1984 Incident a Chilling Omen of Fraud Probe

In February, 1984, an agent of the Defense Criminal Investigative Service paid a call on Walter R. Edgington, a marketing executive at GTE Government Systems just down the road from the Pentagon. The agent said he was looking into the theft of secret military documents by defense contractors and free-lance consultants.

“You don’t have to explain. I know why you’re here,” Edgington reportedly responded, volunteering that he first saw classified Pentagon documents at GTE shortly after joining the firm in 1966 and had received a steady flow of secret data ever since.

“Every major corporation gets the same material,” the investigator said he was blandly told.

Massive Bribery Inquiry

The GTE case, it now appears, was a chilling portent of the massive Pentagon bribery investigation now unfolding across the country. As the GTE affair demonstrated, the $150-billion-a-year defense acquisition business is so vast, so complicated and so little understood that it offers opportunities for corruption and questionable business practices on a staggering scale.

To understand the dimensions of the Pentagon’s system for acquiring the weapons, trucks, ships, helmets, boots and the thousands of other things needed to project U.S. military power around the world, consider this: Not counting the legions of military and civilian personnel involved in secondary roles, the Defense Department has 50,000 designated contract officers, dealing with 300,000 military suppliers. It grants an average of 62,000 contracts every day.

By themselves, the rules spelling out the way defense contracts are to be sought and awarded are bound into books that occupy--literally--almost a quarter of a mile of shelf space, Pentagon officials say.

And, for the business corporations large and small that seek government contracts, one of the critical elements at every stage of the long procurement process is information, especially advance information that competitors may not have.

What weapons and equipment are the armed forces thinking of obtaining--or cutting back on--in the future? How much money is being budgeted for current procurement of particular items and which programs are winning and which losing in the internal jockeying over funds and policy support?

Most important of all, once competition begins for a particular contract, what exactly does the Navy, or the Army or Air Force, want? What is the nature of the competition? Where is a rival’s bid strong or weak? What clues can be gleaned about its product, its cost structure, manufacturing techniques and other proprietary matters? And what political forces are influencing--or might be brought to bear on--Pentagon decision-makers behind the scenes?

A Tight-Knit Fraternity

The quest for such information, as competitive in its own way as the struggle for contracts, has given rise to a tight-knit fraternity of consultants who know their way around the Pentagon jungle. Many labor diligently within the bounds of established procedures, but federal investigators say that some use payoffs, job promises or other gratuities to get such data improperly from contacts in the military bureaucracy.

The GTE episode offers an instructive primer or case study on how the defense acquisition business works in practice, how that practice sometimes diverges from theory and how easily it can all be corrupted.

It’s a world of Beltway Bandits, Old Crows, rent-a-generals and let-the-buyer-beware--in this case, the buyer being the American taxpayer.

In September, 1985, the Department of Justice indicted GTE, Edgington, a second GTE executive and Bernie Zettl, a colorful consultant who allegedly was funneling secret Pentagon papers to the company. GTE pleaded guilty to possession of classified material regarding electronic warfare programs and paid a $590,000 fine. Charges against the two GTE executives were dropped, but the Zettl case is unresolved.

Investigators involved in the case were furious that their superiors stopped the inquiry at GTE and did not allow them to pursue leads implicating at least 25 other major defense contractors and dozens of consultants. One investigator called the GTE case the “tip of the proverbial iceberg” and said the Defense Department and the Justice Department set the current probe back by two years by prematurely ending the earlier inquiry.

The Zettl case also opened a window on a little-known network of electronic warfare specialists known as the Assn. of Old Crows, a 25,000-member organization linking professionals in industry and the military. Zettl was one of the founders of the group, named for a World War II operation that jammed German radar signals.

Retired Military Officers

The Crows, scattered throughout the defense electronics industry worldwide, consist mainly of retired military officers who have moved into high-ranking positions in the major companies that supply sophisticated military jamming, surveillance and communications gear.

The association, based in Alexandria, Va., provides a remarkably efficient system for moving valuable information, officials familiar with the group said. Members, who maintain their contacts in the military and seek to provide their clients or companies with such things as early tip-offs on future Pentagon plans, meet formally and informally throughout the United States, Europe and Asia to swap war stories and industry gossip.

