Arms and the Dudes: How Three Stoners from Miami Beach Became the Most Unlikely Gunrunners in History (2015)
Chapter Five
TASK ORDER 001
On January 26, 2007, David Packouz was parking his Mazda Protégé in the lot of his dive apartment building when his cell phone rang.
“Dude, I have good news and I have bad news,” Efraim Diveroli said. “What do you want first?”
“What’s the bad news?”
“Our first order is only for $680,000.”
“So we won the contract?” Packouz asked in disbelief.
“Fuck yeah.”
An upscale Italian restaurant in South Beach was the site for their celebration. Multiple bottles of Cristal were consumed as they toasted their incredible good fortune. The two friends, already stoned from the joint they’d smoked on the way to dinner, were now responsible for one of the central elements of the Bush administration’s foreign policy. Packouz’s cell phone rang: a massage client wanting to make an appointment. Packouz told her he’d retired as a masseur. As they ate, they passed Diveroli’s plastic cocaine bullet back and forth under the table, using their linen napkins to pretend to blow their noses as they wiped away the residual white powder.
“You and me, buddy,” Diveroli said. “You and me are going to take over this industry. I see AEY being a ten-billion-dollar company in a few years. Those fat cats in boardrooms running Fortune 500 companies are worried about their stock price. They have no idea what’s about to hit them.”
“General Dynamics isn’t going to be too happy right now,” Packouz agreed.
Diveroli grinned at the thought of two dozen corporate employees twisting in the wind while two kids outwitted them. They both knew many hurdles had to be overcome. The first was confirming that AEY had really won the entire contract. The year before, when Diveroli had “won” a contract in Iraq supposedly worth $50 million, he’d gone on a jag rejoicing in his triumph. But the next day he’d discovered he was only one of five companies that had qualified to bid on scores of much smaller contracts that were being put out for mini-competes. He’d done well in the mini-competes, frequently beating the larger companies he was vying with. But the experience had taught him not to get too excited too quickly.
Then there was the size of the first task order. More than $600,000 in grenades was a big sum, it might seem. But in the context of a $298 million contract it was suspiciously small. Was the government testing AEY? Was the order for grenades a way for the Army to see if AEY could actually deliver? The spring fighting season was looming, with the US deploying a small number of forces to counter the anticipated spring offensive from the Taliban, but the surge of troops into Iraq had made arming the Afghans even more crucial. In the headlines, a new candidate for president named Barack Obama was claiming that the Bush administration had failed to pay sufficient attention to Afghanistan—a contention underscored by daily reports of bombings, skirmishes, and casualties in the rapidly deteriorating offensive against the Taliban called Operation Mountain Fury.
Arranging a line of coke on the dashboard of his new Audi in the parking lot after dinner, AEY’s president reminded his colleague of their precarious position. “You’ve got the bitch’s panties off,” Diveroli said, affecting his best movie-star swagger. “But you haven’t fucked her yet.”
The days that followed were euphoric—and terrifying. The fear that they’d make a mistake and lose the contract crowded their thoughts, just as the calculation of their coming riches quickened their pulses. The notion that they’d do something to blow the deal wasn’t fanciful. For all their precocious skills, the dudes were prone to be precisely that: dudes. This propensity was on display in the e-mail Packouz drafted to the Pentagon’s defense attaché in Skopje, Macedonia. It was part of a larger effort to enlist the assistance of American soldiers stationed in countries throughout the former Communist Bloc. Packouz reasoned that American-embassy officials in countries that were now friendly with the United States would know details about these countries’ stockpiles of surplus ammunition.
Like some others, Colonel Chris Benya had agreed to help AEY source ammo in Macedonia; assisting the company was effectively assisting the US military, after all. Packouz imagined himself to be efficiently conducting business as he sent Benya an e-mail outlining the ammo AEY wanted to acquire; finance would be provided by the “Banc of America,” Packouz wrote. The message looked amateurish to Benya—maybe even fraudulent.
“I was contacted today by David Packouz of AEY,” Benya wrote to the Army’s procurement representative in Rock Island, Illinois—the agency in charge of AEY’s contract. “There are many alarm bells going off based on what he sent. The attached documents had many errors, including misspelling ‘Banc of America’ on the letterhead and the use of different typesets on the alleged contract. I also found it strange that the company does not have a corporate e-mail address and seems to use Gmail. Bottom line is none of this seems to add up.”
Packouz had the spelling correct, but Benya was right: giving two stoners from Miami Beach the contract to supply ammunition to the Afghan National Army didn’t add up.
But Benya’s suspicions didn’t give anyone in the Army pause. “The contract with AEY is legitimate,” replied Rock Island.
If the Army had done even rudimentary due diligence on AEY, the company would’ve been ruled out of contention long ago. Although the dudes didn’t know it, AEY and Diveroli had been placed on the State Department’s watch list a year earlier, when he’d flown back from an arms show in Paris. But the entry didn’t mean that AEY had done anything against the law.
“There appear to be several suspicious characteristics of this company,” the State Department’s classified profile of AEY reported, “including the fact that Diveroli is only twenty-one years old and has brokered or completed several multimillion-dollar deals involving fully and semi-automatic rifles. Future license applications involving Diveroli and/or his company should be carefully scrutinized.”
But the Army didn’t consult the watch list, because it didn’t have to—by design. Then there were the accounting practices of AEY. If the Army had inquired, it would have been discovered that the dudes essentially had no bookkeeping or record-keeping systems. From the beginning, Diveroli had operated by the seat of his pants. When checks came in, he put the money in AEY’s various accounts—the locations and amounts in these accounts were top secret. When he spent money—on office supplies, on weed, on body shots at hot spots like Skybar or B.E.D.—he spent AEY’s money. The company had no protocols to ensure it was keeping its affairs in order. The possibility of attracting the attention of the Internal Revenue Service terrified Diveroli, Packouz could see.
