Wiretaps Tracked Defense Data Sales : Search Warrants Give Details of Fraud Probe; Navy Halts Action on Contracts

WASHINGTON — Federal investigators, relying heavily on an elaborate network of electronic surveillance, said they were able to track step-by-step the activities of private defense consultants as they bought and sold secret information on defense contracts, according to court documents made public Thursday.

Spurred by a tip from a single former Navy civilian employee, agents of the FBI and the Naval Investigative Service said they uncovered a series of sometimes-overlapping rings in which private consultants used payoffs, gratuities and other favors to obtain secret defense contract information from Pentagon officials--information the consultants then sold to eager defense contractors.

The documents, consisting of FBI affidavits in support of requests for two search warrants, provided the most detailed picture thus far about the inner workings of what federal officials have described as the biggest procurement scandal in the Defense Department’s history.

Eight Contracts Cited

The Navy immediately halted all action on potentially tainted contracts cited in the affidavits, Rear Adm. James B. Finkelstein, chief of naval information, said Thursday night. “Until it’s fully studied, there will be no further action taken on those contracts,” he said. The two court documents cite eight Navy contracts potentially worth $545 million.

The Navy became aware of the contents of the affidavits late Thursday afternoon and had not had a chance to review the documents or the contracts involved, Finkelstein said.

Meanwhile, the scandal had its first direct impact on weapons procurement Thursday when Norden Systems Inc., a leading candidate for a $120-million contract to build an air command and control system for the Marine Corps, withdrew from the competition amid allegations that a consultant for the company had improperly obtained information about its competitor’s bids. (Details in Business)

The search warrants unsealed in Dallas were served two weeks ago at Varian Continental Electronics Inc. in Dallas and at the home of defense consultant Mark C. Saunders in Alexandria, Va., a suburb of Washington.

Varian Continental Electronics, a unit of Palo Alto-based Varian Associates, is a supplier of radio and radar transmitters to the military. Saunders is a former Navy electronics purchasing agent who was fired in 1982 after being convicted of using inside Navy information to profit in the stock market. He has since gone into business as a consultant to defense contractors, working out of his home.

FBI affidavits supporting the search warrants describe in stunning detail the nature of Saunders’ alleged dealings with industry and fellow consultants. As the FBI described it, confidential and classified military contract information was treated like an illicit commodity, referred to in code, hidden in safes and sold to the highest bidder.

Shared Bid Information

In one wiretapped conversation described in the warrant, Saunders complained to an associate that sometimes valuable information “falls in your lap and you can’t sell it for a nickel.” In another recorded talk, fellow consultant Thomas Muldoon told Saunders: “If you can get anything, we . . . can make some money.”

In one case, the documents said, Saunders shared bid information received from Navy civilian employee George G. Stone with Muldoon, who was working for a client interested in a $120-million Marine Corps contract. After Stone provided the confidential bid numbers, Saunders allegedly passed them on to Muldoon.

“$60,000 is in the bag now,” Muldoon told Saunders, according to the court documents.

The affidavit alleges that Litton Industries Inc. of Beverly Hills was paying Muldoon $8,000 a month for information supplied by Saunders. Muldoon split the fee with Saunders, the warrant says.

John Thom, Litton’s public relations manager, refused Thursday night to comment on the affidavit. “Our feeling is it would be inappropriate to make any comment with an investigation under way,” he said.

Muldoon was also providing services to Hazeltine Corp. of Greenlawn, N.Y., and Emhart Corp. of Farmington, Conn., according to the warrant, but it did not specify what services were provided. Hazeltine Corp. is one of two dozen defense contractors searched by FBI agents over the last two weeks in connection with the Pentagon corruption probe.

The chief source of Saunders’ information appears to have been Stone, who took over Saunders’ key contracting position in the Navy’s Space and Naval Warfare Command after Saunders was fired, according to the affidavit.

Stone, a 27-year civilian government employee, was served with a search warrant at his Navy office on June 14. He is one of six Pentagon employees under suspicion in the probe who have been reassigned and stripped of all contracting duties by Defense Secretary Frank C. Carlucci.

