Pentagon Ends Payment Freeze in Fraud Probe

Secretary of Defense Frank C. Carlucci, abruptly reversing course, announced Monday that the Pentagon will resume payments on nine Navy contracts that had been suspended 10 days ago because of suspicions that they were tainted by fraud or bribery.

Carlucci announced the freezing of payments on $1.2-billion worth of Navy programs on July 1, after search warrant affidavits unsealed in Dallas in the Pentagon procurement investigation indicated that the contracts might have been obtained as a result of inside information illegally acquired from a Navy official.

But a detailed review of information made public about the nine programs “does not indicate that any of the current contracts in the affected programs are tainted” and payments are being resumed immediately, the Pentagon said.

In announcing the freeze at a press conference, Carlucci had said, “We do not need to await convictions or even trials” to halt payments on suspect contracts.

The about-face indicates how difficult it will be for the Pentagon to act on allegations of corruption in contracts without airtight evidence. The freeze brought immediate complaints from aerospace companies that they were being punished before being found guilty of wrongdoing.

Payments were resumed to Unisys Corp. and TRW Inc. in a $712-million anti-submarine warfare program; to Litton Industries Inc. in a $150-million hand-held radio transmitter program; to ITT Corp. on a $51-million fiber optics program; to Varian Continental Electronics Inc. on a $6.3-million very low frequency transmitter; to Loral Terracom and Canadian Commercial on a $49-million radio program; and to Hughes Aircraft Co. and Raytheon Corp. on a $38-million carrier combat direction system.

Industry executives suggested that Carlucci had announced the freeze to make it appear that the Pentagon was moving aggressively to stamp out contracting fraud at a time when the investigation was gaining momentum.

Lawsuit Threat Discounted

Defense officials insisted that the reversal was not a response to the threat of lawsuits by as-yet-unindicted individuals and firms that were cut off by the Pentagon.

“Whatever was done, the lawyers are satisfied was done on solid legal ground,” a senior Defense Department official said. “The Pentagon’s authority to debar and suspend progress payments does not have to wait for conviction or even for indictments.”

According to the court documents released in Dallas, investigators believe Navy contracting official George G. Stone provided critical bid information to Mark C. Saunders, a former Navy official now working as a defense industry consultant in Alexandria, Va. The search warrants alleged that Saunders then sold the data to another consultant, Thomas E. Muldoon, and to at least one firm bidding on a Navy radio receiver contract.

The warrants, based on extensive wiretaps, alleged also that Stone tipped off Saunders to a wealth of valuable information about bids on eight other programs. Saunders passed much of the information to Muldoon, who sold it to his corporate clients, according to the warrants.

Stone, a division head in the Navy’s Space and Warfare Command, has been suspended without pay, the Navy said 10 days ago.

The Navy has also suspended Saunders, Saunders’ consulting firm and Muldoon from all government contract work. And the Navy is moving to bar Varian Continental Electronics Inc. and Varian executive Joe Bradley from government work.

Saunders allegedly worked with Bradley to shape Navy contract specifications to favor Varian’s bid to supply the Navy with a low-frequency radio transmitter. Monday’s announcement said that payments to Varian on this $6.3-million contract, which has been completed, were being resumed.

The suspensions of individuals and firms will remain in force “pending completion of the investigation and any ensuing legal proceedings,” unless modified, the Pentagon statement said.

The suspensions of Stone, Saunders, Bradley and Varian were announced by Carlucci when he outlined the freezing of the payments. Saunders’ firm, Acquisition Control Ltd. of Alexandria, was added Monday.

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