Treasury Officials Reopen Weapons Probe : Investigation: Department is looking into allegations surrounding abrupt end to a 1993 undercover operation.

The Treasury Department has quietly reopened an internal investigation to determine whether U.S. Customs Service officials were pressured five years ago into prematurely ending an undercover operation to break up a plot to sell $70 million in arms abandoned in Vietnam, officials said.

Sources in Washington said the new probe was launched because officials believe an inquiry in 1993 into the abrupt end of the weapons investigation, code-named Operation Leatherneck, was not complete.

According to documents obtained by The Times and interviews with Treasury and Customs officials, the investigation into two weapons dealers was sanctioned at the highest levels of the U.S. government in May, 1990, at a time when federal law prohibited any trade with Vietnam.

Documents show that at least two Vietnamese generals and an official from the Ministry of Tourism were helping U.S. arms merchants obtain American-made weapons. The Vietnam trade embargo was lifted in 1994, but it is still illegal for U.S. citizens to purchase weapons left in Vietnam.

The U.S. arms dealers--one a resident of Miami, the other living in Bangkok, Thailand--had promised to deliver to undercover agents weapons ranging from F-5 jet fighters to thousands of M-16 rifles, according to the documents. The arms supposedly were going to end up being sold to governments in Latin America or Africa.

The new probe is looking into the reason the undercover operation was terminated. It began after Customs Special Agent Frank Caliendo--who was abruptly removed as lead investigator in the case and reassigned from Cleveland to Orange County--sued the Treasury Department, challenging his removal and the decision to end Operation Leatherneck.

Caliendo, 44, declined to be interviewed, but he alleges in the suit that Customs officials retaliated against him for demanding to know why he was removed from the case without explanation. A hearing on the suit is scheduled Tuesday in a Washington federal court.

Treasury Department spokesman Howard Schloss confirmed that “the Leatherneck investigation has been reopened internally by the [Treasury] inspector general.” The U.S. Customs Service is part of the Treasury Department.

Schloss added that the investigation centers on the role of the Treasury Department’s Office of Foreign Asset Control, which worked on Operation Leatherneck with the Customs field office in Cleveland.

Sources said that part of the internal investigation will focus on R. Richard Newcomb, director of the Office of Foreign Asset Control.

Newcomb declined to comment, but this is not the first time that his actions in a Vietnam embargo investigation have come under scrutiny. In 1991, he ordered a halt to a Customs investigation of allegations that U.S. companies were illegally doing business with Vietnam. The inspector general’s investigation reportedly is looking at the 1991 case, as well.

In a written statement to Treasury Department investigators, Steve Plitman, Newcomb’s former deputy, charged that Newcomb had ordered him to lie to Rep. John A. Boehner (R-Ohio) about why Operation Leatherneck was terminated. Boehner was making inquiries on behalf of Caliendo and an informant in the case, Mickey Downie, who was a licensed firearms dealer at the time.

“I absolutely refused and told Newcomb that the Leatherneck case had never been fully investigated to fruition,” Plitman said in a three-page declaration, which was obtained by The Times.

Plitman, who was transferred to Customs last month when his Treasury Department job was eliminated, declined to be interviewed. But a Treasury Department source said the internal investigation was reopened “in part because of the hell that Plitman raised about Newcomb’s role in Leatherneck.”

Documents show that the initial approval for Operation Leatherneck, which began in Cleveland, was given by the Undercover Review Committee at the Customs Department’s Washington headquarters.

The investigation fizzled when Caliendo, a former Marine officer, was removed and replaced by a younger agent who had no undercover training or experience. The operation was put on hold for two weeks, documents show, while the younger agent took a crash course in undercover work and weapons familiarization.

Richard Siegel, head of the Customs Service enforcement office in Cleveland who ordered Caliendo removed from Operation Leatherneck and later recommended his transfer to California, declined to comment on the new investigation, as did Customs spokesman Steve Duschesne in Washington.

The investigation comes in the wake of an unprecedented agreement reached last month by Treasury Department and Justice Department officials giving the FBI sole authority to investigate allegations of corruption in the Customs Department’s San Diego and Los Angeles districts. Normally, those investigations are done by Customs’ own internal affairs officers and the Inspector General’s agents.

