The FBI's Miami office contended last August that the Justice Department's refusal to prosecute Pratt & Whitney Aircraft Group "defies logic" because the company's overcharges on defense contracts are "a flagrant abuse to decency and common sense."

In an eight-page internal memorandum to William H. Webster, then director of the Federal Bureau of Investigation, investigators also accused the Air Force of "gross negligence" for allowing the contractor to bill the government for $22 million in improper charges from 1979 through 1984.

Senior Justice Department officials here closed a four-year investigation of Pratt & Whitney last summer without bringing charges. They acted on the recommendation of Leon B. Kellner, U.S. attorney in Miami, who said the company's billings were "shrouded in uncertainty" because of vague and complicated Defense Department rules.

The FBI memo warned Webster that failure to prosecute Pratt & Whitney "could send an errant signal to all contractors dealing with the Defense Department that, if the issue is significantly complex, vague and voluminous, the federal government may not pursue court action."

Whether defense-fraud cases have become too complicated to be prosecuted successfully by the Justice Department again became an issue in embarrassing fashion earlier this month. The department dropped fraud charges against General Dynamics Corp. and admitted that the indictment should not have been brought in the first place.

A House investigations subcommittee headed by Rep. John D. Dingell (D-Mich.) plans hearings next month on the department's handling of cases involving Pratt & Whitney and General Dynamics. The panel subpoenaed the chief FBI investigator in the Pratt & Whitney case in 1985, but he declined to answer questions on orders from the Justice Department.

When department officials dropped the indictment of General Dynamics in a case involving the Divad, or Sgt. York, antiaircraft gun, they admitted that they had not understood the intricacies of the firm's Army contract.

They also defended closing a probe of General Dynamics' submarine contracts by saying the Navy acquiesced in questionable cost overruns, leaving prosecutors with no identifiable "victim."

In the Pratt & Whitney case, the Air Force failed to challenge what the FBI described as clearly illegal overcharges on aircraft contracts. The FBI's memo, dated Aug. 21, 1986, written by bureau investigators and issued by William E. Wells, head of the Miami field office, represented a last-ditch attempt to salvage the case.

According to Pentagon auditors, Pratt & Whitney's plant in West Palm Beach, Fla., billed the government for such expenses as fishing and golfing trips for Air Force officers, lavish banquets, luxury cars for executives, Miami Dolphins football tickets, rodeo outings, 4,000 souvenir baseball caps and a $4,500 seminar for executives' wives at a yacht club.

The company also charged the Pentagon for a $67,500 donation to the Oklahoma Art Center, made at the request of an Air Force major general in Oklahoma City.

Bob Carroll, vice president for communications for Pratt & Whitney's government products division, said the company understands "from the Justice Department" that the Aug. 21 FBI memo had been "reviewed by the criminal division and FBI headquarters and both concurred with the U.S. attorney's recommendation not to prosecute . . . . We feel it is inappropriate to comment any further."

An Air Force spokesman had no comment.

U.S. Attorney Kellner, in a letter last July to Associate Attorney General Stephen S. Trott, said that "criminal charges are not warranted" because the Air Force never challenged specific items billed by Pratt & Whitney. Instead, he said, the Air Force took a "bottom-line" approach by negotiating a compromise figure for the company's overhead costs.

"This office reached the conclusion that no prosecution could be brought . . . even though our sensibilities may have been offended at the notion of a contractor asking taxpayers to reimburse it for items such as souvenirs, air shows and lavish parties," Kellner wrote.

The Pentagon's procurement system has improved, Kellner said. But at the time, he said, "the relevant regulatory principles were vague, conflicting and overlapping in crucial respects, and amorphous and open-ended concepts such as 'public relations' and 'employe morale' blurred the line between reimbursable and non-reimbursable costs."

The Pratt & Whitney case received widespread publicity after former Pentagon auditor George R. Spanton charged that his superiors failed to act on his reports of improper billings. The head of the Defense Contract Audit Agency (DCAA) was fired in 1985 for allegedly retaliating by ordering Spanton transferred, but a federal appeals court overturned the dismissal.

The FBI's Miami office said in the memo that it was "convinced" that Pratt & Whitney "could be successfully prosecuted for submitting fraudulent claims to the United States."

Some of the company's billings to the Pentagon were "expressly unallowable by any conceivable interpretation," the investigators said.

The memo said Pratt & Whitney's billing practices "could not have been successful without the cooperation, or indifference, shown by the United States Air Force Plant Representative's Office." That office reviews all expenditures at a contractor's plant, in this case at the Pratt & Whitney division in West Palm Beach.

The Air Force office was "directly responsible for continually allowing the types of costs PW included in its claims to go unchecked," the investigators said. They said the Air Force viewed Pentagon auditors who questioned the company's billings "as the enemy."

While no "quid pro quo" existed, investigators said, several Air Force supervisors assigned to the West Palm Beach plant later went to work for Pratt & Whitney.

"Historically, military personnel retiring from the plant have obtained positions within the corporate umbrella" of Pratt & Whitney, "leading those that have followed to foresee such opportunities for themselves upon retirement," the memo said.

"If this were a bank-fraud matter, evidence of 'gross negligence' could be introduced as proof of misconduct," investigators said. The Air Force officials' conduct, they said, "must be seen as 'gross negligence.' "

While Pratt & Whitney "may point to the Air Force as sharing the blame . . . the greed, negligence, incompetence or mistake in judgment of a victim may mitigate but not absolve the criminal from being held accountable," the memo said.

Once the Justice investigation began, the memo said, Pratt & Whitney "realized that the items being questioned were so obviously outside the acceptable range that it sought to repay the costs . . . and reimburse the government." It said the FBI was "particularly disturbed" that prosecutors never acted on this offer.

The only funds recovered were "approximately $4 million in double billing, which PW (after much denial) could find no logical explanation for," the investigators said. The memo also rejected prosecutors' suggestions that defense-procurement rules are too ambiguous to allow for prosecution, calling such arguments "an exercise in metaphysics."