The Long, Tortured Tale of Hughes’ Project 776 : Arms deals: Wrangling over a costly ‘80s-era air defense contract with Egypt has led to secret arbitration in Switzerland.
The handwritten note that Hughes Aircraft Co. Chairman Albert Wheelon received from former CIA agent James R. Fees in 1987 was only a harbinger of the dark storm approaching the firm’s headquarters in Los Angeles.
Hired to investigate whether Hughes Aircraft was making illegal payoffs to Egyptian military officers in connection with an air defense program, Fees offered this startling assessment:
“There are VERY serious problems to be cleared. My feelings--indeed my conviction--is that whatever it costs to clean up that situation must be expended . . . so that it is not left as a ticking time bomb.”
Wheelon relayed the warning to his superiors at General Motors Corp., which owns Hughes, but they brushed it aside with a reminder that GM had an important truck project in Egypt, he would later assert in a memo. When Wheelon pressed the issue, it led to an acrimonious board meeting in early 1988, and he was summarily fired a few weeks later.
But Wheelon’s ouster eight years ago as chief executive of the GM subsidiary is still echoing today. The Egyptian problems that Fees warned about have only grown worse and remain highly contentious.
Internal GM and Hughes documents obtained by The Times, along with interviews of key Hughes officials, tell an extraordinary story of internal strife in America’s largest industrial corporation over the Egyptian contract--one of the biggest U.S. defense electronics deals in the Middle East.
The unusual events in Hughes Aircraft’s Egypt program also have caught the attention of Pentagon officials, who are casting a wary eye at the growing problems of U.S. defense contractors doing business in the Arab and Israeli worlds.
Hughes fell behind schedule, ran into tough technical problems, lost millions of dollars and eventually began feuding with the Egyptian military, which suspected that Hughes had bribed officers.
The mess boiled over last year when Hughes took its case against Egypt to secret arbitration in Switzerland, charging that the Egyptian Ministry of Defense stiffed the firm for $180 million on the air defense program, known as Project 776.
GM and Hughes officials declined to discuss the suit or the events relating to Wheelon’s firing. GM General Counsel Thomas A. Gottschalk acknowledged in an interview that the company investigated reports of “possible improper payments” in Egypt, along with other countries, and reported the allegations to the U.S. attorney in Washington.
“There was no evidence to support any of those allegations,” Gottschalk said.
In recent years, however, General Electric Co., Teledyne Inc. and Lockheed Martin Corp., among others, have pleaded guilty to criminal charges involving the Middle East arms business. As the legal and financial woes have mounted, Pentagon officials earlier this year quietly began to clamp down on international arms deals.
The roots of today’s problems reach back to the 1979 Camp David accords, in which the U.S. government agreed to underwrite about $3 billion in annual arms deals for Egypt and Israel. The result was an extraordinary rush of defense orders, but with loose controls and in a region where paying gratuities--considered bribes under U.S. law--is not uncommon.
Egypt’s Ministry of Defense tapped Hughes in the early 1980s to build an air defense system that was supposed to cost $212 million, but after many modifications and additions ended up costing $480 million.
After the system was completed in 1993, Hughes demanded another $180 million, arguing that Egyptian military officials were responsible for delays and changes that caused significant cost overruns in the program and left Hughes with multimillion-dollar losses.
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Egyptian military officials balked at Hughes’ demand, reflecting their long-held belief that it was Hughes that had cheated Egypt. Egyptian officials were convinced that Hughes had padded the Project 776 contract by at least $40 million, according to the confidential report by Fees, the ex-CIA investigator.
When the dispute could not be resolved, it ended up in Swiss arbitration. It has become a matter so sensitive that GM officials refuse to even acknowledge the case’s existence. Egypt, meanwhile, has hired the powerful Washington law firm of Patton, Boggs & Blow. Among other things, Egypt is trying to show that Hughes has a history of gold-plating weapon systems and incurring massive cost overruns.
Gottschalk and Wheelon both declined to discuss the specific events, citing a confidentiality agreement. GM directors and former executives--including former Chairman Roger Smith--who were involved in Wheelon’s ouster declined repeated requests for interviews during the past year.
