Justice Dept. Bungled Fraud Case on General Dynamics Billing, U.S. Memo Admits

The government committed such serious errors in its abortive fraud case against General Dynamics’ Pomona division that some top Justice Department officials conceded that a “dearth of evidence” left them with “substantial doubt” that crimes had been committed, according to an internal Justice Department memo.

The memo will be made public today at a hearing called by Rep. John D. Dingell (D-Mich.), chairman of the investigations panel of the House Energy and Commerce Committee, to examine charges by the committee’s staff that the Justice Department has bungled some of its most important cases involving defense fraud.

The Justice Department dropped its case against General Dynamics, which alleged that the company defrauded the government of $3.2 million, on June 19, four days after the 46-page memo blew multiple holes in the case against the company.

But a top Justice Department official is expected to testify that the Pentagon allows defense contractors to understate the cost of weapons, with both sides knowing that a contractor will dip into other public funds to make up its losses, according to prepared testimony by Assistant Atty. Gen. William F. Weld.

The Pentagon may overlook or ignore contractual infractions, which undercuts the Justice Department’s ability to prosecute cases, Weld’s prepared text says. A source on Dingell’s committee termed the practice as Pentagon acquiescence of cost overruns and infractions of its contractors. A Defense Department official denied that the Pentagon acquiesces in advance to cost overruns.

The memo discloses that a number of key Army officials who were responsible for negotiating the General Dynamics contract had not been asked by Justice Department officials for an interpretation of the contract before they sought a grand jury indictment.

“The Justice Department simply didn’t do its homework before the indictment was sought,” a Dingell committee staff member said Wednesday. “Justice was under a tremendous amount of pressure to whack General Dynamics somewhere, because of all the problems that had surfaced in the company. But there is no doubt Justice has bungled this thing.”

Several years ago, General Dynamics was embroiled in charges that a number of its divisions had engaged in separate incidents of fraud and overcharging the government. Although the company was temporarily suspended as a defense contractor, most of the investigations were eventually dropped.

A spokeswoman for the U.S. Attorney’s office in Los Angeles, who participated in the case, refused to comment and referred questions to a Justice Department spokeswoman in Washington. She could not be reached.

The major problem in the Justice Department’s case, according to the memo, was the department’s misinterpretation of the very basis of General Dynamics’ contract to build prototypes of the Division Air Defense Gun or DIVAD.

The company, which eventually lost the DIVAD program to Ford Aerospace & Communications, was issued a “firm, fixed-price, best-efforts” contract for $39 million. Under General Dynamics’ interpretation, the contract required only that it make its best effort to deliver prototype guns.

Once the company’s costs had exceeded the $39-million fixed price, it continued its work and billed part of the cost overrun to two types of overhead accounts (bid and proposal, and independent research and development).

Despite repeated pleas by the company that Justice investigators interview senior Army officials for their interpretation of the “best-efforts” clause, the Justice Department did not do so and sought the indictment based in part on an investigation by the Defense Contract Audit Agency, according to a source knowledgeable about the case.

Saw No Problem

When Justice officials later did interview six key senior Army officials, according to the memo, they found that all of them had originally assumed that General Dynamics would charge some of its overrun to overhead accounts or found nothing wrong with the practice.

Moreover, Army officials awarded the $39-million development contract to General Dynamics knowing that it could never cover the full amount of work required. The Army had originally estimated thta the prototypes would cost $60 million, the memo quotes Assistant Secretary of the Army Edward Miller as saying. Defense contractors often conduct development work at a loss in hopes of winning profitable contracts later.

A staff member of Dingell8s committee said the Justice Department was “totally outgunned” by General Dynamics’ attorneys. The company spent $21 million on its defense, he said, and is planning to recover that money through contract billings to the government.

The Dingell committee hearing will call Weld, the assistant attorney general, and four FBI agents as witnesses. The committee will also look into several other Justice Department cases involving defense fraud, including a case against Pratt & Whitney in Florida and General Dynamics at its Electric Boat unit in Rhode Island.