Northrop Settlement Does Not End Its Legal Problems

Northrop sought Wednesday to portray its guilty plea on 34 counts of criminal fraud against the Pentagon as an apparent victory, but the settlement leaves unresolved a number of difficult legal problems and may result in additional punitive measures.

The Los Angeles aerospace firm remains the target of at least three major criminal investigations by grand juries around the country, despite an agreement under which the Justice Department is dropping several probes related to the MX missile, sources close to those cases said.

The settlement will clearly help the company in its efforts to put its legal problems behind it, securities analysts and other sources said Wednesday, and it is far less severe an outcome than it could have been. Nevertheless, the company still faces a wide range of difficulties.

The continuing criminal cases include allegations that the firm made political payoffs to South Koreans, that it bilked the Customs Service on conducting drug contraband auctions and that it overcharged the Air Force by $20 billion on the B-2 bomber.

Under the guilty plea Tuesday, Northrop admitted that it had falsified tests on a guidance device for nuclear-armed cruise missiles and for a flight stabilization system on the AV-8B Harrier jet. But charges against two executives were dropped.

As a result, one federal source said Wednesday that the government is examining whether Northrop or one of its divisions should be barred by the Pentagon from getting new contracts. The company and the Air Force are discussing that issue, the source said.

When a contractor has pleaded guilty to defrauding the government on two separate programs, it is generally “debarred,” the source said. But that rule is frequently broken “with a big company like Northrop.”

Northrop spokesman Tony Cantafio said the outcome of the case would aid the company’s efforts to eliminate an existing suspension imposed by the Pentagon on the precision products division after the firm’s indictment. He said he was unaware of any discussions on the overall issue of debarment.

While the company sought to put the best light on its guilty plea, trumpeting the fact that the government dropped 141 criminal counts, critics of the company said that the matters bargained away by the government were relatively minor compared to the ongoing investigations.

The Justice Department agreed to drop criminal cases involving allegations that the company improperly tested parts for the MX missile guidance system, improperly tested another MX part called a heat exchanger, and committed fraud in its use of petty cash to buy MX parts outside of normal purchasing channels, according to a written announcement distributed to Northrop employees. In addition, a probe into early allegations on B-2 fraud was dropped, but not more recent allegations.

And the government did not drop parallel civil cases on those matters. Northrop is a defendant in two civil suits brought jointly by former employees and the Justice Department. One case involves the same allegations to which the company pleaded guilty and the second case alleges that Northrop overcharged the Air Force in the petty cash scheme.

The guilty plea by Northrop will significantly strengthen the $63-million civil fraud case on the cruise missile, said Herbert Hafif, the Claremont attorney representing the former employees who brought the suit. Northrop attorneys Brad Brian and Richard Sauber declined to comment on any impact Tuesday’s plea might have on pending civil litigation.

A Northrop announcement to employees and shareholders Wednesday by company President Kent Kresa termed the criminal case involving the guilty plea as an “unnecessary ordeal” and termed the settlement as “gratifying to all of us that we have been able to resolve many of these issues.”

One securities analyst remarked after reading the statement, “They don’t think they did anything wrong.” Indeed, the Kresa statement did little to retreat from the company’s contention that the charges were “unwarranted.”

Hafif, whose clients made many of the original allegations against Northrop, dismissed out of hand the notion that Northrop had scored a victory against the government.

“That is like the captain of the Titanic saying we had a very successful evacuation,” Hafif said. “They are gloating over peanuts.”

Hafif said the issue of the petty cash fund was always a stronger civil case than a criminal case and that the criminal probe involving the MX missile was long ago dropped.

But Brian said Wednesday that he was “very pleased” with the settlement. He said the company had admitted problems with testing at its Pomona facility three years ago and would have been willing to settle those charges some time ago.

Brian added that the company and the government had been fighting for the past year over allegations that a fluid used in the cruise missile would not work and stressed that the government had dropped all those charges in the plea agreement.

“This is a complete and total victory for the company on those issues,” Brian said.

The Kresa statement said the Justice Department agreement with Northrop prevented the firm from disclosing to the news media some facts that it was able to provide to employees, stockholders, investors, customers and “other appropriate agencies.” But the company quoted the language of the compromise in the announcement and made it widely available.

Aerospace analyst Paul Nisbet of Prudential-Bache Securities said he was shocked. “It sounds like government censorship.”

Kresa was not available for an interview and a company spokesman declined to answer questions about the intent of the statement.

Assistant U.S. Attorney William F. Fahey, the lead prosecutor on the Northrop case, clearly was surprised when he was told about the statement, but said he would withhold comment until he had seen it.

Securities analysts were mixed in their interpretation of the settlement and its impact for the future of the troubled company.

Aerospace analyst Jack Modzelewski at Paine Webber said that while he has long felt the government’s case against Northrop was not a strong one, the settlement does not pull the company out of its serious problems.

“It helps, but no company has this many problems,” Modzelewski said. Last week, Paine Webber downgraded its recommendation on Northrop, advising investors to sell the stock.

Northrop last week reported that it lost $63.5 million in 1989, resulting from cost overruns on a number of programs and the slowdown in electronics business, caused partly by the Pentagon suspension of Northrop’s precision products division. That was the division involved in the fraudulent activity.