Pentagon Fraud Scandal Washes Up in San Diego : FBI Search at Cubic Leaves Firm, Community Jittery About What Is Coming

At one of San Diego’s biggest defense firms, Cubic Corp., layoffs this spring aren’t the only nagging worry. There’s also the question of why the FBI spent six hours last month searching the office of Senior Vice President C. C. (Sam) Wellborn.

Even Cubic itself wants to know more. Last week, a federal magistrate in San Diego denied the company a copy of a sealed document in which investigators reveal their reasons for the June 14 search carried out as part of the unfolding Pentagon investigation.

Cubic’s Defense Systems subsidiary is the only San Diego company that has been the target of a search warrant in the probe. A major figure in the Pentagon investigation is William M. Galvin, a Washington defense consultant who has done work for Cubic.

A handful of other local firms are also curious about the investigation because they were unsuccessful bidders on programs that are now under scrutiny.

The unfolding Pentagon procurement scandal has its focus primarily in the Washington area, where investigators are probing the role of defense consultants and Pentagon officials in what prosecutors portray as a far-reaching fraud and bribery scandal.

But the scandal has also reached into communities across the nation where the defense industry does business--in St. Louis, the home of McDonnell Douglas, in Los Angeles, where three major defense contractors were searched, and here in San Diego.

While no longer the sleepy town that it was in 1919 when the Naval Station on San Diego Bay was established, the Defense Department--and particularly the Navy--is still vital to the region. An estimated 22% of the county’s estimated $42.1-billion economy during 1987 comes from the military and its retirees.

Not surprisingly, the scandal has also prompted considerable interest among the county’s sizable community of retired and active military personnel, partly because much of what has become public so far involves the Navy Department and Navy contracts.

“The facetious first response is that you immediately wonder which of your friends in the consulting business will be on that list,” acknowledged former Vice Adm. William St. George, who now practices law.

Earlier Scandal

Since few details are known about the Justice Department investigation, particularly as it might affect San Diego, people are “waiting for the second shoe to drop,” said retired Rear Adm. Bruce Boland, a county government official who retired in 1987 as commander of San Diego’s sprawling naval complex.

Procurement scandals, of course, are also not all that new to San Diego’s military community, which vividly recalls the Navy’s harsh response to a 1985 procurement scandal that rocked the Miramar Naval Air Station when it became known that the Navy had paid $630 each for a pair of ashtrays.

That scandal resulted in the formulation of new procurement regulations. And, “Two very fine Navy officers (in San Diego) both got ramrodded out of the service,” Boland said. “I’ll be interested to see the downstream fallout of this investigation.”

Just what fallout there will be in San Diego is far from certain. But sailors and Marines at the largest naval complex outside the Soviet Bloc could feel repercussions if contracts tainted by the probe are frozen, rebid or rescinded, according to former Adm. Edward Briggs, who retired recently after serving as commander of the surface fleet in the Atlantic.

“I’m worried about the effect (the investigation) will have on our ability to design, procure and deploy weapons,” Briggs said. “We may have already lost some combat subsystems.”

For now, however, the investigation and its effects seem to be limited, at least in San Diego. But some other individuals and companies besides Cubic have been touched by the swirling controversy.

The FBI in December tapped the telephone of Donald Illeman, a local defense industry consultant since the mid-1970s. The wiretap was revealed in an affidavit made public recently in Dallas.

The FBI did not, however, explain why Illeman’s telephone was tapped. Last month, the consultant would only say that he is “a friend” of one of the individuals whose name has surfaced in the investigation.

In court documents in San Diego concerning a 1982 divorce, Illeman’s former wife said William Parkin and Thomas Muldoon had been guests in their San Diego home. The FBI on June 14 searched the offices of Parkin and Muldoon, two Washington-area defense consultants.

In those divorce records, Illeman identified himself as a former manager of contracts for General Dynamics Electronics. He also said he had worked as a consultant for various defense contractors, including Teledyne, General Dynamics, Ford Aerospace, Cubic and Itek.

