Top officials of the nation's largest defense contractor, General Dynamics Corp., in November 1977 delayed the public announcement that delivery of the first Trident submarine had slipped by one year to keep the price of the company's stock from dropping, according to a secretly made tape recording of some of their telephone conversations.
Chief company spokesman Fred J. Bettinger defended the firm's actions and the tape-recorded comments of company officials as perfectly proper. He said the company had no firm or reliable analysis at the time showing a one-year schedule slippage. He also charged that the tape recordings are not a full and accurate record of the statements of company officials and were made by a former General Dynamics executive who is under indictment for taking kickbacks.
On the tape, dated Nov. 30, 1977, General Dynamics' chief financial officer was told by the general manager of its shipyard that the Trident delivery date of October 1979 stated in a company press release was "not real." In reply, the financial officer said the company's chairman, David S. Lewis, "understands that. But he wanted to go ahead anyway only to stop our stock from sliding."
In a statement issued yesterday, Lewis said: "I have no memory of a schedule slippage being an issue at the time, nor any discussion about the price of General Dynamics stock."
A recording made 10 days after the Nov. 30, 1977, tape shows that another senior company official questioned whether the Securities and Exchange Commission might be concerned that shareholders had not been informed that cost overruns on another type of submarine, the Los Angeles-class attack subs, had climbed to more than $800 million.
In a portion of that conversation, recorded on Dec. 9, 1977, General Dynamics' vice president for contracts, Max Golden, expressed concern that internal overrun estimates were "contrary to what the hell we have published" for shareholders.
Added Golden in the taped conversation: "We don't want the SEC to get it overrun information before we go public on this" because, he added, "if you say . . . your overrun or your loss is $800 million or $1 billion . . . , if you spent six months discussing it with the Navy, or three months, what about shareholders who buy and sell stock?"
Golden, who as contracts officer was not responsible for financial reporting, said in a recent interview that he did not specifically recall the conversation, but did recall his general concern that shareholders be kept informed about mounting cost overruns on a timely basis as required by SEC rules. After reading a transcript of his taped remarks, Golden said, "It sounds like me saying: How the hell can you do this to shareholders?"
Two months later, in February 1978, the company publicly announced that its overrun on attack submarines was $843 million. General Dynamics' chief financial officer, Gorden E. MacDonald, pointed out in a recent interview that although the company had not disclosed any estimates of overrun figures in the fall of 1977, it had filed claims to recover $544 million in cost overruns from the Navy and had stated publicly that additional claims would be filed.
A copy of this conversation and 10 others were made available to The Washington Post by P. Takis Veliotis, a former executive vice president and director of General Dynamics. Veliotis left the company in May 1982 and was indicted by a federal grand jury in September 1983 for allegedly sharing in kickbacks on unrelated ship construction. He is living in Greece and is listed as a fugitive by the Justice Department.
The tape recordings were made at a time when General Dynamics was under financial pressure as a result of a longstanding cost-overrun battle with the Navy.
The publication of adverse information about construction schedules and the size of cost overruns potentially could have had a direct impact on General Dynamics' earnings and the price of its stock. On one part of the tape, MacDonald said press reports that followed a Navy news conference on the Trident were damaging the company.
"Since that announcement hit the wire, we've already lost another 1 1/2 points on the stock," he said.
Half of Veliotis' taped conversations were made over a two-day period and relate to the Trident delivery schedule. The price of General Dynamics stock began to drop on the afternoon of Nov. 29 after two Navy admirals announced during a Pentagon press briefing that the first of the 560-foot missile subs was six months late and $400 million over budget. Some of the press reports that followed overstated General Dynamics' responsibility for the overrun.
On the tape, General Dynamics' chief financial officer, MacDonald, said he and the company chairman, Lewis, wanted to clarify the overrun figures. With regard to the delivery schedule, he said the company would point out that it previously had told the Navy the Trident would be delivered in October 1979 and acknowledged that Navy officials thought an April 1980 delivery date was more likely.