Before AEY had been awarded the contract, it had been audited by the Army to make sure it had the financial wherewithal to sustain the contract on the government’s net-thirty-day terms. Reams of documents had been produced by Diveroli and Packouz, many of them exaggerated to show that AEY had far more money than it actually did. None of the ledger high jinks had been detected.
AEY’s patchy record of performance in Iraq hadn’t alerted the Army either. Night-vision goggles, mounts for gun scopes, ammunition—AEY’s goods had sometimes been of poor quality or been delivered late, or Diveroli had used bait-and-switch tactics, substituting an inferior brand for the one the contract specified. The “source selection team” assessing AEY’s abilities had determined that the company should be rated “unsatisfactory.” This should have ruled AEY out of the running. But days before the contract was awarded the official who oversaw the contract had changed the rating to “good.” The official hadn’t bothered to closely examine AEY’s past performance, not through negligence but because the system didn’t require tiresome attention to detail. The contract was being run from the offices of the Sustainment Command in Illinois, a million miles from the war. American and Afghan soldiers in the war zone would have to live with the consequences of a decision made in a distant armory.
The process was not only emblematic of the entire procurement procedure, but also the war itself. Somehow the US government was simultaneously squandering billions and shortchanging the war in Afghanistan. AEY had won the contract because it had the lowest price, although two other bidders were within 2 percent of the total evaluated price AEY came up with. Price was only one criterion the Army was supposed to consider. The only competitor with an overall rating higher than AEY’s had bid 80 percent more than AEY—more than $500 million. The Army had seen no reason to pay such a vast premium, given that AEY’s evaluation was only slightly lower.
“Our competitors had bloated budgets and big staffs,” Packouz recalled. “We were lean and mean. The Army wanted to do Afghanistan on the cheap, and we were the cheapest.”
But Diveroli wasn’t content with his generous profit margins, which promised to make AEY at least $30 million. All of the ammunition AEY was buying had to be paid for up front, and the government wouldn’t pay the dudes until thirty days after delivery of each shipment. Because of the size of the contract, Diveroli would have to commit all of his money and also borrow millions from the Utah businessman Ralph Merrill. To finance the deal they’d also likely need to get a loan from a bank. So Diveroli decided the company should apply for “progress payments,” which would enable AEY to be paid more quickly by the government—and thus avoid onerous financing costs. To receive these preferential terms from the Army, the company had to undergo a financial inspection. Diveroli decided to risk this further scrutiny.
To prepare, Diveroli and Packouz wrote biographies of themselves to provide to the Army’s officials. Packouz was modest. Diveroli less so. “Efraim has built a stellar reputation for very competitive, on-time, smooth, and successful deliveries,” Diveroli said of himself. “Efraim has proven himself to be a professional, savvy, and knowledgeable businessman, with legendary skills in negotiation and business strategy. His passion and skill have enabled him to build AEY into a multimillion-dollar defense-contracting firm of worldwide renown. He plans to continue building AEY into a lasting and respected institution.”
The reality was less grand. AEY’s books were a mess, as Ralph Merrill knew, and the Army would be sending a team to Florida to examine AEY’s records. To help the dudes, Merrill sent his personal accountant from Salt Lake City to Miami to introduce them to elementary bookkeeping software in an attempt to make AEY’s accounts presentable.
On the day of the inspection, Packouz and Diveroli made it a point not to smoke a joint first thing in the morning, as was their custom. They wanted to be sharp. Both dressed in their best button-down shirts and business shoes as they nervously braced for the encounter.
They needn’t have worried. The Army’s team consisted of half a dozen matronly women dressed in frumpy skirts and sensible shoes. To Packouz they looked like grandmothers, not fierce auditors. Diveroli was a master at ingratiating himself with older women as a goofy but lovable kid.
“If it wasn’t absolutely illegal,” Diveroli announced, surveying the conference room, “I would love to buy you all diamonds.”
The women smiled. Formalities were attended to. The women said that the ammo AEY was acquiring had to be safe, it had to work, and it had to be delivered on time. No problem, Diveroli assured them. Diveroli said AEY would send a representative to each country to see that the ammo had been stored and preserved properly, particularly against moisture damage. AEY would test-fire the ammo to make sure it worked.
While Diveroli charmed the women, Packouz sat silently—a bald-headed, blue-eyed specter.
“What does David do?” one of the women finally asked. “What’s his role?”
“David is our international man of mystery,” Diveroli said. “He’s the guy who makes the magic happen for us in some pretty unmagical places. If you need to move some kind of product”—Diveroli didn’t specify arms, but the euphemism for arms was understood—“from one godforsaken country to another godforsaken country, David is your man.”
Packouz remained poker-faced. As the meeting adjourned, the dudes were triumphant. Rolling a spliff in Diveroli’s car, they agreed they’d aced the test.
Days later, bad news arrived. If AEY was to receive progress payments, the Army wanted to see the company’s tax returns. For Diveroli, this was verboten. No subject was more sensitive to the young gunrunner than taxes and his relations with the IRS—or, as he referred to the agency, “the three-letter word.”
Finance would have to be done conventionally. Diveroli had to risk his own money, as well as take a loan from Ralph Merrill. AEY also established a “factoring agreement” with Wells Fargo. Instead of waiting for payment from the government, AEY would sell its receivables to Wells Fargo at a discount. AEY would get paid quickly enough to satisfy its suppliers, and in return the bank clipped a piece of the profit from the deal. The arrangement wasn’t ideal, but it provided a steady and reliable source of funds—as long as Diveroli was content with the profit margin, an issue that continued to be his Achilles’ heel.
