Huge Profits in Defense Fraud, Ex-Prober Says

A former Pentagon investigator who alerted Congress to “systemwide” procurement fraud problems three years ago said Monday that abuse was so extensive that sensitive military documents were treated “like a Sears & Roebuck catalogue” and profits gained by trading classified information made “drug money look like a drop in the bucket.”

Robert L. Segal, a former Drug Enforcement Administration agent who investigated the procurement fraud cases while working for the Defense Contract Investigations Service, said also that another serious issue raised by the scandal is its potential for weakening national security.

‘Whole Documents’ Obtained

“Whole documents were coming out. Documents with everything--from procurement goals to how much the government was willing to spend on it. It’s the kind of information that not only tells you how much you should bid but may even help you decide to go into a business you’d never considered before,” he said.

Segal, who made his remarks in a three-hour interview with The Times, is the first federal investigator to comment on the defense procurement fraud allegations since the FBI disclosed last week that it had served dozens of search warrants across the nation in what is believed to be the largest scandal of its kind in Pentagon history.

He was thrust into the center of a dispute between Congress and the Justice Department this week when Sen. Charles E. Grassley (R-Iowa) accused the department of ignoring Segal’s early reports of widespread fraud in Pentagon procurement operations. Grassley said also that Justice Department officials improperly blocked testimony by Segal at a congressional hearing in 1985.

“The Justice Department could have pursued this aggressively more than three years ago, but they didn’t,” Grassley charged.

Atty. Gen. Edwin Meese III strongly contested those claims at a highly unusual news conference at which he was joined by top Justice Department prosecutors. “I can assure you that at no time has this department had to be dragged into any indictment when the evidence is there,” Meese declared.

U.S. Atty. Henry E. Hudson in Alexandria, Va., who heads the current investigation, denied that his office had ignored early warnings of extensive fraud and bribery. And he said that charges could be broadened to include bid-rigging by military contractors and top Pentagon officials.

Lead Investigator

In 1984, Segal had been the lead investigator in a procurement fraud case against GTE Government Systems Corp., a case with striking similarities to the current Pentagon inquiry that included evidence the company had improperly obtained classified documents.

But Segal said the GTE case was only the “tip of the iceberg.” He said that at least 25 companies were involved--”all of them household names”--and that they appeared to have “espionage units” with one mission: to obtain classified documents that would give them an advantage over their competitors.

Based on evidence developed by Segal’s staff, GTE Government Systems was indicted along with a Washington-area defense consultant, Bernie Zettl. The company agreed to plead guilty and was fined $500,000. Zettl is awaiting trial in federal court in Alexandria.

Segal said that he was especially troubled to learn two months after GTE paid its $500,000 fine that the company was awarded a $4.3-billion contract to supply field telephones to the Army.

“There’s no deterrent to procurement fraud when you pay your fines out of pocket change from your government contracts,” Segal said.

FBI ‘Showed No Interest’

The former investigator, now vice president of an insurance marketing firm, said that evidence suggesting the involvement of high-ranking Pentagon officials and persons in Congress also was developed during his earlier investigation. He said that Defense Contract Investigations Service agents took those leads to FBI officials in Alexandria “but they showed no interest.”

Segal said his greatest concern is national security problems exposed by the widespread practice of selling or trading classified documents. “If these guys are willing to sell our secrets to the highest bidders, how can we be sure one of them doesn’t speak Russian?” he asked.

He said some of the documents discovered in the desks of industry executives were so sensitive that “they’re never supposed to leave the Pentagon except in a censored form.” He questioned whether the country can trust the patriotism of “people who sell to the highest bidder.”

“These are people who can be bought--and the Russians have dollars, too,” Segal said.

Grassley said that the problem disclosed by this investigation is not an aberration but the way the system works. “This is ingrained in the culture of the military-industrial complex,” he said.

Testimony Halted

In his criticism of the Justice Department’s handling of the case, Grassley recalled how Segal tried to testify about this pattern during a 1985 hearing of his subcommittee and how Deputy Assistant Atty. Gen. Victoria Toensing grabbed the microphone to stop him.

