s—what’s the deal 

on this? I don’t just mourn this problem; I’m profoundly upset by 

it. Obviously, particularly because it’s the government, it’s people’s 

money. People I represent in West Virginia don’t have a lot of 

money to throw around on waste, fraud, and abuse or anything 

else. What—what is the reason? What’s at root for this? How much 

have you three spoken up? 

Mr. HOWARD. I’ll go first, Senator. 

We have spoken up over the years. 

The CHAIRMAN. You gave an example. 

Mr. HOWARD. Well, 1992, 2004, 2005, we’ve alerted the Agency 

to vulnerabilities of this program to fraud, waste, and abuse, and 

we’ve made recommendations to improve it. 

32 

The CHAIRMAN. You made recommendations to improve it. 

Have you followed up to see what happened? 

Mr. HOWARD. Yes, sir, we have, and the Agency has implemented 

our recommendations. 

The CHAIRMAN. OK, so, how come it’s only 2009, you know, 2 

years into the last century, 2002, 2004, 2005, et cetera? I mean, 

this is going on every day all the time? 

Mr. HOWARD. Yes, Senator. 

The CHAIRMAN. You just aren’t aware of it? 

Mr. HOWARD. Well, I think we’re aware of what’s been brought 

to our attention, and we have certainly investigated the cases that 

have been brought to our attention. 

We’ve had 50 cases brought to our attention since about 2001. 

We’ve investigated those. We’ve had eight that have been closed 

with a conviction or a civil settlement, and we have five currently 

in process. 

We’re not a substitute for the Agency’s internal control process, 

sir, and I think that’s where the breakdowns are. 

The CHAIRMAN. Well, you’re—you’re the Acting Inspector General 

of NASA. Allison Lerner, you’re the Inspector General of the NSF. 

Ms. LERNER. Correct. 

The CHAIRMAN. And, Patricia Dalton, you’re the Managing Director of Government Accountability Office section. 

Do you—do you have to wait until things come to you? Do you 

have anybody that goes around and pokes—pokes into these situations? 

Ms. LERNER. We do poke, but, our efforts to poke are stymied, 

to a certain extent, by the limitations of the databases that exist. 

I will say I’ve been at NSF in the IG position only since the end 

of April, but in the dealings that I’ve had with our investigative 

staff, they love these types of cases. They take them seriously, 

more seriously than perhaps some other people within the OIG 

community. But, they are difficult cases to work because of the difficulty in obtaining the information that will enable you to understand if you have an actual instance of duplicate funding or not. 

We do take them seriously. We have. And as I indicated, we’ve 

had 64 investigations since the program began at NSF, and we’ve 

had some significant outcomes as a result. We have five ongoing 

cases right now that we are taking seriously and that we are working. 

We got the attention of NSF management back in the early 90s 

and got them to institute some strong disclosures and certifications 

that really help us in instances where there is fraud to have successful prosecutions or outcomes. 

The relationship that we’ve developed with the program staff and 

the presentations given by our staff to awardees that walk them 

through the ramifications of fraud, and show them the actual 

checks that we’ve been given by people to pay back and the pictures of Federal prisons where they could go, not that they have 

been, but where they could go if they defraud, have an impact. I 

know we don’t catch every instance of fraud, but I think we’re 

doing our level best to prevent it, and when it’s detected, to pursue 

a strong, positive outcome. 

The CHAIRMAN. Why am I dissatisfied? 

33 

Ms. DALTON. I would think, Senator, it’s because these problems 

have been identified for many, many years. GAO has identified 

these for the Congress since the early 90s, and Congress has acted 

and asked for things to be done, and they have not been completed 

on time, and even, as I reported, it’s not where it should be now. 

The CHAIRMAN. If somebody is labeled an ‘‘inspector general,’’ 

doesn’t that mean that you spend all of your waking hours pursuing? In other words, isn’t it your job to assume that waste, fraud, 

abuse, and corruption is going on? That, in other words, you—you 

don’t accept that—— 

Ms. DALTON. Yes. 

The CHAIRMAN. You hope not to run into any, you assume that 

it’s going on? Because it’s—it’s the nature of—of what happens in 

this country. I don’t hear passion. I don’t hear anger. 

I mean, you talked about, Mr. Howard, somebody getting a—as 

though he was trampled, paying $1,100,000, but got to stay at 

home, and—and I heard that, and I almost—I almost interrupted 

Senator McCaskill in outrage that—that this would somehow be acceptable to you. I mean, when people do things like this, I mean, 

shouldn’t they be fired, stripped, go to—go to prison? 

Mr. HOWARD. Sir, I agree. We don’t get to make those decisions. 

The CHAIRMAN. Now, what do you mean ‘‘we don’t?’’ You’re an— 

you’re an Inspector General. 

Mr. HOWARD. But, sir, I’m not a judge or a jury. 

The CHAIRMAN. Well, that—so, that means that—that the person 

above you decided this was not worth pursuing. 

Who is the person above you? 

Mr. HOWARD. Department of Justice, sir. That is who we work 

with on these cases with the Federal prosecutor. 

The CHAIRMAN. Well, what about—what about NASA itself? 

Mr. HOWARD. Sir, there is no one in NASA that influences what 

I do. 

The CHAIRMAN. I’m not suggesting that, but there’s obviously nobody in NASA that wanted to follow up what you were doing. The 

Department of Justice didn’t. 