It was now February, time to perform—time to enter into contracts with suppliers and start the deliveries. The quotes they’d used for the bid were still available. But now that they’d actually won the contract—instead of lying about having won the deal to get good quotes—Diveroli and Packouz were sure they could command better prices than the ones they’d used for the bid.
The first delivery was slated to be 40 mm underbarrel grenades designed to attach to a Soviet Bloc rifle. For the bid, AEY had used prices from Yugoimport, one of Thomet’s Serbian connections. Now Diveroli wanted to cut Thomet out—or get the Serbs to lower their price. Working the Internet, Packouz found a company named Arcus, in Bulgaria, that was willing to sell the grenades at fifty cents less per unit than Yugoimport. The difference meant nearly a million dollars more in profit.
Diveroli e-mailed the Serbs, describing the lower price from the Bulgarians and demanding they meet or beat it. The Serbs were not pleased. The Serbian tough guy who ran the company had, understandably, assumed that the quote he’d offered would be honored. But the dudes had no intention of doing anything other than making the most money possible. The Serb called as soon as he received AEY’s demand.
“You buy from us,” the Serb told Diveroli. “We do business long time. We good partners.”
“I’d love to buy from you,” Diveroli replied, inviting Packouz to listen on the speakerphone as he often did, relishing the chance to perform for his friend. “But my hands are tied. I got a better price.”
“Price is already too low. You buy from us.”
“Listen, baby, we may have had sex, but we’re not married. I don’t run a charity. You either come down on price or we gotta buy somewhere else.”
Diveroli hung up and said to Packouz, “Can you believe that fucker? Who does he think he is? Does he think he can push us around? This is the USA. Nobody fucks with us. Get the Bulgarians on the line and let’s close this deal.”
Packouz dialed the director of the arms company in Sofia—a man who spoke good English. Diveroli wasn’t satisfied taking the lower price from the Bulgarians. He wanted to squeeze even more from the deal.
“Buddy, you and me, we’re going to do some big business,” Diveroli began. “We got a really bright future. Just one little thing. You gotta come down a little on price.”
“But we’re already lowest on market,” said the Bulgarian.
“I know that and I appreciate it. But I need a price that’s a dollar apiece lower.”
“Impossible. My board will never accept.”
“I’m counting on you to use your world-class powers of persuasion. I know this is rough, but it’s the only way. We got some bad quotes from some people who now can’t deliver. If we don’t deliver, the American government will cancel the whole contract and then the party’s over. Everybody loses.”
“How can I convince my board this is the truth?” the Arcus executive asked, implying that Diveroli was lying.
“I know you’re about to pull down your pants and you gotta make sure you’re not about to get fucked. I’m willing to pull my pants down here. I’m going to go against my company policy just this one time. I’m going to show you my government contract. The price the Army is paying me is on the contract. If I send you those documents, do you think the board will go to nineteen bucks a grenade?”
There was a long pause. “It is possible.”
“I will send the documents over right away,” Diveroli said, trying to contain his glee. Hanging up, he grinned and started to jump up and down, then fell to the floor and kicked his legs in the air in joy. “Who’s the fucking man!” Diveroli bellowed. “Who just negotiated one point one million dollars in extra profit in one phone call?”
Giddy, Diveroli leaped up and high-fived Packouz. “Now you’re going to modify the contract and put in a fake price that the government is paying us,” Diveroli instructed Packouz. “Put it like we’re only making three percent profit on the deal. But make sure the fake documents are fucking beautiful. We got millions riding on this.”
“Yes, sir,” said Packouz, awed by Diveroli’s gift for dissembling. “We’re going to have a twenty-five-percent profit margin on a twenty-six-million-dollar deal. Holy fuck, dude!”
“Stick with me, buddy. You and me, we’re going places.”
David Packouz felt his life changing quickly and in exciting ways. He tried not to calculate the money he was going to make, but it was hard to resist the temptation to imagine the life he’d soon be leading. He was going to be a millionaire many times over. But as his girlfriend’s pregnancy progressed, she began to despair of Packouz’s growing obsession with money. They’d finally broken up after weeks of fighting over his work schedule. She told him that he’d lost track of what mattered in life. Packouz believed he was building a secure financial future for his daughter—which had to take precedence over everything else, even his hope of becoming a rock star.
On February 9, 2007, his daughter, Amabelle, was born.
“I knew I had to get even more serious about business,” Packouz recalled. “It wasn’t a game anymore. I was a father now.”
Diveroli decided that Packouz would be primarily responsible for fulfilling the Afghan contract. Diveroli determined that the best use of his time was to search for even more contracts to bid on. Diveroli told his friend not to “waste” time babysitting his newborn daughter. “You got your whole life to spend with your kid,” Diveroli said. “Right now, we’ve got to make money.”
To help with the administration, AEY hired an office manager as well as two young Latina office assistants they’d found on Craigslist. But essentially Packouz was on his own with the Afghanistan deal, apart from Diveroli’s overbearing oversight and occasional troubleshooting. An undertaking like this would command dozens of skilled and experienced employees at a company like General Dynamics.
To find new sources for the Afghan deal, in mid-February Packouz flew to Abu Dhabi for IDEX, a munitions trade show in the Middle East that billed itself as the “most strategically important defense exhibition in the world.” He was carrying business cards with his new title: Vice President. To prepare for the trip, Packouz had purchased a silver aluminum briefcase and a pair of wraparound reflective sunglasses, to better look the part of a badass gunrunner.
On the plane Packouz met Jorge,I a young man from Guatemala who was attending the show on behalf of his family’s business, which supplied rich ranchers with the weapons to enforce their dictatorial rule over that country.
