Northrop Claim in S. Korea Case Rejected by Arbitrator : Aerospace: The firm said it paid $6.5 million as a goodwill gesture to win future jet sales. The current ruling, however, raises more questions about the company’s conduct.

In a stunning legal setback for Northrop, a South Korean arbitrator has rejected the company’s claim that it was the innocent victim of fraud when it paid $6.25 million to a Korean power broker in an effort to sell jet fighters to that nation’s air force.

Northrop has claimed that it paid the money to a company controlled by the late Park Chong Kyu, a former political operator in South Korea, ostensibly to build a luxury hotel in Seoul that would win the Los Angeles firm goodwill for future weapons sales.

But the payment to Park has become shrouded in controversy amid allegations that it was actually intended for political payoffs that would break U.S. laws.

Two federal grand juries are investigating whether Northrop violated provisions of the U.S. Foreign Corrupt Practices Act and whether the firm or its chairman, Thomas V. Jones, violated terms of a 1975 consent decree that alleged Northrop made $30 million in foreign payments without proper financial controls.

The claim rejected by the arbitrator was filed before the Korean Commercial Arbitration Board in 1987. Northrop has sought legal action to recover its money and clear the firm of allegations of wrongdoing, but the arbitrator’s decision seems to raise even more serious questions about its conduct in South Korea.

The arbitrator in the case concluded that Northrop’s $6.25-million payment “was for purposes other than for investment” in the hotel project and that Northrop failed to abide by Korean foreign investment laws.

The secret arbitration decision, dated May 31, was uncovered by the House Energy and Commerce Committee staff and has not been reported earlier.

The finding represents a “devastating blow to Northrop’s version of the events” and “strips away any veil of legitimacy,” said Rep. John D. Dingell (D-Mich.), chairman of the Energy and Commerce Committee. Dingell’s remarks came in a letter to Securities and Exchange Commission Chairman Richard C. Breeden, in which Dingell criticized Breeden for not conducting his own probe into the matter.

Northrop officials said Tuesday that the arbitrator’s decision is “not controlling or binding” and that the company will challenge the finding. The arbitration case was originally filed by Northrop, but was dropped when the company decided to file for arbitration before the International Chamber of Commerce. The Korean Commercial Arbitration Board case was kept alive by the original Korean defendants, who asserted the Korean board had jurisdiction.

“We said all along that this was an investment in a hotel, we were defrauded by a group of Koreans and that’s why we filed suit to recover the money,” said Northrop spokesman Tony Cantafio. “The (arbitrator’s) decision was a technical one and it was wrong. What he did was add language to the contract that wasn’t there.”

It remains unclear which arbitration claim will have precedence if the outcomes are conflicting, but the matter is likely to end up in Korean courts.

The arbitrator’s finding confirmed details of a 1988 Times investigation of the payment, which reported that Northrop violated its internal corporate policies and failed to comply with foreign investment laws in South Korea. Since the controversy surfaced in 1988, four senior Northrop executives connected with the matter have abruptly retired.

The funds remain unaccounted for, the hotel was never built and Northrop never sold any F-20 jet fighters to the Koreans or anybody else. The F-20 project was dropped after the company invested $1.2 billion of shareholder funds. The last F-20 is mounted on a wall in the Museum of Science and Industry in Los Angeles.

“Northrop shot themselves in the foot by bringing that arbitration case,” said a source close to the federal investigation. “They thought they were going to slam-dunk the Koreans. But they got an arbitrator who was familiar with international investment laws.”

The arbitrator was Choon Kyung Lee, the vice chairman and a partner in the accounting firm San Tong, which is owned by New York-based KPMG, the parent of the Peat Marwick accounting firm.

Lee found that “Northrop neither sought nor obtained MOF (Korean Ministry of Finance) approval, which is the prerequisite of foreign investment into Korea.” He also found that Northrop failed to follow Korean law that requires that funds be directly sent to South Korea in such investment projects.

Rather, in a bizarre deviation from normal corporate financial controls, Northrop executives wired the $6.25 million to Hong Kong to “an unknown passbook account opened by a young girl named Milli Kim,” according to the arbitrator’s finding. Kim was a friend of Park, according to investigators.

