Informant Given Probation, Ending Kickback Probe

A former manufacturing representative whose testimony was crucial to the convictions of 19 aerospace employees was placed on five years’ probation Thursday, concluding what authorities said was an “unprecedented” undercover investigation of kickbacks in Southern California’s defense industry.

Rex Blaine Niles, 49, was the federal government’s star informant in a three-year crackdown on defense contractor fraud, dubbed “Operation DEFCON,” which federal officials credit in part for widespread reforms in the defense industry and a tough new federal kickback law.

The investigations reached across a broad spectrum of companies and contracts, targeting buyers and supervisors at such firms as Hughes Aircraft, Rockwell International and Magnavox on programs ranging from the B-1B bomber to the Strategic Defense Initiative and the space shuttle.

‘A System-Wide Problem’

“I think prior to Niles coming forward and exposing how widespread this was, people in the defense industry thought there was a case of maybe one or two guys out there accepting kickbacks,” Assistant U.S. Atty. William C. Price said.

“The defense industry has changed its perception of the problem,” he said. “They have realized it’s not a case of one or two bad apples, it’s a system-wide problem and they’ve instituted reforms.”

Niles was a Simi Valley manufacturer’s representative in 1985 when, facing possible criminal charges himself in the first wave of Operation DEFCON indictments, he approached government officials about the possibility of cooperating in the investigation.

Niles told the investigators that a number of prime defense contractors had demanded that he give them half his 10% commission on subcontracts as a kickback. “He found it after a period of time to be an unpleasant cost of doing business,” said Niles’ attorney, Jerry L. Newton.

For the next 2 1/2 years, Niles continued operating his Rex Rep sales company, wearing a hidden microphone to record his conversations with aerospace company representatives and meeting regularly with government agents about his contacts.

“He essentially worked full-time for the FBI, the IRS and the Department of Defense,” Newton said.

Fred Heather, a former federal prosecutor who handled most of the original DEFCON cases, said it quickly became clear that kickbacks were a much more widespread practice than anyone had initially believed.

“There was very clear evidence that kickbacks were a routine practice and longstanding custom within the industry,” Heather said in an interview last summer. “There had developed a kind of arrogance among people in the industry that they could get away with murder.”

19 Pleaded Guilty

The evidence Niles compiled--involving kickbacks totaling $1 million--was so compelling that all 19 defendants indicted in the investigations he participated in pleaded guilty to criminal charges, Price said.

Niles himself pleaded guilty to one count of paying a kickback on a government contract and aiding in the filing of a false income tax return, charges for which, in light of his cooperation, U.S. District Judge J. Spencer Letts decided no prison time was warranted.

“As you now stand there, you’ve felt at least as strongly about these things as the rest of us, and you’ve done what you can do,” the judge said. “I think it’s an important thing that’s happened.”

Niles said he is “just very happy that I was able to be of assistance to the government.”

“I was not very comfortable throughout the years with the situation I found myself getting deeper and deeper in and I’m just happy it’s come to a close,” he said.

Richard Drooyan, Chief Assistant U.S. Atty., said the Operation DEFCON investigation, which so far has led to a total of 30 criminal indictments, has prompted defense contractors to take a stronger role in policing their own employees.

Federal officials also credit the DEFCON case and similar investigations throughout the country with passage last year of the Anti-Kickback Enforcement Act, which increased maximum penalties to 10 years in prison and also required companies to work more closely with the government in reporting kickbacks.