A congressional staff report charged yesterday that General Dynamics Corp. "in effect had two sets of records" for 18 submarines it began building in the 1970s, one for itself and a second for the Navy that hid the project's increasing delays and cost overruns.
The staff document attacked the Navy's controversial 1978 settlement of the overruns, which brought General Dynamics $634 million. The congressional investigators suggested that the overruns were the company's fault because it deliberately bid low to win the contract.
General Dynamics has repeatedly denied allegations that it bid low or supplied false information to the Navy and has defended the settlement as fair.
The report, released by Sen. William Proxmire (D-Wis.), said internal documents of the nation's largest defense contractor show that:
* While the company promised the Navy that it would meet its delivery deadlines, an internal study warned that "there is no way [General Dynamics] can perform to these schedules." The study said the company's Electric Boat division would have to increase its work force by half to meet the deadlines.
* At one point the company told the Navy that construction of the last 11 submarines would require 40.6 million man-hours, while it privately estimated that the job would take 48.6 million man-hours. The actual total grew to 76.9 million man-hours.
* General Dynamics stopped telling the Navy about its manpower problems in 1973 after its submarine program manager warned in a memo that this could jeopardize any future claims against the Navy. "We'll never be able to make a claim hold up if we are reporting inadequate manning," the memo said.
At a Joint Economic subcommittee hearing yesterday, Proxmire also castigated former Navy secretary Edward Hidalgo for "a clear conflict of interest" in accepting $66,000 in consulting fees from General Dynamics after negotiating the $634 million settlement for the government. Hidalgo strongly defended the settlement, which he arranged as a Navy assistant secretary, and his employment as a General Dynamics consultant 11 months after leaving the Pentagon. He said that the company hired him in an unsuccessful effort to sell its F16 planes to Spain and that there was "no conceivable conflict" with his former Pentagon post.
"I have no apology to make for that," Hidalgo said. He also criticized the media for spreading "irresponsible allegations and innuendoes" about him.
Hidalgo said General Dynamics officials did not like the 1978 settlement and were angry with him for forcing the company to accept a $359 million loss as part of the agreement. "They thought it was a damned outrage," he said.
"They liked you well enough to pay you $66,000 . . . as soon as you left the Navy," Proxmire said. "They certainly didn't hold a grudge very much, did they?"
"They thought . . . that I was a damned good lawyer," Hidalgo replied.
The Justice Department, which in 1981 closed an investigation of cost overruns on the submarines, has reopened the probe based on allegations of fraud by P. Takis Veliotis, a former company executive who is now a fugitive from an unrelated indictment. There were cost overruns of about 50 percent on the Los Angeles-class submarines, delivery of which is virtually complete.
The staff report, written by committee investigator Richard F. Kaufman, charged that General Dynamics "bought in" to a second Navy contract for 11 submarines by submitting a bid that it knew was too low. The report said that while making the bid in 1973, company officials did not tell the Navy that they were running into cost overruns on the seven submarines already under construction and were discussing the need to submit a claim for the higher costs.
"General Dynamics knew . . . that deliveries of submarines would be delayed many months more than were being reported to the Navy," the report said. " . . . On occasion, internal reports were prepared comparing the information reported to the Navy with the information known to General Dynamics, suggesting that the company in effect had two sets of books."
The report said company Chairman David S. Lewis had insisted that the Navy be told that the last submarines would be delivered on time. Soon after winning the second contract, the company told the Navy that the first batch of ships would be delayed six to eight months. By 1976, the company acknowledged that the last subs would be delayed nearly a year.
The report also charged that the company knew as early as 1974 that it faced a large loss on the submarines but failed to tell the Securities and Exchange Commission or the public until 1978. The report criticized the SEC for closing a four-year investigation of possible reporting violations by General Dynamics without taking testimony from company officials.
As early as 1974, a company official warned in an internal memo that General Dynamics faced at least $25 million in losses on the first seven submarines, according to the report. In 1977, it said, another official warned that the losses on all 18 ships would exceed $1 billion, which the company later revised to $843 million.
While General Dynamics was reporting no losses to its stockholders, it was telling the Internal Revenue Service a different story, according to the report. It cited company documents as saying that General Dynamics claimed a $95 million deduction on its 1974 tax return, charging this against what the company anticipated would be total losses of more than $750 million on the submarine contracts.
Sen. Charles E. Grassley (R-Iowa) said the Justice Department "ignored the evidence" in dropping its original probe of General Dynamics, despite what he said were recommendations for indictments by the chief prosecutor on the case and the FBI.