The arbitrator found that Northrop had been warned by its own Korean attorneys, Lee & Ko, that wiring funds to Hong Kong would not satisfy Korean law.

Indeed, Lee Min Ha, an aid to Park Chong Kyu in the hotel deal, was later jailed in South Korea for violating Korean foreign currency laws in the hotel deal.

Moreover, the joint hotel venture between Park Chong Kyu and Northrop was never properly consummated, according to the arbitrator. The arbitrator concluded that if Northrop remitted funds before receiving proper approvals for its joint venture with Park, then “it was done outside this agreement.” He found that Northrop did not invest any money in the joint venture company, known as the Asia Culture Travel Development.

A colorful cast of characters surrounded Northrop in the deal, and at the center was Park. Park, known as Pistol Park for his love of guns, was a former bodyguard to South Korean dictator Park Chun Hee, who was assassinated in 1979. Park Chong Kyu remained politically powerful afterward, however.

Park was owner of the Safari Club, a Seoul nightclub with a gaudy interior of red felt-covered walls. The club featured a private blackjack room and a special lounge where young hostesses were available. It was the Safari Club property that Park was supposed to contribute as his part of the hotel venture.

Northrop was led to Park by Jimmy K. Shin, a Honolulu nightclub operator, whom Northrop paid $102,000 annually as a consultant. In a 1986 letter to Northrop Chairman Jones, in which Shin claimed his reputation had been damaged, Shin alleged that the $6.25-million payment for the hotel was a “sales promotion fund.”

The hotel deal became just one of four deals that Northrop used to funnel money to Park Chong Kyu, according to the Times investigation. Others included hiring him as a direct consultant for $6,500 per month, hiring a Park-controlled bus company as a representative for jet fighters sales in South Korea and funding an obscure trading company in Hong Kong controlled by Park. The trading company, Bancaborro, employed two sons of former Northrop Vice President James Dorsey, according to an attorney involved in Northrop litigation.

By 1986, Northrop was desperate to extricate itself from these deals. As a final act, the company agreed to pay $1.5 million to end the sales representation agreement. But the money was paid through yet another Korean operator by the name of Kang Sae-hi, also known in Korea as Wheelchair Kang.

Kang had earlier written what was widely regarded as an extortion letter, in which he threatened to disclose a laundry list of improper activities in which Northrop had participated.

Seven months after writing the letter, Kang received through an intermediary $500,000 from Northrop, part of a $1.5-million payment to end the sales representation agreement, according to bank records obtained by The Times. The other $1 million was wired to a secret account at Credit Suisse, a bank in Lugano, Switzerland. The $1.5-million payment was made even though Park’s company, Dong Yang Express Co., had never earned any sales commissions.

The entire matter of the Korean deals appears headed for a public hearing by the House Energy and Commerce Committee, which has been investigating the matter for several years. The committee has subpoenaed Jones, but Jones has submitted an affidavit to the committee saying that if called to testify, he will assert his Fifth Amendment rights against self incrimination, according to a committee source.

Northrop’s board issued a reprimand to Jones for his role in the Korean deals but at the time took no further action. Since then, Jones has stepped down as chief executive of Northrop but remains chairman.

Jones declined to be interviewed.

In his letter to the SEC, Dingell charged: “Based on the evidence developed since 1988, including the findings of the Korean arbitrator, it would appear that Mr. Jones violated the requirements of his 1975 consent agreement with the SEC, as well as the Foreign Corrupt Practices Act. Mr. Jones was a key player in the Korean hotel deal.”

The letter to SEC Chairman Breeden asserts that the SEC enforcement staff was instructed to not investigate the Northrop case until the grand jury investigation is completed. Dingell asked who directed the enforcement staff to back off and why.

Mary McCue, an SEC spokeswoman, declined Tuesday to say if the SEC is investigating whether Northrop or Jones breached the consent decree.

“To the knowledge of senior officials currently with the commission, the charge that the commission enforcement division has been directed not to investigate alleged violations of a 1975 consent order involving Northrop Corp. and certain of its officers is simply not true,” McCue said.