The Year ('97) in Corporate Crime
Surprise! Arms Merchants Cheat
When one of the bolts holding a 500-pound Maverick missile to the wing of a military plane breaks, and the missile is left dangling, attached by only the remaining bolt--and when that sort of accident begins to happen rather often--you'd think the Pentagon's sleuths would quickly find out what the hell was going on. But it took the military years to figure out that United Telecontrol Electronics was knowingly using defective bolts to hold the launchers in place. Phony computer-controlled measurements made it look like the parts had passed inspection. Some company officials pleaded guilty to fraud; although their crime disrupted operations at air bases around the world--costing taxpayers big bucks--and put lives at risk, the penalties were far less than, say, a marijuana dealer would get. A former U.T.E. vice president got the maximum, an easy twenty-one months in prison and a $40,000 fine.
The Navy blames defective gearboxes on Navy F-18 fighters for seventy-one emergency landings and several in-flight fires, as well as the loss of an F-18 during the Gulf War. (They came to that conclusion after inspecting 150 gearboxes and finding that all--100 percent--were defective.) The outfit that made the lousy gearboxes, Lucas Industries, pleaded guilty to falsifying quality records and was penalized $106 million (not so large if you consider that Lucas has estimated yearly revenues of $6.7 billion).
Tec-Air Services and two of its execs pleaded guilty to fraud for failure to service properly aircraft emergency gear such as the oxygen apparatus that is supposed to be activated in case of accidental cabin depressurization. A big deal? Some would think so, seeing as how these systems are supplied to (among other aircraft) the Boeing jets used by the President and Vice President.
Does the Pentagon get angry about that sort of dangerous cheating? Nah. Maybe because it has become so commonplace. As the Journal says, "In courtrooms across the country, similar scenarios are playing out. Huge and small defense contractors are facing charges of manufacturing faulty products." Yes, and facing a host of other charges as well. Like fraud. And influence-peddling. And deceptive bookkeeping.
Alliant Techsystems was reportedly under investigation for overcharging the Pentagon by "tens of millions of dollars on various missile-production contracts." Alliant bought its space-propulsion contracts from Hercules, which itself is the target of a massive privately filed False Claims Act suit seeking hundreds of millions of dollars in damages for falsifying quality-control records, doctoring the books, etc. At first, Hercules denied the charges; then it claimed the government had known about the "multiple, recurring errors and procedural deviations" in the production of rocket motors, and therefore, being aware, it couldn't have been defrauded.
Arms merchants try to wear down accusers, and often succeed. But not always. In 1986 two women supervisors in a Hughes Aircraft plant alerted federal officials that the company was falsifying quality-control tests. Because of their whistleblowing, they say, they were harassed and were eventually hounded out. They sued Hughes under the False Claims Act--and a decade later they were finally victorious, winning $891,000 for themselves, $450,000 for their lawyers and $3.1 million for the government. This is nothing new for Hughes. Four years earlier it was convicted of criminal failure to test properly equipment vital to jet fighters, tanks and other U.S. weaponry and fined a piddling $3.5 million--and the Pentagon continued to do business with the company.
In this industry, it's constantly "déjà vu all over again." Journal reporter Andy Pasztor reminds us that "in the mid-1980s, Litton admitted that it had methodically defrauded the Pentagon for almost a decade by inflating prices, charging twice for some raw materials and failing to disclose rebates from vendors on dozens of Navy electronics contracts." Litton is still very much in the military business, and apparently some suspect it's still up to its old tricks, for federal agents raided its offices in Los Angeles to investigate alleged overcharges going back a decade.
If these rascals delay long enough, they are let off with cream-puff penalties. Lockheed Martin, the huge military contractor, closed the longest-running influence-peddling scandal--dating back to the eighties--by paying a mere $5.3 million on behalf of Martin Marietta Corporation, with which it merged in 1995. It was bad enough that such a trifling penalty could settle a suit accusing Martin Marietta of a $30 million overcharge. Worse, the cheap settlement wiped clean the slate of a company that had snagged its disputed contract with the help of an influence peddler and a crooked Navy department official. The contract was to build a supersonic low-altitude target to test the Navy's missile defense. The project was finally junked. Cost overruns--coming to almost 100 percent and due mostly to the contractor's faulty bid--helped kill it. But Martin Marietta walked away with $192 million.
McDonnell Douglas got off with a $500,000 fine for misleading the Pentagon on its $6.6 billion contract to build the C-17 cargo jet. The company kept telling the government it would break even, though its own estimates showed it would lose at least $1 billion--which it did. Guess who paid the difference.