The perils of the inverse pump and dump
One of my not-so-secret goals of this newsletter is to bring phrases like "NAICS arbitrage" and "them's the breaks" into the daily lexicon of #govcon. In an earlier posts, I used a phrase that at the time wasn't really ready for its day in the sun. Today, though, is the day to bring the "inverse pump and dump" maneuver back into the spotlight.
To explain the concept of an inverse pump and dump, it may be useful to first explain the concept of a normal pump and dump scheme. The basic way a pump and dump works is, as Wikipedia explains, that someone "artificially inflat[es] the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price." It's securities fraud[1], and it operates by exploiting the incentives of momentum investors to get in on stocks that are on the upswing.
Now, the inverse pump and dump maneuver is not securities fraud.[2] And the key to the whole thing is that a vendor intentionally promises the government an unbelievably great deal on price, only to later stiff the government during performance because the price was artificially deflated.[3]
Here's one way it can work. The government sometimes creates multiple-award IDVs so that agencies can issue task orders against those IDVs and enjoy competition with multiple vendors at the task order level. And, when creating an IDV, one relatively common practice is to include a "sample" task order, require vendors to price that task order, and use the vendor's pricing for the task order as an evaluation factor for a spot on the IDV. With this approach, the government has a general sense of two things: (1) how vendors might structure their proposals for future tasks and (2) how much the vendors might charge for future tasks. It's a pretty common, but there's an incentive problem.
Suppose you are a vendor trying to win a spot on the IDV, potentially seeking to displace incumbent contractors. And suppose you decide to run an inverse pump and dump maneuver. You might bid super low on the sample task order because you are willing to take a loss on that first task order so that you can compete for future tasks. Or you might choose to bid certain labor categories really low because you'll just put in a "no bid" for future task orders where you'd need to use those labor categories.
The point is that, in shaping your overall proposal strategy, you bid artificially low on the first task order so that you win a slot on the IDV and bid higher on later task orders. That is an inverse pump and dump!
But, friends, I'm here to tell you the maneuver doesn't always work.
For example, last week we talked about how agencies sometimes use "price realism" to protect the government's interest against the lowest bidder sacrificing mission. If an agency decides to conduct a price realism analysis, that can knock out a vendor.
But even without a formal price-realism analysis, there are perils to relying on the inverse pump and dump. And, recently, the Court of Federal Claims gifted us with an instant classic in Golden IT, LLC v. United States.
Here's the basic story. The US Department of Agriculture created a multiple-award Blanket Purchase Agreement against the GSA Schedules program for maintenance of Food and Nutrition Services' applications, databases, and hosting environments. USDA used a phased approach and evaluated vendors on their technical approaches, past experiences, and price. And—although it only planned on making 6 awards—the USDA ended up making 8 awards: 4 to small businesses and 4 to small disadvantaged businesses. The winners all received "high confidence" ratings on their technical and experience factors, and none presented any price risks.
Golden IT, meanwhile, received "some confidence" ratings for its technical and experience factors and a moderate price risk. Golden IT did not get an award and filed a protest with the Court, alleging that USDA's evaluation of Golden IT's technical and experience factors was "arbitrary, capricious, and otherwise not in accordance with law". As a habitual reader of bid protests, I assure you that these facts had all the markings of going nowhere fast.
But check it out, y'all: Golden IT totally persuaded the court that the USDA screwed up the evaluation! Golden IT put points on the board for USDA's failure to credit Golden IT's Salesforce and SharePoint experience! It scored a win for USDA's failure to credit Golden IT's with the past performance of its joint venturers! It managed to show that USDA incorrectly discounted the size of Golden IT’s prior experience! In the parlance of NBA Jam, Golden IT was on fire!
Indeed, here's what the court wrote:
Since the record does not illustrate how the USDA might attribute revised findings to its confidence ratings for each phase, the Court cannot conclude that Golden IT would not have a substantial chance of being assigned “high confidence” ratings for its Phase 1 and Phase 2 submissions.
Normally, when the court makes statements like this, that is enough to carry the day. Unfortunately for Golden IT, though, all that winning only took them to Game 7. And, well, Golden IT was no Golden State in this Game 7.
Because, you see, Golden IT played the inverse pump and dump. And they got caught.
On the 18th page of a 20-page opinion, the court finally turned to the question of price. And here, the USDA claimed that Golden IT's price presented a "moderate risk":
The evaluation team recognized that Golden IT[’s] quoted price for the example call was significantly lower than the IGCE and was the second lowest of the vendors. It gave the impression of not acquiring the correct caliber of staff required for this requirement. In looking at the positions offered, they were generally in line but in their discount of the rates-it was so high that it would be a concern if the vendor could retain that caliber of staff at those rates (moderate risk).
Every government agency wants their vendors to bring "the A Team" to the game. And USDA worried that, because Golden IT's prices were so low, it wasn't going to bring "A players" to the contract. The court essentially agreed and said "sure, that's is a reasonable thing to worry about!"
Which made me wonder: how far off was Golden IT from the mark? Well, we don't exactly know! Here's more from the court:
The RFQ stated that “[p]rice quotes shall be evaluated by comparing proposed prices received in response to the solicitation and to the [IGCE].” The IGCE for the sample call order was $1,385,060.00. Golden IT proposed a price quote for the sample call order of [* * *], which is [* * *] lower than the IGCE. On this basis, it was reasonable for the USDA to consider Golden IT’s proposed price quote “significantly lower” than the IGCE.
So, we know that Golden IT was not the lowest bidder; it was the second lowest. We know that it was below the IGCE, but we don't know how much lower. That's some [* * *].
In the end, though, we know it was low enough for the USDA to call foul and for the Court of Federal Claims to sustain the call:
[E]ven if Golden IT were to be assigned “high confidence” ratings based on a reevaluation, Golden IT would still not have a substantial chance to receive a BPA award because it cannot improve its price evaluation. The Court determined that the USDA rationally found that Golden IT’s price quote presented a “moderate risk.” ... The USDA’s unfavorable evaluation of Golden IT’s price quote is critical because, for all offerors selected for award, the USDA stated that their proposed pricing “showed that they understood the requirement and their pricing was aligned.” It does not appear that the USDA assigned any level of risk to the respective price quotes submitted by the eight selected offerors.
Sad trombone for Golden IT.
But for the rest of us, Golden IT is an incredible example of the risk you take when you run the inverse pump and dump as a vendor. No one can fault you for wanting to bid low to get that first task order and the spot on the BPA. In fact, sometimes the government will even give you credit for cost savings!
But if you bid too low, you might just jeopardize the whole thing.
Them's the breaks!
[1] I mean: everything is securities fraud. See, generally, Matt Levine.
[2] Though, again, everything can be securities fraud. Id.
[3] Another inversion of the classic pump and dump is the "short and distort," which works by artificially deflating the price by trash-talking a company and then shorting the stock. But that's not quite an inverse pump and dump, because an inverse pump and dump artificially deflates the price by painting an overly optimistic picture, not a negative one.