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The Stoner Arms Dealers: How Two American Kids Became Big-Time Weapons Traders

Page 5 of 9

The pair met at Diveroli's apartment to smoke a joint and discuss strategy. Supplying the contract would mean buying up hundreds of millions of dollars worth of ammunition for the kind of Eastern Bloc weapons that the Afghans used. Because such weapons were traded in the gray market — a world populated by illegal arms dealers, gun runners and warlords — the Pentagon couldn't go out and buy the ammo itself without causing a public relations disaster. Whoever won the contract to arm the Afghans would essentially be serving as an official front operation, laundering shady arms for the Pentagon.

Normally, a small-time outfit like AEY wouldn't have a shot at such a major defense contract. But Diveroli and Packouz had three advantages. First, the Bush administration had started its small-business initiative at the Pentagon, mandating that a certain percentage of defense contracts go to firms like AEY. Second, the fledgling arms dealers specialized in precisely the sort of Cold War munitions the Pentagon was looking for: They had the "past performance" required by the contract, and they could fulfill the order using the same supply lines Diveroli had developed through Thomet. Third, the only requirement in the contract was that the ammunition be "serviceable without qualification." As Diveroli and Packouz interpreted it, that meant the Pentagon didn't care if they supplied "shit ammo," as long as it "went bang and went out of the barrel."

For the two friends, it was a chance to enter a world usually reserved for multinational defense contractors with armies of well-connected lobbyists. "I knew it was a long shot," recalls Packouz. "But it seemed like we might be able to actually compete with the big boys. I thought we actually had a chance. If we worked hard. If we got lucky."

Bidding on defense contracts is a speculative business — laborious, time-consuming, with no prize for second place. As they passed a joint back and forth, Diveroli decided it was time for Packouz to step up and take on a larger role.

"I don't really have time to source all these things," he told Packouz. "But I've got good contacts for you to start with. I want you to get on the Internet and get a price from everyone and his mother. Any new sources you bring to the table, I'll give you 25 percent of the profit."

This was Packouz's big chance. That night, he went online and searched defense databases for every arms manufacturer in Eastern Europe he could find — Hungary, Bulgaria, Ukraine, any place that might deal in Soviet-era weapons. He e-mailed or faxed or called them all. The phone connection was often bad, and Packouz had to shout to be heard. If the person who answered didn't speak English, he would say "English! English! English!" and then spend minutes on hold while they tracked down the one guy in the outfit who spoke a few words. "Da, da," they would tell Packouz. "You buy, you buy." When he managed to make himself understood, he told the manufacturers that the ammunition had to "work." It also had to "look good," and not be in rusty boxes or exposed to the elements.

For six weeks, Packouz worked through the night, sleeping on Diveroli's couch and surviving on weed and adrenaline. He located stockpiles of ammunition in Eastern Europe at good prices. At the same time, Heinrich Thomet sourced a massive amount of ammunition through his Albanian connections. As the date for the final bid neared, Diveroli agonized. He paced day and night, a cloud of smoke over his head as he smoked joint after joint, muttering, worrying, cursing.

"Efraim was conflicted about whether to put a nine percent or 10 percent profit margin on top of our prices," Packouz recalls. "The difference was more than $3 million in cash, which was huge — but with either margin, profits were going to be more than $30 million. He figured everyone else was going to take 10 percent, but what if another bidder had the same idea as him and put in nine percent? So maybe he should go with eight percent. But then we might be leaving money on the table — God forbid!"

Finally, at the last possible moment, Diveroli went for nine percent. He scribbled a number on the form: $298,000,000. It was an educated guess, one he prayed wouldn't be undercut by the big defense contractors. There were just 10 minutes left before the application deadline. The two friends jumped in Diveroli's car and sped through the quiet residential streets of Miami Beach, making it to the post office with only seconds to go.

The Pentagon can be a slow-moving bureaucracy, a place where paperwork goes to die. But because the Afghanistan solicitation was a "pseudo case," it had been designed to move swiftly. On the evening of January 26th, 2007, Packouz was parking his beat-up old Mazda Protege when Diveroli called.

"I have good news and bad news," Diveroli said.

"What's the bad news?" Packouz asked.

"Our first order is only for $600,000."

"So we won the contract?" Packouz asked in disbelief.

"Fuck yeah!" said Diveroli.

The two friends, still in their early twenties, were now responsible for one of the central elements of the Bush administration's foreign policy. Over multiple bottles of Cristal at an upscale Italian restaurant, the pair toasted their amazing good fortune. Throughout the meal they passed Diveroli's cocaine bullet back and forth under the table, using napkins to pretend to blow their noses.

"You and me, buddy," Diveroli said. "You and me are going to take over this industry. I see AEY as a $10 billion company in a few years. These fat cats in their boardrooms worrying about the stock prices of their companies have no idea what is about to hit them."

"General Dynamics isn't going to be too happy right now," Packouz agreed.

Despite the celebratory air, they both knew that their work had just begun. They had already managed to clear three different government audits, hiring an accountant to establish the kind of basic bookkeeping systems that any cafe or corner store would have. Now, a few weeks after winning the contract, AEY was suddenly summoned to a meeting with the purchasing officers at Rock Island.

Diveroli asked Ralph Merrill, the Mormon gun manufacturer from Utah, to come along. An experienced businessman in his sixties, Merrill had provided the financial backing needed to land the contract, pledging his interest in a piece of property in Utah. Diveroli had also shown auditors his personal bank balance, by then $5.4 million.

The meeting with Army officials proved to be a formality. Diveroli had the contracting jargon down, and he sailed through the technical aspects of the transaction with confidence: supply sources, end-user certificates, AEY's experience. No one ever asked his age. "We were supremely confident," says Packouz. "I just think it never occurred to the Army people that they were dealing with a couple of dudes in their early twenties."

In reality, the Pentagon had good reason to disqualify AEY from even vying for the contract. The company and Diveroli had both been placed on the State Department "watch list" for importing illegal firearms. But the Pentagon failed to check the list. It also ignored the fact that AEY had defaulted on prior contracts. Initially rated as "unsatisfactory" by the contracting office, AEY was upgraded to "good" and then "excellent."

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