But Veliotis objected, according to the tape. As the shipyard's new general manager, Veliotis told MacDonald that neither date could be met. He also said the Trident was more than a year behind the company's schedule and would not be delivered before the end of 1980. Veliotis urged MacDonald to amend the press release to state that the Trident schedule was being reevaluated and then said the dates in the press release were "not real."
MacDonald said in an interview last week that because he had preceded Veliotis as general manager of Electric Boat, he was in a position to rely on schedule assurances from the shipyard's senior managers. MacDonald said these managers had told him the earlier schedule could be met, and based on those assurances, MacDonald said, he recommended that Lewis stand behind the early delivery date. He said he considered Veliotis' protest to be partly motivated by hostile feelings toward him.
Finally, MacDonald said Veliotis had been general manager for little more than a month at the time of the conversation and was two months away from completing his report to top management on new schedules for the Trident and other submarines.
Those schedules were completed by Veliotis in February 1978; the company announced then that delivery of the first Trident was being postponed to November 1980. After additional construction setbacks, the first Trident, commissioned as the Ohio, was delivered to the Navy a year later on Oct. 28, 1981.
Some of MacDonald's statements from the recording were first published last month in the St. Louis Post-Dispatch. General Dynamics officials said then that they would not comment on MacDonald's reported statements without first hearing the tape, and the Post-Dispatch was unable to provide a copy or a transcript. The Washington Post later obtained a copy of the recording from Veliotis and offered to play it for company officials so they could respond.
General Dynamics officials last week declined an offer to hear the tape. Robert H. Duesenberg, the firm's general counsel, said company officials wanted to avoid authenticating the tape. Bettinger, General Dynamics' spokesman, pointed out that the reported gaps and interruptions in the recording suggest that Veliotis recorded only those portions of conversations that might appear damaging or embarrassing to others in the company, but which if placed in context would be perfectly proper.
MacDonald's remarks from the Veliotis tape were read to him during an interview last week. MacDonald did not dispute the accuracy of any of his recorded remarks.
Veliotis has made a copy of the recordings available to the FBI and the Justice Department, which are investigating his allegation that General Dynamics engaged in fraud during the 1970s in its relations with the Navy and with its shareholders. The company has denied those allegations.
The SEC last month opened an investigation of General Dynamics.
Veliotis said in a telephone interview from Athens that even though he had been general manager of the shipyard for only one month before the taped discussion, he and a half-dozen managers had previously conducted a five-month study of Electric Boat.
From this review, Veliotis said, he reached firm conclusions that the company had been adhering to unrealistic schedules on all of its submarines. Veliotis said he told Lewis around Oct. 20, 1977, that the overrun at Electric Boat was going to exceed $1 billion and that the first Trident would not be delivered before the end of 1980. Veliotis has provided The Post with copies of internal cost studies produced by Electric Boat's staff in October, November and December of 1977 showing that the submarine division had calculated more than $1 billion in overruns.
MacDonald said in an interview that he was not familiar with these cost studies.
Lewis said in a recent interview that he has only a general recollection that Veliotis cast doubt on the company's cost figures in October 1977. MacDonald said last week that he did not believe that reliable cost-overrun figures were calculated until February 1978.
Late 1977 was a difficult period for General Dynamics. The company had filed a $544 million claim against the Navy alleging that Navy-imposed design changes and delays were devastating the attack submarine program. The Navy blamed the problems on poor management and productivity at Electric Boat.
Electric Boat had run out of funds under its construction contracts. It was spending $15 million a month to keep its gates open and corporate officials were threatening to pull workers off the submarines if the Navy did not settle the cost-overrun dispute.
The other pressing question for General Dynamics at the end of 1977 concerned the completion date and final costs for the first Trident submarine.
Veliotis took over the shipyard on Oct. 24, 1977. He was charged by Lewis with straightening out the management problems.