Gus Slayton, the group’s executive director, asserted in an interview that the Old Crows are in no way linked to the present scandal. Only one of the 16 Pentagon officials and private consultants served with search warrants last week is a member, Slayton said, refusing to name him. Numerous executives of the defense firms searched belong to the group.

Secret Documents

According to charges filed in the GTE case, the company went to extraordinary lengths to conceal its possession of classified military documents and their sources. An official of a subsidiary of the firm rented a post office box in California to receive the secret documents obtained by Zettl to keep them out of the regular GTE internal mail system, the indictment said.

The government said GTE paid Zettl, a retired Air Force major, more than $120,000 in consulting fees from 1979 to 1983. A GTE internal memo said Zettl’s connection to the company and his activities were to be kept confidential. “We do not want to list on paper the work that he is doing,” the memo said.

To conceal the true nature of his work, prosecutors charged, Zettl submitted monthly reports “which made only veiled or no reference at all to the documents being provided.”

Zettl Ruined Financially

According to an associate, the publicity surrounding the GTE case ruined Zettl professionally and financially. He is no longer in the defense consulting business, has moved from the Washington area and could not be reached for comment.

Among the documents GTE admitted illegally possessing were sensitive Defense Department budget reports, including program objective memoranda known in Pentagon jargon as POMs (to rhyme with “Moms”) and 5-year defense plans, or FYDPs (pronounced “Fid-ips”).

Access to such internal Pentagon planning documents can prove invaluable to a defense contractor, because they offer a preview of what weapons the military is planning to build, how many of them are likely to be bought and how much money the Pentagon plans to set aside for them.

A former mid-level military purchasing official said that “POM drills”--early reviews of spending priorities in which military officers hammer out internal agreements and compromises on future spending--begin about a year before the Pentagon budget is submitted to Congress. Program officers are literally locked in small rooms, sometimes for days at a time, until agreement is reached on what kind of new amphibious vehicle the Marine Corps needs, for example, or how many new aircraft the Navy wants to buy in the coming year.

All POM discussions and documents are supposed to be confidential, the former official said. But as soon as the meeting breaks up, contractor sales representatives and consultants begin calling the Pentagon, asking whether their favored system made it into the POM and trying to find out how much money was set aside.

It is a time for former military officers who have gone to work for contractors to hit up their buddies for favors, for current military officers to think about their post-retirement plans and for freewheeling consultants to try to make or buy friends who can open the Pentagon’s vaults, the former official said.

“A retired lieutenant colonel, now working for one of the Beltway Bandits, calls a lieutenant colonel still in the service, a guy he’s known for 20 years, and says: ‘What’s going on with this program?’ It’s a daily occurrence during POM drills,” according to the former official, now an industry consultant himself.

Beltway Bandits are Washington-area firms that provide consulting services to government and industry, usually highly specialized. While some do detailed technical and analytical studies, others exist primarily as conduits to the government bureaucracy. They are scattered around the Capital Beltway, a freeway encircling Washington and running through newer Virginia and Maryland suburbs where many of these firms built their offices.

Intelligence Gathering

Within prescribed limits, such intelligence gathering is legitimate--even vital to the government and the defense industry. Companies need good information to make intelligent planning decisions and the Pentagon, for its part, needs strong suppliers well equipped to meet its special needs.

An official of one of the most prominent Beltway Bandits, a firm that does more than $300 million a year worth of studies for the U.S. government and private firms, said that in the last few years a new breed of bandit has sprung up, catering to defense contractors and sometimes operating at the edge of the law.

“I call them boutiques, four-man or five-man outfits, calling themselves ‘marketing representatives.’ I say they’re sleazeballs,” said the official, who asked that his name not be used. “These are usually very small offices. They don’t do anything. They don’t do studies. They don’t sell anything, except information.

“They’re connectors, fixers, who concentrate on the beginning of the process, who can go to their clients and say: ‘The government is interested in buying such and such.’ ”

Among other things, such early notice helps a company decide whether or not to bid on a Pentagon job, in itself often a multimillion-dollar decision. Preparing a bid for a complex weapons system can cost as much as $5 million and involve a project team of as many as 100 company employees, one military procurement specialist said.

‘Rent-a-General’ Firms

A subgroup of these “boutique” consulting houses are the so-called “rent-a-general” firms composed solely of former generals and admirals. Industry will turn to one of these outfits for help on a specific project, knowing that the former officer can pinpoint a colleague still in uniform who is in a position to help the company.

