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

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There was only one explanation for the meteoric rise: Diveroli had radically underbid the competition. In private conversations, the Army's contracting officers let AEY know that its bid was at least $50 million less than its nearest rival. Diveroli's anxiety that his bid of nearly $300 million would be too high had failed to consider the corpulent markups employed by corporate America when it deals with the Pentagon. For once, at least, taxpayers were getting a good deal on a defense contract.

The first Task Order that AEY received on the deal was for $600,000 worth of grenades and ammunition — a test, Diveroli surmised, to make sure they could deliver as promised. Make a mistake, no matter the reason, and the Pentagon might yank the entire $298 million contract.

After their celebratory dinner the night they received the contract, the two friends headed for Diveroli's brand-new Audi. As Diveroli arranged a line of coke on the dashboard, he warned Packouz not to make any mistakes with the grenades.

"You've got the bitch's panties off," Diveroli said, adopting his best movie-star swagger. "But you haven't fucked her yet."

Diveroli and Packouz needn't have worried. They had barely gotten started on the order for grenades when the second Task Order arrived. This time, it was for more than $49 million in ammunition — including 100 million rounds of AK ammo and more than a million grenades for rocket launchers. There was no question now. The Pentagon was ecstatic to award the contract to a tiny company like AEY, which helped fulfill the quota set by Bush's small-business initiative.

Packouz calculated that even with the tight margins, he stood to make as much as $6 million on the contract. But he wasn't so sure that AEY was going to be able to deliver. Diveroli had already hit the road, traveling to the Ukraine, Montenegro and the Czech Republic in search of suppliers. So Packouz would have to tend to most of the Afghanistan contract by himself — a job that any conventional defense contractor would have assigned to dozens of full-time, experienced employees.

In February 2007, saddled with a gargantuan task, Packouz went by himself to the annual International Defense Exhibition in Abu Dhabi to look for suppliers. "It was bizarre," he says. "I was just a kid, but I was probably the single biggest private arms dealer on the planet. It was like Efraim had put me into the movie he was starring in." To look the part of an international arms dealer, Packouz carried a silver aluminum briefcase and wore wraparound shades. He also had business cards printed up with an impressive new title, considering he was part of a two-man operation: vice president.

In Abu Dhabi, Packouz hoped to find a single supplier big enough to meet most of AEY's demands. The obvious candidate was Rosoboron Export, the official dealer for all Russian arms. The company had inherited the Soviet Union's global arms-exporting empire; now, as part of Vladimir Putin's tightly held network of oligarchic corporations, Rosoboron sold more than 90 percent of Russia's weapons. The firm was so big that Packouz could have just given them the list of ammunition he needed and they could have supplied the entire contract, a one-stop weapons shop.

But there was a catch, the kind of perversity common in the world of arms dealing: Rosoboron had been banned by the State Department for selling nuclear equipment to Iran. The U.S. government wanted Russian ammo, just not from the Russians. AEY couldn't do business with the firm — at least, not legally. But for gun runners, this kind of legal hurdle was just that — a hurdle to be jumped.

Packouz went to the main Russian pavilion every day to try to get an appointment with the deputy director of Rosoboron. The giant exhibit was like a souk for arms dealers, with scores of Russian generals in full-dress uniform meeting with businessmen and sheiks. Finally, on the last day, Packouz was given an appointment. The deputy director looked like he was ex-KGB — big and fat, in his sixties, with thick square glasses. As Packouz spoke, the man kept surveying the pavilion out of the corner of his eye, as if he were checking to see if he was being watched. Packouz showed him the list of munitions he needed, along with the quantities. The director raised his eyebrows, impressed by the scale of the operation.

"We have very good interest in this business," he said in a thick Russian accent. "You know we are only company who can provide everything."

"I'm aware of that," Packouz said. "That's why we want to do business with you."

"But as you know, there is problem. State Department has blacklist us. I don't understand your government. One month is OK to do business, next month is not OK. This is very not fair. Very political. They just want leverage in dealing with Kremlin."

"I know we can't do business with you directly," Packouz said. Then he hinted that there was a way to get around the blacklist. "If you can help us do business with another Russian company, then we can buy from them."

"Let me talk to my people," the Russian said, taking one of Packouz's newly printed business cards.

It was the last Packouz ever heard from the Russian. Several weeks later, as he was arranging supply routes for the deal, Packouz was informed that AEY would not be given overflight permission for Turkmenistan, a former Soviet satellite that had to be crossed to reach Afghanistan. "It was clear that Putin was fucking with us directly," Packouz says. "If the Russians made life difficult for us, they would get taken off the American blacklist, so they could get our business for themselves."

Packouz managed to obtain the overflight permission through a Ukrainian airline — but the episode was an ominous reminder of how little he understood about the business he was in. "There was no way to really know why the heads of state were doing things, especially when it came to something like invading Iraq," he says. "It was such a deep game, we didn't know what was really happening."

With the flights to Kabul arranged, Packouz hit the phones looking for more ammunition. The cheaper the better: The less the ammo cost, the more he and Diveroli would pocket for themselves. They didn't need quality; antique shells, second-rate mortar rounds — all of it was fine, as long as it worked. "Please be advised there is no age restriction for this contract!!!" AEY advised one potential supplier in an e-mail. "ANY age ammunition is acceptable."

Of course, if the Pentagon really cared about the Afghan National Army, it could have supplied them with more expensive, and reliable, state-of-the-art weapons. The Bush administration's ambivalence about Afghanistan had manifested itself in the terms of the contract: The soldiers of Kabul and Kandahar would not be abandoned in the field, but nor would they be given the tools to succeed.

Packouz sat on the couch in Diveroli's apartment, bong and lighter handy, and called U.S. Embassies in the "stans" — the former Soviet satellites — and asked to speak to the defense attache. Deepening his voice and adopting a clipped military inflection, Packouz chatted them up, made them laugh, asked about how things were in Kazakhstan, described how sunny it was in Miami. Whenever possible, he threw in military lingo designed to appeal to the officers: He was working on an essential contract in the War on Terror, he explained, and the United States military was counting on AEY to complete the mission. "I said it was part of the vital process of nation building in the central front of the War on Terror," Packouz recalls. "Then I would tell them the specifics of what I was after — mortar rounds, the size of ammo, the amount. They were all eager to help."

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