An article yesterday about the retirement of General Dynamics Corp. Chairman David S. Lewis incorrectly stated that, with Lewis' knowledge, General Dynamics executive P. Takis Veliotis tape-recorded some telephone calls with Adm. Hyman G. Rickover. Lewis was not aware of any of Veliotis' tape-recording activities.
David S. Lewis, the chairman of General Dynamics Corp. for the past 15 years, announced his retirement yesterday, one day after the Navy suspended major defense contracts and questioned "the integrity and responsibility of the corporation."
Lewis, 67, stepped down after taking General Dynamics to its preeminent position in the defense industry as supplier of the Trident missile submarine to the Navy, the M1 main battle tank to the Army and the F16 Falcon to the Air Force. His departure from the company he rebuilt is the culmination of a bitter feud with an errant though once-trusted executive vice president, P. Takis Veliotis, whose allegations of wrongdoing by Lewis and other senior managers have led to a series of government investigations, Navy sanctions and embarrassing disclosures.
In a news release from the St. Louis-based company, Lewis said he will be succeeded by Stanley C. Pace, who will leave his job as vice chairman of TRW Inc. to take a brief transitional post under Lewis and then assume full control as chief executive officer by the end of the year.
"I have been planning to retire since the latter part of 1983," Lewis said in the news release. "However, I have been pleased to have the opportunity to serve this fine company during this additional period when General Dynamics has been subjected to extremely heavy outside pressure."
He referred to the investigations by the Justice Department, several congressional committees, the Securities and Exchange Commission and the Internal Revenue Service. The investigations focus on allegations that the company misled the Navy on ship costs and schedules, concealed potential losses and cost overruns from stockholders and billed the Navy for such extraneous expenditures as entertainment and gifts for high military officials, country club memberships and kennel fees for an executive's dog.
Earlier this month, Lewis denied reports of his imminent retirement, saying he wanted to see the company through the numerous investigations.
The results of one investigation were announced Tuesday by Navy Secretary John F. Lehman Jr., who fined General Dynamics $676,283, 10 times the value of gifts that General Dynamics officials had given to Adm. Hyman G. Rickover over a number of years while Rickover was supervising contracts for nuclear submarine construction at the company's Electric Boat division.
Lehman also suspended two divisions of General Dynamics from receiving new contracts until the company repays the government for $75 million in overcharges and sets up a "rigorous code of ethics" for its officers.
Rickover, 85, who is now retired, received a letter of censure. He has acknowledged accepting jewelry and other gifts, but has strongly maintained that the gifts never influenced his tough and unrelenting pursuit of competition between defense contractors and his vocal attacks on what he believed were inflated and exaggerated cost overrun claims filed with the Navy by General Dynamics and other shipbuilders.
"My conscience is clear," Rickover said in a statement he released yesterday.
Lewis' success at General Dynamics and his troubled retirement are closely connected to the important relationships he forged with two strong personalities: Rickover, the legendary admiral who offered Lewis a chance to build the largest fleet of nuclear submarines ever ordered by the Navy; and Veliotis, the Greek-born shipbuilder who rescued General Dynamics after the submarine program was overwhelmed by cost overruns, quality control and management crises.
Shortly after Lewis joined General Dynamics in 1970, Rickover promised that the company could win contracts to build half of the Los Angeles-class submarines the Navy was planning to construct in the 1970s as well as the first Trident ballistic missile submarine if the company pledged that its Groton shipyard would be dedicated exclusively to building ships for Rickover's nuclear navy.
In an interview last summer, Lewis confirmed Rickover's offer and the company's acceptance, both of which were memorialized in the minutes of the corporation's board of directors. He said he accepted Rickover's power over the award of nuclear submarine contracts as a fact of life. When Rickover called his office to complain, Lewis said he sometimes stood up behind his desk and answered, "Yes, admiral."
Lewis thereafter personally reduced by 12 percent the company's bid for 11 of the 18 Los Angeles-class submarines awarded to Electric Boat in the early 1970s. On another occasion, after a telephone call from Rickover in 1973, Lewis directed that the company's bid on the first Trident submarine be recast to Rickover's liking.
But Lewis' decision to cut the bid and his unswerving optimism that his management team could meet the schedules and productivity levels needed to produce the submarines at the negotiated contract cost both proved unwarranted. Over the next four years they fell victim to the highly complex design of the Los Angeles class, unskilled laborers whose work had to be constantly ripped out and redone and a chronic shortage of steel and other materials.
Cost monitors at Electric Boat began forecasting a $1 billion overrun on the submarine construction beginning in late 1974, but Lewis refused to believe them. Over a period of years, he "retargeted" the forecasts based on optimistic assumptions that productivity would improve dramatically.