Why are you an inspector general? Why—why do you hold the 

position? What—what is your—— 

How do you—how do you get out of bed every morning? 

Mr. HOWARD. To prevent and deter fraud, waste, and abuse, and 

to improve the Agency’s operations and programs. And I think 

we’ve been fairly successful at that, sir. 

The CHAIRMAN. Ms. Lerner? 

Ms. LERNER. It is a frustration when you are an Inspector General that you can’t be everywhere at every time and fight every instance of fraud that occurs in the agency that you oversee, and if 

passion isn’t coming across, I’m sorry; it should. I’ve spent my entire Federal career in this type of work, and I believe passionately 

in the mission of what we do. 

But as has been noted, we can’t be everywhere at every time, 

and we have many different programs with fraud that we have to 

oversee, many different areas that we have to pursue, and we do 

find ourselves spread very thin in attempting to cover all of the 

fronts in which the fraud can occur and is occurring. 

34 

I do think that at NSF, we’ve done our level best at tackling 

every allegation of fraud in the SBIR Program that’s come our way, 

and when we’ve been able to substantiate the charge to pursue it 

as far as we can. We are limited because we investigate, but the 

Department of Justice makes decisions about prosecution. 

The CHAIRMAN. Well, what would happen if you decide that you 

couldn’t prosecute, but that you had done the investigation and you 

just held a press conference saying what you turned up and then 

turned it over to the Department of Justice? Would that get you 

fired? Would that embarrass you? I mean, compare yourself to—to 

Mr. Longhi. Look what he did. Why can’t you hold a press conference? 

Ms. LERNER. That’s a strategy I haven’t considered, but I think 

in most instances where we’ve substantiated the charge, we have 

been able to follow the case through and receive some sort of positive outcome, whether it’s administrative in that it’s opened—or it’s 

terminated so that no further funds could be abused—civil awards 

wherein we could recover—potentially double or triple damages 

back to the program. Unfortunately, no real criminal outcomes, but 

we pushed it as far as we can. 

The CHAIRMAN. Were there criminal activities? 

Ms. LERNER. You know, when you have tax evasion, potential—— 

The CHAIRMAN. Isn’t that a criminal activity? 

Ms. LERNER. Yes, but—— 

The CHAIRMAN. So, when they—when it came back far short of 

that from the Department of Justice and—— 

Ms. LERNER. Well, when settlement agreements are reached, 

that’s part of the settlement and it can be that jail time is avoided, 

but—— 

The CHAIRMAN. Well, give me an example of a settlement agreement that was reached. 

Ms. LERNER. I’m sorry? 

The CHAIRMAN. Can you give me an example of a settlement 

agreement? Give me some context. 

Ms. LERNER. I believe our office has turned over copies of settlement agreements to your staff, and I do have those. I can’t off the 

top of my head give you specifics from them, but they do have several examples of—— 

The CHAIRMAN. I’m glad they have several examples. I’d like to 

have an example. Can you just plumb your thinking a little bit and 

see? 

I’ll—I’ll go to Ms. Dalton and see what she has to say, and you 

think about. 

Ms. LERNER. OK. 

Ms. DALTON. Well, at the Government Accountability Office, 

most of our work is done directly at the request of the Congress, 

and our work is almost exclusively program evaluation work. 

Since the inception of this program, we have reported numerous 

times to the Congress about problems with the program, including 

the issue of duplicate awards, and we’ve been reporting that since 

the mid-1990s. We do not do the investigative work that the inspector generals do. 

The CHAIRMAN. OK, so, you turned it over to the Congress. 

35 

Who—where did you—who did you turn it over to? 

Ms. DALTON. It would have been numerous committees of the 

Congress. It’s whichever Member of Congress or Committee that 

has requested the work is who are reports are written to, and then 

they’re publicly available. 

The CHAIRMAN. Mr. Longhi, do you understand my frustration? 

I assume it’s yours, too. 

Mr. LONGHI. Yes, I do. I—may I add something here? 

The CHAIRMAN. Please. 

Mr. LONGHI. I very much wanted to see Dr. Munshi have a criminal conviction because of everything that went—that transpired. I 

wasn’t there in the room, but I believe from input from my lawyer 

that the—the NASA special agents aggressively tried to get this 

case tried criminally. When they presented the—the evidence to 

the Department of Justice, the Criminal Division, it was decided 

that—not to go forward because I think, in part, it was so technical 

that they—they understood the evidence, but trying to present that 

to a jury, they thought it would be a very, very difficult case to try 

when you start to get into chemical compounds, and it breaks down 

in showing the—the details of the fraud, and they just—I—I think 

it came down on that point that the Department of Justice, the 

Criminal Division shied away from it because it would be so hard 

to try on a technical basis. 

The CHAIRMAN. Now, I don’t want to be—I’m going to seem political when I say this, but I—I fully understand that—that in the 

last 8 years that the Department of Justice was not as active as 

it might have been on a number of fronts, but it’s—it’s incomprehensible. 

Did you ever see the movie ‘‘A Civil Action?’’ 

Mr. LONGHI. No, sir. 

The CHAIRMAN. Any of you see it? 

[No response.] 

