Judge Rules Litton Shifted Costs Illegally : Defense: The decision damages the company’s efforts to fend off a $500-million whistle- blower suit.

A federal judge in Los Angeles said Monday that a unit of Litton Industries illegally shifted computer costs to military accounts, handing the company a major setback in its effort to fend off a $500-million whistle-blower lawsuit.

U.S. District Judge Mariana R. Pfaelzer found that the cost accounting system used by Litton Systems Inc. of Woodland Hills was illegal under federal procurement laws. The ruling to define issues in the case was issued Thursday and made public Monday.

The lawsuit accuses Litton Systems of overcharging the Pentagon by $50 million by shifting costs at its computer-service business from commercial to military accounts.

But in order to collect damages the federal government and whistle-blower James Carton still must prove that Litton knowingly violated the law, said Carton’s attorney, Carl H. Moor.

Litton spokesman Robert Knapp declined to comment on the ruling, except to say it was under study by the company’s legal counsel.

Both Litton and attorneys for Carton asked Pfaelzer to rule on whether the accounting system was legal before deciding whether the case should go to trial.

“We’re certainly proceeding to prepare for trial,” Moor said.

The lawsuit was filed under the False Claims Act, the federal whistle-blower statute that allows private citizens to sue contractors on behalf of the government.

The act allows treble damages plus a fine of up to $10,000 for each false claim. The lawsuit contends there are thousands of false claims, making the case one of the largest government-supported whistle-blower actions currently in litigation, said Moor.

The lawsuit alleges that Litton deliberately shifted costs to the Pentagon by under-recording commercial usage and providing discounts to commercial customers.

Carton, former technical director for the Litton Computer Services division of Litton Systems, left Litton in 1987 after reporting the problem to the company. He filed the lawsuit in April, 1988, and now is a manager for Northrop Corp.