TRW Will Face Review on Pentagon Contracts

A series of cases in which TRW overcharged the government on military work has prompted a high-level Pentagon review that could lead to the firm being suspended from obtaining new defense contracts.

The Defense Logistics Agency, a contracting arm of the Defense Department, has assigned a review of TRW to its contracting integrity division, which has the authority to suspend a contractor for ethical violations, The Times has learned.

“We are aware of serious allegations against TRW,” a Defense Logistics Agency spokesman said. “Naturally, this causes concern on our part. However, we have initiated no formal proceeding to suspend or debar this company. DLA is looking at the company’s overall integrity.”

The House Energy and Commerce subcommittee on oversight and investigations has scheduled hearings for later this month into various cases of TRW mischarging that have come to light since 1984. Mischarging occurs when costs are billed to an inappropriate contract or account, often resulting in the government paying excessive charges.

Subcommittee chairman Rep. John D. Dingell, (D-Mich.), has met twice with TRW President Joseph T. Gorman to review the allegations. Either Gorman or TRW Chairman Ruben F. Mettler is expected to be called to testify about TRW’s mischarging cases, subcommittee sources said.

TRW, which builds some of the Pentagon’s most sophisticated electronics gear and is the nation’s 27th-largest defense contractor, is under federal criminal investigation in Cleveland for overcharging and is under scrutiny by a grand jury in Colorado Springs for similar accounting irregularities. Defense contractors that are indicted or sued as a result of such investigations often are suspended as a result.

In the Cleveland case, TRW used two sets of books, one for internal purposes and one to show the government, subcommittee investigators said. The Cleveland operation was earning a 50% rate of profit on some contracts, they added, including parts for the C-5 cargo jet’s engines.

In addition to the Cleveland and Colorado Springs cases, mischarging incidents have occurred at TRW divisions in Sunnyvale, San Diego and a small unit in Pennsylvania. So far, none of the mischarging cases have involved TRW’s most important profit center, its Defense and Electronics Sector at Redondo Beach, also known as Space Park. But now it appears that Space Park is under scrutiny.

The Defense Contract Audit Agency, the Pentagon’s auditing arm, has conducted a confidential draft audit and found millions of dollars in alleged mischarging on defense contracts there, The Times learned. Officials of the audit agency declined to comment on the report, saying it is subject to revision and that it is against their policy to discuss draft audits.

The audit reportedly uncovered several categories of mischarges, including errors in “unmatched” charges. In those cases, labor charges cannot be tied to any specific contract, as is required under defense accounting rules.

TRW vice president Julian Levine said he could not comment directly on the audit. “The simple fact that they have filed a report doesn’t mean that, on second look, that it wouldn’t be revised,” he said.

Levine said the company was not aware of the Defense Logistics Agency’s review or that a possible suspension was being considered. Levine said all of the cases of mischarging have resulted from self-disclosure by the company. He added that accounting on defense contracts can be very complex, resulting in disagreements when no wrongdoing was intended.

Another TRW official said: “We certainly don’t believe there is a systemic problem. We believe they are unrelated. The only thing that has been systemic is our effort to root out the problems and report them to the government.”

One measure of the gravity of TRW’s current situation is the action the company took in December when it fired two top managers, including an officer of the corporation, Robert L. North, in connection with an internal probe in San Diego that found that the company had overcharged the Pentagon $2.5 million.

A key issue that the Dingell committee will take up later this month is whether TRW has attempted to deflect attention from its Redondo Beach operation by firing officials at other units around the country.

A wide-ranging investigation into activities at Redondo Beach could cause significant problems for both the government and TRW because it could disrupt the large amount of top-secret work conducted there.

Defense Department Inspector General Derek J. Vander Schaaf said in an interview that his office has assigned a review of the TRW mischarging cases to the Defense Criminal Investigative Service.

“We are not taking the company’s word for it that everything is hunky-dory,” Vander Schaaf said. “The DCIS is looking into each and every one of these cases.”

Vander Schaaf said TRW’s conduct in voluntarily disclosing the cases of mischarging would argue against a suspension, especially if the apparent pattern of mischarging at its various divisions is not tied to a broad policy or an intent to overcharge the government.

Nonetheless, enough evidence of “substantial overcharges” was accumulated in Cleveland to trigger a Justice Department criminal investigation of the company.

A related government civil case against the company charges that TRW’s compressor components and power accessories divisions fraudulently misstated labor and material costs on subcontracts for making and supplying military aircraft parts and equipment.

The civil suit was originally brought by three TRW employees who filed under the False Claims Act, which permits individuals to sue contractors on behalf of the government. Last June, the Justice Department took over the suit, which asked for $1.2 billion worth of damages.

One Pentagon source remarked: “I have a feeling that this company is going to be in a load of trouble real soon.”

Suspension actions are becoming more commonplace. In 1986, the Pentagon suspended 299 contractors, up from only 55 suspensions as recently as 1982.

Most suspensions are imposed against smaller firms, but, increasingly, large firms are also affected. General Electric, Litton Industries and General Dynamics are a few of the major contractors that have been suspended in recent years.

In many cases of suspension, contractors are also indicted or sued civilly. Once firms are criminally indicted, the Pentagon has acted quickly to impose penalties under a suspension.

A suspension of TRW would represent a major escalation, however, because of the firm’s critical work in top-secret reconnaissance satellites and a variety of espionage hardware programs. In many respects, the government is more dependent in the short run on TRW than it is on GE, Litton or General Dynamics.