Northrop Accused of Using Unauthorized MX Parts

A congressional subcommittee is investigating evidence that Northrop Corp. set up a highly irregular operation to deal with its mounting problems in the MX missile program by funneling at least a quarter of a million dollars to a fictitious business that purchased parts outside normal Defense Department procurement and inspection procedures.

As part of their probe, congressional investigators have taken possession of part of 80 boxes of MX missile electronics that Northrop allegedly dumped into a garbage bin when it ended up with too many parts. The allegations come from a former Northrop manager who controlled the money.

The small parts are mostly in packages that bear Northrop shipping documentation, including some with unbroken acceptance inspection seals inside special electrostatic-type packaging. The parts, inspected by a Times reporter, appear unused.

The existence of a Northrop petty cash operation, which operated under the name Liaison Engineering Services, to buy parts from vendors could violate some Pentagon procurement regulations, according to contracting experts at the General Accounting Office, the Air Force and the subcommittee.

Defense contractors must abide by a complex set of regulations that cover subcontracting and inspection, especially on something as critical as a nuclear missile system. The Pentagon reviews and must formally approve the purchasing and subcontracting operations of defense contractors. Setting up a secondary purchasing operation under the control of an employee’s private bank account would be outside the scrutiny of the Air Force and possibly in violation of those regulations, according to contracting experts.

A Northrop spokesman acknowledged the existence of Liaison Engineering Services but said the company considers it a “procurement expediting system” that is legal and within defense regulations. The spokesman said the company, based in Century City, does not have any information and cannot respond to the report that MX parts were discarded in a dumpster at its Hawthorne plant.

An Air Force spokesman at the Ballistic Missile Office in San Bernardino, which manages the MX program, said the service learned of the allegations about the petty cash fund and discarded parts from the congressional subcommittee only Wednesday and is looking into the matter.

The investigation by the House Energy and Commerce’s subcommittee on investigations and oversight into evidence of a petty cash fund used to buy missile systems parts comes on top of other longstanding Northrop problems in the MX program. The Air Force has suspended 100% of MX contract payments, amounting to about $40 million being held back so far, because Northrop is seriously behind schedule in deliveries of guidance systems for the missile.

Work Returned

The firm is also under investigation by the General Accounting Office and the Justice Department. Rep. Les Aspin (D-Wis.), chairman of the House Armed Services Committee, has said in a letter to the GAO that 20 of 29 MX guidance systems delivered to the Air Force had to be returned to Northrop because of defects.

Northrop Chairman Thomas V. Jones said Wednesday that Northrop expects to begin meeting Air Force delivery requirements this summer. He attributed delivery delays to problems with vendor parts.

Northrop is under contract to build the MX missile’s “inertial measuring unit,” a highly sophisticated device that guides the missile in flight. The unit is about the size of a basketball and is packed with electronics gear and gyroscopes. In addition, Northrop is building ground test equipment to maintain the units.

The allegations involving the petty cash fund are being made by David Peterson, who said in an interview that he is the former branch manager for ground test equipment in the MX program, a job in which he supervised a group of 100 workers at Northrop’s Hawthorne plant. Peterson said he was laid off last month.

Peterson was directed to set up the petty cash fund, according to an internal Northrop memo dated May 2, 1985, which Peterson provided to The Times and to the subcommittee. By early this year, according to a memo dated Jan. 19, 1987, Northrop had funneled $246,194.10 through a private bank account set up by Peterson.

Extensive Records

Unknown to Northrop, Peterson said, he kept extensive records, including canceled checks, bank statements, invoices, parts requisitions and a massive volume of other computerized records of the activities of Liaison Engineering Services and the petty cash accounts.

Those records were turned over to the congressional subcommittee by Peterson’s attorney, Herbert Hafif of Claremont. Subcommittee staff members visited Northrop this week to investigate the matter.

“We now have complete proof . . . that Northrop has actually destroyed parts critical to the Peacekeeper (MX) project in order to circumvent the United States government’s procurement and testing requirements,” Hafif said. “The net result of this is that the reliability of the entire Peacekeeper project has been jeopardized.”

Peterson said in an interview that Northrop created and funded Liaison Engineering Services because its internal purchasing department, bogged down in a complicated bureaucratic system, was unable to deliver desperately needed MX parts to the manufacturing operation in a timely manner. This part of Peterson’s story was corroborated by other Northrop employees interviewed by the Times.

Peterson said the bank account he operated was not the only petty cash account; there were six other accounts, he said, run by other employees.

100 Days for Orders

He said the purchasing department needed as many as 100 days to fill an order for a small part at a time when the program was short thousands of small parts on a daily basis.

Under the Liaison Engineering Services operation, small parts, principally electronic components, were ordered from vendors and delivered to a post office box on Aviation Boulevard, across the street from the plant, an address also used by Liaison Engineering Services on its checking account.

In addition, Peterson said, the operation used two employees as “runners” to pick up parts from local vendors and take them to the plant. The parts were inspected for quantity and obvious physical damage but were not subject to rigorous acceptance tests that were standard under the MX program.

“It was a ‘Heath kit’ we were building,” he said, referring to commercial kits with which hobbyists build electronic gear.

A Northrop spokesman said that none of the parts procured by Liaison Engineering Services went into MX guidance systems but instead were used for ground equipment.

Bulging Inventories

Such a massive volume of parts was purchased through Liaison Engineering Services that when the same parts ordered through the conventional purchasing system began arriving, Northrop’s inventories began to bulge, Robert Kilborne, an attorney at Hafif’s office who is heading the case, said.

An Air Force audit in August, 1985, cited Northrop for not having reported excessive property and asked for a full accounting of the inventory, according to documents obtained by Jason Rowe, a private investigator working for Hafif.

Peterson said Northrop dealt with the excessive inventory by discarding it in a garbage dumpster at the plant. He said he recovered about 80 boxes of those parts from the dumpster and turned them over to Hafif. Peterson alleges that the 80 boxes represent no more than 5% of the total discarded at the plant over an 18-month period.

“We will be making available to the committee some time in early June all 80 boxes of the missile parts that Northrop attempted to destroy,” Kilborne said. “We have already met with the committee and have transferred the parts that cost in excess of $300 apiece. We also turned over highly classified parts to the committee, which are marked ‘Property of the Air Force.’ ”

The allegations made by Peterson are expected to be the subject of a hearing next month by the House investigating subcommittee, a staff member said.