The state’s massive deal with novice medical supplier Blue Flame mysteriously falls apart, with Maryland now calling for an investigation into the company’s conduct.
Update May 6, 2020: After this story posted last night, The Washington Post reported this morning that the U.S. Justice Department has opened a criminal investigation into Blue Flame Medical. The Post’s anonymous sources said the inquiry is focused on the firm’s troubled contracts with California and Maryland, and that Blue Flame’s attorney declined comment on the federal probe.
On March 26, as the coronavirus pandemic was mounting and governors across America scrambled to secure medical supplies, the state of California wired almost a half-billion dollars to a company that had been in business for just three days.
The recipient: Blue Flame Medical LLC, a Delaware-based company headed by two Republican operatives who jumped into the medical supply business on March 23. The pair — Mike Gula from Washington, D.C., and John Thomas of Southern California — had vowed, in their words, to help “fight Covid-19 with the industry’s broadest product selection from hundreds of suppliers.”
Within hours of the enormous wire transfer, the deal was dead and California was clawing its money back — $456.9 million, nearly half of what the Legislature had allocated for the state’s pandemic response. The payment to Blue Flame and cancellation of the deal six hours later were revealed in copies of checks, wire transfer receipts and emails obtained by CalMatters through a public records request.
It’s unclear why California decided to make such a large purchase for 100 million face masks from a new and untested company. Days ago, Maryland canceled its own order with Blue Flame and asked the state attorney general to investigate the company for its failure so far to deliver the supplies. And California Democratic Rep. Katie Porter also has raised questions about the company’s credibility.
Blue Flame’s attorney, Ethan Bearman of Los Angeles, said today he had no information about the California situation but criticized Maryland’s actions. He described it as “beyond comprehension” that Maryland is disputing the contract and said the company “fully intends” to honor it.
Still, California’s broken deal provides a look at the chaotic marketplace of medical supply procurement and the dollars at stake in the crisis that has killed nearly 70,000 Americans.
The federal government left it up to states to purchase the masks, gloves and other gear that can protect workers from contracting COVID-19. That spike in demand — combined with a global shortage of supplies — created a cottage industry of new suppliers and brokers. Now the FBI is warning states about “rapidly emerging fraud trends” in the procurement of medical supplies governments are desperately seeking to combat the pandemic.
After the Blue Flame purchase fizzled, Gov. Gavin Newsom announced reaching a deal to buy nearly $1 billion worth of face masks from a Chinese company called BYD. The masks have begun to arrive in California but Newsom has refused to release that contract or any details, arguing that doing so could imperil delivery of the supplies in the fragile and unpredictable marketplace.
“It’s been a Wild, Wild West of PPE sales and offers,” said Thomas Tighe, president of Direct Relief, a nonprofit aid agency that sends supplies including personal protective equipment (PPE) to disaster sites.
“The pricing and some of the conduct is scary.”
Tighe doesn’t have any experience with Blue Flame Medical, the company at the center of California’s mysteriously canceled deal. But he said he’s seen the normally low-key business of masks and gloves become a hotbed of confusion and competition as new actors dive into the fray.
“A strong desire to protect our health workers does lend itself to being exploited for financial gain by folks who are out to make money,” Tighe said.
Blue Flame’s president has described the venture as an altruistic effort to help the United States deal with the pandemic by tapping into connections he and his business partner established through politics.
“We realized that I actually had some very good relationships with quite a few PPE manufacturers, all over the world,” John Thomas said April 15 on his “Thomas Guide” podcast.
“So we quickly put together an organization called Blue Flame. And we, I believe, are now one of the largest, if not the largest, supplier of COVID-19 supplies.”
Thomas, a political strategist, and Gula, a political fundraiser, drew attention in Washington, D.C., as soon as they launched. “Republican fundraiser looks to cash in on coronavirus,” read the headline on a March 27 Politico article, which said Gula was leaving politics to devote himself to the new business. Thomas told The New York Times that their political connections helped them find suppliers and customers, but that they formed the company to help people, not to get rich.
Before launching Blue Flame, the pair worked together earlier this year on the campaign of Republican Don Sedgwick, who was seeking the Orange County congressional seat held by Porter. Sedgwick lost in the March primary.
Now Porter is raising concerns about Blue Flame and asking the federal government to ensure that such companies are charging fair prices. Blue Flame’s founders have no experience providing medical supplies, and the company may amount to “a costly and burdensome middleman from which states and localities must now purchase supplies,” Porter wrote in an April 8 letter to the inspector general of the U.S. Department of Health and Human Services.