At a Nov. 29 Pentagon press briefing, the Navy's Trident managers, Rear Adms. Donald P. Hall and Albert L. Kelln, gave a detailed presentation about the Trident's costs and estimated that its delivery schedule had slipped six months, from October 1979 to April 1980.
That afternoon at 2 p.m., according to the tape, MacDonald was on the phone to Veliotis telling him about a report of the news conference on the Dow Jones news wire.
"I just wanted to know if you were aware of it," MacDonald said. Veliotis said he was not and added, "We have no report on the Trident ourselves . . . until I conclude my studies" and "I think we should be calling Admiral Hall and giving him hell . . . , it's not our date." Then Veliotis added, "Don't give him any dates, though."
"No, I won't," MacDonald replied.
At 2:30 p.m., MacDonald called Veliotis again. MacDonald said he had read the Dow Jones press report to Vice Adm. C.R. Bryan, chief of Navy shipbuilding. According to MacDonald on the tape, Bryan said the reporters misunderstood several dates and cost-overrun figures used in the press briefing.
MacDonald reviewed with Veliotis what each date meant in the Trident delivery schedule. But Veliotis said neither MacDonald's date of October 1979 nor the Navy's date of April 1980 could be met.
"The Navy, they know and we know that it won't be before the end of 1980," he said.
MacDonald defended the October 1979 delivery date he had given the Navy, but Veliotis said, "Well, you told them about a year and two months too early."
Without agreeing, MacDonald acknowledged that Navy officials had told him, " 'You're too optimistic,' and I said, 'That's probably true . . . .' "
A little later in the discussion, MacDonald said his differences with Veliotis were not the point. "The point was," he said on the tape, "that since that announcement hit the wire, we've already lost another 1 1/2 points on the stock."
In a subsequent conversation on the tape, Veliotis talked to Bryan about the Trident schedule and told him the schedule evaluation would be finished in two months.
The next call was recorded Nov. 30, the day after the press briefing. Veliotis spoke with Frank Johnson, then chief spokesman for General Dynamics, who read him the press release the company proposed to issue within the hour.
The release broke down the $400 million overrun, which was attributable in part to General Dynamics and in part to the Navy. It also emphasized that the company was not close to reaching its contract ceiling and, therefore, could make a profit. In the statement's final paragraph, the company repeated the October 1979 delivery date for the first Trident, adding that Navy officials considered an April 1980 date more likely.
After Johnson finished reading, Veliotis reacted by saying, "I don't know who gave you those deliveries. They're not mine . . . . I know they're going to be later than what you are saying."
"Is it going to be later than what the Navy is saying?" Johnson asked.
"Yes, it will," Veliotis replied.
Veliotis suggested that, if the company was going to say anything about the Trident schedule in the press release, it should be consistent with what Veliotis had told Bryan the day before. He suggested that the press release be amended to say he was "investigating the situation" and would release revised schedules in February.
Johnson promised to relay Veliotis' objection to Lewis.
About two hours later, MacDonald called Veliotis and told him that the press release had gone out.
Veliotis asked: "Did he come back and tell you that those dates that you give there, they're not real?"
"Yes," MacDonald replied.
"But you still want to do it?" Veliotis asked.
"Yes, Dave [Lewis] wanted to go ahead anyway," MacDonald said.
Veliotis repeated his complaint to MacDonald: Bryan had been told Veliotis was working on new schedules. "But . . . in that press release, we're giving the impression to people that we are going to deliver the ship in April 1980 . There is no chance of doing that. No way."
MacDonald replied: "We understand that, too. And Dave [Lewis] understands that. But he wanted to go ahead only to stop our stock from sliding."
"We have at some time to tell people the truth, you know," Veliotis said.
"I know it," MacDonald said.
"At some time we have to come out and say what the delivery is," Veliotis said, "and I don't know what the stock will do at that time, but we have to do it."
The tape recording faded during MacDonald's response to this statement.