Hughes Accused of Overcharging on Defense Jobs : High-Level Manager at Firm Sues; Claim Involves Work on B-2 Bomber, F-18

A high-level manager at Hughes Aircraft has accused the firm of overcharging the government by $40 million on the radar system for the B-2 stealth bomber and F-18 jet fighter, according to a civil suit filed in U.S. District Court in Los Angeles.

The executive alleges in the suit that top-level officers of Hughes participated in a conspiracy to defraud the government by shifting development charges among programs in a way that increased the government’s costs.

The suit does not specifically identify the B-2 program but rather refers to a classified project designated as the “2301 special program contract.” The 2301 project was identified as the B-2 radar by other knowledgeable Hughes sources not involved in the lawsuit.

The suit is notable because the allegations were made by a member of upper middle management, William J. Schumer, who was division contracts manager at the Hughes Radar Systems Group in El Segundo. Such allegations against management seldom come from members of management itself.

He is still employed by Hughes, but in a different division.

Filed Under Court Seal

As a division contract manager, Schumer negotiated contracts and his signature could commit the corporation to multimillion-dollar contracts. There were reportedly only six such managers at the Radar Systems Group.

The suit, brought under the federal False Claims Act, was filed under court seal last January. It was quietly unsealed late last month and brought to the attention of The Times by sources at Hughes.

The Justice Department, which can intervene and join such lawsuits, is actively investigating the matter, according to Dean Francis Pace of Los Angeles, Schumer’s attorney. The investigation is being directed out of Washington rather than the local U.S. Attorney’s Office, an indication of the case’s sensitive nature.

“The highly classified nature of these contracts is a problem,” Pace said. “Very few people have access to these contracts.”

Indeed, the suit asserts, “Plaintiff believes that certain facts may not be alleged without jeopardizing national security.”

In a lengthy statement, Hughes Aircraft said the suit involves the allocation of charges among different contracts and that an internal investigation found that all the charges made were proper.

The suit alleges that starting in 1983 Hughes overcharged the government by shifting costs from a fixed-price contract for the radar on the F-15 jet fighter to cost-plus contracts on the B-2 bomber and the F-18 jet fighter.

Called Intentional

In general, when a defense contractor improperly transfers expenses from a fixed-price contract to cost-plus contract, it increases profit. On a firm fixed-price contract, each dollar of cost reduction represents an additional dollar of profit. But on a pure cost-plus contract, an additional dollar of cost will not affect profit.

The suit asserts that the mischarging was intentional and was done with the explicit knowledge of J. R. Giacoletto, currently president of the Radar Systems Group, and Meade Livesay, former president of the group. Giacoletto and Livesay could not be reached Thursday for comment.

Hughes won a contract for the 2301 special program on March 8, 1982, which specified that the Hughes radar for the F-15 jet fighter, known as the APG-63, would be adapted for the B-2 program, according to the suit. The radar processing core modules, which are the electronic guts of the radar, would be common to both programs.

Schumer alleges that Hughes agreed to develop an improvement to the F-15 radar that would be provided to the B-2 program at no cost.

Charges Spread Out

But in July 1983, Giacoletto told Schumer to draw up an internal “commonality agreement” that would divide the costs of developing the new hardware equally among the F-15, 2301 program and the F-18, the suit alleges. Schumer refused to do so, because it would be “triple dipping” and “a conscious contractual and legal violation,” the complaint said.

In September 1983, “Giacoletto summoned Schumer into his office and demanded to see what Schumer had done on the commonality agreement. Schumer reported that he had done nothing to create the agreement and joked, ‘Tell me where they send you so I can have my wife bake a cake with a file in it,”’ a disclosure statement by Schumer attached to the civil complaint said. “Giacoletto became angry and said, “Damn it. I am directing you to draw up that agreement.”

A commonality agreement eventually drawn up by somebody other than Schumer and dated March 15, 1985, provided for dividing some of the hardware development costs among the three programs. Ultimately, the charges for certain portions of the hardware development were spread out to the other contracts, the suit alleges.

Schumer is seeking treble damages permitted under the False Claims Act, which would amount to $120 million. Under the law, plaintiff’s can bring suits on behalf of the government and share in the recovery of damages.

In response to a Times inquiry, a Hughes statement said: “This matter involves the manner in which development costs should be allocated among several defense procurement programs in order to pay for the development of technology that benefits all of them. The method of allocation has been a subject of discussion between Hughes, the government and the prime contractors for approximately three years. Our internal investigation has confirmed that development costs on these programs were properly charged.”