Old Friend Gave Companies Entree to Lehman : Consultant, Clients Had Many Meetings With Navy Secretary
During John F. Lehman Jr.’s watch as secretary, the Navy discarded its traditional reliance on single contractors to provide everything from torpedoes to aircraft carriers. Instead, the system pitted contractor against contractor on the theory that cutthroat competition would translate into lower costs.
By all accounts, it did. But, with multibillion-dollar contracts at stake, weapons suppliers began grasping for any advantage they could get, including friends in high places in the Navy.
Nobody was higher in the Navy Department than Lehman. And his relationship with one particular defense consultant illustrates how companies eagerly enlisted a consultant who could give them ready access to Lehman in their battles for multibillion-dollar contracts.
Neither Lehman nor his consultant friend, S. Steven Karalekas, is under investigation in the current federal inquiry into contract fraud and bribery at the Defense Department. But a number of contracts obtained by some Karalekas clients are being examined for possible irregularities.
In his more than five years as secretary of the Navy, Lehman met regularly with a tight circle of defense contractors who were ushered into his office by Karalekas, a fellow Navy reservist and lawyer who had previously worked with Lehman in private business.
The frequent access obtained by Karalekas and his clients is documented in 1,417 pages of official daily logs that list Lehman’s business meetings, meals, travels and telephone conversations between 1982 and 1987.
The logs, obtained by The Times, show that the Navy secretary was readily available to Karalekas and executives of the huge defense firms he represented, such as McDonnell Douglas Corp. and General Electric Co. The logs indicated that few other consultants or contractors got in to see Lehman.
Pentagon officials and others in the defense industry question whether their close friendship did not create at least the appearance of impropriety.
For example, former Navy Secretary James H. Webb Jr., who served in the job for about a year after Lehman’s resignation in April, 1987, said that he “made it a habit to refuse” to see defense consultants, in part because he did not want to create the appearance of a conflict of interest.
Likewise, Sen. John W. Warner (R-Va.), Navy secretary during the Richard M. Nixon Administration, said he did not favor certain consultants or contractors during his term of office.
And a former Reagan Administration official, who is a mutual acquaintance of Lehman and Karalekas, said he was “offended” that Karalekas “cashed in” on the office of the Navy secretary. “I think it is a shameless exploitation of friendship,” said the official, who asked not to be identified.
Lehman has refused to make any statements to the press since the Defense Department investigation into procurement practices was disclosed last month.
Karalekas, denying that his relationship with the secretary was improper, said in an interview that he offered his clients far more than a special contact with the Navy secretary. “It’s a false statement that I was retained strictly as a door opener to John Lehman,” Karalekas said.
Karalekas, 45, the godfather of one of Lehman’s daughters, appears on the secretary’s logs 111 times during his 5 1/2 years in office, including 28 meetings at Lehman’s Pentagon office, a dinner cruise on the Potomac River and a weekend getaway to Atlantic City.
McDonnell Douglas signed up Karalekas in 1982 primarily for “a door-opening job” to provide an “entree” to Lehman, said retired Air Force Maj. Gen. Gordon M. Graham, the former head of the firm’s Washington office. “He was a very close friend of Lehman’s and on a very, very personal basis . . . . He certainly didn’t make any secret of that.”
Similarly, General Electric spokesman George H. Jamison said: “We retained Mr. Karalekas to provide access to Secretary Lehman . . . . “
The access Karalekas enjoyed at the Navy secretary’s office stopped when Lehman resigned last year.
When asked about his frequent appearances on Lehman’s daily logs, Karalekas told a reporter: “I’m pleased that my name does show up there because I think you would be more concerned or suspicious if I had a relationship with these clients and it never showed up on these logs. It’s an indication of the full disclosure and openness of the relationship.”
Karalekas, a 1965 graduate of the Naval Academy and a cheerleader during his freshman year, said he first met Lehman in 1971 when Karalekas worked for Charles W. Colson as a staff assistant to President Richard M. Nixon and Lehman was a National Security Council senior staff member under Henry A. Kissinger.
Karalekas said he and Lehman and their wives became so close that he now considers Lehman “a best friend.”
Lehman, in one of his final acts as secretary last year, made Karalekas’ wife, Christina, the sponsor of a new Navy ship, the minesweeper Champion. When Lehman joined Paine Webber Inc. in January, the Wall Street investment firm leased Washington office space from Karalekas.
One evening in 1982, Karalekas said, he was at the Sign of the Whale, a popular Washington watering hole, when “a drinking buddy” groused that McDonnell Douglas executives had no contacts with the young, brash secretary of the Navy.
“When I was first retained (by McDonnell Douglas), they did have a problem with the Navy refusing to talk with them,” Karalekas said. “They were looking to break the ice.”
For a major defense contractor such as McDonnell Douglas, tapping a source close to Lehman was considered critical because the Navy secretary had assumed personal control of the Navy’s multibillion-dollar acquisitions process.
Unlike his predecessors, Lehman was the official who would dictate the terms for contract competitions during the Reagan Administration’s massive Navy buildup.
For McDonnell Douglas, Karalekas provided the pipeline. He said he volunteered to the company, the nation’s largest defense contractor, that he was a close friend of Lehman, and he negotiated a consulting agreement.
Neither McDonnell Douglas nor Karalekas would disclose how much he was paid. Karalekas refused also to disclose his other defense clients. He said his negotiated deal with McDonnell Douglas included consulting work on a wide variety of issues before the Navy, the Air Force, the Army and other government agencies.
“I did not think it would be in their best interest or mine to be seen as someone who was simply dealing with John,” said Karalekas, who continues to represent McDonnell Douglas more than a year after Lehman left the Pentagon.
McDonnell Douglas offices were searched in connection with the investigation into procurement fraud. Investigators have sought documents related to the business dealings of McDonnell Douglas executives brought into Lehman’s office by Karalekas, including Thomas M. Gunn, Robert C. Little and James P. Caldwell, according to an FBI search warrant in St. Louis.
Karalekas brought Alan Bond and Alan Birchmore, directors of another client, Airship Industries Ltd., to see Lehman on Sept. 25, 1986, at a time when the firm was seeking a potential $5-billion contract to build 48 radar-surveillance blimps. Last year, Westinghouse and Airship won a hotly contested $168.9-million prototype contract over blimp-maker Goodyear Aerospace Corp.
