NBC News and news services
updated 10/4/2011 6:01:40 PM ET 2011-10-04T22:01:40

In what federal prosecutors call "one of the most brazen corruption schemes in the history of federal contracting," two employees of the Army Corps of Engineers and two other men have been charged in an alleged $20 million bribery and kickback scheme.

Prosecutors say the case may be one of the largest procurement fraud schemes in the nation's history.

An indictment unsealed Tuesday includes charges of bribery, conspiracy and unlawful kickbacks. The two Army Corps employees, Kerry F. Khan and Michael A. Alexander, received kickbacks in exchange for steering government work to a subcontractor, prosecutors say. The men had the authority either to order products and services through government contracts or to secure government funding for projects.

Also charged are Khan's son, Lee A. Khan, who prosecutors say benefited from the scheme, and Harold F. Babb, the director of contracts for Eyak Technology LLC, a Virginia-based contractor known as EyakTek that did business with the government and was the prime contractor for a five-year, $1 billion contract administered by the Army Corps of Engineers.

The scheme, which authorities say spanned roughly four years, involved phony and inflated invoices for government contracts and millions of dollars in kickbacks that were funneled through a network of shell companies in the United States and around the world.

U.S. Attorney Ronald Machen, the top prosecutor in the District of Columbia, said at a news conference that the indictment alleges "one of the most brazen federal procurement scandals in our nation's history."

"This scheme was staggering in scope," he later said. "I think it surprised all of us."

All four defendants appeared in federal court for an arraignment a few hours after their arrest. They wore streets clothes but with their feet shackled so they could only take tiny steps into the courtroom. Their attorneys entered pleas of not guilty on their behalf but said they hadn't even had time to closely read the 42-page indictment.

Read the indictment detailing the bribery and unlawful kickback charges

Prosecutors say Khan and Alexander received the kickbacks in exchange for steering government contracts to a Virginia-based subcontractor that provided software encryption devices and other information technology. The company is identified in the indictment only as Company A. The company's chief technology officer, who was also not named in the indictment, submitted fraudulent and inflated invoices to EyakTek, and the work was certified as completed. The money, approximately $20 million in inflated expenses, was then funneled back to the four defendants, prosecutors said.

In a separate scheme that prosecutors say was halted Tuesday, the defendants allegedly conspired to steer a $780 million contract to Company A, which was going to serve as the prime contractor on an Army Corps contract.

The Khans also agreed to wire money to a relative imprisoned for a drug trafficking crime to prevent him from snitching on them to law enforcement, according to the indictment.

They say Khan received more than $5 million as well as luxury cars, computer equipment, televisions, and expensive liquor. He also received home improvements and renovations, court documents say.

Prosecutors say Alexander received more than $1 million in cash and favors, including a $21,000 Cartier watch and first-class airline tickets.

The government claims that when promises of future payments and favors are factored in, the scheme involved more than $20 million in illicit payments.

Federal agents searched 29 bank accounts and seized three luxury cars and seven expensive watches. They're also seeking to take control of 16 pieces of real estate they say were paid for in whole or in part by kickbacks.

EyakTek describes itself as an Alaska Native-owned business. The Washington Post reported that, according to federal officials, EyakTek obtained corps contracts on technology-related work and that Khan, Alexander and Babb began directing work to the unnamed company. An official at that company submitted inflated bills for its work to EyakTek, which then submitted the bills to the corp.

The Post reported that federal officials said the "overhead" on the inflated work was then paid out to the Khans, Alexander and Babb.

If convicted of the charges, Kerry Khan and Alexander face a maximum of 40 years in prison.  Babb faces up to 35 years, and Lee Khan faces a sentence of up to 25 years.

U.S. Magistrate Judge Deborah Robinson scheduled a hearing for Thursday morning to decide whether the four should be detained pending trial.

NBC News' Pete Williams, The Associated Press and msnbc.com staff contributed to this report.

© 2013 msnbc.com

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