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Counter Proliferation Investigation Unit
12/17/2010

Munitions supplier convicted of defense procurement fraud and lying to US Army on government munitions contract

MIAMI -- A North Salt Lake, Utah, man was convicted on Friday on charges of defense procurement contract fraud, following a four-year investigation led by U.S. Immigration and Customs Enforcement's (ICE) Homeland Security Investigations (HSI) and the Defense Criminal Investigative Service (DCIS).

Ralph Merrill was convicted by a jury in the Southern District of Florida after a three-week trial on charges of conspiracy to make false statements to the U.S. Army to execute a scheme to defraud the Army in connection with a procurement contract with the United States worth $1 million or more, and to commit wire fraud. He was also found guilty of committing 21 counts of major fraud against the United States, and 11 counts of wire fraud. The jury acquitted Merrill of 14 major fraud and two wire fraud counts. Merrill was one of five defendants named in a superseding indictment returned in July 2008. Three co-defendants, Efraim Diveroli, David Packouz, and Alexander Podrizki, and Diveroli's company, AEY Inc., pleaded guilty in 2009 and are pending sentencing.

According to the indictment and evidence presented at trial, the defendants engaged in a scheme regarding a contract issued by the Department of Defense in January 2007 to secure $298 million in munitions for use by the Afghanistan National Army and Police. Among the items to be provided were millions of rounds of 7.62 mm automatic rifle and machine gun ammunition suitable for the Afghan armed forces' Warsaw Pact-model small arms. AEY Inc. won the contract to provide these supplies to the U.S. Army.

The testimony at trial related how Merrill joined with Diveroli to finance the purchases of this ammunition and to seek sources of supply garnered through Merrill's years of experience in arms dealing. Merrill was to receive 50 percent of the total profits, which the defendants projected to be millions of dollars.

According to the testimony and evidence at trial, AEY's plans ran into trouble in April 2007, when they discovered that the 7.62 mm ammunition they had planned to buy from the Albanian Ministry of Defense was actually manufactured in China. Following the Tien An Minh Square massacre, the U.S. government had enacted an arms embargo that precluded purchases of ammunition made by any entity that was part of China's military establishment. A clause noting this prohibition and precluding supplying the contract with Chinese-made ammunition was included prominently in the Army's contract with AEY.

"ICE HSI is committed to protecting U.S. troops and our allies, and we are not about to let their safety be compromised by a group of greedy profiteers," said ICE Homeland Security Investigations in Miami Special Agent in Charge Anthony V. Mangione. "ICE HSI prioritizes using its full statutory authority to investigate and enforce criminal violations of all U.S. export laws related to military items, controlled 'dual-use' commodities and sanctioned or embargoed countries, as the magnitude and scope of the threats facing the United States has never been greater."

U.S. Attorney Wifredo Ferrer stated, "Today's verdict reaffirms the message that defense contractors are responsible for the effectiveness and safety of munitions they provide to our troops and allies. When these contractors intentionally cut corners to line their own pockets, they risk the safety and lives of our men and women in uniform. We will continue to prosecute these cases vigorously."

Sharon Woods, director of the U.S. Department of Defense's Defense Criminal Investigative Service stated, "Today's verdict sends a strong message to those who perpetrate fraud for their own financial gain against the Department of Defense (DoD). The jury's verdict highlights the DoD Inspector General's Defense Criminal Investigative Service's dedication to protecting America's warfighters."

"We are very pleased with today's guilty verdict," said Brig. Gen. Colleen McGuire, provost marshal general of the Army and commanding general of the U.S. Army Criminal Investigation Command. "The findings reinforce our continued steadfast commitment to bring all those who would defraud the U.S. Army to justice. It is unconscionable to think that someone would provide substandard ammunition to our coalition partners when their very lives depend on it."

Testimony at the trial and numerous e-mails exchanged amongst Merrill and the other participants disclosed that they knew that they could not legally sell the Chinese 7.62 mm ammunition to the Army. However, procuring it from alternative sources would have cost more, and delayed meeting their delivery schedule, on which they were already late. To protect their investment and to pursue the extensive profit potential of the contract, the defendants decided to buy the Chinese ammunition, disguise its origin, and ship it to the U.S. Army's ammunition depot in Afghanistan.

The scheme came apart in August 2007 when ICE and DCIS agents served a search warrant at AEY Inc.'s offices in Miami Beach while investigating licensing violations. Packouz and Podrizki then came forward and revealed to federal agents the scheme that had been in place to ship the Chinese ammunition disguised as being made in Albania.

The investigation was conducted by ICE Homeland Security Investigations in Miami, the U.S. Department of Defense, Defense Criminal Investigative Service, the U.S. Army Criminal Investigation Command, and the Defense Contract Audit Agency.

Assistant U.S. Attorneys Eloisa Fernandez, Adam Schwartz, and Frank Tamen, Southern District of Florida, prosecuted this case.