General Dynamics

GENERAL DYNAMICS Corporation, a St. Louis, Missouri-based defense contractor, is alleged to have defrauded the U.S. government by inflating costs, understating profits, and committing contract fraud by offering kickbacks in connection with a 1970s-era shipbuilding contract.

In 1985, government prosecutors charged the firm with criminal fraud stemming from early development work for a U.S. Army air-defense gun system, known as the Division Air Defense weapon (Divad). The allegations combined to make General[Page 351] Dynamics into a symbol of the problems with military procurement.

In the late 1970s, the U.S. government offered a subsidy program to make American companies more competitive with foreign shipbuilders. The government later claimed that Quincy Shipbuilding division of General Dynamics fabricated an estimate that was designed solely for the purpose of winning an $80 million subsidy. The subsidy allowed a profit of only 10 percent on the ships, but General Dynamics' actual profit was about three times that amount.

The government complaint, brought against the contractor in 1987, charged that the firm kept two sets of books for the building of the ships, which were used to carry liquefied natural gas. One set of books accurately portrayed the company's costs and profit projections. But the other set of books were based on widely inflated costs, misleading estimates and illegal kickbacks received by General Dynamic's officials for subcontracting work. General Dynamics, however, claimed that it was being penalized for setting overly optimistic goals for its work on the ships.

The company insisted that the supposedly secret set of books were merely estimates for an operating plan, and not hard figures reflecting costs and profits on the ships.

In 1991, the federal government attempted to recover $240 million by suing General Dynamics and four of its employees in a New York federal court. The sum included the $80 million subsidy as well as an additional $160 million in penalties. The government alleged that the kickbacks had inflated the amount of subsidies by $7 million. The Department of Justice later dropped the suit. In 1996, the government was ordered to pay the firm $25 million for legal fees incurred during the pursuit of the case.

General Dynamics is also alleged to have committed fraud in the 1980s by illegally billing the Pentagon for cost overruns related to the $5 billion Divad project. General Dynamics was briefly barred from bidding on defense contracts as a result of the charges. Under the direction of Defense Secretary Caspar Weinberger, the navy ended General Dynamic's suspension from new government contracts in 1986, and stirred controversy by promising that the government would never again suspend the company for any subsequent indictments involving its earlier activities. Generally, an indictment brings an automatic suspension from new contracts. The criminal action was subsequently withdrawn by the Justice Department.