Firm Must Pay $1.9 Million in Fraud Tied to U.S. Jet Parts

Consolidated Aeronautics Corp. was ordered Monday to pay a $1-million fine and more than $987,000 in restitution for fraudulently substituting used or refurbished parts for new ones on critical safety components for a variety of U.S. military aircraft.

The company’s president, Gordon Strube, was sentenced to six months in custody and given a $300,000 fine, while Vice President Ronald Guy was ordered to serve a year in prison and pay a $50,000 fine.

The North Hollywood defense contracting firm, which supplied parts for the A-7, F-104, F-4 and B-52 military jets, among others, was one of the first to be charged in the Justice Department’s recent crackdown in Southern California on fraudulent product substitution in the defense industry.

“This kind of crime strikes at the very heart of our national security system,” Judge A. Wallace Tashima said. “The integrity of the defense contracting system depends on the integrity of the military procurement officers and the honesty and reliability of defense contractors.”

Criminal Charges

In criminal charges filed in late March, the U.S. attorney in Los Angeles accused Consolidated of substituting used or re-manufactured parts on a variety of aircraft systems and certifying to the government that they were new and unused.

Assistant U.S. Atty. William Fahey said substitutions of hydraulic parts on the flaps for the Navy’s A-7 attack jet and hook assemblies for the F-104 fighter could have led to fatal crashes if installed.

The company and its top two executives pleaded guilty in May to a variety of false statement and conspiracy charges, but they have insisted that none of the parts substituted were deficient, or if they were, that none would have endangered lives because of stringent military tests designed to detect defects on safety-critical military parts.

But Tashima rejected that claim on Monday, declaring that “the obvious hope was that these would get by, and that the substitutions would not be uncovered.”

A former Consolidated Aeronautics employee told investigating agents that about 80% of the parts the company shipped out as “new surplus” were in fact used, reconditioned or newly manufactured.

The employee said he was told by company management, including Guy and Strube, that product substitution was “all right” because “everyone was doing it,” according to the agents’ declarations in the case.

Old Jets

Another former employee told a federal grand jury that as much as 75% of Consolidated’s inventory of parts for sale came from “cannibalizing” old jets or from government warehouses.

In the case of “selector sets” supplied for the Navy’s A-7 aircraft, all of the parts supplied failed subsequent military tests, and the original manufacturer found them to have been improperly refurbished, Fahey said.

Company lawyer Joseph Petrillo, arguing that Consolidated’s “very survival is at stake,” said the company has successfully supplied aircraft parts for more than 34 years, with a rejection rate of only about half a percent on parts supplied to the government.

Strube, 69, of Beverly Hills, argued that he was ill and away from the company when much of the alleged wrongdoing occurred but agreed to plead guilty to three counts of making false statements and claims because he wanted to take responsibility for his company.

Partly in response to the executive’s need for medical treatment, Tashima specified that his six months in custody be spent in a community treatment center, suspending an additional 18 months in custody. He also ordered Strube to perform 1,000 hours of community service.

Guy, 43, of Encino, argued that his background in sales made him unaware of the government contracting requirements preventing the substitution of parts of purportedly equal quality.

“I deeply regret my wrongdoing,” he told the judge. “I never did intend to sell defective parts to the government.”

Guy was also ordered to perform 150 hours of community service.

Petrillo said it is likely the company will be barred from any government contracts for the next three years.