Letter Suggests Extortion of Northrop in Korea Deals

Northrop, anxious to extricate itself from a web of disastrous business deals in Korea, paid $1.5 million in 1986 ostensibly to cut ties with its Korean partners, but some of that money went to a shadowy Korean who had earlier written what was widely regarded as an extortion letter to Northrop, The Times has learned.

The letter, which was obtained by The Times, was written in January, 1986, by Kang Sae-hi, better known in Korea as “Wheelchair Kang.” In the letter, Kang threatened to disclose a laundry list of allegedly improper activities in which Northrop had participated in an effort to help sell its F-20 jet fighter.

Seven months after writing the letter, Kang received through an intermediary $500,000 of the money Northrop paid to sever its Korean connections, according to U.S. bank records obtained by The Times. After receiving the money, Kang then signed an agreement with Northrop, releasing the firm from all future claims, according to federal investigators.

An independent report to the government of Korea last year on Northrop’s activities identified Kang as an “extortionist” and some of his associates as “known hoodlums.” Filings by defendants in a Northrop civil fraud suit also characterized the Kang letter as an extortion effort.

Hawthorne-based Northrop is under investigation by a federal grand jury in Los Angeles and in Congress by the House Energy and Commerce Committee. Those investigations are looking into whether the company violated the U.S. Foreign Corrupt Practices Act. In addition, the probes are considering whether the company or its chairman, Thomas V. Jones, violated the terms of a 1975 consent decree that alleged that Northrop made $30 million in foreign payments without proper financial controls.

The series of transactions involving the $1.5 million makes it appear that Northrop was blackmailed with embarrassing and potentially damaging information about its sales activities abroad, and then arranged to make payments to obtain an agreement to keep the information confidential, investigators said.

The Kang letter, which was addressed to former Northrop Vice President James Dorsey, threatened to “publish all facts that I know” about Northrop’s activities in Korea.

Kang acquired the nickname “Wheelchair Kang” because he was once shot in the back and is now confined to a wheelchair. His 1 1/2-page letter is typewritten in English with sometimes tangled syntax, but his demands are explicit. Kang wrote that Northrop’s refusal to deal with him up to that point was “utterly unreasonable and made me annoyed very much. I have consequently determined to find out the way of self-help to get paid for what I have done until now for your company.”

Among the things he threatened to disclose were details of a $6.25-million payment that Northrop made in August, 1984, to an organization controlled by the late Korean power broker Park Chong Kyu.

‘Sales Commission’

The money ostensibly was for a luxury hotel that was to demonstrate Northrop’s good will toward Korea. But Kang alleged in his letter that it merely amounted to a “varied form of sales commission for F-20 paid in advance.” Such a sales commission would probably violate U.S. laws.

Kang is not the only former business partner that has turned on Northrop. A number of the Korean partners and a former Northrop consultant, who are being sued separately by Northrop for fraud, said the hotel was simply a cover for what amounted to a political lobbying fund. Northrop has denied those allegations and insisted that it was defrauded in an honest business venture by the Koreans.

But a large number of irregularities have surfaced in the hotel deal, including the alleged failure of Northrop to obtain required approvals from the government of Korea for its hotel before it sent the money to its partners. It also failed to observe any number of precautions in controlling its money and wired the funds to a Hong Kong bank account controlled by a “young woman” who was an acquaintance of Park, according to a legal filing by defendants in the Northrop fraud suit.

The hotel venture was just one of a series of unusual Northrop deals in the 1980s, during the company’s concerted effort to sell the F-20 jet fighter, which it spent $1.2 billion to develop privately with the hope of selling to foreign nations. The firm did not sell a single airplane.

The firm also became intimately associated with a cast of colorful characters. They included James K. Shin, a former Honolulu night club operator who had ties to Kang.

Shin was hired as a Northrop consultant and paid $102,000 per year to help establish ties in the Korean government. His ties to Kang went back to at least the 1970s, when he operated a Waikiki night club, which was raided in 1975 for an illegal gambling operation, with Park Bo Sook, another Kang associate.

