U.S. Reportedly to Drop Case Against General Dynamics

The Justice Department has closed a three-year investigation of General Dynamics after finding insufficient evidence that the company defrauded the government in building nuclear attack submarines, according to federal law enforcement sources.

Department officials will emphasize that while there was some evidence that General Dynamics may have falsified information about submarine delivery schedules and cost overruns, the Navy did not rely on this questionable data. Prosecutors lacked an identifiable “victim” on which to base a fraud case, the officials say, because the Navy acquiesced in the firm’s actions.

The deterrent effect of prosecuting the nation’s largest defense contractor and its top officers, including former Chairman David S. Lewis, would have been substantial, officials said. But they added that the case was too complex to meet the department’s standard that charges must be likely to result in conviction.

The decision, expected to be announced this week, marks the second time that the department has declined to prosecute the St. Louis-based company, which received $8 billion in military contracts last year. A three-year probe of the submarine cost overruns was closed in 1981 but reopened in 1984 after new allegations by P. Takis Veliotis, former head of the company’s Electric Boat division in Groton, Conn.

Veliotis, who is a fugitive in Greece on charges of splitting $2.7 million in kickbacks from General Dynamics suppliers, refused to testify against the company unless prosecutors dropped the kickback case. The Justice Department refused, in part because of concern that Veliotis would not be a credible witness under such circumstances and that tapes of his secretly recorded conversations with Lewis and other company executives therefore would be of little value.

In a last-ditch attempt to salvage the case, prosecutors recently granted immunity to Gorden E. MacDonald, who was involved in the submarine dispute as General Dynamics’ former chief financial officer. An Electric Boat vice president, Arthur M. Barton, also was given immunity. But their testimony proved insufficient to warrant an indictment.

General Dynamics has consistently denied any wrongdoing on the submarine contracts, which have been the subject of several congressional inquiries.

Prosecutors have long expressed doubts about the complex case, which one official called “a nightmare.”

Veliotis alleged that General Dynamics deliberately underbid a Navy contract to build 18 Los Angeles-class submarines in the 1970s. He also alleged that a 1978 settlement with the Navy on cost overruns, which brought the company $639 million, was based on fraudulent claims.

Prosecutors questioned, among other things, whether the company gave a false estimate for delivery of Trident submarines in 1977 and whether it later provided false cost-overrun data on Los Angeles-class submarines to Congress, the Navy and the Securities and Exchange Commission. But sources said investigators found no clear proof of criminal intent by General Dynamics, such as destruction of documents or maintaining two sets of books.