Northrop Dealt New Legal Blow Over Payment
In a second major legal setback for Northrop Corp., an international arbitration group has concluded that the company paid $6.25 million to a South Korean power broker in a possibly illegal attempt to sell its jet fighters to that country’s air force.
The arbitrator rejected Northrop’s claim that the money was intended to finance the building of a luxury hotel. The ruling said that three company vice presidents were aware of the real purpose of the funds and that its chairman, Thomas V. Jones, probably knew of and approved the payment.
“This is not a situation where low-ranking officers colluded to defraud Northrop but where Northrop acted, probably illegally, through its top management,” said Wolfgang Kuhn, a German lawyer who served as arbitrator for the International Court of Arbitration. The independent, nongovernmental court is affiliated with the International Chamber of Commerce.
Jones stepped down as chairman of Northrop Wednesday and was replaced by the company’s chief executive, Kent Kresa. A spokesman said that Jones’ retirement is not related to the ruling.
The new arbitration findings are similar to a report issued in May by a Korean arbitrator, who also had been asked to settle a dispute between Northrop and the Koreans who received the money. But the new decision provides substantially more detail, raises the issue of illegality and, according to a federal investigator, is likely to add fuel to two pending criminal inquiries.
A copy of the secret arbitration decision, dated Sept. 4, was obtained by The Times.
Northrop officials said Wednesday that they disagreed with the conclusions and will pursue a civil lawsuit in Korea to recover the money. They said that the report does not say the money was intended to bribe Korean government officials.
“The ruling makes no conclusion or finding to support widespread reports and allegations that the company’s investment was to be used to make payments to Korean government officials,” said company spokesman Tony Cantafio.
Cantafio said that he does not know if the new ruling is binding on the company, although the court’s regulations make its decisions binding. Northrop has maintained that the decision by the Korean arbitrator was not binding.
Two federal grand juries are investigating whether the Northrop payment violated U.S. laws against bribing foreign officials and whether the firm or Jones violated the terms of a 1975 consent decree which alleged that Northrop made $30 million in foreign payments without proper financial controls.
In addition, Northrop executives will be challenged to explain the conclusions at a hearing later this year before a subcommittee of the House Energy and Commerce Committee. The panel is examining Northrop’s work for the Pentagon and its foreign practices.
The arbitration ruling “appears to be consistent with the subcommittee findings and provides an additional reason for us to question Northrop’s management and their practices in the (jet) sale,” said Rep. John D. Dingell (D-Mich.), chairman of the subcommittee.
Allegations that the $6.25 million was destined for payoffs have swirled around Northrop for two years and, while the new ruling does not say where the money wound up, it provides additional details to the plot.
The payment was made by Northrop in August, 1984, to an account in Hong Kong opened by a young girl and controlled by the late Park Chong Kyu, an influential Korean political operative and former presidential bodyguard.
Northrop has maintained that the money was for a joint venture with Park for a luxury hotel in Seoul aimed at bringing the company good will. But, according to the finding, a few days after the money was deposited, $3 million was transferred to Park’s account in Singapore and the remainder was dispersed to his associates.
Min Ha Lee, an aide to Park who received $2 million, was later jailed for violating Korean currency laws. James K. Shin, a Honolulu nightclub owner who led Northrop to Park, got $1 million. An additional $248,000 in cash and traveler’s checks went to Kang Sae-hi, also known in Korea as Wheelchair Kang.
Park, who owned a Seoul nightclub and once was a legislator, had no experience in hotel development. He did, however, assist Northrop in its efforts in 1984 to sell $2.5-billion worth of its new F-20 jet fighters to the Korean air force.
According to the ruling, the money was intended to promote the sale of these planes, and three Northrop vice presidents were aware of its real purpose. They were identified as Welko E. Gasich, senior vice president for programs; James A. Dorsey, vice president and manager of Pacific affairs, and Donald D. Foulds, vice president for trade.
All three men have left Northrop. Jan Lawrence Handzlik, an attorney for Foulds, said that his client had no knowledge of any agreement to divert funds to Park. Dorsey’s lawyer, Daniel H. Bookin, said that Dorsey has maintained consistently that he knew of nothing illegitimate in the hotel investment. Gasich’s lawyer did not return a telephone call.
On Oct. 10, 1984, Park arranged a demonstration flight of the F-20 in Korea and the plane crashed. Two months later, Park wrote a “Dear Tom” letter to Jones at Northrop assuring him that the crash was only a “temporary setback,” according to the ruling. Park also wrote that he had been assured by then-Korean President Chun Doo Hwan that the F-20 program was “go,” and he described conversations with a general and government minister about the plane.
However, Northrop never sold any F-20s to Korea and the plane project was dropped after the company invested $1.2 billion in it. The hotel was never built and Park died in December, 1985.
In concluding that there was no plan to build a hotel, the ruling said Northrop bypassed some of its own internal personnel in arranging the payment, sent the money to Hong Kong despite advice from its Korean lawyer that it had to be deposited in an account in Korea, and demonstrated little interest in the hotel deal until after the collapse of the jet sale.
In 1986, Los Angeles-based Northrop contended that it was defrauded by the Koreans in the hotel deal and filed a claim with the Korean Commercial Arbitration Board to get its money back. Northrop later dropped its claim in Korea and moved the case to the International Court of Arbitration.
But the Korean case was kept alive by the original defendants, who maintained that the Korean board had jurisdiction. Last May, the Korean arbitrator said that the money had been paid to Park to promote the sale of the F-20. Northrop officials challenged the findings and said that they would await the international court’s decision.
The new decision backed the Korean finding and went further by raising the issue of the legality of the payments and naming the Northrop officials who were aware of the deal with Park.
“The arbitrator is convinced . . . that Northrop’s highest management, including Mr. Dorsey, Mr. Foulds, Mr. Gasich and probably Mr. Jones knew of and approved the oral understanding and agreement with C.K. Park,” said the ruling.
CHAIRMAN RETIRES: Northrop’s Thomas V. Jones exits after 27 years. D1