In the current inquiry, for example, prosecutors allege that former Assistant Navy Secretary Melvyn R. Paisley recommended last year that one of his clients, McDonnell Douglas Corp., retain retired Adm. James A. (Ace) Lyons, as a consultant on foreign aircraft sales. Lyons had just left his post as commander of the vast Pacific Command, which gave him access to top Korean military officers who were considering a major purchase of McDonnell Douglas F-18 jets.

Because military assignments rotate on a 2-year or 3-year cycle, a retired flag-rank officer has an incentive to cash in quickly on his connections because his friends will soon be moving on to new duties in the service, one retired officer said.

Once an item survives the Pentagon budget process, it then moves over to Congress, where it passes a number of pressure points that potential contractors or their agents can exploit. The budget first is reviewed by the Senate and House Armed Services committees and their influential staffs. Programs must survive scrutiny in these committees, and friends there can be critical.

Adding and Subtracting

Congress can add as well as subtract weapons from the Pentagon’s recommendations. The Pentagon has tried several times to kill the Midgetman missile, for example, but the House keeps funding it. Individual lawmakers routinely lobby their colleagues to vote for weapons that would be built in their home districts, even those the military does not want.

Many defense sales representatives and independent consultants are former committee staff members who maintain close ties to the staffs and members of the committees. A plea to a congressman for information on a particular project, sweetened with speech fees, campaign contributions and promises of new manufacturing jobs in the district, often yields the desired effect, according to the defense aide of a Senate Armed Services Committee member.

Rep. Roy Dyson, for instance, who prosecutors say is under scrutiny in the current corruption investigation, accepted thousands of dollars in campaign contributions and honoraria for speeches from officials linked to Unisys Corp., a computer and defense electronics firm also under investigation. Dyson, a Maryland Democrat, sits on the House Armed Services Committee and its procurement subcommittee.

The appropriating committees of the House and Senate represent a final step before final votes on funding government projects and are the next access point for contractors. The name of the chairman of the defense panel of the House Appropriations Committee, Rep. Bill Chappell Jr. (D-Fla.), is said by federal law enforcement sources to have come up in the current fraud inquiry, although sources caution that the investigation is in its preliminary phase.

Chappell said last week that he sees as many as 100 defense industry representatives a day.

Basis for Company Bids

If a weapon survives Congress, it goes back to the Pentagon, where procurement officers prepare a Request for Proposals (RFP), a thick document containing the weapon’s specifications and performance requirements that form the basis for company bids. Industry representatives lobby military officials at this stage to get more detailed information on the specs--and sometimes to get them tailored in ways that favor their firm.

Investigators are studying evidence that industry representatives have offered bribes for favorable treatment at this stage too.

The real effort, however, and the key to the current fraud and bribery case that prosecutors are building, comes near the end of the contracting process, the “best and final offer” stage.

After bids are received, Pentagon purchasing officials reject those firms that are not technically capable of carrying out a job and reduce the competition to at most three or four companies. Those firms are asked to submit their final offers, which are evaluated solely on price.

“Now information on what the other guy’s price structure looks like, or what particular hardware piece he’s bidding, any information from his bid can be absolutely decisive,” said an industry consultant familiar with the process.

“The sleazeball gets this key data and might sell the information to one or more of the bidders. He can start a bidding war. Once you’ve lost two or three (competitions) because you played clean, you’re in trouble in your company. The incentive to participate and just not ask questions is very high.

“Once it starts, it spreads like a cancer; it contaminates everybody,” he said.

Federal prosecutors are investigating whether top Navy officials sold “best and final offer” data relating to aircraft and jet engine sales to consultants, who passed the information to McDonnell Douglas and United Technologies Corp. These sensitive bidding documents are clearly marked “proprietary” and every industry executive knows he is not supposed to have such data from rival firms, an official familiar with the process said.

Investigators are looking at 75 to 100 contracts, 15 major defense firms and about 50 consultants, according to U.S. Atty. Henry E. Hudson.

The investigators who interviewed Edgington, the GTE executive, asked him why, knowing that he had unauthorized Pentagon documents and was continuing to receive them, he did not shut off the supply.

According to the agent’s memorandum, Edgington replied: “If you already have your feet in the mud, why take a shower?”