In Abu Dhabi, Packouz and Jorge went directly to the convention center, a gleaming new facility in the desert. IDEX was the largest arms show on the planet, bigger even than Eurosatory; the vast facilities accommodated fighter jets, tanks—every war machine imaginable. The opening reception was like the bar scene in the first Star Wars, it seemed to Packouz, a congregation of all manner of killer and conniver in the universe: sweaty Filipino generals, vain, ribbon-wearing Brazilian colonels, dim-witted upper-crust British officers. Then there were the weapons: armored vehicles, unmanned drone aircraft, precision-strike bunker busters. There were seminars and live-fire shows in front of the grandstand outside the pavilion, with mobile missile launchers and amphibious tanks emerging from the water.
Walking the show, Packouz no longer felt like a kid tourist gawking at the exhibits. The twenty-five-year-old with the silver briefcase may not have looked the part, but he had good reason to feel the strut of a gunrunner enter his stride.
“I was probably one of the biggest private arms dealers on the planet,” Packouz recalled. “It was bizarre. It was like Efraim had put me into the movie he was starring in. It was an out-of-body experience—strange but exhilarating.”
To help Packouz get oriented, Diveroli had given him the contact information for a Ukrainian arms broker named Vidak.II The youthful Packouz, the slick Jorge, and the heavyset Vidak stationed themselves near the bar for a cocktail reception. The emirate was a Muslim country, but booze was plentiful. As they surveyed the sheikhs and generalissimos, Jorge and Vidak fell into an in-depth debate about where the best prostitutes could be found—Thailand or Ukraine? Judging by the beautiful, gaudily dressed young women working the all-male crowd, Abu Dhabi had plenty of hookers, too.
The next morning, Packouz woke in his hotel room so hungover he could barely lift his head. Something about drinking in the desert air made it doubly punishing, he was learning. But Packouz knew he needed to seize the day, regardless. At the show, he met up with Jorge, who told him about the three Chinese hookers he’d hired the night before. They were cheap, Jorge said. Why not have three?
China was on Packouz’s mind for other reasons. The dudes had been informed that they couldn’t source any of the weapons from China. But the ban was an obstacle to be overcome, they’d decided. As Packouz walked the show, an e-mail from Diveroli arrived, the whole message written in upper case: “MAKE GOOD CONNECTIONS WITH CHINESE AND EXPLORE ALL LEGAL POSSIBILITIES.”
The idea of buying Chinese ammo to ship to Afghanistan made perfect sense. As China was a neighbor, it would mean avoiding having to fly over a bunch of Eastern European countries, greatly simplifying logistics. Chinese ammunition had been purchased by the United States in the 1980s to arm Islamic insurgents in Afghanistan fighting the Soviet Union. The covert operation, famously depicted in Charlie Wilson’s War, was a strategic triumph and a prime example of the kind of sly intelligence that once ruled American procurement policy—and won wars.III “Just the thought of using Chinese Communist guns to kill Russians—just the irony of it,” one of the CIA agents who worked the case recalled. “Getting two guys on the same side fucking each other makes it easier for you to fuck both of them, and aside from just the general idea of fucking each other, their equipment was good—top-notch—and it was cheap.”IV
Packouz made his way to the booth for the Chinese arms company Norinco. The Chinese were proudly displaying their new eight-wheeled combat vehicle. Packouz handed a Chinese official his list of munitions for the Afghans. The man inspected the contract with interest. Norinco could supply nearly everything AEY was after and at competitive prices, the official said. For years, China had shipped vast quantities of AK-47 ammunition to the United States for the domestic market. Now the country was staking out a claim as the low-cost alternative to both American and Soviet Bloc weapons—and low cost interested the dudes above all else.
As Packouz inquired about terms, he recalled, the Chinese delegate seemed to have a vague inkling about a new American ban on certain weapons systems they produced. But he was shocked when Packouz explained that it appeared the ban applied to the purchase of all Chinese munitions. For the US government and its contractors, doing business with a “Chinese military company” was now illegal, Packouz said.
“Do you know if your company is considered a ‘military’ company?” Packouz asked the Norinco executive.
“Military company?” he asked. “We manufacture military equipment, so of course we military company.”
“Is it a private company or a state company?”
“In China ownership not so simple. It sometime secret who own company. Could be advantage to be public or be private. This information not public.”
“I can’t buy from you if you’re a government company,” Packouz said.
“This not fair! In China, company can be private one day, state-controlled the next. What difference it make?”
“We have to follow American law.”
“But it make no sense for China-type business.”
Packouz sighed and took the Chinese catalogs and moved on. He didn’t possess a law degree, or a diploma from the Pentagon’s Defense Acquisition University. His training reading the Talmud or learning massage hadn’t prepared him to parse poorly defined terms in obscure defense regulations.
The Russian pavilion was nearby. With an exhibit covering more than an acre, the Russian company Rosoboron was selling everything from the latest iteration of the Kalashnikov to the Antey-2500 long-range surface-to-air missile and a line of non-nuclear submarines. When Packouz approached one of the hard-looking military types manning the exhibit, the Russian didn’t want to talk to a kid muttering about buying 100 million rounds of AK-47 ammo. Packouz showed the Russians the contract and asked to meet his boss. The man waved him off.