The CHAIRMAN. Do you remember—I’m sorry. I’m—I’m really 

sorry about that. It’s a very good—it’s a very good movie, and it’s 

a story about the case against Grace and Company. It’s not a story, 

it’s a factual account, and Grace and Company paid the largest 

amount in the history of litigation in New England for—for cleanup 

of toxic waste, which they—which happened after what you’re talking—all of what you’re talking about. It was very technical. And 

the lawyer who was taking this on couldn’t get a jury to understand, and, more importantly than that, he couldn’t afford to hire 

the—the different toxicologists and, you know, all the fancy specialties at $100,000 a year or—or month or whatever, you know, to 

pursue it. 

And it was—it came to the attention of the EPA because three 

boys who didn’t like the man who had owned this, you know, supremely toxic land had gotten out of it by a weak judge, they—they 

were tossing firecrackers and one went into the river next to this 

dumping ground, and the river exploded into fire, and then, you 

know, a month later, EPA closes down the company, cleans everything up, and hits Grace and Company with the largest suit in the 

history of New England. 

36 

So, things happen in different ways. Things are complicated, but 

I—I had always thought that, I don’t know, that IGs somehow 

pushed, they just pushed. And that’s the value of their work. 

That a case—and I’m not saying that you don’t, and you all have 

cases that have come, that have been settled. Well, sometimes you 

don’t want to settle something. Sometimes, you don’t want to settle 

something, you want to make a point. And, so, you just—you just 

stick with it, and—and then you either make it or you don’t make 

it. If you—if you don’t make it, then you don’t get the settlement 

money, and bravo for the person who gets away with a—with a, 

you know, criminal or antisocial behavior. 

I’m just—I’m perplexed because, you know, you don’t have to go 

to Iraq; you don’t have to go to anything going on in this country. 

There’s—we’re dealing the other day with some soldiers from— 

from Iraq who’d been hit with the same chemical compound that 

was sort of like Hexavalent Chromium or something like that. In 

other words, it was the worst kind of chromium which would just 

eat out your insides and turn you cancerous. And it was in dust 

form. They all dealt with it. The Army denied that there was any 

problem. And they broke out into rashes and their marriages broke 

up, they couldn’t read newspapers and they couldn’t keep jobs. And 

they finally came to us, and some of us are very, very mad about 

it, and I suspect you’ll see results from it. And, as far as I’m concerned, results are the only things that count. Effort is nice, but 

results are what count. 

I’m not lecturing you. I’m—I understand I’m not making any 

friends here, and I don’t really care. I—I’m just on behalf of aggrieved people, much less taxpayers, I would—I just—I want to see 

hope. 

So, let me—so let me just close—let me just close by asking each 

of you what you think could be done to ameliorate the situation 

and make it more efficient. Starting with you, Ms. Dalton. 

Ms. DALTON. Sure. I think there are a number of things that 

could be done. Some of which they already are supposed to be 

doing, but I think they can be done better, and there are some 

things that they haven’t done that they need to do. 

I talked about this database. It was supposed to be done in 2001; 

it still is not where it needs to be by a long shot. It, as I said, 

doesn’t include the proposal information. That, I think, is critical 

because we’ve been talking about fraud, but the best way to stop 

fraud is to prevent it from happening in the first place, and if we 

could get proposal information that all agencies could look at easily 

and search, it would be much easier to identify these duplicate 

awards, and, hopefully, that they would never occur. 

Second, I think that the certification statements could be improved. All of the agencies have done better, but there are differences among the agencies in terms of the types of certifications 

that each awardee is given. When we were talking about criminal 

penalties, one of the these is false statements, 1,001 certification 

violations. Those can be prosecuted very easily, but you need a 

clear certification statement. If we could get quality certification 

statements as to what each of the people at the organizations that 

are getting awards are certifying that they are not receiving duplicate awards, et cetera, I think that would improve the program. 

37 

I also think that we should have clearer definitions of what similar proposals are or identical proposals. Because we have repeatedly found duplications of awards. 

And then, finally, I think that we should have clear, good information on what we’re getting for the money. Have we gotten technology that can be commercialized? What other outcomes have 

come such as the research that the government needs, for example, 

to improve our weapon systems or health research. 

So, those are four things that I would recommend that we focus 

on. 

The CHAIRMAN. OK. Ms. Lerner? 

Ms. LERNER. I’ll reiterate what Ms. Dalton said. The single most 

important thing that would help us make more cases like this 

would be an improved database so that we could proactively go out 

and try and find instances of duplicate funding instead of having 

to wait for program officers to raise issues to us or whistleblowers 

like Mr. Longhi to raise the issue. If we had a proactive, better 

database. We have software, we have the ability to go out and 

match the proposals and find these things and could make tremendous progress in that regard. 

I do think the certifications that we have are 1001 Certifications. 

We require them throughout the lifecycle of the award. We’re very 

well-positioned, and I’d be happy to work with other Inspectors 

General, and if we want to convene a working group and talk about 

the certifications and how those could be improved across the community because I think we have a good example that could be 

worked from. 

I’ll turn it over. 

Mr. HOWARD. Thanks. I agree that the working group is a very 

good idea. I think there are two things that we could do. 

One, in the Inspectors General’s Office, we will be passionate and 

proactive in finding out why these internal control weaknesses 

exist in the Agency’s program, and make definitive recommendations to address them. 

Second, we will encourage the Agency while we’re doing our 

work, to take a look at itself and try to find out why it’s not complying with its own internal control regulations. 

The CHAIRMAN. Do you know what the first law that was passed 

after 9/11 was? Passed by the Congress? Any of you know? 

[No response.] 

