Hughes Admits Test Failure in Microchip Case : Lawsuit: Whistle-blowing ex-employee discloses a memo supporting his contention that the company used millions of defective chips.

Hughes Aircraft conceded Wednesday that defective microchips caused the failure of at least one test torpedo that was part of a system scheduled to be installed in U.S. Navy submarines next year.

The admission came after a former staff engineer at Hughes’ Ground Systems Group in Fullerton--who has filed a $9.6-billion whistle-blower lawsuit against the defense giant--released an internal company memo supporting his contention that Hughes used millions of defective chips that could endanger the nation’s defense system.

Michael Denlinger filed suit in U.S. District Court in Santa Ana in June, alleging that Hughes covered up flaws in 4.75 million microchips installed in defense systems. The former senior staff engineer’s lawsuit was unsealed Tuesday.

On Tuesday, Hughes characterized Denlinger’s allegations as erroneous. The company said it was unaware of any system failures that had occurred as a result of the defective chips described by Denlinger.

But on Wednesday, Denlinger held a 90-minute news conference to outline his five-year battle with Hughes and release an inch-thick stack of documents supporting his case. Among the documents was a Hughes memo dated Sept. 28, 1988, saying that an AD-CAP (Advanced Capability) torpedo had failed during a test because of a cracked chip.

Hughes confirmed the contents of the memo. The company said it had been unable to thoroughly check Denlinger’s claim of a torpedo failure on Tuesday because of a companywide holiday. Hughes continues to deny charges that it covered up flaws in microchips.

Denlinger said at his news conference that he has been in hiding in Northern California since he resigned from Hughes in January because of what he said were repeated threats on his life. Two Orange County Sheriff’s Department officers and a private armed guard were on hand at the news conference.

“Our weapons systems have to be 100% reliable,” Denlinger said. “If they fail at any critical moment, disaster can happen. Lives can be lost. That is why I persisted.”

Denlinger alleges that Hughes took a shortcut in its soldering methods during a five-year period in the middle and late 1980s, causing cracks in chips that were supposed to be airtight in order to prevent corrosion.

Essentially, the chips were allegedly dipped almost whole into vats of solder--what Hughes calls its tinning process. The process can cause the chips to crack if they are exposed to cleaning solvents or cold solutions immediately afterward.

“You can take a glass and put it in an oven at 500 degrees Fahrenheit and then you throw it in a sink of cold water and it cracks,” Denlinger said.

Hughes has said that its soldering procedures conformed with government specifications but that it was aware of an industrywide problem of microchip cracking. The company established two committees--one in 1985 and another in 1987--to study the issue.

But Denlinger has alleged that the committees’ reports “contained certain gross inaccuracies known to be false by defendant Hughes,” according to his lawsuit. Hughes executives had “full knowledge that defective products would still be sold to the United States government,” the suit adds.

Among the documents released Wednesday was an internal memo dated Jan. 5, 1988, that says Hughes’ inventory contained a “significant number” of defective chips. The report’s authors concluded that “product reliability may be affected.” They recommended that the tinning process be suspended.

Documents released Wednesday by Denlinger’s attorneys show that General Dynamics Corp. issued an industrywide alert in 1986, warning of “catastrophic electrical failures” caused by microchips that were put through the tinning process.

Denlinger claims he made every effort to change what he thought was a flawed system at Hughes before deciding to sue the company under the federal False Claims Act, a 1986 law that divides any spoils between the complainant and the U.S. government.

“There was a conflict between my own code of professional ethics and the conduct of Hughes management,” Denlinger said. He made comparisons to the space shuttle Challenger disaster, which resulted from a flawed part.

Denlinger said his repeated warnings, including written reports, were mostly ignored by management. “They swatted me away like a fly,” Denlinger said. “I was a nuisance to them.”

Hughes spokesman Dan Reeder said Denlinger’s opinion was simply different from that of his colleagues.

Denlinger said he went into seclusion early this year because he said he didn’t want Hughes officials to be able to find him. He claims someone shot at him in early June when he was wading in a tide pool in Morro Bay.

On Wednesday, his attorneys sent a telegram to the Justice Department, seeking protection for their client.

“We have just become aware of this request,” said Michael Robinson, a Justice Department spokesman. “He only made the request (Wednesday) in spite of the fact that the case has been filed for some time.”