C. Russell Twist, who represents Downie in a $20-million suit against the Treasury Department, said that Customs and Treasury officials have repeatedly resisted efforts by Caliendo and Downie to obtain internal reports concerning Operation Leatherneck and the first inspector general’s probe.

Downie, 45, a career informant, charged that misconduct by Treasury and Customs officials in closing the arms investigation cost him $20 million in informant payments he would have received had the case been prosecuted.

Immediately after leaving Operation Leatherneck, Downie went to work for the FBI as an informant in a corruption investigation of the Cleveland Police Department that resulted in 43 convictions.

Documents obtained by The Times show a web of contradictory reports from Customs and Treasury officials about why the arms investigation stalled.

In June, 1989, the two U.S. arms merchants asked for permission from the State Department and Newcomb to legally purchase and import the weapons from Vietnam. In a June 12, 1989, letter to Newcomb, one of the partners offered to donate “20% of the profits from the sale . . . to selected nonprofit organizations” in the United States.

Both Newcomb and State Department officials denied permission for the weapons transaction. Nonetheless, an associate of the two men approached Downie later that year at an Ohio gun show with the deal to market $70 million in weapons stored in Vietnam, not knowing of his ties to federal law enforcement agencies.

Downie contacted Caliendo, with whom he had worked on a variety of cases for 16 years. Caliendo, in turn, obtained permission from his superiors to begin an investigation of the arms deal. Over the next few weeks, Downie talked several times with the arms brokers and set up meetings to discuss the deal, according to the lawsuits.

As the investigation progressed, officials in Washington were informed, and according to one memo from Plitman, Operation Leatherneck “had great support from the White House and National Security Council.”

Four weeks into the undercover operation, however, Caliendo was yanked from the case and Downie refused to work with the new agent.

After Customs officials closed Operation Leatherneck, Siegel and other Customs officials asserted that the two arms merchants never intended to go through with the weapons deal. One Customs report labeled the American in Bangkok “a known con man.”

But a Treasury Department official who monitored the investigation said the arms dealers appeared genuine. “These people weren’t pretending. They were talking price, quantities and dates. We knew they had five ships available to transport all this stuff. We intended to seize the ships too. Caliendo had all this information confirmed, that’s why we made this a Class I [highest level of undercover operation],” said the official, who requested anonymity.

Documents show that Siegel offered different explanations of why his office closed the operation without making any arrests or seizures.

First, he said that federal prosecutors in Cleveland declined to prosecute because investigators had failed to buy any weapons. Then he told Treasury officials that Leatherneck had to be shut down because Caliendo “had lost all control” of informant Downie, whom he described as “running amok,” according to the documents obtained by The Times.

Plitman noted in his memo to Treasury investigators that he was involved in the operation “from the inception” and was “amazed” at the allegation that Caliendo had lost control of Downie.

“At no time during my involvement in this case did I ever hear one word about this kind of problem,” Plitman said in the memo. “And I had continuous contact with the Cleveland office throughout.”

Plitman acknowledged in his written statement that prosecutors “wanted guns on the table” before pursuing a prosecution. But he added that Customs officials ignored offers from Treasury officials “to do whatever was necessary to change that position to include the sending of a letter . . . explaining the critical and sensitive foreign policy and national security interests” at stake in pursuing the case.

According to Plitman’s memo, Siegel later offered a third explanation. The memo quotes Siegel as saying, “There were higher levels involved in the closing of this case.”

Siegel never offered any further explanation on the identity of the high-level officials.

In his suit, Caliendo is seeking to find out if there was pressure from high-level officials for his removal and transfer. It’s not the first time he has complained of how he has been treated during his career.

Caliendo joined the Customs Service in 1983 after leaving the Bureau of Alcohol, Tobacco and Firearms. The next year, he sued his former agency, alleging that it refused to give him a service recognition in retaliation for his testimony on behalf of female agents in a sex discrimination suit.

Caliendo settled the suit for an undisclosed amount, and the agency agreed to post a notice at the entrance to its Cleveland office saying that it had violated his civil rights.