Northrop Fined $17 Million in Fraud Case
Northrop Corp. pleaded guilty to 34 criminal fraud charges Tuesday and agreed to pay the government $17 million, one of the largest fines ever assessed a defense contractor, to end a massive criminal case.
“This is a very significant victory in our efforts to combat defense contracting fraud and misconduct,” said Assistant U.S. Atty. William F. Fahey, lead prosecutor in the case.
The large fine, Fahey asserted, will be “a tremendous deterrent to corporations who choose to cut corners on certifications (of tests) on significant military programs.” He said investigators for the Air Force and the Navy, several of whom were in the courtroom, had spent the better part of three years developing the case.
Northrop spokesman Tony Cantafio said the plea agreement was “in the best interest of all parties involved.” The company issued a formal statement saying that the agreement represented “a complex compromise.”
The government agreed to drop 141 counts against Northrop and charges against two executives in return for a guilty plea on 34 counts of making false statements. The counts that were dropped included 139 charges of making false statements and two conspiracy charges. The guilty plea came on what was to have been the first day of a lengthy trial against the Century City-based defense contractor.
Additionally, the government agreed “not to prosecute, file criminal charges, or seek indictments” in certain investigations of the company, which were listed in sealed court papers mentioned in another document filed in connection with the plea agreement.
Northrop has been the subject of at least five investigations by the government, including allegations that tests on the MX missile were falsified, that the company overcharged the government on the B-2 stealth bomber, and that the company made improper payments to South Koreans.
It was not clear from documents filed Tuesday whether those investigations were among those that the Justice Department agreed not to prosecute. The Justice Department would not comment on how extensive that part of the agreement is.
“The resolution of all these other pending investigations and the government’s decision not to prosecute on them after all these highly publicized allegations were made over such a long period of time has to raise questions about the validity of those allegations in the first place,” said Les Daly, Northrop’s senior vice president for corporate affairs.
However, another Northrop spokesman said the company could not disclose any details about the sealed papers.
An aide to Rep. John Dingell (D-Mich.), one of the most outspoken critics of Northrop, said: “Why would such a list be sealed? That is outrageous. I am shocked. I don’t think Congress is going to be too happy about that.”
In April, 1989, a federal grand jury in Los Angeles indicted Northrop 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 indictment alleged that the company also defrauded the government by improperly testing components for the AV-8B Harrier jets, used by the Marine Corps.
At the time of the indictments, Fahey said that the allegations were among the most serious of any defense case of its type because the weapons were nuclear-armed and because the allegedly fraudulent activity went on for 10 years.
Of the 34 counts of false statements that Northrop pleaded guilty to, 23 involved the cruise missile and 11 involved the Harrier.
U.S. Circuit Judge Pamela A. Rymer, who has been presiding over the case, agreed to accept the pleas in a brief courtroom hearing.
As a critical element of the plea agreement, the government agreed to dismiss charges against two high-ranking Northrop executives. They were accused of a conspiracy to supply missile guidance parts that contained a fluid that would freeze during operation at temperatures required under the contract.
The company did not plead guilty to any of those charges, a point that was emphasized by lawyers for the two men, Joseph Yamron, 62, a corporate vice president and general manager of the firm’s precision products division in Newton, Mass., and Northrop Vice President Leopold Engler, 60, also of Massachusetts.
Engler has “been vindicated,” said his lawyer, Richard Kendall. “We’re pleased with the outcome. The ‘cold temperature’ charges were dropped totally,” he said, referring to the allegations about the fluid.
Both Yamron and Engler have been on administrative leave with pay since the charges were filed. Yamron’s lawyer, Walter Bonner, said he expected his client would return to active duty with the company as early as today.) “He absolutely maintains his innocence.”
Northrop spokesman Cantafio said both men would return to work soon.
Fahey said he thought dropping the charges against the two executives was an “appropriate resolution.”
Earlier in the afternoon, Clarence Gonsalves, a former Northrop plant manager in El Monte, where much of the illegal activity occurred, pleaded guilty to eight counts of the 175-count indictment, including conspiracy and falsifying test results.
Gonsalves’ lawyer, Vicki Podbersky, told Rymer that under an agreement reached with the government, prosecutors would recommend a three-year maximum sentence. However, she also acknowledged that he faced a potential fine of $1.28 million. Rymer set sentencing for Gonsalves for May 1.
Prosecutor Fahey said the government had agreed to give the other defendant in the case, Cheryl Hannan, a former quality assurance supervisor, pretrial diversion, essentially a form of probation. She was not required to make a guilty plea or pay a fine.
Hannan also had been accused of conspiracy and participating in the falsifying of test results on the cruise missile.
The fifth Northrop employee indicted in the case, Howard Hyde, an engineering supervisor in the Pomona plant, pleaded guilty to three counts of making false statements last year.
Negotiations to resolve the case were launched last Wednesday, Fahey said, as jury selection was being completed. Tuesday morning, the lawyers appeared at the courthouse, but did not give their opening statements as scheduled. Instead, they held a series of meetings leading up to the settlement. U.S. District Judge W. Matthew Byrne Jr. acted as mediator.
Northrop still faces civil fraud charges for allegedly faking tests on cruise missile parts. Rymer said that she would not require Northrop to pay any additional restitution because of the pending civil cases.
Until Tuesday, the largest criminal fine was believed to be the $5.5 million paid by Rockwell International in 1989.
A House Armed Services Committee source late Tuesday questioned whether the admission of guilt would prejudice the military services against Northrop in future contracts, since the Pentagon has established a policy of using past performance on contracts in awarding future work.
Northrop produced components for the cruise missile at its Western Services Department, a small operation located first in El Monte and then in Pomona, that reported to the precision products division in Newton, Mass. The Western Services Department was shut down in December, 1987, after reports about faked tests became public. The work was moved to the Massachusetts plant.
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.
During congressional hearings in 1988, Northrop’s former vice president Frank Lynch conceded: “We discovered a problem at our Pomona plant with regard to practices there which involved a number of programs in which test results were not properly represented, where . . . (we) falsified test results.”
Northrop officials said that they had shut down the small operation and fired four employees. Northrop attorneys Richard Sauber and Brad Brian said in court Tuesday that test results had been falsified and that employees falsely certified that tests had been performed.
Specifically, Sauber acknowledged that certificates of conformance with contract standards that had been filed by Northrop employees were false “because particular flight data transmitters either had failed product reliability verification testing or had been subject to incomplete . . . testing.”
After the late afternoon hearing, Northrop spokesman Cantafio asserted that “as of late summer, there had been only six failures out of 98” tests performed on cruise missile parts made by Northrop, and he said none of the failures had been attributed to the flight data transmitters. He said he did not know what accounted for the failures.