Gottschalk insisted that Wheelon’s firing “did not have anything to do with Egypt.” But interviews, internal company documents and a memorandum prepared by Wheelon’s attorney tell another story--showing that whatever other issues may have existed between Wheelon and GM, the Egyptian matter had become a bitter dispute. The timing of Wheelon’s firing coincided closely with his combative efforts to probe into the Egyptian deal.
The entire Project 776 program was paid for with U.S. foreign military sales credits, part of the annual $1.3 billion in military aid granted to Egypt under the Camp David accords, according to H. Diehl McKalip, deputy director of the Defense Security Assistance Agency.
But unlike most Egyptian arms contracts, Project 776 was a direct commercial deal that cut the Pentagon out of the loop. McKalip says the legal problem in which Hughes is now embroiled illustrates what can happen when U.S. defense firms make commercial weapons deals outside the U.S. military’s regulatory framework.
While commercial deals are permissible--and often desired because they incur less oversight--the majority of foreign weapons sales occur under the Pentagon’s Foreign Military Sales Program, making them subject to U.S. acquisition laws, McKalip said.
After watching bribery scandals unfold in Egypt, Israel and other Middle East nations, McKalip’s organization concluded earlier this year that the commercial deals needed greater oversight and began for the first time to subject such deals to auditing during the course of the contracts.
The Pentagon had wanted an outright ban on funding commercial arms deals with U.S. credits after a scandal broke involving a General Electric contract with Israel. But Congress blocked the proposal after heavy lobbying by Israel, according to defense officials.
The problems for U.S. contractors frequently revolve around their foreign agents. Without a politically well-connected agent, a U.S. contractor has no chance at getting a contract with the Egyptian military.
Only months after becoming the new Hughes chairman, Wheelon learned about allegations that Mohamed Nosseir, Hughes’ influential sales representative in Cairo, was possibly making illegal payments to Egyptian officials, according to a 1993 memorandum prepared by Wheelon’s attorney to submit to GM’s legal staff after Wheelon was fired.
Hughes paid Nosseir $15,000 per month and put Nosseir’s firm, Alkan Group, under a $11.4-million contract, according to copies of the contracts and other records.
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Nosseir has a long list of blue-chip clients. In addition to Hughes, he also represents Rockwell International Corp., Raytheon Co. and AlliedSignal Inc., according to a recent advertisement that he placed in the Financial Times. He also holds a major interest in the Pepsi bottling franchise in Egypt.
But Hughes considered Nosseir a risk. A 1988 internal business analysis of the Egyptian arms market warned that the relationship with Nosseir was “unsatisfactory” because he bordered on being “too influential.”
“The company is vulnerable to embarrassment as a result of Nosseir’s activities, as perceived or in reality, connected directly to Hughes or not,” the report said.
The company undertook an unusually extensive investigation of Nosseir, including taking these highly unusual actions:
* Williams & Connolly, a Washington law firm, was hired to audit Alkan’s contract and asserted that it contained $4 million of slush. The report concluded that “the contract has enough slack to allow for improper payments if Alkan decided to make them.”
* Fees, the ex-CIA agent, was hired at the recommendation former Director of Central Intelligence Richard M. Helms. Fees submitted two reports, the handwritten note (which carried the advisory “read and destroy”) and a formal report shortly after. Egyptian military leaders, Fees said, were “suspicious” that one of their generals had been “very close to the Hughes agent for many years.”
* Hughes International Vice President John Koehler was dispatched to Cairo to conduct an assessment. Nosseir complained that “he was not getting enough money to take care of government officials,” including paying for the medical care of an Egyptian general’s wife, Koehler recalled in a recent interview.
“It was not clear that either Egyptian or U.S. laws were being broken, but management was loose and we needed to tighten up,” said Koehler, who has since left Hughes.
Nosseir said in a recent interview that he was stunned by the Hughes investigation into whether payoffs had occurred and forcefully disputed the allegations. The medical care involved a retired general and was an act of charity, he said.
“I can assure you I am a guy who never pays anything,” Nosseir said. “No payments have been made by my organization, which has been in business for 21 years very honorably. Frankly, I am scared to pay anything.”
