Northrop Deals With S. Korea Pursued Despite Officers’ Doubts

Agreements made by Northrop with two Korean organizations to help sell the F-20 jet fighter were not in compliance with Northrop’s own internal corporate rules and policies, according to internal company documents and former corporate executives.

Even before the two deals went sour and Northrop lost $7.75 million, the Korean connection was a subject of controversy within the company because of doubts about the financial wisdom of the investment and questions about the background of the Koreans involved in the deals, according to knowledgeable sources.

The Korean agreements are now the subject of a probe by the House Energy and Commerce Committee’s subcommittee on oversight and investigations, which is looking into whether the Los Angeles-based company may have violated the U.S. Foreign Corrupt Practices Act.

Northrop said Thursday that the agreements were legitimate business deals and that the company was a victim of fraud in the loss of its investments. The deals were in compliance with internal corporate policies, it said.

Missing Millions

At issue are at least two agreements that Northrop made with Koreans. One was a joint venture agreement with Asia Culture Travel Development to build a hotel in Seoul, in which Northrop invested and lost $6.25 million. The second was an agreement with the Dong Yang Express Group, in which Northrop was to pay sales commissions of up to $55 million for help in marketing the F-20 jet fighter to the Korean Air Force.

The hotel was never built. The $6.25 million disappeared. Northrop never sold the F-20 jet fighter to the Koreans or anybody else. And the company has retained a Washington law firm to pursue a civil law suit in Korea to recover its money.

But long before these embarrassments unfolded publicly, the wisdom of the Korean agreements was questioned internally.

“There was a perception that people were using the company for their benefit,” said a former Northrop executive knowledgeable about the agreements. “They were running roughshod over normal corporate procedures and policies.”

Those policies are some of the strictest in the aerospace industry, enacted after Northrop signed a consent decree with the Securities and Exchange Commission in 1975, resulting from accusations that the firm made illegal domestic political contributions and paid $30 million in commissions and consultant fees to foreigners without adequate controls required by securities laws. Northrop’s policy directives, signed by Chairman Thomas V. Jones, amount to detailed rules governing the conduct of company business.

Under Northrop Corporate Policy Directive No. 72, a copy of which was obtained by The Times, the Northrop board was required to give its written approval to commissioned sales agent agreements that exceeded $200,000 in value in any one year or that met any number of other conditions. Those other conditions required board approval in agreements involving “the use of undisclosed principals or undisclosed subagents by the representative.”

The nine-page directive also contains a long list of requirements about the qualifications for foreigners hired as sales representatives, including whether the agents have an established track record and whether they have a “reputation for . . . activities which are either illegal or improper or which are likely to embarrass the company.”

Didn’t Hold Office

The Northrop board gave its approval to both deals, despite reservations expressed by some high-level Northrop officials.

In both deals, there appeared to be “undisclosed principals” and individuals whose “reputation” could have been called into question.

Included in the hotel deal and the Dong Yang sales representation deal was the apparent involvement of the late Park Chong Kyu, better known as C. K. Park. Park was believed to be the financier and principal of both organizations involved in Northrop’s Korean deals, even though he apparently held no official position, according to congressional investigators.

C. K. Park was the one-time chief presidential bodyguard to the late Korean dictator Park Chung Hee. He was considered the second most powerful official in the Korean “blue house,” or presidential palace, and exerted vast political influence.

C. K. Park was arrested in Korea in May, 1980, on charges that he misused public office to accumulate personal wealth. It’s not known what became of those charges, but Park continued to play an important role in Korean politics until his death in 1985.

His background might have precluded an arrangement with Northrop under its corporate policies, although it is unclear who within Northrop knew of Park’s involvement in its Korean deals.

“There was a lot of sentiment that this was an indefensible arrangement,” said an official knowledgeable about the deal.

No Comment From Retiree

Northrop Vice President James A. Dorsey allegedly knew of Park’s involvement, according to a letter to Northrop’s chairman, Jones. The 1986 letter, written by former Northrop consultant Jim K. Shin, alleges that Dorsey and Northrop Vice President Welko Gasich met with Park at the Tokyo Prince Hotel in March, 1984, to discuss the two deals.

Dorsey operated Northrop’s Pacific area marketing through an office at a Hilton Hotel in Honolulu. Dorsey, now retired in Honolulu, declined to comment Thursday.

Shin’s role in Northrop’s Korean deals also raises questions. He was a paid Northrop consultant, but only days after Northrop signed its contract with Dong Yang, Shin signed an agreement with Dong Yang that gave him 25% of Dong Yang’s commissions from Northrop, according to copies of both agreements obtained by The Times.

Such an arrangement would clearly have been forbidden under the company’s policy and raises a number of questions about conflict of interest, according to former Northrop executives. It is unknown whether Northrop or any of its officials knew about Shin’s arrangement with Dong Yang.

