Table of Contents
Summary
On April 11, 1989, a federal jury indicted Northrop Corporation along with five employees from its Precision Products division in Newton, Massachusetts on conspiracy and fraud charges for allegedly falsifying tests on nuclear armed cruise missile components and supplying equipment that the company knew had failed to meet government specifications (Vartabedian, 1989). The United States District Court filed criminal indictments of 167 counts against Northrop. The charges also included one that Northrop knowingly defrauded the United States Government by improperly testing components for the AV8B Harrier jet; currently used by the United States Marine Corp (Vartabedian, 1989). Part of the allegations against Northrop included a government report in 1987 that found that many of the Northrop delivered components did not meet specifications. At the time of the indictment, Northrop faced fines of more than thirty million dollars (Vartabedian, 1989).
Problem
Two high-ranking Northrop executives knowingly delivered missile guidance components that contained a fluid would freeze during operation. The contract clearly specified the operation temperatures and Northrop neglected their duty to ensure that the components meant the requirements. The indictment alleges that Northrop employees knew that the damping fluid used in the transmitters would freeze at temperatures between forty degrees below zero and fifty degrees below zero. The contract required that the transmitter to be able to operate at temperatures as low as sixty-five degrees below zero.
Northrop was aware of the fact that if the fluid froze too early; it could cause the guidance system to fail. The transmitter component was critical to the flight data transmitter when used on air-launched cruise missiles from bombers such as the B-52 Stratofortress and B-1 Lancer. The transmitters were actually assembled in California with parts from their Precision Products division in Massachusetts (Vartabedian, 1989).
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Northrop conducted a study in 1983 that proved that the cruise missile would not perform at sixty-five degrees below zero. Northrop held the proof that the damping fluid did not meet contract specification and never did. Regardless, Northrop continued to build the transmitters with the inadequate fluid. It was discovered that the Northrop supervisors and employees in charge of the testing often failed to complete the full testing requirement. Employees often changed test results to show that the transmitters passed their tests even when they failed.
The Northrop employees were accused of falsifying certificates of conformances for the transmitters. Northrop finally brought the issue to Boeing, the prime contractor for the missile, and the United State Air Force’s attention in July 1988. Northrop then explained that they could not guarantee the performance of the transmitter components at the required temperatures. Northrop employees also revealed that they had failed to conduct mandatory vibration tests on the delivered stabilization system components for the AV8B Harrier jets (Vartabedian, 1989).
Northrop’s negligence in this Department of Defense (DoD) fraud case was considered to be among the most serious due to the type of weapon systems and timeline involved. Allegedly, fraud had been being committed on nuclear-armed weapon systems for ten years. Northrop had been charged with fraud in two other civil cases for allegedly faking tests on the same cruise missile parts and parts for the ten nuclear warhead MX missile (Vartabedian, 1989). Northrop was also being investigated at the time by the Occupational Safety and Health Administration for allegations of unsafe working conditions at the facilities manufacturing the B-2 bomber (Vartabedian, 1989).
Significance of the Problem
The United State Air Force and Navy had to evaluate the test data and evidence and determine whether they needed to fix any or all of the potentially compromised weapon systems (Vartabedian, 1989).
Northrop’s management negligence put the company and Northrop’s B-2 business at risk. If Northrop would have lost the B-2 program over their Precision Products division, it would have been catastrophic for the company and its future in the aerospace industry.
Conclusion
In early 1990, Northrop pleaded guilty to nearly three dozen federal counts related to falsified testing on both the AV-8B Harrier jet and cruise missile programs. Northrop agreed to pay a seventeen million dollar fine. A sum of money that would equal nearly thirty-three million dollars in 2018 currency. In the plea bargain, Northrop entered guilty pleas to thirty-four counts of false statements to the United States government, the government in turn dropped the rest of the 167 counts. The then United States Assistant Attorney, William Fahey, called the outcome a “very significant victory”. He believed that the case was a win in regards to the government’s effort to combat defense contractor fraud and the mismanagement of government contracts (AP News, 1990).
The Prosecutors dropped all charges against Joseph Yamron, former Vice President and General Manager of Northrop’s Precision Products division. Charges were also dropped against Leopold Engler, who was once Northrop’s Vice President of their instrument operations. Northrop’s former plant manager, Charles Gonsalves, entered a plea under an agreement with Prosecutors; one count of conspiracy and seven counts of making false statements to the United States government between 1984 and 1987. He entered his plea just before facing a jury.
Gonsalves was sentenced to no more than three years in prison along with a fine of no more than 1.2 million dollars (AP News, 1990). Cheryl Hannan, a former quality assurance supervisor for Northrop, performed work on both the Harrier and cruise missile programs. Prosecutors agreed to offer her a program that would eventually help her avoid prison time if completed to the satisfaction of her probation officers. Howard Hyde was the chief engineer and also pleaded guilty as well for falsifying tests on the Harrier program (AP News, 1990).
