The Pentagon Up for Sale

By Ed Magnuson

By spending $160 billion a year on its huge purchases of sophisticated weapons and mundane supplies, the U.S. Defense Department has become the "largest and the most important business enterprise in the world," declared a presidential commission that undertook to reform the Pentagon's procurement procedures two years ago. It is also a system, said the commission, that is "fundamentally ill" in the way it awards 15 million contracts annually. Just how wrong things have gone at the Pentagon became apparent last week. Operation Ill Wind, an extensive two-year investigation of fraud and bribery in the handling of major purchases, blew into the open, rattling Washington and the nation's military-industrial complex.

After being briefed on the probe, Republican Senator Charles Grassley predicted that it will reveal a "fraudulent use of taxpayers' money beyond the wildest imagination." Speaking into a committee microphone he thought was turned off, Republican Senator John Warner, a former Secretary of the Navy, confided that "rampant bribery in Government" had been uncovered. Congressman Les Aspin, chairman of the House Armed Services Committee, said he was "utterly astounded."

The cries of alarm seemed justified. Sources close to the investigation, conducted jointly by the FBI and the Naval Investigative Service, predicted that at least 100 people will be indicted within the next 90 days. Among the suspects are past and present Pentagon officials, as well as industry employees and consultants who allegedly paid bribes for inside information that gave companies an unfair advantage in bidding for contracts. Two Democratic Congressmen or their staffs are also under scrutiny. Eventually, Operation Ill Wind may rank as one of the biggest federal white-collar crime cases ever prosecuted.

Although the Reagan Administration's $2.2 trillion defense buildup has been plagued by cost overruns, phony bills from contractors and gold-plated weapons systems that often do not work, this scandal is different. Rarely, if ever, have such high-ranking Pentagon officials been suspected of graft on so large a scale. And while Defense Secretary Frank Carlucci maintained that the corruption concerned "individuals, not the institution," prosecutors disagreed. "It's going to show that the whole procurement process is a joke," contended a high-ranking investigator. While not claiming that all transactions are fraudulent, he insisted that "there hasn't been a significant contract let in the past six or eight years that hasn't been made on the basis of inside information."

For Carlucci, who has been lobbying with a reluctant Congress to sustain the defense buildup, the scandal will make his task more difficult. Nor will it help Vice President George Bush, whose campaign for the Oval Office has already been saddled with the Iran-contra affair, implications of widespread impropriety among Reagan appointees and the investigation of Attorney General Edwin Meese. The Vice President could be further embarrassed by his close association with former Navy Secretary John Lehman. One of the principal targets of the investigation is former Assistant Secretary of the Navy for Research, Engineering and Systems Melvyn Paisley. He and an associate, retired Admiral James ("Ace") Lyons, who had commanded the Pacific Fleet, were close personal and professional friends of Lehman's at the Pentagon.

The wide-ranging inquiry began in 1986 with a tip from an unidentified civilian employee of the Navy, and has concentrated heavily on that branch. But the Naval Investigative Service evidently did not warn Lehman (who resigned last year) that the probe was under way. Even Former Defense Secretary Caspar Weinberger was kept in the dark and, until last week, so was Carlucci. No one at the White House was informed until shortly before the matter became public.

At the FBI, former Director William Webster and his successor, William Sessions, approved the investigation under the guidance of William Weld, then chief of the Justice Department's criminal division, and Deputy Attorney General Arnold Burns. Both officials resigned from their posts in late March, after maintaining that Attorney General Meese may have violated conflict-of- interest laws. Word of the inquiry was kept away from Meese until just before Burns left. The reason: their boss was mentioned in one taped conversation between suspects in the probe. Only after investigators were satisfied that Meese was not implicated did Burns brief the Attorney General.

After getting details of the budding Pentagon scandal from Carlucci last week, President Reagan summoned to the White House his top law-enforcement officials, including the Attorney General, the FBI director and U.S. Attorney Henry Hudson, who is coordinating the grand jury work in Alexandria, Va. Reagan asked for a "thorough investigation" of the allegations and said he was "very concerned" about them.