Packouz persisted and persisted, circling back to the Russian exhibit every day. Finally, on the fourth day of IDEX, as the show was drawing to a close, he was granted an audience with a deputy director of Rosoboron. The Russian was overweight, in his sixties, with thick, square glasses and a five-o’clock shadow. To Packouz, he looked like a KGB villain from a James Bond movie. He listened as Packouz spun his tale about the giant Afghanistan deal, eyebrows raised skeptically. What Packouz was saying sounded insane. It didn’t seem plausible that the US Army would rely on an overeager naïf to supply hundreds of millions of dollars’ worth of ammunition to Afghanistan. The Russians had been about to bid on the contract when the Pentagon suddenly and arbitrarily announced its ban. Standing before the Russian was a kid who plainly was unqualified to handle such a momentous contract. Was this a joke?
The Russian kept surveying the exhibition center, looking to see if he was being videotaped or watched—if he was the subject of a prank, or a sting.
Exasperated, Packouz handed over the list of ammo and the quantities. The director appraised the list and looked at Packouz skeptically.
“I’m serious,” Packouz insisted. “My company has the whole contract.”
“We have very good interest in this business,” the Russian finally said. “You know we are only company in world who can provide everything.”
“I’m aware of that. That’s why we want to do business with you.”
“Da. But as you know, there is problem. State Department has blacklist us. I don’t understand your government. One month is okay to do business. Next month is not okay. This is very political. Pentagon want leverage with Kremlin to get better price.”
“We can’t do business with you directly,” Packouz said. “But what if you sold the ammunition to another company, then we bought it from them? If you can help us do business with another Russian company, then we can buy from them. As long as they aren’t a government business.”
“Let me talk to my people,” the Russian said, taking one of Packouz’s freshly printed cards.
Packouz would never again hear from the Russian—the significance of which would only be revealed in time.
/ / / / /
Task Order 002 arrived at AEY’s headquarters in Miami on March 9, 2007: 1.1 million GP-30 grenades, nearly 100 million rounds of AK-47 ammo, and on and on. The total value was $48,717,652.70. There was no doubt anymore: AEY really had won the contract. The dudes really were the sole suppliers for the Afghan National Army and police. It was one thing for Diveroli to win scores of small contracts in Iraq, but an entirely different matter for the Pentagon to entrust a significant portion of the fate of a nation to a couple of young stoners—no matter how smart and adept they were.
Packouz’s sense of elation was overwhelming. He decided it was time to upgrade his life. He was sick of living like a penniless masseur.
Packouz had yet to receive a dime from Diveroli, but he sold his beater Mazda and bought a late-model blue Audi A4. He moved from his tiny efficiency studio into a nice one-bedroom in the Flamingo—the swinging South Beach condo where he’d long given massages to the residents and met the mother of his child. Diveroli had moved there a few months earlier. Packouz’s new pad overlooked the pool, where attractive young women could be seen lounging in the hot tub at all hours. Their dope dealer, Raoul, also lived in the building, providing unbeatable convenience.
Packouz went online and bought a Volcano vaporizer, a smoke-free pot-smoking device that heated the marijuana and turned the cannabis oil into a vapor. The Volcano meant he didn’t have to actually smoke the pot, avoiding toxins and carcinogens. With the amount of weed he was consuming, Packouz considered it an important investment in his health. The stainless-steel device took pride of place on his new living-room table—the crisp, clean high a manifestation of his state of mind.
The Flamingo was a constant party, Packouz discovered, a swirling, sexually supercharged South Beach scene. The marketing slogan for the building was “South Beach revolves around us,” and it was true: at all hours of the day, people were drinking, dancing, making out in the Jacuzzi.
“Sometimes more than just making out,” Packouz recalled. “Outside my balcony there were always a few women sunbathing topless.”
Packouz and Diveroli went to a lot of parties in the building. Most of the other tenants worked in fashion, if they were women; the men tended to be young stockbrokers and lawyers. When people asked what the pair did for a living, they would talk about being international arms dealers. They’d say that they were responsible for all the bullets in the Afghan war.
“They’d think we were lying, but it was the truth,” Packouz said. “It was heaven. It was wild. We felt like we were on top of the world.”
The pair would often toke up and go to the American Gun Range, the only firing range in Miami that would let them fire the automatic Uzis and MP5s Diveroli had collected.
“When we let go with our machine guns,” Packouz recalled, “all the shooters would stop and look at us like, ‘What the fuck was that?’ Everyone else had pistols going pop pop. Diveroli’s MP5 would go tututututu, like a dog’s bark. We loved it.”
With the business growing so radically, Diveroli began to approach the other kids in their posse to recruit them to work for AEY. One of the first he approached was Alex Podrizki, Packouz’s best friend, who was then a student at college. Podrizki deflected Diveroli.
“I wasn’t interested,” Podrizki recalled. “After he’d come back from LA—after he told us that his uncle had fucked him out of a lot of money—Efraim changed. He was controlling, always trying to get everyone to work for him. He wasn’t funny anymore. He tried to get me to work with him a few times but I said no.”
It seemed to Packouz and Podrizki that Diveroli’s greatest ambition—apart from vast riches, a private jet, and a reputation as a ruthless arms dealer—was to have all his friends working for him. It was partly a power trip, they thought, but it was also how Diveroli blended business and personal life into a monomaniacal vision.
Seeking more help around the office, Packouz and Diveroli put up an ad on Craigslist. A random assortment of applicants turned up for interviews: young Hispanic women, African-American men, Asian college students, Haitian and Cuban refugees without immigration papers. The interviews were unorthodox, with Diveroli offering an extended speech on what he expected from his employees:
“The most important thing is hard work. I’m not promising it’s going to be easy. Look at me. I’m barely twenty-one years old and I’m a multi-fucking-millionaire. You know how I got this way? By hard fucking work, that’s how. If you listen to me and do what I say, you’ll make a lot of fucking money.” Diveroli would pause and gesture at Packouz, talking on the phone. “Look at him. I brought him into the business a year ago, and now he’s managing one of the largest small-arms munitions purchases in history. He’s about to be very rich. That can be you. But you gotta do what he does. You gotta be faster, smarter, better than all the schmucks out there. It’s a dog-eat-dog world. So are you going to be the alpha dog? Or are you going to be eaten?”