He noted that Segal accused the Justice Department of refusing to recognize the magnitude of the case, choosing instead to focus on the narrow GTE investigation. “Its refusal to recognize the magnitude of the case . . . bewilders me,” Segal told the committee.

Grassley said he was sorry that he allowed Toensing to halt the testimony. “I wish now I hadn’t,” he said. “There wasn’t anything in the testimony that could have jeopardized the GTE case.”

But the senator refused to speculate about why the Justice Department refused to widen its investigation, and he did not accuse Reagan Administration officials of complicity.

“You have this going on under both Republican and Democratic administrations,” he said. “It’s part of the culture of the bureaucracy. It’s part of the culture of the military-defense complex--the buddy-buddy system.”

‘Asleep at Switch’

Nevertheless, he added: “Our Justice Department has been asleep at the switch when it comes to investigating procurement fraud.”

In addition, Grassley said that the case demonstrates the need for a better law to control the revolving door, adding that it is a “farce” to allow the industry to police itself as is now the case. “It’s like putting the fox in charge of the chicken coop,” he said.

Meese, however, challenged Grassley’s accusations at a press briefing that he said was designed to correct “misinformation” and provide a “fuller and more accurate view.”

Flanked by U.S. Atty. Hudson and the acting criminal division chief, Edward Dennis, Meese said that investigating and prosecuting defense procurement fraud have been a top priority since his predecessor, Atty. Gen. William French Smith, created the Justice Department’s defense procurement fraud unit in 1982.

“I know of no information that was not pursued assiduously,” Meese said. He contended that information from Segal had been pursued by the department’s criminal division and now is the subject of “ongoing cases.”

His news conference was viewed as an unusual step because Justice Department officials normally go to great lengths to avoid any comment on continuing investigations.

Grassley’s charges represented yet another area of criticism of the Justice Department’s performance under Meese, who has been the subject of a 13-month investigation by an independent counsel.

78 FBI Agents on Case

In an effort to show how seriously the department has been pursuing the defense fraud case, Hudson said that 78 FBI agents are working full time on the investigation, along with 15 agents from the Naval Investigative Service and eight prosecutors from his office and the department’s procurement fraud unit.

In addition to searches carried out a week ago at 38 offices and homes of Pentagon officials, defense industry consultants and defense contractors, Hudson said that a federal grand jury in Alexandria has issued more than 270 subpoenas for information.

Hudson said that, after viewing all the evidence produced by the searches and subpoenas, bid-rigging charges could be added to expected counts of bribery, false statements, conspiracy, conflict of interest, theft of government property and wire and mail fraud that now are under consideration by prosecutors.

Despite reports that former Assistant Atty. Gen. William F. Weld, as head of the criminal division, withheld knowledge of the nearly 2-year-old investigation from Meese, the attorney general said that he had been informed of the inquiry “several months ago.” Meese said that he received “routine notice” of the case 60 days ago, although that was after Weld resigned on March 29.

Sources close to Weld said that he had decided against briefing Meese on the case, which he regarded as the single most important investigation conducted while he was at the department, because Meese’s name had been picked up on a wiretap during the investigation. The reference in the recorded conversation to Meese--as an official who could help land defense contracts--did not lead to any incriminating information, one source familiar with the matter said.

Meese said he did not believe that the sweeping inquiry will discourage contractors from attempting to compete for defense work. “As a result of this investigation,” defense contractors will know they are competing on a level playing field, he said.

Political Impact Discounted

The attorney general discounted the chances of any political impact resulting from the investigation.

“I don’t think it will have any political fallout since it was this Administration that discovered the offenses that were committed largely by others, that the people that are involved are relatively lower-ranking people in the defense hierarchy--to the extent that ultimately the evidence shows they may be involved,” he said.

Meese, who did not name those he described as “lower-ranking people,” refused to comment on reports by The Times and the Washington Post that former Navy Secretary John F. Lehman Jr. is being investigated. Others who are known to be under scrutiny in the case include Melvyn R. Paisley, former assistant Navy secretary under Lehman; James Gaines, deputy assistant secretary of the Navy; and Victor D. Cohen, deputy to the secretary of the Air Force.

Staff writers Sara Fritz and John Broder contributed to this story.