Exclusive: How a days-old company pressured California into $450 million deal on COVID-19 gear
Just days after Gov. Gavin Newsom put California under a stay-at-home order to slow the coronavirus outbreak, executives at a newly formed company called Blue Flame began aggressively pressuring state officials to buy 100 million masks and wire nearly half a billion dollars in prepayment, text messages and emails obtained by The Sacramento Bee show.
The communications, obtained through a Public Records Act request, show Blue Flame co-founder John Thomas sent more than 100 emails and texts over a weeklong period to officials at the state’s Department of General Services, urging them to hurry to secure a deal and send the money before another country bought the masks instead.
“Not to ramp up pressure but literally minutes matter on me being able to lock down this inventory,” he told a California official in one message.
Lifesaving N95 masks were in critically short supply at the time and needed by health care workers treating COVID-19 patients. At a March 23 news conference, as officials were in talks with Blue Flame executives, Newsom said the state needed to find 1 billion gloves, 500 million N95 masks, some 200 million shields to prepare for a surge in infections.
“In order to procure that, it’s going to take a heroic effort,” Newsom said. “Many of us are competing for the same limited supplies. And as a consequence of that, people are tripping over themselves to make deals.”
Reflecting the urgency, a state contracts official told Thomas the department was exploring options to “circumvent the law” and provide an upfront payment to secure the masks.
The state ultimately struck a deal with Blue Flame that week and authorized a $456 million upfront payment for 100 million N95 masks, which are thought to be the most effective in preventing coronavirus spread.
That deal fell through when Blue Flame’s bank called California officials to raise concerns about the transaction. Blue Flame is now suing the bank, alleging it interfered with the deal and damaged the company’s reputation.
Several government agencies reportedly are investigating Blue Flame, including the Department of Justice and the state of Maryland. The U.S. House Energy and Commerce Committee. Committee also opened an inquiry.
In response to questions from Congress, the company has admitted that it has not been able to secure all the supplies it has promised clients, but argues that its executives have tried to secure equipment as quickly as possible and provided refunds for goods they couldn’t deliver. Democratic representatives in Congress have held it up as an example of what went wrong in the early days of coronavirus outbreak when states competed against one other to buy pandemic supplies.
The emails and text messages illustrate the pressure state officials were under to secure deals quickly, and they reveal some of the tactics used by executives at Blue Flame.
Pressure on California to wire money quickly
The records indicate Thomas first exchanged emails with a Department of General Services official on Friday, March 20, after he was connected with the department by an official in the governor’s Office of Emergency Services.
Thomas and his associate Mike Gula, both Republican political operatives with no experience selling protective equipment, had recently begun forming Blue Flame as a medical supply company, intending to sell masks and other supplies during the pandemic.
The day he was introduced, Thomas emailed with Bill Simonson, an official at the Department of General Services, about mask prices and Blue Flame’s inventory.
Thomas texted Michael Wong, a contracts administrator at the department, in the evening on Sunday, March 22 saying he had “whatever covid supplies you need and can get them to you quickly.” He told Wong that California must pre-pay for N95 masks, and added that “shipping is going to get jammed up so I really need to place orders asap.”
State government contracts usually move slowly through a process managed by the Department of General Services that’s designed to ensure taxpayers aren’t ripped off. A state agency will put out a request for proposals, receive bids and pay only after a product is delivered. But during the pandemic, state officials needed to secure supplies fast.
Wong told Thomas he would need to “figure out the prepayment issue” and asked to speak the next morning.
“We can supply you anything you need at the best prices, speed and capacity I promise,” Thomas responded. “I’m just getting worries about shipping delays if we wait to order.”
Later that night, Thomas texted Wong asking if the governor’s Office of Emergency Services or the state controller could “find a way to authorize pre-payment in an emergency?”
Wong texted back the next morning.
“We’re researching alternative options but it’s hard to circumvent the law,” he said.
“Right that little thing,” Thomas responded.
At the time, while governments and hospitals were scrambling to get needed supplies amid a global shortage, it was common for manufacturers to require upfront prepayments. California paid nearly half a billion dollars upfront to another manufacturer, BYD, for N95 masks in a different deal around the same time, which represented a 50% prepayment.
