Special Report: The Mask Middlemen – How pop-up brokers seek big paydays in a frenzied market

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© Reuters. FILE PHOTO: Dr. Nicole McCullough, a global health and safety expert at 3M, demonstrates the correct way to put on a N95 respiratory mask at a laboratory of 3M in Maplewood, Minnesota

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By Joseph Tanfani and Josh Horwitz

(Reuters) – Brian Kolfage, a Florida military veteran, recently convinced Americans to donate millions of dollars for a privately built wall on the U.S. southern border. Now he has jumped into a new venture: hawking millions of protective face masks that are in critically short during the coronavirus pandemic.

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About a month ago, Kolfage formed a business called America First Medical, which offers on its website and in social media pitches to broker large-volume sales of high-grade masks known as N95s. He said he charges about $4 each – several times the pre-pandemic prices but a few dollars less than some hospitals, nursing homes and first responders are now paying.

Though he hasn’t yet found buyers, Kolfage says he’s found masks all over the world, including stockpiles hidden away in warehouses in Japan and Eastern . If a deal goes through, he will collect a commission between 1% and 3%, depending on the size of the order, he said.

He said he’s performing a public service. “We’re the ones out there kissing the frogs and doing all the work that these hospitals and others can’t do,” Kolfage, 38, told Reuters. “We’re the ones making these connections. If the hospital wants to pay the money, that’s up to them.”

Kolfage aims to be one of the new mask middlemen. As the novel coronavirus has spread around the world, an improvised, chaotic market has sprung up. Brokers claim to have access to tens or even hundreds of millions of masks – generally outside the normal supply channels and at prices much higher than the former retail of about $1 each.

High-volume deals – even with low-percentage commissions – could bring big paydays for the middlemen. And these brokers could help ease critical shortages if they succeed in encouraging manufacturers and traders sitting on scarce supplies to sell them where they’re needed.

But the frenzy also has broken down standard quality controls, opening the market to an influx of masks of uncertain origin and effectiveness, medical suppliers and healthcare industry officials say. As supplies run ever lower, hospitals and nursing homes are being deluged with offers, and some say they have no choice but to pursue the promising leads while hoping to sidestep the scams.

The hot commodity in the mask trade is the N95 device, sturdier than surgical masks and better able to filter out much smaller particles such as the coronavirus. Health experts say lower-quality or ill-fitting masks are more likely to let airborne pathogens through, exposing healthcare workers to a virus that has killed nearly 39,000 people across the globe and infected close to 800,000.

Reuters spoke to five new mask brokers, three in the United States and two in China, which is the world’s largest mask manufacturer and accounts for about half of global production. These middlemen described a wild marketplace, in which they seek to quickly connect sellers and buyers before competitors can move in and sell stockpiles out from under them.

Jake Mei, an owner of a pump supply firm in Houston, , said in one LinkedIn (NYSE:) posting that he had 8 million masks, two models made by industrial giant The 3M Company (NYSE:), for sale, at $4.10 to $4.20 a mask. “Good price and quick delivery!” he promised. In an interview, however, he said he’s having trouble finding inventory.

None of the middlemen would disclose suppliers or customers, and Reuters could not independently confirm their access to vast stashes. All said manufacturers were setting base prices, which they said accounted for the bulk of recent price increases.

Kolfage told Reuters that the masks he finds – which he says are not from China – are of good quality, certified by the U.S. Food and Drug Administration. And he’s not price gouging, he said, but rather charging a commission far lower than other brokers.’ Reuters is aware of prices higher than his, including those that New York Governor Andrew Cuomo recently said had risen from 85 cents to $7 apiece.

“This is just an impossible situation to manage,” Cuomo said publicly on March 22, describing a bidding war over medical equipment that’s pitting states against states, in which prices can rise within 20 minutes.

On March 23, President Donald Trump signed an executive order prohibiting hoarding and price gouging of medical supplies, and Attorney General William Barr said the Justice Department had launched a national task force to investigate such schemes.

If you “have a big supply of toilet paper in your house, this is not something you have to worry about,” Barr said at a White House briefing that day. “But if you are sitting on a warehouse with masks….you will be hearing a knock on your door.”

A U.S. Department of Justice spokesman declined to comment on the mask trade. The FDA did not comment, except to describe how it has eased some requirements during the crisis and opened the door to sales of masks that meet other countries’ standards. Betsy Lordan, a Federal Trade Commission spokeswoman, said there is no federal law against price gouging, and the FTC has not pursued such cases in past disasters.

Christian Fjeld, worked on FTC legislation as a staffer in both the House and Senate, says a patchwork of state laws aim to stop companies from charging prices generally defined as “excessive” or “unconscionable.”

But “they are squishy terms,” said Fjeld, now vice president of ML Strategies, a lobbying firm. If high prices are being set by suppliers in a scarce market, he said, it would be tough to make a case that the sellers are gouging.

‘STEALTH’ COMPANIES, COUNTERFEITERS AND PROFITEERS

Some mask brokers appear to be counterfeiters or selling substandard knock-offs, according to a major manufacturer, 3M of St. Paul, Minnesota, and a major hospital supplier, Premier Inc, of Charlotte, North Carolina.

Chaun Powell, Premier’s vice president of strategic supplier engagement, said some pitches from suppliers, offering masks by the millions of uncertain provenance, have struck the company as highly suspicious.

“Our stealth company is currently supplying bulk quantities” of N95 masks, said one pitch forwarded to Premier. “If you know of any buyers who would be interested, (the supplier would) love to cut you in on the transactions.” Premier declined to disclose the sender’s name.

Powell said his company has issued warnings to its customers about pop-up brokers. But he said some clients are considering these offers anyway, placing orders and hoping for the best.

