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GE Suspended as Pentagon Contractor

March 29, 1985|JAMES GERSTENZANG | Times Staff Writer

WASHINGTON — General Electric Co., the nation's 10th-largest corporation, was temporarily suspended Thursday from receiving any new Pentagon contracts because of the giant manufacturer's indictment on federal fraud charges.

The suspension by the Air Force, which acted for the other service branches as well, could last throughout a lengthy court fight or could be lifted sooner, based on the company's future performance.

The company said it had not been convicted of any crime and is willing to reimburse the government "for any improper charges that may have been made." It added, in a statement: "In view of these facts, we consider the Air Force's action highly unusual and disproportionate to the issues under dispute."

Return of Profits Sought

In a related development, the Air Force asked General Electric and United Technologies Corp. to voluntarily return to the government $208 million of "excess" profits from spare parts contracts. The alleged higher margins turned up in a Pentagon audit that criticized the Air Force's and Navy's handling of the contracts.

The moves followed by several weeks the Pentagon's decision to temporarily suspend monthly payments of $40 million to General Dynamics Corp., the largest defense contractor, following discovery of contracting abuses. The actions reflect a growing effort at the Pentagon to crack down on procurement problems.

A federal grand jury indicted General Electric Tuesday in Philadelphia on charges that it had defrauded the Air Force of $800,000 on a Minuteman nuclear missile warhead contract. The grand jury alleged that company officials had altered employee time cards and other records to make it appear that cost overruns on the Minuteman contract had occurred on other government projects, for which reimbursements were available.

'Lack of Honesty'

In a letter to John F. Welch Jr., chairman and chief executive officer of General Electric, Air Force Secretary Verne Orr said the indictment "provides adequate evidence" of fraud and criminal offenses, as well as indications of "a lack of business integrity or business honesty" on the part of the company.

"The Air Force has determined that immediate suspension action is necessary to protect the interests of the government," Orr wrote in the letter, which was made public Thursday.

The Air Force secretary was acting on behalf of the Pentagon, a Defense Department spokesman said, because the Air Force does most of the government's defense business with General Electric.

The suspension applies to any new contracts General Electric would seek as well as renewal of old contracts. However, the terms of existing contracts will be fulfilled.

The company's 1983 contracts with the Pentagon were valued by the Aerospace Industry Assn. at $4.5 billion. The figures on its 1984 business are not yet available.

Wide Array of Contracts

The company's contracts with the government cover such products as aircraft engines, nuclear reactors for submarines and aircraft carriers, guided missile systems and transmission parts for military vehicles.

Orr gave the company 30 days to present arguments against the suspension.

An Air Force spokesman said General Electric could resume business with the Pentagon before the end of proceedings in U.S. District Court in Philadelphia if the Air Force decides that the company is taking proper steps to prevent conduct similar to that with which it has been charged. If the case goes to trial and a verdict is appealed, its resolution could take several years.

By Thursday, the indictment had produced no apparently significant impact on General Electric stock. It closed last week at 61 7/8 and dropped seven-eighths on Thursday to close at 59 1/8. However, the suspension of the company's right to bid on new contracts was announced after the New York Stock Exchange ended trading Thursday.

In seeking reimbursement on the spare-parts charges, Orr told Welch and Harry J. Gray, chairman and chief executive officer of United Technologies, that it is in the interest of the companies as well as the Pentagon to resolve military procurement problems voluntarily.

"National support for building military strength has been severely battered by public perception that we pay too much for the goods and services we acquire," he wrote.

$208 Million Sought

General Electric was asked to return $168 million; United Technologies was asked to hand back $40 million.

According to the Air Force, the excess profits on the contracts for spare parts purchased between 1978 and 1983 occurred because inflation was significantly lower than anticipated in 1982 and 1983, overhead estimates were higher than actual costs and changes were made in labor cost accounting.

The parts were for engines on at least six models of Air Force and Navy airplanes, including the C-5 transport, the largest cargo plane in the world, and the F-15 and F-16 fighter jets.

Ken Turpin, a spokesman for Pratt & Whitney, the United Technologies division that made the spare parts, said officials of the parent company believe that no refund is justified. But, he said, United Technologies is "anxious to work with the government to resolve the situation since our reputation as a major defense contractor is being questioned."

The company said in a statement that "the profits earned were reasonable and are consistent with the Department of Defense's own guidelines . . . ."

Brian H. Rowe, a General Electric senior vice president, said in response to the request for reimbursement that the company did nothing wrong.

"There were no cost overruns and no overcharging," he said. "The government did not pay one cent more than it contracted to pay for the parts."

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