Most applicants sat dumbfounded. Some took the bait. Diveroli set them to work bidding on virtually every contract the Pentagon posted on FedBizOpps—everything from walkie-talkies to sniper sights—working entirely on commission. Instead of concentrating on the huge Afghan deal, and contenting himself with ensuring AEY did a stellar job and reaped millions in profits, Diveroli set out to win as many contracts as possible. But a pattern quickly emerged with the new hires. Most quit within days, repulsed by Diveroli’s screaming and ranting and raving. New ads were put up on Craigslist and new recruits were brought in, the company lurching from crisis to crisis. Diveroli was creating a “boiler room” atmosphere at AEY, though instead of pushing worthless penny stocks for commission, the new staff was bidding on federal contracts. AEY was the epitome of what the Bush administration had aimed to achieve by using private contractors—or it was a parody of that policy.
Packouz tried to ignore the commotion as he concentrated solely on the Afghan contract. He was indeed smart, adaptable, a fast learner. He was also out of his league. He’d never actually delivered a major deal for the US military overseas. Now he was tasked with single-handedly attempting to oversee the entire Afghan contract.
Signs that AEY was going to hit trouble were evident before the first shipment of grenades left Bulgaria for Kabul. Henri Thomet had given the dudes a “delivered” price for the ammo he was going to supply. This included a quote for airfreight. To calculate its bid, AEY had used Thomet’s price of $63,000 for each flight. But that quote was now obviously totally unrealistic. In the early months of 2007, oil prices were going through the roof, in part because of the uncertainty of America’s two faltering wars. When Packouz tried to charter flights, he discovered the real cost was more than $125,000 per flight.
“We’re fucked,” Diveroli wailed when Packouz told him the numbers. “We’re fucked! These numbers are totally unfuckingacceptable. You better fucking fix this. Get that Swiss motherfucker on the phone.”
When they tracked Thomet down, Diveroli insisted that he cover the difference between the price quoted and the current market cost. Thomet refused. A flurry of angry e-mails followed. Then Thomet vanished. For weeks he became impossible to reach. He didn’t return Diveroli’s e-mails or answer calls on his cell phone.
Diveroli and his ever-changing group of workers continued to bid on Iraq contracts, while Packouz chased the other parts of the Afghanistan contract. Weeks were passing—critical weeks, as AEY was expected to begin delivering in April and it was now March.
Time was of the essence because of the urgency of the demand for ammunition in the war zone. But there was also a bureaucratic reason for the hurried delivery schedule. The Afghan contract had been created by way of a little-known process called a “pseudo case.” Employing the pseudo case meant that the Pentagon was using money preauthorized by Congress without any specifications for how it was to be spent. This lack of oversight applied to Congress as well as the press, as few beat reporters covered arcane matters like small-arms procurement policy. Money designated under a pseudo case had to be spent within a specific time—in this case, two years. Given the vast scale of munitions called for in the contract, the Army was pressuring AEY to perform—and to perform immediately—otherwise the money would be lost.
As the end of March loomed, Thomet still wouldn’t answer his phone. Nor would he reply to e-mails. Diveroli and Packouz were panicking—yet again. Nearly two months had elapsed since they’d won the contract and deliveries were due. The Bulgarian grenades were sitting on pallets ready to go. AEY had to start making deliveries soon or risk losing the entire contract. Diveroli called his financier Ralph Merrill in Utah to plead with him to contact Thomet. Diveroli said that Thomet was treating him like a pesky kid—which, of course, he was.
Merrill agreed to try. He e-mailed Thomet and relayed Diveroli’s complaints. Merrill was friendly with Thomet; they’d done business together long before Diveroli came along. Phone calls followed. From their conversations, Merrill could tell that Thomet was distracted by personal issues and wasn’t paying close attention to business. Merrill urged Thomet to staff up, to hire enough people to handle the logistics of performing the Afghan contract. But Merrill realized that Thomet wasn’t interested in doing the bidding of AEY. The Afghan deal was AEY’s problem, not Thomet’s.
Merrill shared his impressions with Diveroli. AEY might have to deliver the ammo on its own, without Thomet’s promised assistance for the munitions he’d sourced. That included 100 million rounds of AK-47 ammo sitting in caves in Albania. Obviously AEY didn’t have the experience to take on such a logistical nightmare. But what other choice did it have?
Every day the Army pushed for a date certain that the shipments would begin. Every day Diveroli kept trying to get Thomet on the phone. Day and night, night and day, Diveroli called and called.
Thomet finally picked up. He was infuriatingly calm, even patronizing. He had no sense of the pressure AEY was under. The entire contract was in jeopardy, and Thomet didn’t seem to care. The skyrocketing airfreight prices weren’t his concern, he said. How could he have predicted the oil shortage and huge price increases? Besides, Thomet said, the price he’d quoted Diveroli wasn’t the final price—it was an estimate. Thomet was turning Diveroli’s trick against him, refusing to be bound by understandings reached during bidding.
This only made the young man angrier. “You have to cover the difference,” Diveroli insisted. “I’m going to lose money on the deal.”
“You don’t understand,” Thomet explained. “The quotes I sent you were for three hundred flights. The first order for the grenades in Bulgaria is only for two flights. When you book a large number of flights, we do what’s called a wet lease—that includes aircraft, crew, maintenance, insurance, all of it. A dry lease is for a short period of time. A wet lease is a long-term arrangement for a lot of flights. Everybody in the business knows the difference between wet and dry leases.”