While details of the probe were closely guarded, its scope is undoubtedly broad. Acting with court-approved search warrants, FBI agents last week moved methodically to seize documents and computer records at 45 sites in at least twelve states. The sweep included the offices of at least five Pentagon procurement officials, 15 defense contractors and six consultants, mostly former Pentagon insiders who now work as middlemen between their former associates and firms seeking military contracts. Magistrates issued more than 200 subpoenas demanding specific records or personal appearances before federal grand juries.

Entering where even the KGB presumably fears to tread, agents reportedly managed to plant an eavesdropping bug in one high-level Pentagon office. They tapped and tape-recorded the telephones of two senior military-procurement officials: James Gaines, director for acquisition and congressional support for the Navy; and Victor Cohen, deputy for tactical warfare systems for the Air Force. They also tapped the home and office phones of an undisclosed number of people outside the Pentagon. NBC News reported that the investigators collected some 4,800 conversations over 290 days and that 671 of the talks contained incriminating statements.

The probers have apparently found that many of the consultants bought inside information from former cronies who still hold Pentagon procurement jobs. Then they sold their secrets to defense contractors at higher prices. Relative to ( the value of the contracts, the cost to the firms was minuscule. "A few bucks for a bribe can mean millions to companies," explained South Carolina Congressman John Spratt, who sits on the House Armed Services Committee.

The army of Washington-based consultants perform an indispensable chore when they are honest. Sometimes dubbed "rent-a-general" agencies, the firms hire former Pentagon brass and braid, then charge as much as $1,000 a day for their advice. Many of the consultants worked in procurement and retain close contacts with their former colleagues. They know both the procedural intricacies of how contracts are processed and the technical needs of the services. "You almost have to be an insider to understand it," says Spratt. Without these middlemen, the military's complex procurement system might not work at all.

When the Ill Wind cases come to court, some of the defense contractors may contend they had no idea that the middleman may have acquired his helpful knowledge illegally. This is something, in all probability, that the contractor does not want to know. "There is an enormous flow of information between the Pentagon and the contractors," explains Aspin. "The dividing line is when bribes are given or taken. This is just plain illegal."

Most of the FBI affidavits explaining the search warrants remained under seal, pending indictments. But one revealing warrant in St. Louis provided a glimpse of the type of cases the investigators are developing. The target was Paisley, a veteran Boeing Co. official hired by Lehman in 1981 as his top procurement aide. Paisley was a tough administrator who laudably joined his boss in trying to shake up the Navy's cozy relationship with contractors. He quit in April 1987, just before a new law went into effect barring Defense procurement officials from having business relationships with the department for two years after their departure. Paisley set up his consulting office in Washington's Watergate complex.

The FBI warrant contends that Paisley passed "classified and/or confidential" information to Thomas Gunn, vice president for marketing at McDonnell Aircraft Corp. in St. Louis. That information helped McDonnell Douglas formulate its plans to sell updated F-18 fighter aircraft to Switzerland and Korea. Paisley allegedly also passed along details of a competing proposal by General Dynamics to sell its F-16 fighters to the same potential buyers. He was said to have acquired a secret study on the helicopter needs of the Marine Corps and its advanced chopper, dubbed Killer Egg, to give McDonnell Douglas an edge in future sales. Six FBI agents spent four hours on Tuesday examining records in Gunn's office and that of his secretary. They also sought the records of Lyons, who now works for the aircraft producer.

In its St. Louis warrant, the FBI indicated that its inquiry was aimed at finding evidence of bribery of public officials, conflict of interest, theft of government property, mail fraud, wire fraud, false statements and conspiracy to defraud the U.S. Whether any of those crimes can be proved against anyone remains to be seen. As rumors of impending indictments swept the beleaguered Pentagon, Carlucci took a calm view. He advised, "Let's not jump off the cliff before we find out what we're talking about here." That may take a while, but the timing could be awkward. If the Justice Department sticks to its announced deadline, the indictments could come shortly before the November election. For the Administration, that would be an ill wind indeed.

With reporting by Elaine Shannon and Bruce van Voorst/Washington