Sundstrand Corp., the Rockford-based government aerospace contractor, has agreed to plead guilty to federal overbilling charges and to repay more than $116 million to the government in the largest military fraud settlement in U.S. history, prosecutors announced Wednesday.
Chicago`s U.S. attorney, Anton R. Valukas, announced the company`s agreement to repay $115 million, with another $1.02 million repayment for overbilling announced by Gene Anderson, the U.S. attorney in Seattle.
The Chicago criminal case-by far the more sweeping of the two-deals with Sundstrand`s overcharging the Defense Department on subcontracts and spare parts for a wide range of Air Force and Navy aircraft, including F-16 and F-18 fighters, the B-1B bomber and cargo and refueling planes.
The company defrauded the government of millions of dollars in misbilled costs, including charges for travel by executives` spouses, snowplowing at executives` homes, airline club memberships, dog kennels, baby-sitting, air shows, radar detectors, non-business travel, lobbying costs, golf, tennis, country club dues, saunas, jewelry and servants for executives and their spouses, according to documents filed by Chicago prosecutors.
The firm also paid more than $100,000 in illegal gratuities to Defense Department officials in the form of wine, liquor, cocktails, meals, theater tickets, tickets to football, hockey and baseball games, golf outings, and motel rooms, according to criminal information filed Wednesday with the plea agreement.
Sundstrand also admitted that it concealed millions of dollars in cost overruns and defrauded the government through millions of dollars in improper tax write-offs by lying to government investigators.
Federal prosecutors in Chicago are continuing their criminal investigation, with it now centering on ”more than one” high-ranking executive with the firm, according to investigators, with possible indictments or guilty pleas expected within three months. Last week, Sunstrand placed two high-level executives, Bernard Kittle and Joseph McCarthy, on administrative leave and reassigned another, corporate controller A. Adrian Kemper, in actions related to the criminal case.
And Defense Department officials in Washington are negotiating with Sundstrand over millions of dollars in other civil overbilling claims arising out of audits of the company by Defense Department auditors. One of these overbillings concerns ”improper” charges on space shuttle contracts, the government said.
Defense Department officials are also considering whether to suspend or ban the company from future government aerospace work.
But Wednesday`s plea agreement brings to a close the federal prosecutors` investigation of the company itself.
”This represents the single most important and the largest fraud case in history related to a defense contractor,” said Don Mancuso, the Defense Department`s assistant inspector general for investigations.
Previously, the largest settlements involving alleged defense fraud were a $90 million payment by Bell Helicopter Textron Inc. last March, and $15 million in payments in 1986 by Litton Systems Inc., according to Mancuso.
Sundstrand, which makes constant-speed drive power mechanisms and electrical systems for aircraft, is doing $710 million in business with the federal government during 1988, according to Defense Department figures. Last year, Sunstrand`s total sales were slightly more than $1.4 billion.
The $115 million repayment includes the original overpayments by the government, as well as penalties and the costs of a grand jury investigation in Chicago. Of the total $115 million, $82 million must be repaid within five days, and the rest in three annual installments of $11 million each.
”The $115 million is actually much more than the amount the government was out in the criminal case,” Mancuso said.
The criminal investigation, spurred by at least a dozen audits by the Defense Contract Audit Agency that turned up more than $130 million in alleged overbillings here and in Seattle, was conducted by the Defense Department`s office of inspector general and the FBI. The Internal Revenue Service investigated the tax matters, and Assistant U.S. Attorney Keith C. Syfert supervised the entire investigation.
Valukas described the case as notice to contractors that defense fraud will not be tolerated by the government.
”Some defense contractors have viewed the federal government as unwilling or unable to enforce its procurement laws,” he said. But this extensive case, he said, ”will send a message to contractors and the people with whom they deal that the federal government can and will employ its resources to root out fraud in the defense industry.”
Evans W. Erikson, Sundstrand`s board chairman and chief executive officer, suggested the plea agreements in Chicago and Seattle ”reflect a major step towards putting this unfortunate chapter behind the company.”
But aerospace industry analysts said the ultimate effect of the criminal investigations into Sundstrand will depend on what executives, if any, are indicted, whether the company is suspended from future military work and how many additional millions of dollars must be shelled out to settle other complicated civil overbilling claims.
Edward Wheeler, vice president and analyst for the New York brokerage firm of County Natwest U.S.A., said Sundstrand has had many months to prepare itself for the financial loss in Wednesday`s settlement, but that, ”It would matter if the issues still outstanding are large.”
At this point, Sundstrand has repaid or agreed to repay the government $127.3 million for overbilling. That includes the amounts in Wednesday`s plea agreements, plus another $11.3 million already paid to settle government civil allegations in the Seattle case involving a subsidiary, Sundstrand Data Control Inc. of Redmond, Wash.
As of June 30, the company had set aside $130 million to cover such overbilling matters.
That apparently won`t be enough.
Sundstrand has conceded that ”the amounts the government might accept to resolve these disputes could exceed the amounts previously reserved by Sundstrand, and resolution could have a materially adverse impact on earnings.”
One investigator familiar with the Sundstrand case said civil repayments still looming ”could reach the neighborhood of $50 million,” though he cautioned that is currently very much a matter under negotiation.
A major part of Sundstrand`s overbilling conspiracy, according to the government, ”was to make Sundstrand more competitive and profitable by concealing millions of dollars in cost overruns on design and development contracts.
”It was part of the conspiracy that Sundstrand intentionally bid for design and development contracts at less than Sundstrand`s estimated cost to perform those contracts,” according to government-filed criminal information to which the company has agreed to plead guilty by Oct. 21.
Instead of admitting that cost overruns were taking place, Sundstrand
”concealed” the overruns and tried to pass them on to taxpayers by including them in overhead that was charged to the government.
Sundstrand`s conspiracy to defraud the government on taxes had to do with the firm`s taking millions of dollars in tax write-offs for ”purported losses on Sundstrand parts shipped to a warehousing company,” the Sajac Co. of Beaver Dam, Wis.
In the tax conspiracy, Sundstrand lied to government investigators ”to conceal the control exercised by Sundstrand over parts shipped to Sajac,”
according to the government.
