Court Clears Way for Fraud Trial on Sgt. York Gun Pact

A federal appeals court cleared the way Friday for prosecution of four top General Dynamics Corp. officials, including former NASA chief James M. Beggs, on fraud and conspiracy charges stemming from the company’s Sgt. York anti-aircraft gun contract.

The decision by the U.S. 9th Circuit Court of Appeals dissolves a stay imposed by a U.S. District Court judge on the seven-count federal indictment alleging that General Dynamics illegally juggled company financial records to recoup millions of dollars in cost overruns on the $39-million contract.

The two-year-old indictment had been on hold pending resolution of General Dynamics’ claims that a federal contract review board should first look at whether the company’s contract permitted it to offset losses on the Sgt. York Division Air Defense gun system by allocating costs to other accounts.

In a 2-1 opinion issued late Friday, the appellate court concluded that U.S. District Judge Ferdinand Fernandez erred in delaying trial on the criminal charges pending the contracting board’s review.

Complex Pacts

“We appreciate the district court’s concern that the complexities of military contracts and regulations are beyond conventional experience and agree that (the review board) has expertise in such matters,” Judge Betty B. Fletcher wrote for the majority.

But because of the “rather convoluted course” the litigation could take if it depended on the findings of an administrative panel, “we conclude that it is entirely possible that the government could lose the opportunity to have the merits of its case decided by a court having jurisdiction over the criminal matters alleged in the indictment,” the court concluded.

General Dynamics and the four men who served in top management positions on the Sgt. York contract are each charged with one count of conspiracy to defraud the United States and six counts of making false statements to the government.

Estimate Made

Federal prosecutors estimate that General Dynamics illegally recovered $3.2 million from the Defense Department as a result of the alleged scheme.

The indictment addresses a $39-million contract awarded to the company in January, 1978, to manufacture two Sgt. York prototype systems for the Army. The contract was subsequently increased to $41 million but did not provide for reimbursement in the event of any cost overruns.

However, the indictment alleges that General Dynamics internally projected cost overruns on the contract and recorded actual losses of nearly $13 million in 1978 and 1979 that were never reported to the Defense Department. The indictment alleges that the losses were instead fraudulently mischarged to other government-funded accounts, enabling the company to recoup some of its losses.

General Dynamics officials concealed the mischarges by submitting numerous reports to the government showing Sgt. York contract expenditures as legitimate expenditures from other accounts, federal prosecutors allege.

Indicted along with Beggs, who served as General Dynamics’ executive vice president before taking over as National Aeronautics and Space Administration chief in 1981, were Ralph E. Hawes Jr., David L. McPherson and James C. Hansen Jr., all employees at General Dynamics’ Pomona Division.

Lawyers for the giant defense contractor contend that the Sgt. York contract either permitted the charges to the other federal accounts or was ambiguous about the propriety of such charges.

‘Web of Laws’

Judge Fernandez, describing defense industry regulations as “a web of laws and rules that almost defy understanding,” referred the contract to the Armed Services Board of Contract Appeals in Washington. The board concluded it had no jurisdiction to specifically act on the district court’s questions about the contract but had not yet acted on a separate civil matter pertaining to many of the same questions.

“Our position was, they do deal with these kinds of issues on a regular basis; they do have expertise in these areas, and if the costs were properly charged in a civil sense, there couldn’t possibly be a criminal offense,” General Dynamics attorney James J. Gallagher said.

Assistant U.S. Atty. William Fahey said he had not yet seen the appellate court’s ruling.

“We’ll study the opinion, and we’ll comment after we’ve had a chance to review it,” he said.

Judge Fletcher was joined in the majority by Judge Charles Wiggins. Judge Melvin Brunetti dissented.