Formation of AEY Inc

Diveroli returned home to Miami Beach, Florida in March 2001 at the age of fifteen. After an argument with his uncle, he told his father he wanted to open a business specializing in arms, ammunition trading, and defense contracts with the U.S. government. He convinced his father to sell him a shell company, AEY, Inc., named after the first initials of him and his siblings, which his father had incorporated as a small printing business, but had not done anything with for years.^[4] Diveroli's success in arms dealing quickly attracted attention within the industry,^[8] he was labeled as an "arms wunderkind" by the Miami Herald and as a "stoner arms dealer" by Rolling Stone as a result of Diveroli's drug use.^{[13] [8]}

Arms Trading Dynamics

During the Cold War, the US & USSR engaged in a protracted and massive arms race.^[14] Millions of weapons were stockpiled throughout Eastern Europe. When the Cold War ended, and the immediate threat of violence subsided, arms dealers started moving some of these weapons.^[8] The sales that followed formed the "gray market" where non-state actors (such as militia or terrorist groups) and legitimate government-sanctioned buyers could procure arms through illegal foreign government sales.^[15] The Pentagon wanted access to this gray market to arm the militias it was creating in Iraq and Afghanistan. The US government therefore required intermediaries, or proxies, to undertake the more covert and intricate facets of arms-related activities. Companies such as AEY emerged as entities facilitating these operations, playing a role in executing tasks that were considered sensitive or clandestine in nature.^[8]

Contracts and Controversies

Diveroli began working during a period of heavy arms trading as a teenager in a one-room apartment in Miami. Equipped with nothing more than a laptop, he sought to enter the industry from the comfort of his couch.^[4][8] He began surfing solicitations on fbo.gov (now sam.gov), or FedBizOpps, a government website where contracts are posted. He began by bidding on small contracts with the financial help of Ralph Merrill, with whom he did business during his time working for his uncle. By the age of eighteen, Diveroli had become a millionaire by continuing to beat out big corporations like Northrop Grumman, Lockheed and BAE Systems. In the words of Rolling Stone, Diveroli had "an appetite for risk and all-devouring ambition."^[8]

After steadily increasing the size of his contracts and developing a track record of success, Diveroli's company AEY, Inc. was awarded a $298 million contract by the Pentagon to provide arms and munitions to the allied forces in Afghanistan.^[4] In meeting the contractual obligations set by the United States government, Efraim Diveroli became involved in interactions with individuals of questionable repute within the arms trade. These interactions extended to engaging with unscrupulous weapons traders, diplomatically compromised individuals, and individuals identified as soldiers of fortune. Diveroli's responsibilities further involved negotiating agreements with foreign defense ministers, participating in meetings held at diplomatic embassies, and responding to communication from high-ranking officials within the United States Army.^[8]

On March 27, 2008, the U.S. government suspended AEY, Inc. for infringing upon the terms of its contract; in violation of a pre-existing arms embargo, the company was accused of supplying ammunition manufactured in China to the Afghan National Army and police. United States Army documents showed that the company totaled more than $200 million in contracts to supply ammunition, rifles, and other weapons in 2007. As a result of publicity surrounding the contract, the United States Army began a review of its contracting procedures.^[16]

The United States House Committee on Oversight and Government Reform ruled the ammunition "unserviceable".^[17] AEY had also failed to perform on numerous previous contracts, including sending potentially unsafe helmets and failure to deliver 10,000 Beretta pistols to Iraq.^[18][19][20]

Convictions and Lawsuits

Ammoworks, a company owned by Diveroli, continued selling arms while he awaited trial for conspiracy.^[21] In late August 2008, he pleaded guilty on one count of conspiracy, and was sentenced to four years in prison on January 4, 2011.^[22][23] He was further sentenced for possessing a weapon while out on bond^[24] and had his overall sentence reduced for assisting in the investigation of the prosecution. Diveroli's former partner David Packouz was sentenced to seven months' house arrest.^[8]

Diveroli's former partner, David Packouz, and Ralph Merrill, the group's former chief financier, later filed separate lawsuits against Diveroli seeking payment of millions of dollars they say they were owed in connection to the weapons contract with the U.S. government.^[25]