Shin did not return telephone calls. He previously declined to comment on his involvement with Northrop. The company said Thursday that it was unaware at the time of Shin’s involvement with Dong Yang.

Northrop has said in an earlier statement that the firm is looking into how Shin may have “benefited” from the arrangement.

Procedure Compromised

It is not known how Northrop found Dong Yang Express Group, but that selection may not have conformed to required procedures. Under Northrop’s standard practice procedure 1-31, a formal selection team was required to examine at least three qualified Korean firms and recommend the most qualified on the basis of a long list of criteria. Individuals knowledgeable about the Dong Yang deal say this was not strictly done.

“They made it look like it was done, but it was after the fact documentation,” the source said.

The Dong Yang deal was unusual in other ways as well. The $55-million ceiling set on the agreement was unusually high, compared to other Northrop sales representatives. The firm had such commissioned agents in Thailand, Malaysia, Singapore, Indonesia, the Philippines, Brazil, Venezuela, Colombia, Portugal and Oman, according to knowledgeable sources.

Typically, these commissions were limited by the board to no more than $3 million or $4 million per deal, according to documents obtained by The Times. It is unknown why the board approved such an enormous commission in the case of Korea.

Some Northorp officials questioned at the time whether Dong Yang or Asia Culture Travel Development had demonstrated a proven track record of dealing with Americans. The entities are believed to have been dissolved.

The Dong Yang deal was arranged through Northrop’s international staff, which was headed by Northrop Vice President C. Robert Gates. But at the same time, Northrop’s aircraft division also had its own Korean consultants that were marketing the F-20 fighter.

Those aircraft division consultants included former Korean Air Force Chief of Staff Kim Tu Wan and another retired Air Force general, Jon Son Lee. But at the same time, the aircraft division officials trying to sell the F-20 did not have direct contact with the Dong Yang representatives.

Hotel Deal Opposed

It was a situation that led one Northrop executive to complain at the time that the firm’s marketing plan had led to fragmentation and mismanagement.

The hotel deal was also affected by unusual arrangements.

A number of Northrop officials said they opposed the deal from the start because of the improbability that the firm would realize any return on its investment.

“I didn’t feel it was crooked, I just saw it as an investment that would never create a return,” one former official said.

Although called a hotel, the venture was more like a lavish guest house.

“This was a desire to show how much Northrop loved Korea,” the executive said. “It was a hotel where visitors (to Korean officials) could stay. What better way to show our relationship with Korea than a hotel? I think it was terribly naive.”

When former Northrop Chief Financial Officer William R. McGagh authorized payment of $6.25 million for the deal in 1984, the money was wired to a branch of the Korea Exchange Bank in Hong Kong rather than sent directly to Korea.

Management Obligations

Northrop apparently relinquished any control of the funds, because they shortly disappeared. In his letter, Shin alleges that C. K. Park received $1.25 million in cash, $2 million went to Dong Yang Chairman Min Ha Lee and $3 million went to a Park bank account in Singapore at the Marine Midland Bank.

Under Northrop Corporate Policy Directive No. 9, covering “international offset obligations,” management was charged with establishing “adequate financial procedures” for controlling costs and ensuring that transactions are “based on sound financial judgment.”

Earlier this year, McGagh stepped down as chief financial officer, but he remains at the company. Northrop’s Chairman Jones declined last month at a press conference to comment on the reasons for McGagh’s exit. McGagh could not be reached.

The deal with Asia Culture Travel Development was executed and signed by Donald Foulds, a now retired Northrop vice president who was in charge of countertrade. He declined to be interviewed.

Jan Lawrence Handzlik, Fould’s attorney, said: “Mr. Foulds was involved in legitimate investment activities in Korea on behalf of Northrop.” He declined further comment.

In April, 1986, Foulds received a letter from Dong Yang, demanding $16.5 million to terminate the sales representation deal and the offset deals.

The letter was interpreted internally in Northrop as an “extortion” attempt, based on Northrop’s potentially embarrassing situation in the failed hotel deal and the failed F-20 sale. C. K. Park had died of cancer on Dec. 3, 1985, effectively cutting off any help Dong Yang had to offer, according to sources.

Northrop agreed in June, 1986, to terminate the Dong Yang agreement and pay $1.5 million. It was apparently the only time the company had made a payment to terminate a sales representation agreement, even though a number of such agreements had to be terminated for a variety of reasons.

A Northrop spokesman said the company would have had a significantly higher liability with Dong Yang if the F-20 sale had been made to Korea. “We were dissatisfied with their performance,” he said.

In Shin’s letter to Jones in December, 1986, he alleges that the $6.25-million payment to Asia Culture Travel Development was intended to be “diverted for use as a sales promotion fund.” The congressional committee is investigating the allegations in the Shin letter.