“It really demonstrates the level of desperation in our supply chain,” he said. “They’re trying to evaluate which is better — to have a faulty mask or no mask.”

The pitches from mask brokers have poured in at an increasing rate as the shortage has grown critical, Powell said.

“In the past five days we’ve had 70 different solicitations,” he said on March 24. “It seems everybody has a friend or a cousin who knows somebody in China who is producing these masks.”

3M recently issued a public statement warning that products being marketed under its name could be counterfeit.

“3M has strict quality standards, and therefore products that have missing straps, strange odors, blocked valves, misspelled words, etc. are likely not authentic 3M respirators,” a company statement said.

One mainstream distributor said that legitimate 3M products also are being diverted out of normal channels by manufacturers or others who want to profit from runaway prices. “The question is, how did the stuff get diverted in the first place?” said Michael Einhorn, president of Dealmed, a supply company in Brooklyn, New York. “There’s something fundamentally wrong with the supply chain.”

“A million people in their garage” seem to have access to the products when authorized distributors do not, Einhorn said. “They’re flipping it to a guy, who’s flipping it to another guy. By the time it ends up in a hospital, 10 people have touched it and made money.”

3M said it has not raised its prices in the pandemic but says it can’t control what others are charging. On March 25, 3M Chief Executive Officer Mike Roman sent a letter to Attorney General Barr and other officials saying the company wanted to help crack down on counterfeiters and profiteers.

Kolfage and other brokers told Reuters they are running clean operations. Kolfage said buyers’ will be held in escrow by a law firm and the products inspected by an independent verification firm before any transaction closes.

SKIRTING SKETCHY OFFERS

The impromptu market thrives on scarcity. Two weeks ago, leaders of a trade group for nursing homes said thousands of their members were about to run out.

“There just isn’t enough out there,” said Dr. David Gifford, chief medical officer at the American Health Care Association.

A survey by Premier released last Wednesday showed that 25% of hospitals that responded said they were down to less than a day’s supply of masks.

The chaotic market compounds the challenges faced by besieged hospitals such as Holy Name Medical Center in Teaneck, New Jersey. Twenty-two Covid-19 patients have died at the facility, which now has 139 patients presumed to have the virus, according to hospital figures as of Sunday.

Staff members have been forced to go outside their normal supply chains to keep medical gear in stock, according to Adam Jarrett, chief medical officer.

One recent shipment of 1,000 masks turned out to be substandard and lacked FDA certification. The vendor agreed to replace them with good ones, he said.

Jarrett said his staff has been able to find enough to keep up a four-day supply while avoiding sketchy offers.

“Anyone who we think may have a product, we are chasing it down,” he said. “We’ve seen offers of a million masks, but you’ve got to buy all million, at $9 each,” or about nine times the pre-crisis level. “There are absolutely unscrupulous people out there doing bad (stuff), but we’ve been smart enough to steer clear of those.”

In non-emergency situations, manufacturers are required to submit lengthy applications to receive FDA certification, including test results and engineering drawings.

Given the shortage, the FDA recently said it would not object to the sale of masks for medical purposes that come from a variety of other countries even though they are not certified to meet U.S. standards.

‘LIKE THE STOCK MARKET’

The new mask brokerage business has roots abroad, where manufacturers are setting the base price and traders are snapping up scarce supplies.

An executive at a Shanghai firm said some traders there are sitting on stockpiles of tens of millions of masks. Those that are N95-standard and FDA-approved are “the unicorn” that everybody is looking for.

“These are traders that are basically just hoarding to see if the price goes up. It’s like the stock market,” said Justin Huang, chief operating officer of JH Consulting Group. “If they have an inventory that they got at two dollars, they can sell it now for four, or they can maybe sell it at five tomorrow.”

Businessman Paul Bhang, from the Chinese city of Hangzhou, said he recently plunged into the mask sales business with a friend.

“A lot of people are not qualified to do this – I’m not qualified,” he said. But Bhang said he needed the money and believes he can connect factories directly with buyers.“Whatever they produce daily, it’s sold out,” Bhang said. “The factories don’t care who customers are now.”

“In an ordinary situation,” he said, “we would go and check the factories and their documents, but now we can only see the photos.”

‘A SELLERS MARKET’

Another newcomer to the mask market is Kolfage.

A U.S. Air Force veteran who lives with his family in Florida, Kolfage lost his legs and right arm in a rocket attack during the Iraq war. After owning and selling right-wing news websites, he set up a fundraiser that capitalized on Trump’s quest to build a barrier on the U.S.-Mexican border, We Build the Wall https://www.reuters.com/investigates/special-report/usa-borderwall-business. The effort pulled in $25 million from donors starting in December 2018.

So far, Kolfage has built two wall sections on private land, in New and Texas. He said he didn’t take any compensation for a year but now is now being paid $10,000 a month as president of the nonprofit running the wall project.

In his new venture, he said, it’s all about speed. On March 3, the day his website was registered, Kolfage posted a picture on Instagram of piles of boxes labeled 3M sitting in a warehouse, saying he had 300 million N95s available to ship to the United States.

“…Trying to reach the U.S. government and arm up our docs with the proper equipment. Message me please,” he wrote, tagging Trump and the U.S. Department of Homeland Security.

The supplies, Kolfage said, were owned by a wealthy businessman who wanted to sell the whole lot for $3 each and triple his investment. “These were in Japan at the airport in Osaka ready to be loaded onto a plane,” said Kolfage, who according to 3M is not one of the company’s authorized dealers.

He couldn’t find a buyer fast enough. The opportunity is “long gone,” he told Reuters on Monday.

“It’s their sandbox,” he said of suppliers. “It’s a seller’s market right now on these things.”

Source: Investing.com

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