Although Northrop pleaded guilty to the negligence charges, they tried releasing a soothing statement. Northrop stated that according the United States military services that use both the AV-8B Harrier jet and cruise missile systems, saying that “both systems have performed satisfactorily in-flight operations “(AP News, 1990). The statement didn’t change the fact that the company lied while falsifying documentation; potentially putting many lives at risk.
It’s important to remember that Northrop was in the middle of this huge defense contract with the United States government to produce the B-2 stealth bomber. Once the dust settled, the government launched an investigation for fraud on Northrop’s B-2 program. The B-2 aircraft was ground-breaking for the use of a tail-less concept and the aircraft’s unique design that utilized its design to evade radar and detection. The aircraft generated small amounts of heat signature and a hard to see slim profile. The B-2 program has been said to have been in the works even as early as 1970s, but the B-2 was not unveiled until 1988 and it did not see its first flight until July 17, 1989.
With this unique technology and innovative aircraft came a hefty price tag (“Northrop Grumman B-2 Spirit Strategic Heavy Bomber / Stealth Bomber – United States”, 2018). The original cost of the first versions of the B-2 cost taxpayers around 737 million dollars; eventually rising to 929 million dollars with platform retrofits and adjustments. By 1997, the B-2 bomber fleet was finally perfected and the total cost of each B-2 added up to 2.2 billion dollars. The total cost of the B-2 program is roughly 44.65 billion dollars (The Infographics Show, 2018). Northrop made a lot of money off the B-2 program and continue to do so to this day. Northrop Grumman currently holds platform authority to the unique aircraft and they continue to work sustainment efforts to support the fleet.
Northrop’s Precision Products division, then Northrop Grumman, was sold to Allied Signal Inc. in mid-1995. Although the terms were not disclosed, the division was valued at fifty-six million in 1994 (Jones, 1995).
Opinion
I agree with Northrop Corporation’s decision to plead guilty for several reasons. I feel like if Northrop didn’t plead guilty and the case went to the courts; their punishments would have been much more severe. Northrop would have been risking more than just the monetary punishment; they would have been putting the whole company at risk. Northrop would have prolonged the unwanted publicity even longer. They could have received a much harsher punishment from the courts; affecting their current and future business opportunities. The jury could have decided to ban Northrop from all or the majority of future government business, a ruling like that could have possibly put Northrop out of business altogether.
I do think that a jury would have convicted Northrop, the evidence must have been substantial. Northrop knew that they had delivered fraudulent reports with customer goods, if there was any doubt that Northrop did not commit fraud, the company would have fought the charges in court. There must have been enough evidence to incriminate the company in the courtroom. Therefore, the company plead guilty and faced the seventeen million-dollar punishments handed to them, outside of the courtroom; a plan that I’d say was a smart move.
Considering the severity of Northrop’s actions, I don’t believe the punishment was quite harsh enough. Although there were no operational failures or catastrophic mishaps while Northrop’s faulty parts were being used, I don’t believe seventeen million dollars was worth the national security risks they created. The fact that the cruise missile may or may not have worked to protect the United States in a time of need is worthy of a harsher punishment. The United States had paid Boeing and in turn paid Northrop to deliver a functional product that was operational to specifications required and they knowingly failed to do so.
This type of behaviour would make me question whether Northrop could handle doing classified work for the United States government. Considering that fact the Northrop was in the middle of a twenty-year development of the newest, most classified bomber program even seen. I’m sure that political ties played a role in this case and its outcome as well. The United States government had invested a lot of time, effort and money into Northrop’s B-2 program by the time this case surfaced and came to fruition.
The government wasn’t going to punish the Contractor of their new technologically advanced project to the point that it negatively effected the program. They still wanted their bomber in case the Cold War actually formulated, so, they couldn’t do too much to Northrop that would threaten that hope. The United States government had already spent millions of dollars in infrastructure to support the new up and coming bomber. They couldn’t cripple Northrop or the whole program, too much was at risk. I believe that the prosecutors in this case were probably manipulated to some degree, again, United States Assistant Attorney, William Fahey, stated that he thought the case was a “victory”. I think he truly believed that the United States government had made an example out of Northrop for other contractors to see and fear (AP News, 1990).
I do believe however that the punishment was probably just harsh enough that other contractors definitely didn’t want to be in Northrop’s shoes. Considering the amount of money that Northrop was making off the B-2 program, I feel like the consequences could have been a little more significant. When the case first kicked off, an aerospace analyst from Prudential Bache Securities did an analysis of Northrop’s predicament. He reported that if Northrop Corporation had to pay half of the original maximum thirty million dollar fine, it’d amount to fifty cents per share of Northrop’s stock. He stating that the fine “could be easily absorbed” (Vartabedian, 1989).
