Air Force Denies Improper Aid to McDonnell : Defense: A 10,000-page report rebuts allegations that accelerated payments to the ailing aerospace firm were an illegal bailout.

In a rebuttal to the Pentagon inspector general, a massive Air Force report disputes allegations that five of its senior officials improperly bailed out McDonnell Douglas in 1990 and charges that the inspector general violated the rights of the accused individuals.

The Air Force findings are scheduled to be sent to Defense Secretary Les Aspin today, sources familiar with the report told The Times on Tuesday. It is the service’s first response to charges made in January by acting Inspector General Derek Vander Schaaf that it funneled nearly half a billion dollars to McDonnell in late 1990. The assistance allegedly violated some federal regulations and laws.

While the Air Force rejected the overall thrust of the inspector general’s findings, it did agree that two of the five officials made errors in judgment and should receive letters of rebuke in their personnel files, the sources said. The report clears three other Air Force officials of any improper conduct.

Neither of the reports carries the force of law. Disciplinary action would have to be taken by Aspin or by the Air Force.

Vander Schaaf had said he would not comment on the report until it was formally released to the Defense Department.

Meanwhile, the report asserts that McDonnell Douglas Chairman John McDonnell undertook an extensive lobbying campaign to solicit financial help and that senior Pentagon officials responded by trying to expedite payments within legal bounds--a markedly different interpretation of the controversial events than that of the inspector general.

“It all happened because John McDonnell came to this building and lobbied the bejeezus out of senior officials of the Defense Department,” said an official knowledgeable about the report. “Was it bad? No, that’s the system we have. That’s what lobbyists in this city do all day long. What is stinko is that the system we have has a lot of defects.”

The internal Air Force rebuttal, amounting to some 10,000 pages with supporting documentation, lambastes the inspector general for the methods used in investigating the alleged McDonnell bailout. The report was authored by Air Force acting General Counsel Myron Nordquist.

The Air Force charges that the inspector general’s report made more than 200 statements of fact not supported by any documentation and that it made dozens of allegations about unprofessional conduct by the five Air Force officials.

“When you start peeling back the onion, the facts don’t support the allegations made by the inspector general,” said Deputy Assistant Air Force Secretary Darleen Druyun, one of the five officials whose actions were criticized.

Confidential sources said the Air Force report cleared Druyun of any improper conduct. In an interview, Druyun said Air Force officials did undertake efforts to speed up the processing of payments to McDonnell in 1990, amid concern that the firm was on shaky financial ground. But she said there was no consideration given to making improper or extraordinary payments.

Nonetheless, two others undertook actions “to save the C-17 program” that went beyond sound judgment, the report finds. Careers, reputations and a military determination to overcome obstacles resulted in some officials taking actions on behalf of the Air Force that later looked like they were done for McDonnell’s welfare, said one official knowledgeable about the report.

In addition, the Air Force report notes that senior Defense Department officials were aware of all of the actions taken by the service in connection with McDonnell’s precarious financial condition in 1990. The involvement of Defense Department officials in the alleged bailout was left untouched by the inspector general.

But the Air Force report shows that former Deputy Defense Secretary Donald Atwood and former Undersecretary John Betti held meetings with John McDonnell at which his request for financial assistance was discussed.

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That the Air Force would take on the inspector general on any level is unprecedented, according to some Pentagon officials. Vander Schaaf is among the best known and most feared officials in the Pentagon. His scathing audits have terminated the careers of many generals, admirals and high-level civilians in recent years.

Nordquist asserted in his report that Vander Schaaf conducted his investigation as an audit but then issued his report as an “administrative inquiry” with criminal overtones. As a result, none of the five individuals cited for misconduct was accorded proper protection of their civil and criminal rights, the report says.

In addition to Druyun, the five individuals are Lt. Gen. Edward Barry, Maj. Gen. Michael Butchko, Brig. General John Nauseef and deputy director for C-17 contracting Al Hixenbaugh.

In a lengthy interview, Druyun characterized Vander Schaaf’s report as “character assassination” and said it had “covered up and twisted the truth.”

The other four individuals declined to comment.

Vander Schaaf said in his January report that Druyun had acted with others in September, 1990, to influence an $81.2-million payment to McDonnell Douglas for the C-17 that was not justified by the amount of progress the firm had made on the program.

Instead, the Air Force paid the money based on the firm’s desperate need for cash, Vander Schaaf said.

But Druyun said her participation in the entire program amounted to attending business meetings over a five-day period and she did not issue any orders, write memos or exert any pressure regarding the C-17 payments.

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Druyun said that had Air Force officials in 1990 followed recommendations suggested by Vander Schaaf in his report, the C-17 program would have collapsed and “the government wouldn’t have a damn thing for the $4 billion paid out at that point.”

Georgetown University Prof. Ralph C. Nash Jr., a federal contract law expert, examined the $81.2-million payment on Druyun’s behalf and found it to be “entirely proper.”

“My name has been dragged through the mud,” Druyun said. “I had been considered for a high-level job in the Pentagon and now my name is off the list.”