Diveroli and Packouz had never heard the terms before. But it didn’t matter. Thomet was immovable. AEY had to be ready to charter dozens of flights to qualify for the cheaper rate. Diveroli decided the best solution was to play for time with the Army. The dudes needed to get the 100 million rounds of AK-47 ammo in Albania trucked to the airport, palletized, and loaded onto cargo planes. They needed to have enough shipments to qualify for a wet lease so as not to be murdered on airfreight.
The Army didn’t care about AEY’s profit margins—it expected the deliveries to be made as contracted. So Diveroli dissembled with the Army. He told the procurement officers in Rock Island that AEY couldn’t ship because of delays in governments’ issuing the export permits needed to move the ammo across national frontiers. It was a lie, but a necessary one to make the contract economically viable. Many administrative and logistical problems were besieging the dudes, but the main problem was AEY’s profit—or the lack of it due to airfreight prices.
“Buddy, we’re not donating this stuff to the government,” Diveroli said.
At the same time, Packouz was furiously trying to obtain the necessary permissions to fly over the countries between the Balkans and Afghanistan. The Stans, as Packouz called the countries—Turkmenistan, Kazakhstan, Uzbekistan, Tajikistan. Packouz was rapidly learning how difficult it was to deal with the governments in countries from the former Communist Bloc. The bureaucrats in the Stans seemed to be deliberately delaying approval to make life difficult for AEY—and thereby the United States.
“I would call the American military attachés in the embassies in those countries and say I was working on a vital mission in the global war on terror,” Packouz recalled. “I was careful to speak their language—‘Yes, sir,’ ‘No, sir’—like I had maybe been in the military myself. Sometimes I would joke with them. It was the dead of winter where they were, so I figured it had to be freezing in the Caucasus. I’d ask what the weather was like in Ashgabat or Bishkek. Then I’d say that I was calling from sunny Miami Beach and tell them what the temperature was. I tried to put them at ease, to get them to my side.
“I told them that it seemed like it was impossible to get the right approvals, no matter how many strings I pulled. The American officers told me off the record that they believed the Russians were getting their neighbors to drag their feet. The Russians were supposed to have had the contract in the first place, but they’d been banned. So the Russians were getting revenge. Putin was fucking with us. Week after week was passing, and we were getting seriously behind.”
In theory, AEY could have shared its woes with the Army—the oil prices, the flyover permissions, the evasive Swiss arms dealer, the Russian machinations. There were regulations that would have enabled the Army to increase the price for the Afghan contract. What was called an “equitable adjustment” made sense, as the changing circumstances were beyond AEY’s control, most especially the hike in airfreight prices. But to tell the Army about the troubles risked AEY’s losing the contract. To ask for a variance would be sending out a distress signal.
Worse, the dudes were convinced some elements in the government weren’t happy that they’d won the contract. They knew that the arms-dealing establishment hadn’t been thrilled when AEY underbid them. It seemed as if officials allied with General Dynamics and the other bidders on the Afghan contract might be undermining AEY. They were worried that false rumors were being spread about them—a fear that proved prescient.
Diveroli finally decided to call a purchasing officer named Kim Jones, at Rock Island, to gently inquire about the chance of a do-over.
“As a hypothetical question,” Diveroli said, “suppose fuel prices suddenly went up. Is there a method for the government to adjust the price to reflect the situation?”
“This is a fixed-price contract,” Ms. Jones explained. “Companies are expected to compensate for volatility in the market by purchasing fuel futures or signing a fixed-price contract with their transportation provider. Will you be having difficulty making the deliveries?”
“Oh, no, oh, no!” Diveroli replied. “That was just a hypothetical question. We are prepared and capable of making all deliveries. AEY will exceed your expectations.”
Giving up, Diveroli called Thomet again.
“Prices are going to go even higher,” Thomet said impatiently. “This is the way it is. Fuel is crazy. Many airlines are hedging with oil futures. Perhaps you should hedge.”
Thomet hung up. Diveroli was downcast. If they paid the full airfreight, AEY wouldn’t make any money on the deal. The dudes might actually lose money, at least on the AK-47 ammo in Albania. But hedging fuel would require AEY to invest in complex financial instruments. The company could buy a fixed or capped hedge, using a commodity swap or options or derivative side bets. Even the most sophisticated investors had to be wary when buying futures, especially in a market as volatile as oil was at that time. Diveroli’s ninth-grade education had reached its outer limits.
“Are you going to hedge?” Packouz asked.
“Are you fucking kidding me?” Diveroli said defiantly. “I didn’t get where I am by hedging my bets.”
Airfreight was too expensive, but perhaps the ammo could be loaded on trains and sent to Kabul through the mountains of Central Asia, Packouz suggested. Or perhaps the ammo could be shipped by sea to Karachi, Pakistan, then carried north by truck to Kabul.
As the US government was learning daily, sending supplies to the mountains of Afghanistan was a logistical challenge of mindbending proportions. In the north of the country the main entry was through a narrow tunnel, built by the Soviets, in the Salang Pass. Trucks lined up to use the tunnel snaked for miles around the mountains. To the south, road transport in Pakistan was risky, with the real possibility that extremists would hijack the precious ammunition, causing yet another disaster.
“I’ll try to look into Pakistan,” Packouz said. “But this is high-value cargo. There are a lot of people in between the Balkans and Afghanistan who’d like to get their hands on all this ammo.”
“We can get Blackwater’s mercenaries to ride shotgun,” Diveroli said, only half joking. “Or we could get Thomet to hire a bunch of those Special Forces soldiers from Eastern Europe that he knows. Those guys are sitting around unemployed. We could get them dirt cheap.”
