Teledyne Case Poses a Dilemma for Feds : Litigation: How far will the government pursue a defense fraud lawsuit that could weaken a key Pentagon contractor?

In a case that could spark a major public policy debate, the federal government may have to decide how far to pursue a defense fraud lawsuit that could financially weaken a key Pentagon contractor.

The guilty plea, entered by Teledyne Industries on Monday, to federal charges that it falsified tests on electronic components appears to add credence to a related civil fraud suit that seeks damages of more than $1 billion.

Teledyne has agreed to pay a $17.5-million fine to settle the criminal case, in which it was accused of 35 counts of submitting false statements between 1987 and 1990. The company is easily capable of paying the criminal fine.

But the civil fine could be much larger, outstripping the firm’s financial resources. In 1991, Teledyne reported operating income of $211 million and total assets of $1.1 billion.

The case was filed by Emil Stache and Almon Muehlhausen under the sponsorship of Taxpayers Against Fraud, a nonprofit corporation that sponsors such whistle-blower suits.

The group has sponsored several major suits that brought in large awards, including a $50-million civil award from Singer and a $75-million criminal award from General Electric. The awards are going to be used to finance other lawsuits, according to Scott Armstrong, director of TAF.

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Armstrong asserted in a telephone interview Tuesday that Teledyne has asked the Bush Administration to intervene in the case and help the company avoid a large civil award.

“They should be disclosing this to their stockholders,” Armstrong said. “If they think the Bush Administration is going to get them out of it, it is an imprudent assumption. They are lobbying hard in Washington to get out of this. They are rolling the dice.”

“I don’t know where they get that. We don’t have any comment on the civil case at all,” said Teledyne spokesman Berkley Baker.

The TAF case alleges that the company sold more than 12 million relay switches to the Pentagon without adequate testing or with falsified testing.

The relays ordinarily would cost $6 each, but the government paid $26 so that each relay could be tested and certified perfect, Armstrong said. He asserted that the government was defrauded of $20 for each relay, or $240 million over a 10-year period.

If the court agrees, the $240 million would be trebled under federal law and the company would be liable for civil fines of another $250 million, Armstrong said.

So far, Teledyne has set aside $12 million for possible payments in the case, according to a recent company financial filing.

Separately, Teledyne reported Tuesday that it earned $16.3 million, or 29 cents a share, on sales of $708.6 million for the quarter ended Sept. 30. That contrasts with a loss of $79.8 million, or $1.44 a share, on sales of $757.7 million, in the year-earlier period. The earnings statement said that the civil suit could result in “additional loss contingency which is not currently estimable.”