“Due to the life or death nature of the nationwide PPE shortage, we are concerned Blue Flame is indicative of a potentially growing trend,” Porter wrote.
Porter declined an interview request from CalMatters. Blue Flame’s Thomas told the Orange County Register that her letter is “absolutely absurd” and dismissed Porter’s criticism as a politically motivated attack against the advisers of her former campaign rival.
On his podcast, Thomas said his company is trying to help states avoid fraud in their quest for medical supplies.
“There’s a lot of bad actors right now going on in this marketplace — fraudulent inventory, price gouging, all these horrendous things, which is the last thing you should be doing in a crisis,” Thomas said. “And it’s the exact opposite of what our company Blue Flame was started to do.”
The state of Maryland canceled its $12.5 million order with Blue Flame on Saturday — and asked the state attorney general to investigate — because the company did not deliver the face masks and ventilators the state ordered on April 1.
“Unfortunately, despite numerous requests for information and order status, Blue Flame Medical has yet to deliver any items under this order, or provide any pertinent data as to a pending shipment,” Maryland’s director of procurement wrote in a letter to the company obtained by the Washington Post.
Maryland had ordered 1.5 million N95 masks and 110 ventilators, according to a purchase order The Washington Post posted, and paid Blue Flame nearly $6.3 million upfront.
California’s order was a lot bigger — and so was its upfront payment. The state ordered 100 million N95 masks from Blue Flame, and its $456.9 million payment amounted to a 75% deposit on the total bill, said Andre Rivera, a deputy director at the state Treasurer’s Office.
Emails show a frenzy of activity as state employees hammered out the details involved in wiring the funds to Blue Flame’s bank in Virginia. At 8:23 a.m. on March 26, a manager at the Treasurer’s Office emailed another bank involved in the transaction:
“Hi Ana, I released a large wire transfer to Chain Bridge Bank just now. Can you please check on it and ensure it is completed quickly?” Natalie Gonzalez wrote.
She then informed her colleagues in state government that the money had been wired. An attorney in the Controller’s Office replied at 9:11 a.m.: “A big thank you to all involved in getting these payments out the door. It is very much appreciated.”
The bank manager emailed Gonzalez at 1:20 p.m. and said the wire transfer was completed. At 2:03 p.m., an official at the Department of General Services announced that the deal was off.
“After a very eventful morning with the Blue Flame purchase, we are no longer moving forward with this vendor,” deputy director Andrew Sturmfels wrote in an email.
“Please provide my team… with whatever info and paperwork we need to submit in order to walk back the warrants and null the wire transfer request.”
In a subsequent email Sturmfels wrote that the “wire transfer was processed on (the State Treasurer’s) end but not completed. Funds are with (State Treasurer’s Office).”
Rivera confirmed in an interview with CalMatters that California’s state treasurer got the money back. “The wire was returned exactly the same day when it was canceled,” he said.
But he referred questions about why California placed the order with Blue Flame and why the deal fell apart to the Department of General Services, which has not responded to multiple interview requests.
California lawmakers allotted $1.1 billion for the state’s pandemic response when they passed a sweeping emergency measure in mid-March. Newsom’s administration has also dipped into a state disaster relief fund, and has said it expects the total cost of managing the crisis to reach $7 billion.
While the state has cut many deals with private companies in response to the coronavirus, few of them — other than the $1 billion contract with BYD for face masks — come close to the sum it sent Blue Flame. Most arrangements are for under $20 million, according to a review of contracts the state released under a public records request. The state agreed to pay three companies between $2 million and $4 million each to refurbish or supply ventilators. It leased an arena in Sacramento for use as a temporary hospital at a cost of up to $3 million, and leased a hospital near San Francisco for $17.5 million. It’s paying a life sciences company up to $13.1 million to test Californians for COVID-19.
Masks, though, will play a critical role in getting California back to some semblance of normalcy as businesses are gradually allowed to open after nearly two months of being closed by public health orders.
“The PPE side of this is so foundational in our ability to open up,” Newsom said Tuesday during a visit to a small business in Sacramento.
“We’re very pleased in this state to have had substantial success in the last week in procurement of tens of millions of new masks that are now coming in, almost on a weekly basis.”
So far, the state has prioritized delivering them to health care workers, first responders and nursing homes, Newsom said, but will soon also distribute them to grocery, transit and retail workers.
“As these product lines begin to open up and we have more of this product, we will start getting it out to the front line.”
CalMatters investigative and data-driven reporting is supported by the Inasmuch Foundation, previously known as the Ethics and Excellence in Journalism Foundation.