Meanwhile, at least two firms in San Diego have found that investigators are possibly reviewing the role of one of their competitors in winning a contract in 1985. That competitor, an Israeli firm named Mazlat, won a Navy contract that was awarded through the office of former Assistant Navy Secretary Melvyn R. Paisley.

FBI agents who searched Paisley’s Washington-area consulting offices on June 14 were looking for “letters, notes, and documentation related to Paisley’s involvement with . . . Mazlat,” according to the government’s search warrant.

Pacific Aerosystems, a relatively small San Diego-based company, was an unsuccessful bidder on that 1985 contract. Teledyne Ryan Aeronautical, another San Diego firm, elected not to compete for that contract.

One Los Angeles-based company elected not to bid on that contract because “we felt they (the Navy) had made a deal with the Israelis,” Developmental Sciences President Gerald Seeman said recently.

“You always have sour grapes after you lose a (competition),” said another executive who was involved in that competition. “But now I wonder if we were banging our heads against the wall for no purpose.”

Difficult Year

But, in San Diego, it is Cubic that finds itself in the spotlight. For Cubic, a miniconglomerate that also manufactures elevators and rapid transit fare-collection systems, the procurement investigation could not have surfaced at a more inopportune time.

Cubic began the year by laying off 400 of its 1,800 employees at its Defense Systems subsidiary after losing several key competitions for Defense Department contracts. Former managers at Defense Systems claim that the layoffs actually involved between 600 and 800 employees, including many senior-level employees.

As a result, Cubic officials--including Wellborn whose office was searched by the FBI on June 14--have been seeking to reassure Defense Systems employees.

“I think it’s time we begin talking about some of the good things we’ve got going for us,” wrote Wellborn in an upbeat column printed in Cubic’s June employee newsletter, “since we’ve all been concentrating in the last few months on the difficult task of streamlining.”

The pep talk was sorely needed.

In May, the subsidiary also lost a bid for an air reconnaissance contract that the company had expected to win. That three-year, $118-million contract would have given Cubic access to a new segment of the hotly competitive defense procurement industry.

In March, Cubic signed a $10.25-million settlement that ended an unrelated Army fraud investigation into a mine detector production contract that Cubic won during the early 1980s.

But Cubic’s defense contract problems really began in 1985 when Rockwell rescinded a multimillion-dollar B-1 Bomber flight simulation system subcontract that had been awarded to Cubic.

Cubic’s role as the “sole source” provider of the Air Force and Navy’s “Top Gun” air combat training system also has come under attack. The company was stunned in 1986 when Ford Aerospace became the first competitor to win a chunk of the Top Gun segment that Cubic has dominated since the early 1970s.

“The whole philosophy in the Defense Department has changed,” complained one former Cubic executive. “They’re no longer interested in (Cubic as) a sole source. They used to come back again and again to the original manufacturer, but now they very rarely do that.”

Little is known about what the investigators hoped to glean from their search of Wellborn’s office. However, a Cubic executive has acknowledged that the FBI warrant specifically mentioned the company’s Top Gun system.

Cubic has acknowledged that it recently had used VAMO, a company established by Galvin and operated by Vicki Paisley, whose name also has surfaced during the ongoing investigation. VAMO’s offices were searched on June 14, according to the FBI.

Cubic spokesmen have declined to comment on Galvin’s consulting role for Cubic, but court records show that the San Diego company between 1983 and 1985 paid $125,279.08 to Athena, another one of Galvin’s Virginia-based consulting firms.

Records of a civil lawsuit filed in San Diego against Galvin in 1985 contain copies of Galvin’s consulting agreement with Cubic and with Teledyne Ryan Aeronautical, a division of Los Angeles-based Teledyne.

According to the contract with Cubic, Galvin was to provide Cubic with scientists and analysts, who would work out of Galvin’s Washington office. Galvin was to report to Wellborn on monthly or as-needed basis, according to the documents.

Those court documents also indicate that Teledyne Ryan Aeronautical paid Galvin at least $50,000 in consulting fees between 1983 and 1985. Teledyne Ryan has declined to comment on its use of consultants.