“Under standard operating procedures in a non-emergency environment, the state relies on various Government Codes for statutory authority for advance payments,” Department of General Services spokeswoman Monica Hassan wrote in a statement. “In light of the unprecedented COVID pandemic and the emergency proclamation, the state exercised its discretion, on a case by case basis, to determine the need for advance payments when acquiring PPE needed to protect Californians.”
A buyer in the U.K.
Thomas emailed Wong in the evening on March 23 saying California needed to order 100 million N95 masks with a 75% upfront payment or his “lead manufacturer” would sell to the United Kingdom instead. He told Wong that California would have 48 hours to inspect and reject the masks for a refund.
Thomas followed up with a text to Wong seven minutes later saying the situation was “urgent.”
Wong said he could not prepay for 100 million masks and pressed for documentation about the products.
“Not to rush,” Thomas told Wong in another message, “BUT I literally have my inventory locked and cannot hold it for much longer without giving them $”
It’s not clear from the text messages and emails where exactly the masks were located while Thomas was communicating with California officials. Thomas and his lawyer did not return requests to discuss the messages.
On March 26, state officials tried to wire the $456 million payment to Blue Flame. A top executive at the bank called State Treasurer Fiona Ma’s office that day to say the Blue Flame bank account had been opened just the day before by a political operative.
Ma declined to comment for this article because her office is named in the complaint Blue Flame filed against the bank, but she told The Sacramento Bee in May that the Chain Bridge Bank official told her office the bank was not comfortable completing the money transfer.
After the deal fell through, Thomas continued to text, email and call state officials for weeks, offering a “workaround” so that the payments could go through and promoting deals on masks and other protective gear.
Government investigations and a lawsuit
The deal with California was critically important for Blue Flame, which was so new it had not even filed for incorporation when it began communicating with state officials, according to a lawsuit the company filed in June against Chain Bridge Bank.
In the complaint, a lawyer for the company wrote that the Blue Flame’s founders incorporated on March 23 “to enter the potential transaction in California.” It opened its bank account at Chain Bridge “in anticipation of reaching an an agreement with California.”
“In addition to causing California to breach its contract and cease doing business with Blue Flame, Defendants’ wrongful actions have led to a torrent of negative press reports falsely suggesting that Blue Flame’s business is a fraud, causing other Blue Flame customers to walk away from transactions and resulting in great harm to Blue Flame’s business and the personal and professional reputations of Blue Flame and its principals,” the company said in its complaint filed in the Eastern District court of Virginia.
Chain Bridge Bank denies those allegations, according to a response the company filed in court on September 29.
Meanwhile, several investigations have been launched into the company, including one by the House Energy and Commerce Committee.
Committee Chairman Frank Pallone Jr. and Rep. Diana DeGette, who chairs the Oversight and Investigations Subcommittee, said they launched the inquiry in May out of concern because of “numerous reports regarding Blue Flame Medical LLC’s failure to deliver on contracts with state and local governments to provide critical medical supplies.”
In a response to questions from the committee, a lawyer for Blue Flame wrote that it was unable to fill all the orders it made because of challenges securing equipment in an extremely competitive marketplace at the start of the pandemic. The company says it refunds clients for equipment it can’t deliver.
As of June 22, the company told Congress it had delivered more than 100,000 N95 masks and KN95 masks, the Chinese version of an N95, to its clients. It had also delivered 150,000 nitrile gloves, more than 20,000 sterile gowns, 1,600 face shields and 37 ventilators.
Pallone, D-New Jersey, and DeGette, D-Colorado, pointed to Blue Flame as a “troubling example” of what happened early in the pandemic, when states turned to “unproven suppliers.”
The Washington Post reported in May that the Department of Justice was also investigating Blue Flame, according to two anonymous sources. The department, which typically does not confirm ongoing investigations, did not respond to a question about the investigation. Maryland’s attorney general was also prompted investigate Blue Flame after state officials said the company didn’t deliver ventilators and masks on time, according to The Baltimore Sun.
This story was originally published October 8, 2020 at 5:00 AM with the headline "Exclusive: How a days-old company pressured California into $450 million deal on COVID-19 gear."