The CHAIRMAN. It was a law that required the FBI and the CIA 

to be able to talk to each other. FBI did internal, CIA did external, 

so, they couldn’t talk to each other. Which is one of the main reasons that 9/11 happened. There were all kinds of clues to indicate 

that this was going to happen, and there were all kinds of clues 

to indicate exactly how it was being set up to happen, the 9/11 

Commission makes those very clear. 

But it—it was interesting because it didn’t make—it didn’t make 

very much difference. The FBI kept on being the FBI. That means 

they had long yellow, legal pads, they were lawyers, and they were 

only there to arrest criminals. The CIA was only there to surveil 

suspects to find out who their contacts were and trail them. Not 

to arrest them, but to trail them in order to learn what the wider 

38 

situation was. Those two cultures would not meet, and, to this day, 

have not met effectively enough. 

Now, why do I mention that? Simply because I’m at a loss trying 

to figure out how you get people to talk to each other, not just to 

have conferences, but you get hooked up by the—the IT that you 

need to be, that what goes across any of your desks goes across all 

the rest of your desks and all of your other folks that Mr. Munshi 

was ripping off money from. It just seems to me these things are 

possible. 

Doctor—I mean Mr. Longhi, do you have any suggestions? 

Mr. LONGHI. Yes, I do. Something very specific. 

I agree with my fellow witnesses, but shine the light on it. Your 

biggest deterrent would be publicity. Scientists fear negative publicity. Their reputations are everything. It’s the—the scientific 

mind. They want to do research; they want to be known for their 

research. If you associate negative publicity with—put these actions out in the open and highlight them, run them up the flagpole, 

this will be a tremendous deterrent. It’s just the psyche of the scientist. They will avoid or try to avoid at all costs negative publicity. 

The CHAIRMAN. Good idea. I don’t mean to appear to be unfriendly or to be unfriendly. I think this is a very important hearing, and I think we’ve made some progress in it. 

I’m going to stop it now. I’m going to put all of the questions 

which I didn’t ask in the record, so, it’ll be a part of the record, 

and I may send some of those questions to all of you. 

So, despite my dour appearance, I adjourn this hearing. Thank 

you. 

[Whereupon, at 4:23 p.m., the hearing was adjourned.] 

(39) 

1 Verified Complaint for Forfeiture in Rem, U.S. v. Real Property Located at 501 South Moody 

Ave., Unit 117, Tampa, FL (Feb. 19, 2009) N.D. Fla. (No. 1:09 cv 41–MP/AK). 2Letter from Chairman John D. Rockefeller IV to Acting Administrator, NASA, Mr. Christopher J. Scolese (Mar. 6, 2009). 3Letter from Chairman John D. Rockefeller IV to Secretary of Defense Robert Gates (May 5, 

2009); Letter from Chairman John D. Rockefeller IV to Secretary of Energy Steven Chu (May 

5, 2009). 4For example, based on the allegation of the contractor’s conduct in the NETECH case discussed above, Committee staff determined that 11 contracts worth $3.3 million are potentially 

at risk for waste, fraud and abuse. 

A P P E N D I X 

Cases of SBIR Waste, Fraud and Abuse 

Compiled by Senate Commerce Committee Staff 

Background 

In February 2009, it was publicly disclosed that Federal authorities were investigating a Florida technology engineering business called New Era Technology 

(NETECH) for Small Business Innovation Research (SBIR) Program fraud. In a filing in a Florida Federal district court, investigators alleged that NETECH’s owners 

repeatedly submitted fraudulent SBIR proposals and invoices to the National Aeronautics and Space Administration (NASA) and used the award money to enrich 

their children and to purchase personal property for themselves, including a BMW 

automobile and a condominium in Ft. Lauderdale, Florida.1

To learn more about the NETECH case, on March 6, 2009, Chairman Rockefeller 

wrote a letter to NASA requesting all documents related to contracts awarded to 

the company.2 After discovering that NETECH had won contracts from two other 

agencies, Chairman Rockefeller made similar requests to DOD and DOE on May 6, 

2009.3

According to the documents produced through these requests, since 1999, N 

ETECH has received seven Phase I and five Phase II SBIR or Small Business Technology Transfer (STTR) Program contracts worth $3,379,566 from NASA, the Air 

Force, and the Navy. Federal investigators allege that NETECH defrauded the government in the course of performing most of these contracts. NASA Inspector General (IG) officials recently informed Committee staff that their criminal investigation 

of NETECH is ongoing. 

In the course of investigating the NETECH case and the SBIR program, Commerce Committee staff learned of other instances in which SBIR awardees defrauded the government. Using online searches and case files produced by the Inspectors General of NASA and NSF, Committee staff has collected 29 cases of SBIR 

fraud between 1990 and the present. These cases involved more than 300 SBIR or 

STTR contracts valued at more than $100 million. Information about these cases is 

presented in a table in the following pages. 

Some of the cases ended in criminal convictions or civil penalties imposed under 

the Federal False Claims Act, while others were resolved administratively within 

the respective IG offices and never made public. Based on the facts of each case, 

the table also estimates the number and dollar value of SBIR contracts that were 

at risk for waste, fraud, and abuse.4

40 

Company Name Description 

Awards 

at Risk 

Dollars 

at Risk 

Year 

Investigation 

Closed 

New Era Technologies New Era Technologies (NeTech) (NeTech) 

Company has been accused of improperly funneling NASA SBIR grant funds Company has been accused of improperly funneling NASA SBIR grant funds 

to personal bank accounts, and submitting fraudulent grant proposals and in to personal bank accounts, and submitting fraudulent grant proposals and invoices. Search warrants were executed on February 25, 2009, and an inves voices. Search warrants were executed on February 25, 2009, and an investigation is ongoing. Company also received awardsfrom DOD and DOE. tigation is ongoing. Company also received awardsfrom DOD and DOE. 