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After Wheelon began raising concerns about Nosseir, the late Donald Atwood, a GM vice president and chairman of the GM Hughes Electronics board, “directed Dr. Wheelon not to explore the matter further,” according to the memorandum submitted by Wheelon’s attorney. (GM Hughes Electronics, which has since changed its name to Hughes Electronics, owns Hughes Aircraft.)
“Atwood emphasized that GM had an important truck manufacturing plant in Egypt, which he did not want jeopardized by an investigation and the attendant publicity it might bring,” the memorandum added. Atwood later became deputy secretary of defense.
An enigma to many to knew him, Atwood died in April, 1994, leaving unanswered the question of why he stopped the investigation. What is known about Atwood is that he was “furious about the problems at Hughes, because he felt that Hughes was a den of corruption,” said a former executive involved in the investigations. “Everywhere he looked there was a can of worms. He was upset over the cost overruns.”
The Egyptian issue also left GM with a $30-million cash shortfall in December 1987 when Hughes temporarily stopped billing Egypt out of concern that each billing would represent a violation of U.S. antibribery laws.
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The issue came to head on March 21, 1988, when Atwood called a meeting of the board of GM Hughes Electronics. Company attorneys said an in-house investigation of Alkan’s contract found no evidence of improper payments.
Wheelon regarded the findings as a “whitewash” and demanded a written report be put into the corporate record--a demand that threw Atwood into a rage, according to the memorandum from Wheelon’s attorney. The board voted Wheelon down, but even minutes of the vote became disputed and were revised twice.
Two weeks later, Atwood told Wheelon he was being fired, and GM publicly announced that Wheelon was leaving “for personal reasons” in early May.
Matters only grew more ugly. After GM officials fired Wheelon, they leaked rumors to the media that alleged it was Wheelon who was involved in an unrelated payoff scheme, this one involving an investigation into satellite marketing in South America.
Until then, Wheelon had a solid reputation. Simon Ramo, a founder of TRW Inc., once said he was more confident of Wheelon’s integrity than that of his own mother.
A Justice Department investigation eventually cleared Wheelon of the allegations, and Wheelon’s many supporters now believe that GM executives leaked the information to discredit him. Gottschalk disputed that, saying he “can’t believe that Hughes as a corporation or as a management authorized anybody” to leak damaging information about Wheelon.
Wheelon eventually restored his reputation. In a ceremony last year at CIA headquarters in McLean, Va., former Director of Central Intelligence R. James Woolsey gave Wheelon one of the agency’s top awards, saying he had “proven that intelligence can be conducted successfully while hewing to democratic principles, to our commitment to freedom and to a sense of fair play and trust.”
Meanwhile, Nosseir was kept on by Hughes. Last year, Nosseir said he cautioned Hughes not to file the arbitration suit against Egypt because it would only sour relations with the government and it was contrary to how other U.S. contractors handle disputes.
“I warned Hughes the defense ministry had never been subjected to something like this before,” Nosseir recalled. After Egyptians learned about the suit, Nosseir added, “They were really pissed off. They started shouting, ‘We will blacklist them!’ ”
Nosseir wasn’t alone in that assessment about the arbitration case.
“If Hughes expects to sell anything to Egypt again,” a Pentagon export specialist said, “it ought to think twice.”
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CHRONOLOGY
Hughes Aircraft’s Egyptian Air Defense Program
1983: Egypt’s Ministry of Defense, following three years of study, issues Hughes Aircraft a contract to replace its Russian-built air defense systems.
1986: Egypt delays a $40-million payment to Hughes, after the firm encounters schedule delays and technical problems.
1987: Albert Wheelon is named chairman of Hughes Aircraft. He hires outside investigators to look into allegations that Hughes’ agent in Cairo has made political payoffs.
1988: Wheelon believes that Hughes faces potentially serious legal problems over the Egyptian contract, but General Motors executives disagree. Wheelon loses a key vote at a tumultuous board meeting and is fired several weeks later.
1992: Facing multimillion-dollar losses on the contract, Hughes claims that Egypt should pay for additional engineering work performed by the company. Egypt refuses, believing the contract has been inflated.
1994: Claiming it is owed $180 million, Hughes takes Egypt to secret arbitration in Switzerland.
-- RALPH VARTABEDIAN
