Northrop Acquitted in MX Missile Fraud Case

In a major setback for federal prosecution of defense fraud cases, a civil jury in Los Angeles has exonerated Northrop Grumman Corp. of certain allegations that it defrauded the government on the MX nuclear missile guidance system, the company announced Friday.

After an eight-week trial that included testimony by 55 witnesses, jurors rejected allegations that the Los Angeles-based company cheated the Air Force by using an unorthodox scheme of fictitious businesses and post office boxes to buy parts for the MX program.

The verdict, reached late Thursday, is almost certain to strengthen the defense industry’s hand in fighting off frequent charges that it routinely cheats the government.

Since the mid-1980s, fraud penalties against contractors have soared, even while weapons budgets have dropped about 70%. The Northrop Grumman trial marked the biggest battle yet, as well as the first time since federal fraud statutes were amended in 1986 that the Justice Department and a contractor have squared off in front of a civil jury.

The company faced potential damages well into the tens of millions of dollars.

“This verdict has to be ringing loudly at the Justice Department,” said Joe Coyne, the Los Angeles attorney who defended Northrop Grumman. “It has national implications because now the Justice Department has to think twice or three times before it picks these fights.”

Justice Department officials were reluctant to discuss the verdict. An agency spokesman would say only that he did not want to speculate about the effect the verdict would have.

The MX case is part of a titanic nine-year war between the Justice Department and Northrop Grumman involving a web of complex criminal and civil cases on a variety of defense programs.

Northrop Grumman pleaded guilty to criminal fraud charges in 1990 and agreed to large settlements of several major cases, but it has prevailed in other cases. Total legal costs for the company and the government reach into the tens of millions of dollars.

The Northrop Grumman verdict comes just as the Justice Department is losing another major case, involving a lawsuit brought by McDonnell Douglas Corp. and General Dynamics Corp. against the Navy for the cancellation of the A-12 attack jet program in the early 1990s.

One problem for government attorneys is that details of defense fraud are often too complex for blue-collar juries, said Lawrence Korb, a military specialist at the Brookings Institution, a Washington think tank.

“The procurement laws are so difficult to understand for the average person,” Korb said. “It is pretty hard to win. . . . The government will be more careful about going back to these cases.”

The Northrop Grumman suit was filed in 1987 by a Northrop supervisor, David Peterson, and engineer Jeffery Kroll. They filed the case under the federal False Claims Act, which allows individuals to sue contractors on behalf of the government and share in any recoveries. Later, the Justice Department joined in the prosecution.

Peterson and Kroll accused Northrop Grumman of setting up a series of fictitious businesses with about a quarter-million dollars of petty cash. The money was channeled into the personal checking accounts of employees so they could buy parts for ground equipment used to test MX missile guidance systems.

Northrop Grumman turned to the unusual arrangement because its elaborate purchasing system, which requires approvals from the military, was backed up and unable to provide enough parts to meet Air Force production schedules.

Employees ordered the parts from electronics suppliers and had the parts delivered to postal boxes on Aviation Boulevard, across the street from the plant in Hawthorne, according to testimony at congressional hearings in 1987.

One fictitious company--controlled by Peterson--was named Liaison Engineering Services. Unknown to Northrop Grumman, Peterson kept lengthy records of canceled checks and computer data, which he later turned over to congressional investigators and the Justice Department.

When the back-channel system became public, Northrop Grumman acknowledged that it had set up the fictitious businesses but argued that it was entirely legitimate under defense procurement rules and that its methods were not intended to defraud the government.

The jury agreed, believing that the government had created many of Northrop Grumman’s problems by attempting to compress the development schedule for the guidance system after Congress delayed legislation to launch the program, Coyne said.

The jury also rejected two other allegations brought by Peterson and Kroll that Northrop Grumman had made improper billings on a specialized piece of test equipment and had overcharged the Air Force on labor costs.

Under both federal court and defense procurement rules, Northrop will be able to recover its legal costs from the government, which it estimated at several million dollars, said company spokesman Tony Cantafio.

“We are delighted with the verdict of the jury,” Cantafio said. “The company’s position that it did nothing wrong has been vindicated.”

Nonetheless, Northrop Grumman did not walk away entirely free. It agreed to a side settlement in the case in March, involving allegations that Peterson and Kroll were wrongfully fired. The amount of the settlement was sealed in court records, but sources said it amounted to about $3.3 million, with about $500,000 each going to Peterson and Kroll. The settlement also covered the costs of their private attorney, Herbert Hafif.

Northrop Grumman is still facing several other cases stemming from the MX.

Only last month, a federal appeals court reinstituted the original MX case, brought by former engineer Brian Hyatt in 1986. In addition, a $4.2-million settlement on MX fraud allegations that Northrop Grumman agreed to make with former engineer Max Killingsworth is also under court review.