11 $3,309,730 $3,309,730 Ongoing Ongoing 

Materials and Electrochemical Research Corp. 

Whistleblower suit, which the U.S. Department of Justice joined in May 2008, alleges that company forged signatures on financing statements for a number of successful Phase II proposals submitted to NASA, DOE,and the Army. 

13 $9,000,000 Ongoing 

Not Public Not Public Company owner made false statements to NSF to transfer a Phase II pro Company owner made false statements to NSF to transfer a Phase II proposal to a different company than the company that performed the Phase I posal to a different company than the company that performed the Phase I 

proposal. proposal. 

2 $599,941 $599,941 2008 

Not Public Submitted two Phase I proposals to NSF that contained plagiarized text and 

figures. 

4 $1,477,475 2006 

Not Public Not Public Submitted proposals to NSF containing falsified information that led to the Submitted proposals to NSF containing falsified information that led to the 

issue of the award for Phase I and II awards. issue of the award for Phase I and II awards. 

21 $4,315,092 $4,315,092 2006 

Not Public Originating from the OIG Hotline, the NASA OIG found in a joint investigation with the DOD OIG, that the company had submitted multiple duplicate 

proposals and reports to DOD, NSF and NASA. 

2 $159,981 2005 

Lithium Power Lithium Power Technologies, Inc. Technologies, Inc. 

Through a whistleblower lawsuit, Lithium was found to have submitted false Through a whistleblower lawsuit, Lithium was found to have submitted false 

statements and duplicative proposals to various DOD components and NASA. statements and duplicative proposals to various DOD components and NASA. 

22 $5,558,969 $5,558,969 2005 

M.L. Energia Whistleblower claims led to a mail fraud conviction for false certifications, duplicative rewards, and plagiarized research. Awards came from NASA, NSF, 

DOD, DOE, USDA, and US Air Force. 

17 $2,314,000 2005 

Not Public Not Public After allegations that the awardee was misusing funds, an NSF OIG audit After allegations that the awardee was misusing funds, an NSF OIG audit identified $34,000 which was unaccounted for. identified $34,000 which was unaccounted for. 

2 $599,701 $599,701 2004 

Nanomaterials Research Corporation 

A whistleblower alerted DOD that the owner was using awards for personal benefit (including a vacation home), submitting falsified time sheets, falsifying data, and submitting duplicative proposals. The company had received 50 SBIR grants from various agencies including NASA, NSF and DOD between 1994 and 1999. 

50 $19,000,000 2004 

Arnav Systems, Inc. Arnav Systems, Inc. NASA Office of Procurement informed NASA OIG that company was inflating NASA Office of Procurement informed NASA OIG that company was inflating 

its labor rates for a Phase II project. its labor rates for a Phase II project. 2 $669,946 $669,946 2004 

Not Public Company was accused of mischarging labor costs on multiple DOD and NASA 

SBIR contracts. 

17 $5,769,618 2003 

Not Public Not Public Owner submitted false statements on proposals, including names and re Owner submitted false statements on proposals, including names and resumes of researchers not employed by the company. Owner overpaid himself sumes of researchers not employed by the company. Owner overpaid himself $20,000. Included 3DOE and 1 NSF awards. $20,000. Included 3DOE and 1 NSF awards. 

4 $400,000 $400,000 2003 

LaserGenics Corporation Submitted duplicative proposals to NASA and NSF, and made 12 false statements in DOD, NASA, DOE, and NSF proposals. 49 $4,734,995 2002 Not Public Not Public Based on an anonymous complaint, the NASA OIG discovered that the com Based on an anonymous complaint, the NASA OIG discovered that the com- pany had charged NASA $100,000 for unallowable costs. pany had charged NASA $100,000 for unallowable costs. 36 $12,477,805 $12,477,805 2002 

41 

Not Public NASA OIG received information that company made false statements in proposals related to the principal investigator, and also forged signatures on 

grant applications. 

2 $139,982 2002 

Not Public Not Public Company received funding from NSF and the Office of Naval Research for Company received funding from NSF and the Office of Naval Research for 

same proposal. same proposal. 2 $170,000 $170,000 2002 

Not Public NSF OIG was alerted by the FBI that the owner of the company had been ac- cused of embezzling $1.25 million from a foreign company. The NSF OIG determined company had obtained duplicate funding from NASA and the NSF 

for Phase I proposals, and had forged signatures of the CFO on falsified proposals. 

2 $50,000 1999 

Not Public Not Public Received duplicative awards from NSF and the Air Force for identical Phase I Received duplicative awards from NSF and the Air Force for identical Phase I 

and Phase II Projects. and Phase II Projects. 

12 $3,864,700 $3,864,700 1999 

Not Public Company failed to disclose simultaneous pending Phase I proposals to the 

DOD and DOE. 

2 $150,000 1998 

GMS Systems GMS Systems Company submitted duplicate proposals to the Department of Education and Company submitted duplicate proposals to the Department of Education and 

National Institutes of Health. National Institutes of Health. 

