BUSINESS/ECONOMY

Probing a defence scandal

Michael Posner,David Lindorff August 6 1984
BUSINESS/ECONOMY

Probing a defence scandal

Michael Posner,David Lindorff August 6 1984

Probing a defence scandal

BUSINESS/ECONOMY

By Michael Posner and David Lindorff

Panagiotis Takis “Taki” Veliotis seems destined to prove the wisdom of a Chinese proverb, “He who rides a tiger cannot dismount.” The former executive of St. Louis-based General Dynamics Corp. (GD) fled to his native Athens in 1982 before a U.S. federal grand jury indicted him on charges of accepting kickbacks in an embezzlement scheme involving GD and a now-

defunct supplier, New York-based Frigitemp Corp. A fugitive from justice, he is now attempting to win limited immunity from prosecution in return for documents that he turned over to federal investigators—documents that he says show intentional deceit on the part of GD in the way it handled defence contracts. The first results of Veliotis’s charges unfolded last week in a Capitol Hill hearing room.

Backed by an impressive array of documents, Richard Kaufman, the shrewd chief counsel for Congress’s joint economic committee, charged that Veliotis —who resigned as president of Quebecbased Davie Shipbuilding Ltd. in 1973 to join GD—was substantially telling the truth in claiming that GD, the nation’s largest defence contractor, had bilked the U.S. Navy of hundreds of millions of

dollars by submitting phony invoices for cost overruns on government contracts to build nuclear submarines. The company denied the allegations.

GD won the contracts in 1971 to build seven Los Angeles-class submarines at its Groton, Conn., Electric Boat division. But, according to Kaufman, production and staff problems on the first phase of construction led to severe cost overruns. As a result, Kaufman said in public testimony before the subcommittee on international trade, finance and securi-

ty economics last week, GD decided to tender a deliberately low bid for phase two—another 11 subs. Overruling the then general manager and comptroller of the Groton facility, GD board chairman David Lewis, claimed Kaufman, allegedly ordered his subordinates to reduce the estimated man-hours needed to build the ships—and hence reduce the costs. Documents that Kaufman presented indicate that “the number of man-hours in the proposal was reduced after the proposal had been worked up at the shipyard and just prior to its submission to the navy.”

Then, Kaufman stated, when expenses far outstripped projections, GD, beginning in 1976, tendered grossly inflated invoices, blaming the Navy’s design changes for the cost overruns. After a two-year investigation, the navy

settled GD’S claims for $634 million, more than five times what its own settlement board had concluded the claims were worth. The settlement, Senator William Proxmire contended last week, “short-circuited the normal claims review procedures.”

In a statement issued by its corporate headquarters in St. Louis, Mo., GD categorically denied all charges against it, noting that two federal grand juries had previously weighed the evidence and had brought no charges. Proxmire also

noted that the justice department had investigated the case for four years and eventually dropped it.

In a separate development last week that could have major implications for Veliotis’s own legal fight—if he ever returns to face the charges against him—U.S. district court Judge William Conner set Oct. 12 for sentencing George Davis, a former vice-president of a GD subcontractor, Frigitemp Corp. Davis was convicted July 20 on all 17 counts of conspiring to defraud millions from both GD and Frigitemp. Davis, who managed subcontracts for insulation work on liquid natural gas tankers built by GD’S Quincy boatyard, was convicted of conspiracy to defraud, racketeering, mail and bankruptcy fraud and obstruction of court proceedings.

Using shell corporations, Davis, be-

tween 1974 and 1979, funnelled $2.7 million to the Swiss bank accounts of both Veliotis and James Gilliland, a Canadian who was Veliotis’s deputy at GD’s Quincy, Mass., boatyard and before that at Davie Shipbuilding. Davis also skimmed another $2.3 million for himself, without the knowledge of other Frigitemp executives, who believed all of the bribe monies were being paid to Veliotis and Gilliland. In return, Veliotis—hired by GD to run the Quincy facility and later promoted to the GD board of directors—directed more than $50 million in subcontracts to Frigitemp.

Shortly before the insulation and refrigeration firm went bankrupt in 1979, Davis incorporated IDT Corp., a Fort Lauderdale, Fla.-based company that inherited the Frigitemp contracts and continued to make payoffs. Davis, Veliotis, Gilliland and others are defendants in a pending, $50-million civil suit filed in May, 1983, by Frigitemp’s bankruptcy trustee, Lawson Bernstein, a New York attorney. But another defendant in that suit, Montreal businessman Mark Deroche, told Maclean’s last week that he was not—as Davis’s lawyers had advised Bernstein—a partner of Davis’s in IDT or in any other firm. Said Deroche, who is recuperating from a heart attack: “The company I own now [Joiner Systems Canada (1983) Ltd.] used to be owned by Davis under a different name. That’s the only tie-in I know. I’ve never signed a cheque that left the country. I have never been a partner of George Davis.” The chief witness against Davis was Montreal accountant Sukhamay Bose, a former employee and business associate of Davis’s in a number of shell companies created as conduits for the kickbacks.

A second Congressional panel, chaired by tenacious Michigan Congressman John Dingell, is also examining the Veliotis affair. In addition, justice department officials reportedly were in Groton last week, poring over GD’s books for evidence of payoffs to senior naval personnel. That investigation stemmed from revelations that retired Admiral Hyman Rickover had accepted gifts worth thousands of dollars from General Dynamics. Ironically, Rickover, who said he does not recall receiving the gifts, was among the Pentagon’s firmest believers in the fraudulent of GD’s shipbuilding claims.

The Davis verdict is ominous for Veliotis and Gilliland. But it pales beside the implications of Congress’s renewed interest in General Dynamics. Rickover has said that if all shipbuilding claims were fully investigated, it would create a scandal “bigger than the Teapot Dome.” GD alone might have to repay the government $1.5 billion. Clearly, the tiger unleashed by Taki Veliotis is a long way from being tamed.