U.S. Drops Prosecution in Sgt. York Gun Fraud Case

The Justice Department abruptly dropped criminal charges Friday against General Dynamics and four company executives, including former NASA Administrator James M. Beggs, conceding that there is insufficient evidence to prosecute them for alleged fraudulent mis-charging on a contract to build the Sgt. York anti-aircraft gun system.

The dismissal order, signed by U.S. District Judge Ferdinand F. Fernandez, clears Beggs and three other executives of charges that they defrauded the government of an estimated $3.2 million by writing off development costs on the weapon to unauthorized accounts.

In seeking the dismissal, government prosecutors acknowledged that General Dynamics had been correct in its original interpretation of the contract, which the company maintained simply required it make its “best efforts� to stay within the $39-million development cost for a prototype weapons system.

“We at General Dynamics are very pleased that the government has filed a motion to dismiss the . . . indictment,� board Chairman Stanley C. Pace said in a statement issued late Friday.

“It has been a long and difficult year and a half, especially for the individuals involved. We are happy for them and their families that the government has withdrawn the allegations against them and that the long, emotional travail for them is now over.�

Beggs, who had headed the company’s Pomona division when the problem-fraught weapons system was still under development, resigned his post as administrator of the National Aeronautics and Space Administration after the criminal indictment was handed down in 1985.

The three other executives named in the indictment, Ralph E. Hawes Jr., David L. McPherson and James C. Hansen Jr., are still employed by the company but have been suspended with pay pending the prosecution because they have lost their security clearances.

Government officials declined to comment on the dismissal, but they had acknowledged in court papers that “testimonial and documentary evidence� uncovered after the indictment caused them to re-evaluate their interpretation of the contract.

Sources close to the case said there was “substantial evidence� that General Dynamics’ interpretation was, in fact, the correct one.

The contract arose out of a decision by the Army in 1977 to build an air defense gun system that would accompany tanks and protect them from attack by enemy helicopters and fixed-wing aircraft.

2 Contracts Awarded

Development costs were estimated at more than $330 million over a period of at least eight years, and as a hedge, Congress awarded two prototype development contracts to General Dynamics and to Ford Aerospace, one of which would eventually be awarded the final development contract.

The indictment alleged that General Dynamics used illegal accounting techniques to hide the true costs of its two Sgt. York Division Air Defense (DIVAD) guns, charging off many of the contract costs to research and development accounts and an account reserved for costs of bid preparation.

The government contended that those charge-offs were illegal because the contract was a “firm fixed price� contract that required the company to meet all development costs within the $39 million the government had awarded for the main contract.

General Dynamics disagreed, arguing that it was actually a novel kind of “best efforts� contract that simply required the company to make its best efforts to produce the weapon within the allocation.

Legal Charges

Under that interpretation, charges to the research and development and bid accounts may well have been perfectly legal.

The government vehemently disagreed with that interpretation, describing it at one point as “strained and convoluted� and “a smoke screen,� but papers filed in federal court Friday make it clear that the government changed its mind.

In fact, government officials said they learned that the “best efforts� wording was deliberately added to the contract by Defense Department negotiators as an “important factor� in the DIVAD acquisition strategy.

Sources close to the case said the government’s rethinking of the case came about, in part, as a result of an interview with the former assistant secretary of the Army who negotiated the contract and after reviewing extensive memoranda in which the “best efforts� concept had been discussed as a novel way of encouraging both companies to develop the weapons system as quickly as possible.

Documents uncovered after the indictment showed, in fact, that the “best efforts� provision had been deleted at one point during the contract negotiations, then deliberately reinserted when contract bidders objected.

Officials Disagree

Some memoranda obtained by The Times indicate that there was widespread disagreement among Defense Department officials about authorizing the best efforts acquisition plan, a concept that had never been tried on a major weapons contract.

Some analysts warned that the language would allow the contractor to deliver nothing but a “bucket of bolts� if the work could not be completed within the funding allocation and still be in compliance with the contract, an argument General Dynamics used later to justify charging some research and development work to outside accounts.

In court documents, General Dynamics lawyers also disclosed that they had obtained an internal Ford Aerospace memorandum indicating that the Army specifically advised Ford that its contract obligations were “limited� under the “best efforts� concept.

After they re-evaluated the contract’s provision, prosecutors said they undertook an “exhaustive� analysis of the case “in an attempt to determine whether a viable theory of prosecution survived.�

“As a result of this further analysis, it is clear that the allegations of the indictment are not supported by sufficient evidence to maintain the . . . prosecution,� the government said.