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Defense Contractor Pleads Guilty to Fraud : Justice: Simi Valley-based Natel Engineering Co. falsified test results on electronic circuits it supplied to the Pentagon for use in jet aircraft and missiles.


More than five years after federal agents opened a major defense fraud investigation against a Simi Valley contractor, the company pleaded guilty in federal court Tuesday and agreed to pay $2.2 million in fines for allowing untested computer parts to be used in fighter jets and missiles.

Natel Engineering Co. Inc. pleaded guilty to two counts of defense contract fraud for falsifying quality checks on computer circuits it manufactured for some of the U.S. military's most sophisticated weaponry.

The plea ended a 5 1/2-year probe by investigators from the U.S. Departments of Justice and Defense into charges that the company failed over a 10-year period to subject electronic components--known as hybrid circuits--to tough tests involving high temperatures and heavy use.

"We don't have any evidence of planes crashing because of this," Assistant U.S. Atty. Lawrence Middleton said. "On the other hand, we view it as very serious. These things are required to be tested for good reason."

Sudesh K. Arora, president of Natel, entered the criminal plea Tuesday on his company's behalf, in a negotiated settlement with the U.S. attorney's office that calls for the company to pay a $1-million fine by 1999. The company also agreed to undergo five years of federal probation, during which its officials must make installment payments on the fine and not violate any local, state or federal laws.

Two weeks earlier, according to Natel attorney Brad Bryan, the company agreed to pay $1.22 million in civil penalties in a civil suit filed against it by the Department of Justice and a former employee. Glenn A. Woodbury, a former Natel testing supervisor, blew the whistle on the company and his co-workers who he alleged were falsifying government-mandated tests on Natel components.

Arora said Tuesday afternoon that he entered the guilty plea on behalf of his company because "we're just trying to get it over with, to get on with it and go forward. It's a 6-year-old allegation. Those employees are no longer with the company."

Arora said the company has lost some business because of bad publicity surrounding the case, but not as a result of any failure of its hybrid circuits.

"Our customers still believe in us," Arora said as he walked out of federal court in Los Angeles. "They believe in the quality of the products we provide."

But Louis Warnick of the U.S. Air Force's Office of Special Investigations said Tuesday that at least one major defense contractor returned hundreds of hybrid circuits to Natel after the circuits flunked the contractor's independent quality tests. Warnick declined to name the contractor but said that the parts were to have been used in missiles and combat aircraft.

Natel's hybrid circuits are densely packed electronic devices, each about the size of a matchbox.

The devices are used to translate electronic signals from the cockpit into computer commands that control aircraft wing flaps, gun turrets and antennas.

The hybrid circuits are used in the Patriot missile system that saw highly publicized action in the Gulf War, and also in Hawk and Stinger missiles, the B-1B bomber and in the Air Force's F-15, F-16 and F-111 fighter jets and bombers. The circuits are also used in the Navy's F-14, E-6, E-2 and A-6 aircraft.

Natel sold the circuits to Hughes Aircraft Co., Martin Marietta Corp., Northrop Corp., and other large domestic contractors, as well as to Western-bloc nations that included Israel, Italy and Sweden. Natel officials have said that the company, which grossed $16 million in 1990, is one of only three firms worldwide that produce the circuit, and controls 40% of the worldwide market.

The Pentagon's contract required Natel to subject the circuits to temperatures ranging from subzero to higher than boiling, then shake them violently. The circuits also were to have been electrically powered for seven to 10 days in a test known as "burn-in."

But the civil lawsuit and the criminal complaint alleged that Natel employees passed hybrid circuits on to buyers after falsely certifying that they had undergone the complete battery of tests.

Woodbury, the former Natel employee who filed the lawsuit joined by the Justice Department, had worked at Natel for six months in 1987 as a testing supervisor before he was dismissed. One week after reporting to management that many circuits failed tests that he had conducted independently, the company told him that his position was being abolished.

At the time the suit was served on Natel, company president Arora dismissed Woodbury as a "disgruntled employee who is trying to make charges that are not true."

Woodbury's suit alleged that Natel produced about 10,000 hybrid circuits per month at an average price of $1,000, but some ranged as high as $10,000. Military purchases were about $6 million to $7 million a month.

Natel failed to complete all the tests, the suit said, and even created a software program for the desktop testing computer that would falsely show that a circuit passed tests when in fact it had failed.

The criminal complaint filed by the U.S. attorney's office cites specific hybrid circuits that Natel falsely certified had undergone full testing in July, 1987.

The testing is required in Natel's contract with the U.S. Department of Defense, and failing to comply with the contract "is absolutely serious in its own right," Middleton said.

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