The FBI “believes that Saunders is paying Stone for this information he is now receiving,” according to the search warrant. “This is based upon statements made by Saunders to Muldoon in which Saunders said he is paying a lot in expenses to get information on specific programs. It is believed these payments are to Stone . . . .”

Disclosed Sealed Bids

Among the programs Stone allegedly gave Saunders information on were:

- ATACC, the Navy and Marine Corps’ Advanced Tactical Air Command Control, a $120-million project. On Sept. 30, 1987, Stone allegedly called Saunders at home and read him sealed bid figures from 10 potential suppliers, one of whom was Muldoon’s client, Norden Systems.

One of Top Four Companies

In January, the affidavit said, Saunders helped Stone move into Stone’s new home, and the two men lunched together twice. In late January, according to the affidavit, “Saunders told Muldoon he had all the important numbers” on the project.

Stone told Saunders in February that Norden was now one of the top four companies in the bidding and said that, even if the company ultimately lost the contract, “if it puts bread on the table . . . it ain’t a waste of time.”

- According to the affidavit, Stone tipped Saunders in December, 1987, that Gould Inc. was going to lose an existing $32-million contract for secure radios. Saunders passed the information to Muldoon, who dubbed their collaboration “Bancroft.” Saunders and Muldoon, using further information from Stone, then developed a list of four potential bidders for the open contract that they might contact.

The ‘Inside Skinny’

- Stone also allegedly provided confidential bidding information on the Navy’s Tactical Environmental Support System program. Stone told Saunders the number of bidders and the number of companies still alive in the competition for the initial $10-million contract, saying the information was the “inside skinny” on the program. Saunders passed the information to Muldoon, but said “we can’t even make any money on it.”

- In August, 1987, according to the warrant, Saunders learned about bidding for a Navy radio called the Digital Wide-Band Transmission System, a program worth more than $100 million. He told Muldoon that Muldoon’s client company’s bid was the costliest and one of the worst technically.

The origins of the government’s still-expanding investigation of defense corruption were officially detailed for the first time by FBI agents in the Dallas warrants.

In September, 1986, the documents said, the FBI and Naval Investigative Service learned that a consultant had offered to supply crucial information to the employee of a company bidding to provide services to the Marine Corps, including costs and bid data of the company’s competitors and the government’s technical evaluation of the offers.

Government sources said the employee who had been approached--a former Navy civilian employee--notified Navy investigators, and the NIS enlisted the FBI’s help.

The two agencies immediately employed electronic recording, and the contractor employee agreed to have his conversations with the consultant monitored. Armed with the stark evidence of these conversations, the FBI and NIS confronted the consultant, who agreed to cooperate with the investigation by consenting to the recording of his conversations with “several individuals,” the FBI agents said.

Middleman Overheard

Among other things, the recorded conversations of the consultant turned up an ex-Pentagon middleman who allegedly paid government employees for inside information and sold it to contractors.

The documents identified the middleman as William Parkin, who retired as executive director of acquisition for the joint cruise missile project office at the Pentagon in November, 1983, and became a consultant in Alexandria, Va. In January, 1987, a federal court in Alexandria authorized federal agents to tap telephones at Parkin’s office and home.

A federal court here, shown evidence developed from the consultant’s recordings and Parkin’s intercepted conversations, authorized tapping the telephones and bugging the offices of William M. Galvin, a well-connected consultant who has become a primary figure in the investigation.

Galvin’s clients include five companies whose offices were searched by the FBI--Unisys Corp., Cubic Corp., Loral Corp., Norden Systems and United Technologies Corp.

Central Figure in Probe

In June, 1987, the same federal court authorized wiretapping and bugging the office of the investigation’s central figure, Melvyn R. Paisley, who became a consultant after resigning as assistant secretary of the Navy for research, engineering and systems two months earlier.

Electronic eavesdropping then mushroomed, with phone taps placed on Saunders in September, 1987, on Paisley’s home phone last October, on San Diego consultant Donald Illeman’s phones last December and on Woodland Hills consultant Fred H. Lackner’s phones last February.

Additional taps were placed on former Unisys executive and consultant Charles F. Gardner’s home phones last January and on the phones of Minnesota consultant Jim Rapinac at an unspecified date.

The wiretap authorizations initially were for 30 days, but many were extended for several 30-day periods, according to the FBI affidavits.