Army Is Probing Its Settlement of McDonnell Audit : Aerospace: A criminal investigation is underway over the handling of an alleged $50.3 million in overcharges.

Army investigators have launched a criminal probe into the Army’s own decision to settle $50.3 million in alleged overcharges by McDonnell Douglas on the AH-64 Apache helicopter for less than five cents on the dollar, government officials said Wednesday.

The Army’s Criminal Investigative Division in St. Louis started the probe in recent days, according to key officials who asked not to be identified. A spokesman at the division’s Washington headquarters declined comment Wednesday.

In late 1990, the Army Aviation Systems Command in St. Louis quietly agreed to settle an audit conducted by the Defense Contract Audit Agency, which found McDonnell’s helicopter subsidiary in Mesa, Ariz., had overcharged the Army on production of the Apache helicopter by $50.3 million. The matter was settled for $2.4 million.

Audits of “defective pricing” are not unusual; typically, they are settled for less than the full amount of the alleged overcharging. But government procurement experts said the McDonnell settlement, amounting to just 5% of the alleged total overcharges, is highly unusual.

In addition, the settlement never was reported to audit agency officials, who continued to work on the audit in preparation for litigation. Only last month, senior audit agency leaders were astounded during a meeting in St. Louis to learn that the case had been settled more than a year earlier.

At least two House committees are looking into the audit settlement to determine whether it was part of a covert Pentagon plan to bail out McDonnell, which was suffering significant cash flow problems in late 1990 and early 1991.

The Pentagon’s inspector general concluded in a confidential report earlier this year that senior procurement officials in the Air Force had devised a bailout plan for McDonnell and that at least some actions were taken to carry out the plan.

Last week, the inspector general issued a report that found the Air Force had relieved McDonnell of substantial financial risk in December, 1990, when it prematurely declared the firm’s first C-17 cargo plane completed when, in fact, it was far from complete. The action was part of an overall effort to improve the firm’s cash flow, the report asserted.

It remains unclear who is the subject of the Army investigation in the Apache audit case. Probes handled by the Army’s Criminal Investigative Division are initiated on a criminal basis, but eventually may become civil or administrative cases, one official said.

In a statement earlier this month, Army officials said they were reviewing the settlement to determine whether it was “reasonable” and “final.” If not, the Army “is prepared to pursue all available remedies,” according to the statement.

The Army statement appears to be suggesting that the settlement did not go through the proper review and approval process within the Army, congressional experts said.

The Army official who settled the McDonnell overcharging claims was a low-level contracting officer who worked at the Mesa helicopter plant and has since retired, according to sources familiar with the case. But Army investigators reportedly are looking into whether a senior Army officer in Washington ordered the Mesa official to make the settlement.

The Army investigators are also said to be trying to determine who may have leaked the existence of the settlement to The Times.