Culture also played a large part in this falsification case. The defense aerospace sector has always been a competitive arena and that type of environment can cause a culture change within an organization. Businesses are put under pressure to perform and deliver at the cost of the lowest bid. In order for a business to make it in the game, they have to take risk and chances at times. Those risks and chances sometimes don’t meet customer needs. If a small business defaults on a contract, it can cost them a lot of money, money that they probably don’t have. Therefore, people may start to bend the truth here and there. Eventually the story gets too far out of hand and the culture of the business begins to change. Companies now a days have these types of situations in their sights. Companies practice and preach full disclosure and ethics with meetings, seminars and computer-based trainings. Northrop Grumman has a motto of “say what we do, do what we say, be able to prove it and make improvements”.
Since the 1980s, companies have really embraced the culture of quality. It’s now common for companies to be certified in one or more quality standards. In the DoD world, a lot of companies won’t do business with other companies that aren’t certified as well. The risk is just too high to do business with companies without standard certifications. Northrop Grumman now only uses suppliers that are on their Approved Supplier List or Approved Processes List.
Although this instance of fraud wasn’t Northrop’s first offense and it surely won’t be the last we’ll ever see in the Defense industry. For example, the Aerospace section is encountering counterfeited parts more and more with electronic parts. Companies that work in the aerospace and Department of Defense (DoD) business are constantly trying to combat this threat. Northrop, now Northrop Grumman, has adopted several quality management systems to ensure that 100% of their delivered products are airworthy and compliant in every way. For example, Northrop Grumman uses quality standards such as ISO 9001 and AS9102. ISO 9001 is an international standard that encourages process control, procedures, records, continuous improvement and management commitment. Northrop Grumman uses AS9102 standards to quality inspect First Article Units.
First Article Units are those that haven’t been made in two years or more. When a part hasn’t been built in two years, Northrop Grumman will send a quality inspector out to the manufacturing facility to do periodical audits and inspections. The quality representative will check the inventory items, processes and certifications of all build components. They verify that the subcontracted supplier is following the process and the parts meet engineering specifications; assuring compliance is being met. By performing First Article inspections, Northrop Grumman is reducing future issues with end items, risk and total costs. They’re prioritizing safety of flight. They’re maintaining and/or improving quality, delivery and customer satisfaction. By performing the inspections during the entire build process help Northrop Grumman reduce costs by catching issues early; which in return reduced production delays and future issues associated with product non-conformance (SAE International, 2014).
Northrop learned a hard lesson back in 1990. They took the blame and owned up to their actions. Northrop was also put out on a line for everyone to see. In a time when record keeping was hard to audit, the United States Government made an example out of Northrop for all to learn from. They wanted other companies doing business with the Government to be aware of what happens to those who falsify. Northrop took it on the chin like they should have and learned from their mistakes.
References
- AP News. (1990, February 28). Northrop Pleads Guilty to Falsifying Tests on Harrier Jet, Missile Parts. Retrieved from https://www.apnews.com/53d0d04c7c21a64c186a2ca2c8ffa465 (AP News, 1990)
- Jones, D. (1995, August 25). COMPANY NEWS; ALLIED SIGNAL TO BUY NORTHROP GRUMMAN DIVISION. Retrieved from https://www.nytimes.com/1995/08/25/business/company-news-allied-signal-to-buy-northrop-grumman-division.html (Jones, 1995)
- Northrop Grumman B-2 Spirit Strategic Heavy Bomber / Stealth Bomber – United States. (2018). Retrieved from https://www.militaryfactory.com/aircraft/detail.asp?aircraft_id=6 (‘Northrop Grumman B-2 Spirit Strategic Heavy Bomber / Stealth Bomber – United States,’ 2018)
- Vartabedian, R. (1989, April 12). NORTHROP CHARGED WITH FRAUD, CONSPIRACY IN DEFENSE WORK. Retrieved from https://www.washingtonpost.com/archive/politics/1989/04/12/northrop-charged-with-fraud-conspiracy-in-defense-work/1b019a8a-c475-42b2-a553-204df9575203/?noredirect=on&utm_term=.74af1eb3daa7 (Vartabedian, 1989)
- SAE International. (2014, October). Aerospace Standard – AS9102 Rev B. Retrieved from https://www.arrowheadproducts.net/wp-content/uploads/2017/11/AS-9102_B.pdf (SAE International, 2014)
- The Infographics Show. (2018, April 12). Why Does the B2 Stealth Bomber Cost $2 Billion? Retrieved from https://www.youtube.com/watch?time_continue=69&v=PbpWGRtHfYw