One attorney familiar with Kang described him as “grossly obese” and given to flashy apparel, including tuxedos with electric green bow ties. Asked if Kang is still associated with Park Bo Sook, the attorney said that he believed that he is, because recently “Park pushed Kang’s wheelchair for him into a meeting.” Shin used his connections with Kang to establish ties with Park Chong Kyu, a powerful Korean who once served as the chief of security for the late Korean President Park Chung Hee. Park Chong Kyu was also a member of the International Olympic Committee.

Northrop eventually signed four separate agreements with organizations controlled by Park. In the most significant deal, the company paid $6.25 million to build a luxury hotel in Seoul, in partnership with a company called the Asia Culture Travel Development Co. The company was controlled by Park Chong Kyu, but Northrop asserts it was unaware of Park’s involvement.

Unaccounted Money

The hotel was never built, and the money remains unaccounted for. Northrop insists that it was defrauded by its partners and filed the civil fraud suit in Korea, as well as a private arbitration suit to recover its money.

Northrop also agreed in 1984 to pay up to $55 million in commissions to Dong Yang Express Corp., a bus company that it hired as a marketing representative in Seoul. By 1986, however, a sale seemed unlikely.

Even though Dong Yang never earned any commissions, and Northrop’s contract specifically allowed it to cancel the contract at any time, Northrop agreed to pay $1.5 million to Dong Yang to cancel the marketing representation agreement.

Investigators for the House Energy and Commerce Committee are looking into whether the $1.5 million was part of an elaborate scheme to cover up the earlier $6.25-million payment.

“There are requirements under the Foreign Corrupt Practices Act to know where your money is going,” one staff member said. “Isn’t Northrop concerned that some of its money was going to Kang?”

Northrop declined to discuss specifics about its relationship with Dong Yang. “The $1.5 million was paid to Dong Yang to conclude our agreement with that company,” Northrop spokesman Tony Cantafio said. “We are just not going to discuss details of litigation and arbitration as these matters go through the normal legal process. What is puzzling is why the House Energy and Commerce Committee continue to release documents while these legal proceedings are under way.”

Northrop sent Dong Yang a $1.5-million cashier’s check dated June 11, 1986, and drawn on its account at Security Pacific Bank. The money was deposited in Dong Yang’s account at the First National Bank of Winnetka, Ill.

Wired $500,000

On July 13, 1986, $500,000 from the account was wired to a Korean bank account controlled by Y. S. Lee. A separate document obtained by House Energy and Commerce Committee investigators shows that Kang instructed that the money be deposited through Lee, in his bank account.

The other $1 million in the First National Bank of Winnetka account was wired on Nov. 28, 1986, to a secret account at Credit Suisse, a bank in Lugano, Switzerland. Investigators are unsure of what happened to that money, but one knowledgeable source involved in the case believes that a substantial portion of it was diverted to Shin.

In addition to the hotel deal, and the Dong Yang representation agreement, Northrop directly paid Park Chong Kyu $6,500 per month as a secret consultant. And it funded an obscure trading company in Hong Kong, Bancaborro, controlled by Park, with an estimated $99,000.

James Dorsey, the son of former Northrop Vice President James Dorsey, was the financial officer of Bancaborro. Michael Dorsey, another son, served on the Bancaborro board, according to an attorney involved in the current litigation. The balance of the board consisted of Park associates in the other deals. In recent months, Northrop has filed civil fraud suits against Bancaborro and Shin, but not against many others involved.

Although Northrop has insisted it was defrauded in an illegal effort to sell jet fighters in Korea, it has forced out four former vice presidents. In addition, the Northrop board of directors last year issued a reprimand to Jones in connection with the Korean deal.

The company is going to great lengths to recover its money and in some cases is assigning as many as a dozen attorneys to key arbitration case hearings. One House investigator speculated that the company has already spent more on legal fees than the full $6.25 million it is seeking to recover.