Pentagon Contractor to Pay $115 Million in Fraud Case

Times Staff Writer

In the largest settlement of a criminal fraud case ever, the Sundstrand Corp., a Pentagon contractor, has agreed to pay the federal government $115 million, the Justice Department disclosed Wednesday.

The company also pleaded guilty to wide-ranging criminal conspiracies to overcharge on defense contracts and to illegally supply Defense Department workers and their wives with gifts. The company also admitted illegally billing taxpayers for saunas, country club dues, dog kennels, snow plowing, baby-sitters and servants for company executives.

The criminal activity, uncovered in a complex, 24-month investigation, spanned a seven-year period beginning in 1980, according to the Justice Department.

Sundstrand makes mechanical and fluid pumps, engine starting systems and rudder controls for a number of Navy and Air Force planes, including the F-15, F-16, F-18 fighters and the B-1B bomber. The company also makes parts for the space shuttle.


The Pentagon is currently studying whether the company, which did $574 million in business with the military in 1987, should be barred from receiving further defense contracts.

“What you have . . . is a tragedy,” said Anton R. Valukas, the U.S. Attorney for Northern Illinois. “You have a company which was doing business with the government which set out . . . to defraud the government--in essence to steal from the government. The only way that type of activity can be deterred is by swift, sure and severe criminal prosecution.”

In a separate investigation in Seattle, a Sundstrand subsidiary agreed to pay more than $1 million in fines, damages and penalties Wednesday after pleading guilty in federal court to fraudulently overcharging the government for work it performed.

Wednesday’s fines and settlements bring to $127.3 million the total that the company has paid to the government this year because of questionable business practices.


Inquiry Continues

“The plea agreements will terminate the Justice Department’s lengthly investigation of Sundstrand Corporation and reflect a major step towards putting this unfortunate chapter behind the company,” said Evans W. Erickson, Sundstrand’s board chairman and chief executive officer.

However a federal grand jury is continuing to investigate individuals within Sundstrand and “those with whom they dealt,” said Valukas. Among those being investigated, sources said, are some Pentagon personnel. That investigation will be concluded before the end of the year.

Last week two top Sundstrand officials were put on administrative leave because of the investigation. They were identified as Bernard W. Kittle, corporate group vice president for Sundstrand’s Advanced Technology Group, and Joseph McCarthy, the group’s vice president of finance and administration. A division officer has also been put on administrative leave and, in a statement Wednesday, the company disclosed that “administrative action has been taken with respect to several other employes.”

Admits to Abuses

Specifically, the company pleaded guilty in U.S. District Court in Chicago to conspiring:

--To hide massive cost overruns on Pentagon contracts and to improperly charge them to the Defense Department as “overhead.”

--To conceal the identities of Defense Department personnel and their spouses who received “illegal gratuities” during a seven-year period beginning in 1980. (Sundstrand, headquartered in Rockford, Ill., was not charged with bribery of public officials, and the Justice Department said Wednesday’s settlement was “unrelated” the massive investigation of alleged bribery by defense contractors now under way in Virginia.)


--To defraud the Internal Revenue Service in a scheme that involved hiding parts in a subsidiary’s warehouse to qualify for improper tax write-offs totaling millions of dollars.

Calls Attitude Common

Valukas said that the abuses uncovered in the Sundstrand investigation reflected attitudes common in the defense industry.

“There has been an attitude which has prevailed amongst a number of defense contractors (that) these matters would be resolved--if at all--civilly somewhere down the road. The attitude (was) that we would not commit the resources to very complex cases and produce indictments,” Valukas said.

A virtual army of government agencies converged on the Sundstrand investigation, including the Justice Department, FBI, the Defense Department’s inspector general, the IRS, the Defense Contract Audit Agency and the Defense Contract Administration Services regional office.

Settlement Kept Secret

The Chicago settlement was reached late in August but was kept secret until Wednesday to allow the company to complete unspecified business with another government agency, Valukas said.

Sundstrand’s future as a defense contractor is now under review, said Col. Francis B. Holland, commander of the regional Defense Contract Administration Services agency.


“Sundstrand has produced a good quality product for a long time,” the colonel said. “Unfortunately we paid too much money for it.”