Beltway Bandits at Work In the Pentagon

By GEORGE J. CHURCH

More than 200 subpoenas. As many as 100 defense contracts subject to cancellation. Tens of billions of dollars at stake. All last week, the revelations coming out of the FBI and Naval Investigative Service probe code- named Operation Ill Wind continued to mushroom into the biggest and most important Pentagon scandal ever.

At the heart of the mess lies the so-called Iron Triangle, the web of cozy relationships among Pentagon officials, defense consultants and military contractors. The scandal has shed light not only on a few suspected of corruption but on an entire system that seems tailor-made for cheating. It has become common practice for top military men to retire and head straight for consulting companies -- sometimes known as Beltway bandits or rent-a-general firms -- where they sell their expertise and contacts to defense contractors.

Through interviews with consultants and others involved in this network, TIME has pieced together details of one of the deals that is part of the massive investigation. Stuart Berlin, a key civilian contracting officer at the Pentagon, allegedly provided information involving an electronic-testing- device contract worth $100 million to a defense consultant who was a close friend. The information made its way to a Long Island firm that hoped to win the contract. In addition, Justice Department officials told TIME that they have specific, solid evidence that former Secretary of the Navy John Lehman last fall warned Melvyn Paisley, a former subordinate who became a consultant and is now a central figure in the Ill Wind probe, that he was under investigation. Based on what is now known, it is doubtful that Lehman will be prosecuted or that such a tip was even illegal; but the allegation, if proved, might keep Lehman out of any future Republican Cabinet.

The story of the testing-device contract begins with the retirement from the Pentagon of William Parkin about five years ago. He had worked for 20 years as a civilian employee of the Navy, rising to become the chief contracting officer on the cruise-missile program. He had a reputation for being tough on contractors; at his retirement party, McDonnell Douglas presented him with a "cost cutter of the decade" award. But afterward, Parkin decided to go through the "revolving door" between the Pentagon and those who do business with it. He set up a consulting firm in nearby Alexandria, Va., to sell his expertise to military contractors.

In 1986 Hazeltine Corp., a defense electronics company based on Long Island, N.Y., became one of Parkin's clients. Hazeltine was competing for a deal to supply devices to test IFF (identification, friend or foe) equipment used on Navy planes. It agreed to pay Parkin $24,000 a year for any marketing information related to IFF that he could gather.

Parkin turned to Fred Lackner, another consultant. They met about ten years ago, when Parkin was working for the Navy and Lackner for a defense contractor; they grew close enough to become involved in several joint business ventures. Parkin gave Lackner half the fees he was collecting from Hazeltine and proposed to share any bonus he might receive if Hazeltine won the IFF contract.

No one apparently told Hazeltine, which professes astonishment at learning that Lackner was in effect on its payroll. "We never heard of him," says a company spokesman. Indeed, there would have been reason to question the deal if it had been known. Although Lackner told TIME he was hired to help on the IFF contract, he readily admits he has no expertise about the devices.

What Lackner did have was even more valuable. In about 1971, while working for Northrop, he had met Stuart Berlin, then and now a Navy civil servant. They formed a close friendship that continued as Berlin rose to become a contracting official at the Naval Air Systems Command -- working on, among other things, IFF.

For a while, all went well. A source who was involved says that Lackner supplied Hazeltine, through Parkin, with invaluable "market intelligence" on the Navy's needs for IFF gear, much of the information either internal or leaked before it was supposed to be made public. (Hazeltine denies receiving any inside dope.) Parkin, says TIME's source, did not bother to ask Lackner where he was getting his stuff; perhaps he did not want to know. Lackner acknowledges getting information about IFF from Berlin, but contends that he broke no laws.

That is what the FBI wants to determine. Two weeks ago, agents armed with search warrants showed up at the offices of Hazeltine, Parkin, Lackner and Berlin to pore through their papers. A search warrant directed them to look for "bank accounts of Berlin in which payments from Lackner may have been deposited in connection with his criminal activities pertaining to Government contracts."

Lackner denies any criminal activities and says, "I never paid him ((Berlin)) anything." But he does not seem to have convinced the FBI. The agents who searched his home and office, Lackner told TIME, grilled him extensively about supposed payments to Berlin and played for him several secretly taped recordings of his telephone conversations. One call was placed by Lackner to Berlin from Parkin's house. Lackner insists he was only trying to arrange to have a cup of coffee with Berlin. Nonetheless, Berlin has been reassigned, and the uproar has held up the award of the IFF contract. Parkin and Lackner have both been subpoenaed to testify before a grand jury that begins meeting in Alexandria next month to delve further into the contracting scandals.

If the FBI can prove there was an exchange of money for secret information, it will be a classic example of the most spectacular part of the Ill Wind mess. One clue to the kind of information often sought: FBI agents searched the Washington office of William Tallia, vice president of Pratt & Whitney, on the authority of a search warrant alleging that the company had copies of sensitive documents filed with the Pentagon by archcompetitor General Electric. Both companies were selling engines for the Air Force F-18 fighter and the Navy's V-22 tilt-rotor aircraft.

