March 16, 2011 9:00 AM ET
Packouz and Diveroli had picked the perfect moment to get into the arms business. To fight simultaneous wars in both Afghanistan and Iraq, the Bush administration had decided to outsource virtually every facet of America's military operations, from building and staffing Army bases to hiring mercenaries to provide security for diplomats abroad. After Bush took office, private military contracts soared from $145 billion in 2001 to $390 billion in 2008. Federal contracting rules were routinely ignored or skirted, and military-industrial giants like Raytheon and Lockheed Martin cashed in as war profiteering went from war crime to business model. Why shouldn't a couple of inexperienced newcomers like Packouz and Diveroli get in on the action? After all, the two friends were after the same thing as everyone else in the arms business — lots and lots and lots of money.
"I was going to make millions," Packouz says. "I didn't plan on being an arms dealer forever — I was going to use the money to start a music career. I had never even owned a gun. But it was thrilling and fascinating to be in a business that decided the fate of nations. Nobody else our age was dealing weapons on an international level."
Packouz and Diveroli met at Beth Israel Congregation, the largest Orthodox synagogue in Miami Beach. Packouz was older by four years, a skinny kid who wore a yarmulke and left his white dress shirts untucked. Diveroli was the class clown, an overweight kid with a big mouth and no sense of fear. After school, the pair would hang out at the beach with their friends, smoking weed, playing guitar, sneaking in to swim in the pools at five-star hotels. When Packouz graduated, his parents were so concerned about his heavy pot use that they sent him to a school in Israel that specialized in handling kids with drug problems. It turned out to be a great place to get high. "I took acid by the Dead Sea," Packouz says. "I had a transcendental experience."
Returning home, Packouz drifted through two semesters at the University of Florida. Short of cash, he studied massage because it seemed like a better way to make money than flipping burgers. Nights, he sat around with his high school buddies getting high and dreaming of becoming a pop star. He wrote angsty rock ballads with titles like "Eternal Moment" — but it was hard to get a break in the music industry. With a shaved head and intense blue eyes, Packouz was plenty smart and plenty ambitious, in his slacker fashion, but he had no idea what to do with his life.
Efraim Diveroli, by contrast, knew exactly what he wanted to be: an arms dealer. It was the family business. His father brokered Kevlar jackets and other weapons-related paraphernalia to local police forces, and his uncle B.K. sold Glocks, Colts and Sig Sauers to law enforcement. Kicked out of school in the ninth grade, Diveroli was sent to Los Angeles to work for his uncle. As an apprentice arms dealer, he proved to be a quick study. By the time he was 16, he was traveling the country selling weapons. He loved guns with a passion — selling them, shooting them, talking about them — and he loved the arms industry's intrigue and ruthless amorality. At 18, after a dispute with his uncle over money, Diveroli returned to Miami to set up his own operation, taking over a shell company his father had incorporated called AEY Inc.
His business plan was simple but brilliant. Most companies grow by attracting more customers. Diveroli realized he could succeed by selling to one customer: the U.S. military. No government agency buys and sells more stuff than the Defense Department — everything from F-16s to paper clips and front-end loaders. By law, every Pentagon purchase order is required to be open to public bidding. And under the Bush administration, small businesses like AEY were guaranteed a share of the arms deals. Diveroli didn't have to actually make any of the products to bid on the contracts. He could just broker the deals, finding the cheapest prices and underbidding the competition. All he had to do was win even a minuscule fraction of the billions the Pentagon spends on arms every year and he would be a millionaire. But Diveroli wanted more than that: His ambition was to be the biggest arms dealer in the world — a young Adnan Khashoggi, a teenage Victor Bout.
To get into the game, Diveroli knew he would have to deal with some of the world's shadiest operators — the war criminals, soldiers of fortune, crooked diplomats and small-time thugs who keep militaries and mercenaries loaded with arms. The vast aftermarket in arms had grown exponentially after the end of the Cold War. For decades, weapons had been stockpiled in warehouses throughout the Balkans and Eastern Europe for the threat of war against the West, but now arms dealers were selling them off to the highest bidder. The Pentagon needed access to this new aftermarket to arm the militias it was creating in Iraq and Afghanistan. The trouble was, it couldn't go into such a murky underworld on its own. It needed proxies to do its dirty work — companies like AEY. The result was a new era of lawlessness. According to a report by Amnesty International, "Tens of millions of rounds of ammunition from the Balkans were reportedly shipped — clandestinely and without public oversight — to Iraq by a chain of private brokers and transport contractors under the auspices of the U.S. Department of Defense."
This was the "gray market" that Diveroli wanted to penetrate. Still a teenager, he rented a room in a house owned by a Hispanic family in Miami and went to work on his laptop. The government website where contracts are posted is fbo.gov, known as "FedBizOpps." Diveroli soon became adept at the arcane lingo of federal contracts. His competition was mostly big corporations like Northrop Grumman, Lockheed and BAE Systems. Those companies had entire departments dedicated to selling to the Pentagon. But Diveroli had his own advantages: low overhead, an appetite for risk and all-devouring ambition.