Rockwell Gets Record Fine for Defense Fraud : Contractor Is Assessed $5.5-Million Penalty for Overbilling Air Force on Satellite System

The largest-ever criminal fine in a defense procurement fraud case--$5.5 million--was imposed Monday on Rockwell International Corp. for fraudulently overbilling the Air Force on a satellite navigation system.

U.S. District Judge Consuelo B. Marshall also ordered the giant aerospace contractor to pay restitution of $446,248 and placed the corporation on probation for five years, during which the company could be subject to further fines if it engages in any other fraud against the government.

Fine Called ‘Draconian’

The fine, which attorneys for the company called “Draconian,� was larger than the $5-million penalty government prosecutors had sought for Rockwell’s conditional guilty plea to charges of overbilling the government by nearly $500,000 on the $1.2-billion NAVSTAR global positioning system.

Rockwell attorneys also predicted that the sentence will have a “chilling effect� on the aerospace industry’s self-policing efforts.

Rockwell has maintained from the beginning that the overcharging and subsequent cover-up were the work of two upper-level management employees in the firm’s Seal Beach and Downey offices.

But government prosecutors contend that high-level corporate officials knew about the cover-up.

The company has retained the right to appeal the conviction based on Rockwell’s assertion that it has been prosecuted for a fraud that company officials discovered themselves and voluntarily revealed to the government under a Reagan Administration disclosure program.

“It’s hard to defend yourself when you’ve already turned your entire investigative files over to the government,� said lawyer James F. Neal, private counsel for the corporation.

“I had hoped and thought that there should be significant consideration given to the fact that it wasn’t aggressive law enforcement that caused us to be here,� Neal said. “It was vigorous self-policing by Rockwell.�

But government prosecutors said Rockwell disclosed the overbilling only after Defense Department auditors had begun asking questions about the NAVSTAR program.

“Would Rockwell have set the auditors straight . . . if they had not first raised (the overbilling) as a problem?� asked Assistant U.S. Atty. George Newhouse, who prosecuted the case with Assistant U.S. Atty. Stephen A. Mansfield. “To believe that Rockwell would have done this would have required a belief in something akin to the sugar fairy.�

U.S. Atty. Robert C. Bonner, who made a rare court appearance arguing for a stringent fine, said the $5.5-million penalty is the largest criminal fine ever imposed on a defense contractor, though restitution orders in some cases may have been larger. The fine, government prosecutors said, represents less than 1% of Rockwell’s $812 million profits for 1988.

“We’re quite pleased, and we hope that a fine of that magnitude will send out a message to the defense industry that the federal courts are taking defense procurement fraud very seriously,� Bonner said.

Lawyers for Rockwell predicted that the fine will have a chilling effect on defense contractors’ participation in the federal voluntary disclosure program, designed to relieve companies from liability if they volunteer information about defense fraud, reimburse the government for any losses and take steps to correct it.

‘Some Hesitation’

“I think it will cause some hesitation on the part of contractors in cases like this,� said Thomas E. Holliday, another private counsel for the firm.

In court, Rockwell attorneys emphasized that the company’s guilty plea was based on a doctrine of law under which the company must accept legal responsibility for the actions of company managers Donald H. Carter and Robert L. Zavodnik, both employees at Rockwell’s Satellite Systems Division, who were also indicted.

Zavodnik, who was fired in October, 1986, pleaded guilty and agreed to testify against Carter, his supervisor. Carter was acquitted at trial but was also eventually forced to leave the company.

The indictment accused Rockwell of obtaining secret reimbursement for unexpected repair costs on the NAVSTAR project from a subcontractor and then billing the Air Force for the same costs. The conspiracy count to which the company pleaded guilty also alleged that Rockwell attempted to cover up the fraud when federal auditors began asking questions.

At one point, Zavodnik met with auditors and delivered a speech blaming the erroneous charging on the “iterative process�--an allegation he later admitted was deliberately intended to confuse auditors.

Government prosecutors argued in court Monday that high-level corporate officials knew about the cover-up and may in fact have directed it.

“Rockwell attempts, your honor, to hold Carter and Zavodnik up as scapegoats,� Newhouse said. But “members of corporate management, including the corporate legal department, were aware of the deception. They were aware that a fraud on the DCAA (Defense Contract Audit Agency) was occurring. . . . They allowed the DCAA to be fooled.�

Neal heatedly rebutted that assertion, alleging that government prosecutors during Carter’s trial elicited testimony from Rockwell employees involved in the cover-up showing that they were more afraid of management finding out about the fraud than about the government discovering it.

“If the government believes corporate management is guilty of these offenses, they should have gone to the mat, as we would have, and not entered into this plea agreement,� Neal said.

In a statement issued after the sentencing, Rockwell again emphasized that it entered the guilty plea only because of its legal responsibility for its employees’ actions.

“Rockwell was sentenced today because of our responsibility under the law for the actions of our employees. We accept that responsibility, but we continue to believe that the company itself should not have been indicted,� the company said.