In a briefing for Congressmen last week, U.S. Attorney Henry Hudson disclosed that he is probing the awards of 75 to 100 contracts, worth "tens of billions" of dollars. That might even be an understatement. Just one of those contracts, calling for McDonnell Douglas and General Dynamics to build the advanced tactical aircraft for the Navy, could be worth at least $45 billion.

Hudson assured nervous legislators that no member of Congress had been subpoenaed or served with a search warrant. There is no indication yet that any Congressman is a target of the investigation.

At the Pentagon, Secretary of Defense Frank Carlucci moved to prevent questions about the legality of future awards by reassigning six officials whose names have come up in the scandal. All were switched to duties that have little to do with contracting. Besides Berlin, the officials include Victor Cohen, deputy for tactical warfare systems for the Air Force, and James Gaines, director for acquisition and congressional support for the Navy. NBC News reported that investigators have videotapes of both accepting bribes from consultants, including Melvyn Paisley; lawyers for Cohen and Gaines did not immediately comment.

The reassignments were about the most Carlucci could do for the moment, since nobody mentioned in the probe has yet been formally accused of anything. Last week Attorney General Edwin Meese said he might have been too sanguine when he predicted that criminal charges in the case could be announced in as little as 30 days. Prosecutor Hudson, who is leading the investigation, said he expects the first of many indictments to be handed down late in the year, perhaps after the November election.

There were reports last week that investigators had learned indirectly, through wiretaps on conversations between other people, that Lehman had tipped Paisley off to the investigation. But Justice Department officials told TIME that the department's evidence is harder and more direct than has been reported. They say Lehman's tip-off to Paisley came late last year, after both had left the Pentagon. Paisley, when he served as a subordinate, had helped Lehman concentrate virtually all Navy contracting decisions in the Secretary's office.

Investigators have not determined how Lehman found out about the secret probe. He was not officially briefed about Operation Ill Wind before he left the Pentagon in 1987. It is unlikely that Lehman can successfully be prosecuted for warning Paisley; that would require evidence that the contentious and impulsive former Navy Secretary had a corrupt motive. But the incident, if proved, could hurt Lehman's reputation. It is also a headache for Vice President George Bush, who has long been close to Lehman and helped persuade Ronald Reagan to give Lehman his job.

Even before Operation Ill Wind surfaced, many Pentagon watchers believed that Lehman and his former boss, Secretary of Defense Caspar Weinberger, could have done more to prevent the increasing number of leaks to defense contractors. An internal Defense Department memo, disclosed earlier this year in an unrelated criminal case, revealed that Weinberger was warned by his staff as early as 1985 that vital information was leaking out of Lehman's office. Weinberger seems to have taken little action.

Between 1984 and 1987, Lehman was the subject of a criminal investigation by the Justice and Defense Departments. The inquiry attempted to determine whether he had acted illegally in awarding General Dynamics a profitable Trident submarine contract amid a furor over cost overruns in another submarine project by the giant defense contractor. The investigation was closed without indictments.

Although Paisley is under investigation for his conduct as a defense consultant, the current issue of Defense Week magazine raises suspicions about his tenure in the Pentagon. In June 1986, the magazine reports, Paisley abruptly changed the Navy's acquisition strategy for the Aegis missile defense system in a way that threw the contract to Sperry (now Unisys). He consolidated the work on six separate components of the Aegis into a single bid, and since Sperry was the only company that had developed bids on all the components, it was the only one prepared to bid on the consolidated contract under the tight new deadlines that Paisely imposed.

At the Pentagon, one fear is that Ill Wind could force officials to invalidate scores of weapons contracts and throw them open for new bids. That could lead to chaos in procurement and delay production of some weapons systems for years. But the brass may have no choice: if investigators prove that a contract was obtained illegally, a court may rule that contract invalid. For example, Grumman Corp. lost the advanced tactical aircraft contract to the combine of McDonnell Douglas and General Dynamics. If allegations in Ill Wind search warrants are proved correct, Grumman could sue to have a new competition.

The House Armed Services Committee planned hearings on the spreading scandal starting this week; the Senate Armed Services Committee will follow in July. Both disclaimed any idea of interfering with the Ill Wind investigation. Their focus will be on determining whether the Pentagon needs new contracting procedures to guard against the kind of massive fraud that Ill Wind seems to be turning up.

Procedural reforms rarely seem to do much good. In 1986 Congress enacted a law intended to close the revolving door by requiring that certain former Pentagon procurement officers wait at least two years before going to work for ; contractors with whom they had conducted "substantial" business. But that did nothing to stave off Ill Wind.

With reporting by Ted Gup and Bruce van Voorst/Washington