Northrop to Defy House Subpoena for Korean Report

Northrop’s board of directors has indicated that it will defy a congressional subpoena seeking a report on an internal investigation into allegedly improper payments the company made to South Koreans, according to congressional sources.

The House Energy and Commerce Committee’s subcommittee on oversight and investigation will open a hearing today into $7.75 million that Northrop paid to Koreans in 1984 and 1986 in an effort to help sell its jet fighter planes in that country.

O. Meredith Wilson, chairman of the executive committee of Northrop’s board, has been subpoenaed to appear at the hearing and apparently will do so. But Wilson let pass a deadline last Friday set by the subpoena to turn over the report of the internal investigation, which was conducted by the board’s law firm, Jones, Day, Reavis & Pogue.

Aggressive Legal Tactics

A federal grand jury also reportedly subpoenaed the report, but the law firm put up an elaborate legal defense, including an attempt to quash the subpoena, according to congressional investigators. A Justice Department official declined to comment, but it is believed that the grand jury is still without the report.

In addition, it was learned Tuesday that the Securities and Exchange Commission has opened at least a preliminary investigation into Northrop’s South Korean deals.

Although Northrop has said it was the innocent victim of a fraud in the Korean deals, investigators have said that posture is inconsistent with the company’s aggressive legal tactics in keeping the results of its internal probe secret.

Although it is not known whether the probe found any fault with Northrop managers, a number of high-level Northrop executives have relinquished their titles or retired during the investigation.

On Tuesday, Northrop announced the retirement of Welko E. Gasich, executive vice president for programs, who played a key role in the company’s Korean dealings and was one of three executives subpoenaed by the federal grand jury. A company press release issued Tuesday praised Gasich for his “key technical and management role in every aircraft program developed in the company during his 35-year Northrop career.”

Earlier this year, the firm’s chief financial officer and several vice presidents retired or were demoted. Other executives have been reassigned to areas outside their normal duties.

Northrop made two deals with South Koreans, ostensibly to help sell its F-20 jet fighter. One involved payment of $6.25 million, supposedly to build a luxury hotel in Seoul, an investment intended to help the Koreans finance weapons purchases. The hotel was never built; Northrop never sold any F-20s, and the company’s money remains unaccounted for.

A former Northrop consultant has alleged that the hotel was a bogus deal intended to provide a cover for a sales promotion fund of questionable legality.

Consent Decree

The incident is reminiscent of a 1975 scandal in which Northrop Chairman Thomas V. Jones was forced to sign a consent decree with the Securities and Exchange Commission. The SEC had accused Northrop of paying $30 million to foreigners without adequate controls required by securities laws.

That consent decree was accompanied by a permanent injunction setting down strict requirements for the conduct of Northrop’s foreign business. The injunction figures importantly in the current controversy.

In a filing with the SEC last month, Northrop disclosed that its executive committee was trying to determine whether the company had violated the terms of the 1975 consent decree.

In the filing, the company acknowledged that if allegations about the hotel deal are true, “the investment might constitute a violation of the Foreign Corrupt Practices Act” and of the consent decree.

In an apparent reference to the investigation by Jones, Day, Reavis & Pogue, the executive committee said it “is continuing its own investigation into these matters with the assistance of outside counsel. Thus far, the executive committee has not concluded that any applicable law or the terms of the 1975 consent decree entered into with the Securities and Exchange Commission have been violated.”

Continuing to Negotiate

Since the company has used the law firm’s investigation as the basis for its report to the SEC that no violations occurred in the South Korea deals, House subcommittee officials believe that it has waived its right to keep the report secret under attorney-client privilege.

The House subcommittee, chaired by Rep. John D. Dingell (D-Mich.), had expected to hear testimony at today’s hearing by Chairman Jones and several other top executives.

But by late Tuesday, it appeared that Jones and the other officers would refuse the request. Northrop Vice President Les Daly said Northrop’s attorneys were continuing to negotiate with the committee late in the day and that it was not known whether the company executives would appear at the hearing.

“The company has and will continue to cooperate with the committee,” a spokesman said. He added that the company has turned over 1,500 pages of documents to the panel.