Northrop Indicted on Fraud Charges Over Faked Tests

A federal grand jury Tuesday indicted Northrop Corp. and five current and former employees on fraud charges for allegedly falsifying tests on components for nuclear-armed cruise missiles and for supplying equipment that they knew failed to meet government specifications.

The 167-count criminal indictment, which was filed late Tuesday in U.S. District Court in Los Angeles, alleges also that the company defrauded the government by improperly testing components for the AV-8B Harrier jets, used by the Marine Corps.

Assistant U.S. Atty. William Fahey said that the allegations in the indictment are among the most serious of any defense fraud case of its type because the weapons were nuclear-armed and because the allegedly fraudulent activity went on for 10 years.

The Air Force and Navy are currently “evaluating the evidence” involving the missile component tests by Northrop to determine whether they need to fix the weapons, the Justice Department said in a statement. A government report two years ago found that many of the Northrop components did not meet specifications.

Northrop already has been charged by the government with fraud in two civil cases for allegedly faking tests on the same cruise missile parts and on parts for the 10-warhead MX missile.

The firm is also facing at least three other current criminal investigations on allegations ranging from improper payments to South Korean organizations to the misuse of consultants in bidding for federal contracts. Fahey refused to comment on the status of those investigations.

Northrop spokesman Tony Cantafio said late Tuesday that the criminal charges “are unwarranted and the company strongly disputes any allegations of criminal behavior by the division or by (current) employees.” He added that the cruise missile components were found in a government report to have a satisfactory performance record.

In congressional hearings last year, company officers admitted that tests on the cruise missile parts had been falsified but said that the company had fired four employees and closed down the small operation where the work was being done.

If convicted, Northrop faces a fine of more than $30 million in the case, the Justice Department said.

The criminal indictment Tuesday includes charges that two high-ranking Northrop executives were involved in a conspiracy to supply missile guidance parts that contained a fluid that would freeze during operation at temperatures required under the contract.

The Northrop executives are Joseph Yamron, a corporate vice president and the general manager of the firm’s precision products division in Newton, Mass., and Northrop Vice President Leopold Engler of Massachusetts.

Ex-Employees Indicted

The others indicted are Charles Gonsalves, a former Northrop plant manager; Cheryl Hannan, a former quality assurance supervisor, and Howard Hyde, former chief engineer for the Northrop operation involved in the cruise missile program.

Northrop produced the components for the cruise missile at its Western Services Department, a small operation in El Monte that reported to the precision products division in Newton, Mass. The Western Services Department was shut down in December, 1987, after reports about the faked tests became public.

The operation produced a key guidance component called a flight data transmitter, which is used in air-launched cruise missiles designed for the B-52 and B-1 bombers. Northrop produced and shipped about 1,175 transmitters between 1981 and 1989 for use in the missiles.

The transmitters were assembled in El Monte from parts that were shipped from Northrop’s Newton, Mass., factory. The indictment alleges that Yamron and Engler knew that a damping fluid used in the transmitters’ gyroscope would freeze at temperatures between 40 degrees below zero and 50 degrees below zero. The contract required the transmitters to operate at temperatures as low as 65 below zero, the indictment said.

Such low temperatures are typical at high altitudes and over polar regions that would be on attack routes to the Soviet Union.

Northrop Study Cited

In 1983, Northrop conducted a study that concluded the cruise missiles would not perform at minus-65 degrees. In August, 1983, Engler presented a report to Yamron that concluded that the damping fluid “does not meet the -65 degrees F. requirement and never did.”

Nonetheless, Northrop continued to build transmitters containing the fluid. On July 1, 1988, the company notified Boeing Corp., the prime contractor for the missile, and the Air Force that it could not guarantee the performance of the transmitters at the required temperatures.

Cantafio, the Northrop spokesman, refused to answer specific questions about the transmitters, including whether the company is still using the original damping fluid in transmitters it is currently building.

Cantafio said Yamron and Engler will take “administrative leave” from their jobs until the charges are resolved. He said the company would stand behind the two executives.

The indictment charges that Northrop supervisors and employees in charge of testing the transmitters often failed to complete extensive tests at the El Monte plant.

The employees allegedly would also change test results to show that transmitters passed tests that they had failed. Northrop, Yamron, Engler, Gonsalves and Hannan are charged with multiple counts of falsifying certificates of conformance for the transmitters.

The indictment alleges also that Northrop, Gonsalves, Hyde and Hannan failed to conduct required vibration tests on components for the Harrier jets. The parts are called rate sensor assemblies and are part of the aircraft’s stabilization system. The company produced and shipped 189 sensor assemblies between 1982 and 1989. Cantafio said the assemblies have “an excellent record of reliability.”

Series of Problems

Securities analysts said that they did not expect the indictment to cause serious financial harm for Northrop but that it is another in a long series of painful incidents for the company.

“With everything else happening, they don’t need this right now,” said John Simon, an analyst at Seidler Amdec Securities in Los Angeles. “The B-2 bomber is being stretched out, the Tacit Rainbow (missile) is behind schedule. Things we don’t even know about are having trouble.”

Aerospace analyst Paul Nisbet of Prudential Bache Securities noted that even the maximum $30 million fine would amount to only 50 cents a share of Northrop stock, which “could be easily absorbed.”

Each of the individual defendants would face maximum jail sentences of five years on each count and fines ranging from $5,000 to $250,000.

Firm Could Be Suspended

Criminal indictments often result in actions by the Pentagon to suspend a defense contractor from receiving new contracts for a period of time at the division where the alleged wrongdoing occurred. Cantafio said that, under current government practices, such a suspension could be imposed even before a trial is conducted or a verdict is reached.

Last year, two employees at the precision products division brought a civil suit accusing Northrop of defrauding the government, a suit in which the Department of Justice joined last month. The suit asks for damages of $60 million.

The division accounts for about 3% of the corporation’s sales, about $174 million in 1988. It produces gyroscopes and other guidance components for aircraft and missiles.