FBI Investigates Alleged Fraud, Kickbacks at NASA : Government: Space agency employees, consultants and major contractors may be involved, officials say.

The FBI is conducting a broad-ranging investigation into an alleged fraud and kickback scheme among private contractors and government officials at NASA’s Johnson Space Center in Houston, government and industry sources said.

Some targets of the investigation were drawn into a sting operation, in which the FBI set up a phony company that allegedly paid off a NASA official to help get a kidney-stone smashing machine onto a space shuttle flight.

The sting also drew in employees of major aerospace contractors, as well as consultants, who provide management and technical services for shuttle missions. In addition, a NASA astronaut, whose identity was unknown, has become a potential target in the investigation, said an industry official with direct knowledge of the case who asked to remain anonymous.

Martin Marietta, a major NASA contractor that is under investigation, has fired two employees of the services group it acquired in April from General Electric, a company spokesman said Thursday. The two employees, who were not identified, were “not key executives,” he said.

The names of other contractors under investigation could not be obtained, but high-level industry sources said some firms have begun conducting internal investigations related to the matter. About half a dozen NASA employees may be implicated and an unknown number of contractor employees, sources close to the case said.

Code-named Operation Lightning Strike, the FBI inquiry is believed to involve millions of dollars in fraud and has been described by officials familiar with the investigation as the biggest procurement fraud case since the Ill Wind inquiry of the late 1980s, in which 50 defense industry and Pentagon officials have been convicted.

The sting operation was called off Thursday after it was disclosed by Houston news media. It could not be determined whether authorities had suspected criminal activity before they set up the sting.

NASA officials acknowledged the existence of the investigation Thursday but withheld detailed comment about the case or its potential consequences. The FBI in Houston and the NASA inspector general declined to comment.

The NASA inquiry is all but certain to heighten scrutiny of the troubled space agency while it is trying to protect its major programs from budget cuts.

The National Aeronautics and Space Administration has suffered through a lengthy series of embarrassing technical failures, including the loss of the Mars Observer spacecraft and problems with the Galileo probe of Jupiter. Separately, the agency has been the target of recent charges that its management system is lax and encourages waste.

NASA Inspector General Bill D. Colvin, who is participating in the Lightning Strike case, testified in October that he had opened 450 investigations into waste and fraud at the agency.

The Lightning Strike case, the technical failures and the financial audits are likely to prompt questions about whether the problems can be traced to a common management failure in the agency, congressional staff said.

“NASA’s dismal record of contract mismanagement and faulty financial controls may have opened the door for these kinds of improprieties,” said Rep. John Conyers Jr. (D-Mich.), whose Government Operations Committee had requested Colvin’s audit.

In setting up the bogus Houston company, the FBI created a high-rolling executive, who actually was a special agent. The executive was said to have developed a kidney-stone smashing machine--which did not exist--that he wanted to test aboard a space shuttle flight.

The sting, aimed at NASA’s Life Sciences Division in Houston, allegedly offered cash to employees of major contractors and NASA in exchange for helping get the phony kidney machine, known as a lithotriptor, on board a shuttle flight.

If the initial allegations about the kickback scheme are borne out, said Rep. Anna G. Eshoo (D-Atherton), “it will further undermine confidence in this agency. It is a troubled agency. It is frustrating, maddening, shocking.”

Eshoo, a member of the House Space, Science and Technology Committee, sponsored legislation earlier this year to tighten financial management of NASA.

“There has been far too cozy a relationship between this agency and its contractors,” she said. “Now this scandal reported today could damage the case for any kind of space program.”

But the industry official knowledgeable about the case asserted that it is unlikely to rank as a major procurement fraud scandal. “This is by no means as big as Ill Wind, no matter how you measure it,” he said. “This is not a big deal. It is not going to affect some corporation’s bottom line.”