Litton Division Pleads Guilty to Defense Fraud : Agrees to Pay Pentagon $15 Million in Restitution and Fines for Overcharges
In what is believed to be the largest monetary settlement ever of a defense contract fraud case, a division of Litton Industries agreed Tuesday to pay the Pentagon $15 million in restitution and fines following a federal indictment for overcharges on defense contracts.
The division also agreed to plead guilty to the 325-count federal grand jury indictment, also announced Tuesday, charging it and two former executives with defrauding the Pentagon of more than $6.3 million in the bidding and awarding of 45 contracts between 1975 and 1984.
The parent, Beverly Hills-based Litton Industries, and its officials were not cited in the indictments, but “the investigation is continuing to determine whether other individuals should be charged,” said Nicholas C. Harbist, an assistant U.S. attorney in Philadelphia who coordinated the investigation.
A Defense Department spokesman could not say whether the agency was considering other disciplinary action, including a possible suspension of Litton, the nation’s 10th-largest defense contractor. The Pentagon has increasingly ordered suspensions of defense contractors in recent years.
Litton spokesman Robert S. Knapp said no notice had been given to the company about a possible suspension. However, Litton Chairman Fred W. O’Green said the company “will take whatever specific additional actions are necessary to reassure the Defense Department that it is a responsible company fully qualified to do business with the U.S. government.”
O’Green said that the company is cooperating with the investigation and that steps have been taken to correct the problems, including strengthened cost accounting and bid and proposal practices.
Litton’s indictment is the latest in a series of legal actions or disclosures of wrongdoing involving such major defense contractors as McDonnell Douglas, General Electric, TRW and Rockwell International.
The Litton investigation began a year ago after Pentagon auditors uncovered “irregularities” at the special devices division of Clifton Precision, a Springfield, Pa.-based unit of Litton Systems Inc., also a Litton subsidiary.
The contracts involved were fixed-price pacts for development, production and sale of aircraft instrumentation and radar equipment for F-16, F-4, F-106 and B-52 aircraft, Cobra jet helicopters and U.S. Navy destroyers and other warships, Harbist said.
The Litton division and the two executives “significantly” inflated estimates of costs for materials through a number of tactics, including forging documents and submitting fraudulent price quotations on bills from vendors, Harbist said. The inflated data came to be known as “chicken fat,” the government said.
The two executives indicted were Michael J. Millspaugh, 34, former vice president for finance and administration at the division, and Joseph DiLiberto, 68, former materials manager there.
Millspaugh, who left Litton late last year, faces a maximum penalty of 125 years in prison and $55,000 in fines, the government said. DiLiberto, who retired from Litton in 1983, faces up to 10 years’ imprisonment and $15,000 in fines. Neither could be reached for comment.
Litton, in agreeing to pay $6.3 million in restitution and fines of about $8.7 million, was accepting the maximum penalty that it could have received, Harbist said.
The $15-million payment will be charged against Litton’s fourth-quarter results and could have a noticeable effect on the firm’s earnings for its current fiscal year, which ends July 31. Due in part to non-recurring writeoffs, the firm earned only $41 million in the first nine months of the current fiscal year, compared to $299 million in the full 1985 fiscal year.
Not the First Time
This is not the first time that Litton has run afoul of the Pentagon on contract procedures. The firm was earlier accused of overcharges on submarine contracts at its Ingalls shipbuilding unit in Pascagoula, Miss. However, the firm was acquitted after a jury trial in December, 1984.
TRW, Rockwell International, GE and General Dynamics also have been the subject of criminal indictments or civil lawsuits in the past two years involving defense contracts.
Nine of the nation’s top 10 defense contractors also are under criminal investigation by the Pentagon, according to Defense Department Inspector General Joseph Sherick, who named the companies in a letter to Rep. John Dingell (D-Mich.), chairman of the House Energy and Commerce subcommittee on oversight and investigations.
The list cited allegations such as bribery, kickbacks, false claims, gratuities, bid rigging, cost mischarging and product substitution.