3 $110,000 $110,000 1998 

Not Public Submitted duplicate proposals and fraudulently reported research results to 

NSF, NASA and DOD from 1991–1998. NSF SBIR reviewer purchased stock in company. 

4 $547,000 1998 

Not Public Not Public Submitted duplicate proposals to NSF and NASA, mischarged NASA for Submitted duplicate proposals to NSF and NASA, mischarged NASA for 

work, used subcontractors for more than 2⁄3 of the work. of the work. 

27 $6,895,528 $6,895,528 1997 

Electro-Optek Received duplicative awards from NSF, NASA and DOD. Charged federal 

agencies for work that was not performed, plagiarized research, and misrepresented qualifications of researchers. 

44 $6,902,814 1996 

AKM Associates AKM Associates Submitted identical proposals and received duplicative awards from NSF, Submitted identical proposals and received duplicative awards from NSF, 

NASA, the Army and the Air Force. NASA, the Army and the Air Force. 

17 $2,204,452 $2,204,452 1995 

Excel Technology, Inc. Submitted at least 36 false statements about duplicate proposals and rewards, key personnel and billing to NSF, NASA and DOD. NA $2,001,573 1995 Not Public Not Public Submitted false claims about principal investigator’s employment eligibility Submitted false claims about principal investigator’s employment eligibility 

and plagiarized data in final report. and plagiarized data in final report. 

4 $391,118 $391,118 1993 

High Energy Laser Associates Received Phase II NSF funds, but did not use them to perform work. 1 $250,00 1990 Not Public Not Public Anonymous letter alerted NSF OIG to plagiarized report data and duplicative Anonymous letter alerted NSF OIG to plagiarized report data and duplicative 

proposals. Company had received grants from 7 federal agencies and sub proposals. Company had received grants from 7 federal agencies and submitted identical data tables in 20 different reports to these agencies. mitted identical data tables in 20 different reports to these agencies. 

49 $11,519,521 $11,519,521 NA 

TOTAL 300 $105,583,941 

42 

5Small Business Administration, SBIR Program Policy Directive 7(a)(1)(iii) (online at: http:// 

www.sba.gov/SBIR/SBIR-PolicyDirective.pdf) (accessed August 4, 2009). 6 2 Companies To Repay U.S. in Fraud Case, NEW YORK TIMES (December 10, 1995) (online 

at http://www.nytimes.com/1995/12/10/us/2-companies-to-repay-us-in-fraud-case.html) 7General Accounting Office, Interim Report on the Small Business Innovation Research Program (March 1995) (GAO RCED–95–59). 8 Id. 

9 Id. 

10Senate Committee on Commerce, Science and Transportation, NASA and NSF Program Efficiency, 105th Congress, (July 24, 1997) (S. Hrg. 105–722). 11General Accounting Office, Interim Report on the Small Business Innovation Research Program (March 1995) (GAO RCED–95–59). 

Committee Staff Analysis 

The information presented in the table above represents a group of individual 

cases in which Federal investigators and prosecutors collected evidence, developed 

facts, and in some cases, brought a civil suit or filed criminal charges. Viewed collectively, these cases provide important information about the features of the SBIR 

program that are most vulnerable to waste, fraud, and abuse. 

Duplicative Proposal Fraud A review of the cases described in the table shows 

that the most common type of SBIR fraud appears to be the submission of so-called 

‘‘duplicative’’ proposals to SBIR-awarding agencies. While SBIR regulations allow 

companies to submit the same research project to multiple agencies, they prohibit 

companies from accepting payment from more than one agency for the same work.5

In spite of this prohibition, there are a number of cases showing that some SBI R 

awardees have managed to receive multiple payments from different SBIR-awarding 

agencies for the same research project. 

The fact that the SBIR program is vulnerable to duplicative proposal fraud has 

been a matter of public record since the mid–1990s. In December 1995, in what the 

New York Times called, ‘‘the largest case of fraud involving the main Federal program that steers research money to small businesses,’’ the government settled cases 

against two companies for misusing $1.7 million in SBIR awards. Excel Technology 

of Hauppauge, NY, agreed to reimburse the government $1.7 million and to pay $1.6 

million in penalties, while ESDI of Bohemia, NY, agreed to reimburse the government $600,000 and pay penalties of $150,000. The companies were accused of illegally accepting money from DOD, NASA and NSF for identical research proposals 

and for submitting research work that had already been completed at state universities.6

At about the same time, Congress heard testimony about the program’s vulnerability to duplicative proposal fraud. In March 1995, the then-Government Accounting Office (GAO) released a study warning, ‘‘the SBIR program is at a growing risk 

of willful or accidental financial abuse.’’ 7 The report noted that in some cases, ‘‘a 

few companies received funding for the same proposals twice, three times and even 

five times before agencies became aware of the duplication.’’ 8 According to GAO, unless informed by a whistleblower of the duplicative proposals, agencies had a very 

limited ability to identify duplicative proposals.9

The Senate Commerce Committee heard similar testimony about the vulnerability 

of the SBIR program to duplicative proposal fraud during a 1997 hearing examining 

major management issues at agencies under the Committee’s jurisdiction. When he 

was asked about SBIR fraud, NSF Deputy Inspector General, Philip Sunshine, told 

the Committee that, ‘‘compared to other programs at the agency, there is more fraud 

in the SBIR program than any other program . . . it is an ongoing problem and an 

issue we’re focusing on, I think I can report with confidence that the agency agrees 

with us that it is an issue.’’ 10

Both GAO and the NSF Inspector General told Congress that the program was 

vulnerable to duplication fraud because there was no program-wide information system that allowed an agency to check if a company had submitted duplicative proposals to or recently won duplicative awards from other agencies. As the 1995 GAO 

report explained this problem, ‘‘. . . individual agencies maintain records of recent 

awards, but this information is generally not available to other agencies. If an official in one agency wants to obtain information from another agency about a specific 

proposal or company, such information is available only through personal contacts 

and conversations.’’ 11

In the 1997 hearing mentioned above, the Senate Commerce Committee heard 

similar testimony expressing concern that the lack of information sharing between 

