Pentagon Bans Northrop Unit From Contracts : Firm Calls Fraud Charges Against Precision Products Division ‘Unwarranted’

A Northrop division that was charged with criminal fraud last April, along with two of its top executives, has been suspended by the Air Force from obtaining new government contracts for an indefinite period.

The Northrop precision products division in Norwood, Mass., which builds guidance equipment and gyroscopes, was notified of its suspension Monday by Daniel Rak, deputy assistant Air Force secretary for acquisition, management and policy.

Northrop said in a statement Wednesday that “the charges are unwarranted and exaggerated and the suspension unnecessary.” The company also said it will “provide information in opposition” to the suspension and begin discussions immediately.

The suspension was not unexpected by Northrop, since the Pentagon has acted in recent cases to suspend contractors upon criminal indictment rather than conviction as was the case in the past.

So far, such suspensions against major prime contractors have lasted only a matter of months. But a letter of notification by Rak said the suspension against Northrop would remain in force pending the completion of the legal proceedings against the company, a condition that puts Northrop in a potentially awkward position.

Took Strong Actions

“It is clearly something that puts extreme pressure on Northrop,” said Wolfgang Demisch, an analyst at UBS Securities in New York. “It sounds like the Department of Defense is using its position as a customer more forcefully than it has to date.”

Northrop said it has already taken strong actions to correct the problems at the Pomona facility where the fraud allegedly occurred. It permanently closed the facility and fired the plant manager and several employees.

Northrop was indicted by a federal grand jury in Los Angeles on April 12 on 167 counts of fraud and conspiracy for allegedly falsifying tests on guidance components for nuclear armed cruise missiles. The indictment was modified last month to include 22 additional fraud counts.

In addition, the general manager of the precision products division, Joseph Yamron, and Vice President Leopold Engler were indicted on charges that they knowingly supplied defective gyroscopes to the Air Force. The two executives have been put on suspension.

Northrop says the charges “are unwarranted, and the company strongly disputes any allegations of criminal behavior by the division or by current employees.” Northrop spokesman Tony Cantafio said in April that the company would stand behind Yamron and Engler.

The precision products division employs about 1,900 workers and accounts for $145 million in annual sales, or 2.5% of Northrop’s total revenue.

Although the division is only a small part of Northrop’s business, the suspension comes at a politically inopportune time when Northrop is facing a major budget battle in Congress over its $70-billion B-2 bomber program.

Needs Good Will

“Defense contractors live off the good will of the body politic and to the extent that you are indicted or suspended, then you are more vulnerable in the halls of government,” Demisch said.

But Cantafio said, “This has nothing to do with the B-2.”

An Air Force spokesman confirmed that Northrop was suspended and that the service had planned to announce the suspension today.

In the letter, Rak said the suspension against the firm was based on the indictment that alleged Northrop and its employees “conspired to defraud the government by knowingly supplying untested and out-of-specification flight stabilization and control packages and making false, fictitious and fraudulent statements and representations” relating to the guidance equipment for a cruise missile and stabilization equipment for the Harrier jet.