Lewis' break with Rickover can be traced directly to Lewis' decision in 1975 to begin filing cost overrun claims with the Pentagon, blaming all of the company's troubles on the Navy and on Newport News Shipbuilding and Drydock Co., which had designed the Los Angeles-class submarines under a Navy contract.
Rickover began a crusade against the cost overrun claims. In 1977 the admiral documented in a private memo to the Navy's inspector general his first allegations that the company's $544 million claim might be fraudulent.
During the darkest hours of the the management crisis at Electric Boat, Lewis asked Veliotis to leave his post at General Dynamics' other shipyard at Quincy, Mass., and rescue Electric Boat, which by then had accumulated a $300 million deficit and was losing $15 million per month.
Veliotis has asserted that Lewis enticed him into accepting that formidable task by promising him the company chairmanship when Lewis reached retirement age in 1982. Lewis has denied ever making such a commitment. Several of Veliotis' subordinate managers have said in interviews over the last year that Veliotis confided what he described as a commitment from Lewis at the time.
For five months, Veliotis and eight members of his management staff from Quincy prepared in secret to take over Electric Boat. When they did so on Oct. 24, 1977, Veliotis's first act was to lay off 3,000 shipyard workers, fire the director of operations and cut $120 million from the yard's overhead costs.
Lewis and Veliotis worked in solid alliance to turn Electric Boat around and oppose Rickover's attacks on the company. With Lewis' knowledge, Veliotis began tape recording his telephone calls with Rickover. But in addition, and unknown to Lewis, Veliotis also taped selected telephone calls with Lewis; General Dynamics' chief financial officer, Gorden E. MacDonald, and other company officials.
Veliotis explained this tape recording in a recent interview by saying that he feared he was being "set up" by top company officials after he discovered what he called a "cover-up" of cost overruns and schedule slippages on the Los Angeles-class and Trident submarines. He has provided the Justice Department with documents showing that he sought private legal advice to determine whether he could be held liable for not disclosing what he discovered.
But Lewis and other General Dynamics officials argue that by 1977, Veliotis already had secretly accepted several hundred thousand dollars in kickbacks into a Swiss bank account and, therefore, his motivation for tape recording -- and possibly doctoring -- conversations with company officials was to create a "Pearl Harbor" (surprise attack) file against the day the kickbacks were discovered.
General Dynamics' attempt to blame the Navy for its overruns culminated in a tense standoff in late 1977 and early 1978 as the company prepared to amend its $544 million cost overrun claim to $1 billion.
In March 1978, citing the Navy's refusal to negotiate a settlement, General Dynamics said it would stop work on the Los Angeles-class submarines, a disruption of shipyard operations that would also threaten the deployment of the first Trident strategic missile submarine, a key component of the Carter administration's strategic arms policy.
Under the personal supervision of President Carter, the Navy settled the claims by agreeing to pay General Dynamics $484 million, plus a portion of future overruns. Over time, the company received $640 million under the settlement, the largest in Navy history.
The company absorbed a one-time loss of $359 million, charged against 1978 earnings.
Rickover's campaign against alleged fraud in the General Dynamics claim resulted in a controversial four-year investigation by the Justice Department and the Securities and Exchange Commission, both of which closed their inquiries in early 1982, without bringing any charges. In the Justice Department inquiry, case attorneys and FBI agents had recommended on several occasions that indictments be returned against the company and some of its officials.
More senior Justice Department attorneys overruled them, citing a lack of "smoking gun" evidence or testimony that showed criminal intent on the part of the company and its officers in filing allegedly inflated claims and in withholding information about cost overruns and construction problems.
The Justice Department reopened the investigation last summer, spurred by the emergence of Veliotis' willingness to cooperate, and to share his tape recordings of key conversations.
Veliotis and Lewis worked in close partnership against Rickover during a series of crises between 1979 and 1981 over quality control problems at Electric Boat that had been a decade in the making. At one point, Veliotis offered to resign and attack Rickover publicly, using as ammunition evidence that Rickover had accepted gifts of jewelry from Veliotis's predecessor at Electric Boat. Veliotis said in one taped telephone conversation that he had enough incriminating information stored in a safety deposit box to put Rickover in jail.
Lewis called Rickover a "sorry bastard" on the tape, and lamented the fact that General Dynamics had been forced to "kiss his boots," but cautioned Veliotis not to do anything rash.
But finally, an unfolding kickback case against Veliotis involving kickbacks he allegedly accepted while running the Quincy shipyard caused Lewis to take formal action against his valued subordinate. After Veliotis' indictment in September 1983 and after Veliotis' attorney had notified the company that he would plead the Fifth Amendment if called to testify before a grand jury, the company took legal action to freeze about $7 million of Veliotis' stock holdings, bank accounts and real estate assets.
From that point, Veliotis' disgorgement of the company's secrets, of Lewis' private conversations, of the threats against Rickover, have led to one of the broadest government inquiries into an American corporation in recent history.