SBIR-awarding agencies made the program vulnerable to duplicative proposal fraud. 

NSF Deputy Director, Joe Bordogna, testified that, ‘‘a major problem here is one in 

which the agencies don’t have a system yet that’s quick to use, a computerized system to check all the input coming i n. We just did a check with some arduous hand 

43 

12Senate Committee on Commerce, Science and Transportation, NASA and NSF Program Efficiency, 105th Congress (July 24, 1997) (S. Hrg. 105–722). 13P.L. 106–554, codified at 15 U.S.C. § 638(k)(2). 14 U.S., ex rel. Alfred J. Longhi v. Lithium Power Technologies (5th Cir., July 9, 2009) (WL 

1959259). 15 15 U.S.C. § 638(g)(7). 16 As discussed above, one of the government’s principal allegations in the NETECH case is 

that ‘‘. . . on multiple occasions, NETECH submitted fraudulent invoices to NASA on these contracts which represented labor hours for alleged employees that NETECH claimed to have paid 

or for whom NETECH incurred labor costs.’’ Verified Complaint for Forfeiture in Rem, U.S. v. 

Real Property Located at 501 South Moody Ave., Unit 117, Tampa, FL (Feb. 19, 2009) N.D. Fla. 

(No. 1:09 cv 41–MP/AK). 17Department of Energy Office of Inspector General, Administration of Small Business Innovation Research Phase II Grants (Aug. 2001) (DOE/IG–0521) . 

labor on the 208 or so proposals we presently have in hand. We found 12 overlaps.’’ 12

When it re-authorized the SBIR program in 2000, Congress ordered the Small 

Business Administration (SBA) to create and maintain a public database containing 

information about SBIR awards, and a government-access database containing information about proposals submitted to SBIR-awarding agencies.13 In conversations 

with Commerce Committee staff over the past few months, officials responsible for 

administering and overseeing SBIR programs have repeatedly stated that a government-wide database of SBIR proposals would be a valuable tool for reducing duplicative proposal fraud. While SBA’s public ‘‘Tech Net’’ website now contains comprehensive SBIR award information, it still does not provide the SBIR proposal 

database mandated in the 2000 statute. 

False Billing and False Representations The table above also shows that some 

companies have won SBIR awards based on proposals containing false information. 

Companies have misrepresented the qualifications of their researchers, presented 

plagiarized data as their own, and forged signatures on proposals in order to win 

grants or contracts. As a general matter, the awarding agencies rely on companies’ 

self-certification that the information in their proposals is accurate and truthful. A 

Federal appeals court recently noted that ‘‘the DOD generally does not verify all of 

the information submitted in a proposal, and it depends heavily on the integrity of 

SBIR applicants.’’ 14

In addition, after the SBIR grant or contract has been awarded, awardees have 

sometimes been able to exploit weaknesses in the program’s financial controls to bill 

the government for work it has not performed. While SBIR grants and contracts are 

based on a company’s agreement to perform a specified project for a fixed price, the 

SBIR statute requires agencies to make their payments ‘‘on the basis of progress 

toward or completion of the funding agreement requirements.’’ 15 In other words, 

payments to companies are based on their ‘‘level of effort’’—the actual hours and 

resources they put into the project. 

Evidence collected by Committee staff during this investigation indicates that 

SBIR award recipients can actually work fewer hours than they propose in their 

budgets and still receive full award payments. Companies can submit invoices to 

agencies for the ‘‘budgeted’’ hours worked and then pocket the difference, because 

the agencies do not generally require the awardees to prove they actually worked 

the number of hours they proposed in the budget. Without a ‘‘budget-to-actual’’ reconciliation process, there is no way to determine if agencies are overpaying for services performed.16

For example, when the Department of Energy Inspector General (DOE IG) audited its agency’s SBIR program in 2001, it identified significant weaknesses related 

to the agency’s handling of invoiced costs submitted by program awardees. The IG 

noted that DOE, ‘‘generally limited its cost reviews to pre-award evaluations of the 

costs proposed in the application submitted by grantees; it did not, as we would 

have expected, place sufficient emphasis on post-award reviews of actual costs.’’ 17

According to this report, once an SBIR award was made, there was no established 

procedure within the agency to verify that the amount submitted on an invoice actually matched up to the work performed by an awardee. In its 2001 audit, the DOE 

IG did its own cost review by asking grantees for documentation to support invoiced 

costs and it found that DOE reimbursed grantees for questionable costs. In one example, three awardees did not provide any documented support for $2.4 million in 

claimed costs. These awardees simply sent invoices to DOE and were paid without 

having properly documented the work. The IG concluded that although it supported 

44 

18 Id. 19Department of Energy Office of Inspector General, Management Controls over Monitoring 

and Closeout of Small Business Innovation Research Phase II Grants (July 2008) (OAS–M–08– 