Diveroli wrote to the Army to again plead for time. “I would like to formally apologize for the recent delays in the delivery schedule that is expected of us,” he wrote. He outlined the issues AEY had faced in the former Communist world. Obtaining overflight permission was still a problem, though it was being resolved. “Other solutions that we are exploring include mapping out alternate routes,” he wrote. “On a good note, we would like to confirm that as soon as we receive these permits, hopefully no later than next week, we are scheduled to begin two to four flights per week out of Albania, Bulgaria, and Hungary. We hope you understand our position and know that we are ready, willing, and able to fully execute these Task Orders and the many more we will receive under this contract over the next two years.”
Then Packouz had an idea. A brilliant idea. Maybe. It was certainly ingenious. The problem was weight—arms were heavy, especially the AK-47 ammo in Albania; a single crate of AK-47 ammo weighed sixty pounds. Even if they successfully stalled the Army long enough to qualify for a wet lease and lower air freight rates, the weight would destroy their profit margin. But what if they repacked the ammo in Albania to reduce weight and increase profitability?
Henri Thomet had told the dudes that the cache of 100 million rounds of AK-47 ammo in Albania dated back to the 1960s. The cartridges were stored in heavy wooden crates. The crates were mounted on heavy wooden pallets. Inside the crates, the ammo was stored in heavy, old tins called sardine cans because they were opened with a key, like Spam. The ammo had been manufactured at a time when weapons were shipped by sea, not air, so little attention had been paid to weight.
The weight of the Albanian ammo was perhaps the only variable the dudes could control. Nothing could be done about the grenades in Bulgaria; they were new and already efficiently packed. But what if the old AK-47 ammo in Albania was taken out of the crates and placed in lighter cardboard boxes? What if the ammo was also taken out of the sardine cans and put in plastic bags? What if it was all loaded on much lighter, modern pallets?
The savings could be significant, Packouz said excitedly, reaching for a calculator. Dozens of flights would be required to ship 100 million rounds to Kabul. Cramming as much ammo as humanly possible on every flight was vital to making the Albanian contract profitable.
“We might be able to still make air transport work, even with the high oil prices,” Packouz said, punching the numbers. “Thomet says the wood from each crate weighs around one kilogram—so just over two pounds. If we got rid of that much weight, we’d save a lot on the transport. I figure it would be just enough to break even on the deal.”
“I don’t work my fucking ass off to break even,” Diveroli said.
“But I don’t think Thomet’s right about the amount of weight. I’ve seen crates that size. They weigh at least seven to ten pounds. With that much weight gone, we’d actually make money.”
“How much?”
Packouz hit TOTAL on the calculator. “About ten percent.”
“Let’s do it.”
Repacking was now the plan, which was obviously not going to be simple or straightforward. Albania was famously corrupt, for starters. Neither of them spoke a word of Albanian. They had no contacts there, other than through Thomet, and he was totally unreliable. How could two dudes in South Beach arrange to have ancient ammo in wooden crates hauled from the mountains of Albania, repackaged, loaded aboard cargo airplanes, and then shipped to Kabul?
As Packouz tried to think, he received an e-mail from the Xinshidai Company in Beijing, a cruel reminder of the caprice so often involved in arms dealing. The Chinese company cheerfully said they would be more than happy to supply 100 million rounds of AK ammo, no problem. It was the ideal solution. The ammo would be new. The price was sure to be competitive. The quality would be at least as good as that of the old Albanian ammo. As next-door neighbors, the Chinese could fly directly to Kabul. All of the ridiculous logistical woes AEY faced would vanish.
Packouz shook his head in despair. He’d sent the Chinese company the request for a quote on the AK ammo months earlier, before the Pentagon had changed the rules and banned Chinese-made munitions. Packouz could see that Xinshidai was definitely a “Chinese military company,” thus it had been disqualified. There was no sensible reason to stop a Chinese company from selling AK-47 ammo to the US Army, via a broker like AEY, certainly not when the urgency of the situation in Afghanistan was considered. But that was what the law said. Sighing, Packouz wrote to say AEY wasn’t able to do the deal with the Chinese.
The reply from the Chinese only made him feel worse: “If the US lift the sanctions, we can provide the price and the products as soon as possible.”
Diveroli had no time for irony. The Chinese and Russian bans were literally crippling the United States in Afghanistan—and that meant AEY. A global shortage of small-arms ammo existed in large measure because of America’s spending spree in Iraq. The only real alternative left to the dudes remained 100 million rounds of ancient surplus ammo sitting in moldering wooden crates in Albania.
“We’ve got to get a motherfucker on the ground in Albania right away,” Diveroli said. “We need a guy we can trust to check out how much these goddamn crates actually weigh. Then that guy can stay there and supervise the repacking job. I can’t go because I’ve got to run the office. I need you here to take care of the government and run logistics on the Afghan deal.”
“What about Alex,” Packouz said, referring to their mutual friend Alex Podrizki. “He’s a smart guy. He’s multilingual. He’s got international experience. He trained with the French armed forces, for God’s sake. He’s perfect for the job.”
“I already talked to Alex about coming to work for AEY,” Diveroli said. “He wasn’t interested.”
“I’ll talk to him,” Packouz said. “He’s been looking for work.”
“That’s not a bad idea. Looks like Albania’s going to be our problem child. We need someone to babysit that bitch.”
I. Not his real name.
II. Not his real name.
III. At least until Osama bin Laden and other jihadis who’d fought in Afghanistan turned on the United States and staged the attacks of September 11, 2001.
IV. George Crile, Charlie Wilson’s War: The Extraordinary Story of How the Wildest Man in Congress and a Rogue CIA Agent Changed the History of Our Times (Grove Press, 2007), 268-69.