09). 20 Id. 21 Id. 

the objectives of the SBIR program, it was concerned, ‘‘. . . that the shortcomings 

identified in this audit undermine the viability of the program.’’ 18

The DOE IG performed a follow-up audit of the DOE SBIR program in 2008 in 

order to determine if the previously observed weaknesses in the agency’s program 

had been corrected. The audit found that the agency, ‘‘had not corrected all previously reported weaknesses in monitoring and administering the SBIR phase II 

grants program.’’ 19 Specifically, the report cited that, ‘‘action had not been com- pleted to resolve about $1.2 million of the approximately $2.4 million of questionable 

costs identified in our previous audit,’’ 20 and that the agency was continuing the 

practice of, ‘‘not reviewing grant costs or closing out completed awards in a timely 

manner.’’ 21

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. TOM UDALL TO

THOMAS J. HOWARD AND ALLISON C. LERNER

Question 1. Mr. Howard and Ms. Lerner, like my colleagues, I’m troubled to hear 

about the fraud going on with SBIR. It is especially troubling because we all know 

that these dollars could and should have been spent by other hard working and innovative small businesses. 

And that’s who I’m concerned about—the businesses that have played by the 

rules. 

I believe we must improve oversight, but in a responsible manner that doesn’t 

over burden honest applicants. Our program in New Mexico tells me that they 

spend about 100 hours preparing each of these applications. How will you ensure 

that new oversight efforts do not overburden honest applicants? 

Answer from Mr. Howard. In my testimony, I noted two deficiencies that make 

it more difficult for us to detect, investigate, and prosecute fraud in the SBIR program: (1) the lack of a comprehensive government database that contains both SBIR 

proposals, awards, and reports and information about them, and (2) inconsistencies 

among the certifications required of awardees by the SBIR agencies. It is my view 

that rectifying these deficiencies will impose no burden on honest applicants. 

To create a comprehensive SBIR database, SBIR would need to coordinate with 

the eleven SBIR agencies to ensure that, in addition to the information that these 

agencies currently provide to SBA, they also provide electronic copies of all SBIR 

proposals, awards, and reports. There should be a strict timeline for SBA to create 

and populate this database in order to ensure that it becomes an effective coordination portal. Creation of such a database should impose no burden on the SBIR companies because they are already accustomed to providing SBIR documentation to the 

government in electronic format. 

With regard to certifications, all of the SBIR agencies already expect that certain 

uniform requirements will be adhered to by applicants and awardees: the company 

must be a small business; the principal investigator must be primarily employed by 

the company; most of the work must be, carried out by the company; the work must 

not be duplicative of work previously or currently funded by another agency; the 

SBIR funds must be expended properly on the specific project covered by the award; 

the Phase II awardee must be the same company that received the Phase I award; 

and all statements in the proposals and reports must be true. The honest companies 

are already complying with all of these requirements, and the NSF awardees already certify on their proposals, requests for payment, and reports. Reinforcing the 

expectation of adherence to these already- extant requirements by adding certifications to all of the documents submitted by applicants and awardees to all of the 

SBIR agencies will impose no perceptible burden on the honest companies. There 

is a small chance that having to read and select yes or no for each of the detailed 

certifications will deter some companies tempted to defraud the SBIR program—but 

there is certainty that those certifications will facilitate prosecuting companies that 

succumb to that temptation. 

Answer from Ms. Lerner. While our work has focused on fraud, waste and abuse, 

we remain mindful that the program’s intent is to provide increased opportunities 

for small business participation in research and development and to help agencies 

in accomplishing their missions. As part of our audit of NASA’s management of its 

SBIR Program, we will assess the adequacy of the Agency’s internal control process 

45 

and will consider whether those processes provide a reasonable balance between the 

requirements levied on program participants and what the Agency needs to achieve 

the program’s objectives and maintain compliance with existing laws and regulations. 

Question 2. Mr. Howard and Ms. Lerner, as we heard during the hearing, many 

small businesses are playing by the rules of the program. I’m certain that they have 

ideas about how to improve fraud detection; after all, fraudulent applicants take dollars that could have gone to them. Have you reached out to applicants that are following the rules to get their input on preventing fraud? 

Answer from Mr. Howard. As I discussed in my testimony, NSF requires all companies that receive Phase I awards to attend an SBIR Phase I workshop, at which 

a presentation by my staff makes it clear to awardees that violations of SBIR program requirements constitute wrongdoing, and outlines the specific criminal, civil, 

and administrative consequences of such wrongdoing. That presentation ends with 

my staff encouraging audience members to contact our office if they have evidence 

of wrongdoing (which some have indeed done). Similarly NSF’s SBIR Solicitation 

contains warnings about the consequences of abuse. NSF OIG has an active outreach program to NSF awardees and is continually seeking input from both NSF 

and its awardees. We have not however, solicited specific suggestions for preventing 

or detecting fraud from SBIR awardees. The idea is an excellent one, and I can assure you that we will be seeking such input beginning with the next such workshop 

and in future outreach activities. 

Answer from Ms. Lerner. To date, we have not proactively reached out to applicants who are following the rules to get their views on preventing fraud but we will 

consider this as part of our audit of NASA’s SBIR program. 

Æ