History of Electric Induction Heating

Press Abuse

By James Farol Metcalf

A Follow-up Story in Newsday



Newsday disclosed yesterday that an American-owned firm in Scotland has shipped the Soviet Union industrial equipment capable of processing an advanced material for use in warhead nose tips, rocket nozzles and other military applications. This material, known as carbon-carbon, can significantly improve the accuracy of nuclear warheads.

The British and American governments moved too late to stop the transfer of technology for which the Soviets wound up paying nothing

This is the second of two stories tracing the history of the complex deal. Yesterday's story described how the company received approval for the sale and made efforts to ensure that the equipment met the letter of the existing export laws. The story described how the United States, with increasing alarm, urged the British government to stop the shipments. Today's story looks at events in the aftermath of a belated British embargo on the equipment in February 1985.



NOVEMBER 9, 1987

The British government, after weeks of prodding by the United States, acted to seize a shipment of equipment on the docks at the North Sea port of Hull, England, on Feb. 8, 1985.

With the seizure, a two-year effort by Consarc Engineering Ltd. of Scotland to sell high-temperature furnaces and other equipment to the Soviet Union abruptly halted.

Both company officials and intelligence sources agree that the British action came too late. The bulk of the equipment-useful for processing a heat-resistant material called carbon-carbon-already had been shipped and installed at a factory north of Moscow.

Now, James Metcalf, the principal architect of the deal, had to fly to Moscow to explain what had happened dock-side. The Soviets - eager to finish the deal - were not sympathetic.

First, Metcalf said, they asked him to return nearly $2 million they had paid as an advance on the $11-million contract for the processing equipment. That was no problem for Metcalf. Since the Soviets refused to pay, Consarc's government-backed insurance policy was to promptly reimburse the company 90 percent of the total cost of the equipment.

Metcalf said the Russians also threatened to sue Consarc of Scotland, its New Jersey parent and the American company that owns both of them, Inductotherm Industries.

"You, Mr. Metcalf, are not a little company that's going to go bankrupt," he said the Russians warned him. "You are part of Inductotherm and you're worth $250 million. So you live up to your international contract or if you don't we'll sue."

He said Nikolai Ivanov, a gruff Soviet buyer with whom Metcalf had been dealing, reminded him that British law permitted British engineers to work on equipment in the Soviet Union, even if the equipment itself had been embargoed.

But Metcalf is an American citizen. He was worried that any additional work after the British embargo would require approval by the U.S. government. In fact, the United States already was moving to enact a parallel embargo on the type of equipment shipped by Consarc. The ban went into effect April 3, 1985. To reinforce the point, assistant secretary of defense Richard Perle fired off a letter to the Commerce Department, urging the agency to be vigilant in its efforts to prevent any further leakage of equipment or know-how to the Soviet plant.

Metcalf went to Washington, retained a lawyer, and asked Commerce whether he could complete the original contract with the Soviets. Commerce asked him to provide information "on a zillion things," Metcalf said. He then wrote a letter "in as plain English as we could write, (saying) that if I went out here I'd get it (the Soviet plant) running."

Metcalf said he believed - and hoped - the U.S. Commerce Department would forbid him to continue work on the Soviet plant. He planned to take the rejection letter to the Soviet Union, "put it on the desk of Mr. Ivanov, and say, 'Mr. Ivanov, the Americans are saying this and I'm an American company and I can't do it.'"

But surprisingly, Commerce agreed to let Metcalf go.

On July 8, Henry Mitnan, an official in Commerce's international trade administration, wrote Metcalf's attorney that "Mr. Metcalf's visit may be carried out ... to assist the USSR ... in the assembly and testing of nine induction furnaces and the isostatic press." As justification, Mitnan invoked a section of the Commerce regulations that allows exporters to work on previously shipped equipment for up to a year after delivery. Andrew Vollmer, Metcalf's attorney, told him the decision was "contrary to our hope and expectation."

Lee Mercer, a top export official at the Commerce Department, said Metcalf's plans were probably approved before word had filtered down about the sensitivity of the equipment sent to the Soviets. "In any bureaucracy, there is always the danger of a disconnect and a time lag," Mercer said.

Although the letter of approval was not what he had counted on, Metcalf did not long languish on his misfortune. He spotted a new opportunity.

"Bingo! Now I'm legal," he reflected. "... Now I not only have permission, but informed permission. I'm not just legal because I tricked someone, I'm legal because I did it legally. Now I'm going to be a big hero. I've given them (the Soviets) the damn equipment. I've given them the money [the $2 million] back. Now I'm going to come and make it work for them.

So once again James Metcalf headed for the Soviet Union. Armed with Commerce's go-ahead, he decided not to entangle Consarc Engineering Ltd. any further. Instead, he began to operate through a consulting firm he had formed in May, 1985, called BEPA Ltd. (BEPA is the Cyrillic spelling for "Vera" the name of Metcalf's Russian wife).

Metcalf enlisted some of the same Consarc engineers who had supervised the construction of the Soviet plant, including Thomas Dick, whom Metcalf made a director of BEPA.

Even as the tiny consulting firm launched its first venture, Metcalf said, "I knew damn well it ain't going to last too long." It was only a matter to time, he figured, until the U.S. government realized what it had allowed.

Still, Metcalf - who remained on the Consarc payroll as well - was eager to resume business with the Soviets.

But the Russian buyers were playing hard ball. They insisted on delivery of a load of spare parts (with an invoice value of about $375,000) that Consarc Engineering had guaranteed under its original contract. Metcalf convinced the Department of Trade and Industry to let him ship virtually all of the spare parts under the terms of the original contract. And Metcalf didn't have to worry about taking a big loss on the parts shipment (which eventually was shipped in August). Reimbursement for the spare parts already had been included in Consarc's post-embargo insurance settlement. The Soviets were given the spare parts for free.

With the spare parts issue out of the way, Metcalf was able to resume negotiations with the Soviets. On July 25, he signed a contract with Ivanov calling for BEPA Ltd. to "supervise erection, adjustment (and) testing" of the furnaces and other equipment already shipped by Consarc. The agreement had the effect of canceling Consarc's obligations. BEPA Ltd., with its complement of former Consarc employees, would do the job instead. The corporation signed a contract with the Soviets for engineering fees and another for $700,000 in supplies.

This time, Metcalf made the Soviets agree in writing that the equipment in question would not be used for military purposes. Article 10 of the contract stipulates; "The buyers advise the sellers that the end use of the project is not military."

Asked recently if he believed the Soviets, Metcalf said, "I knew damn well that was a lie, but at least it got me to sign the contract with them . . .I wasn't going to do anything illegal." In several other conversations, however, Metcalf said that he isn't really sure what the Soviets planned to do with the equipment.

Both Royce and Lane had their recorders turned on when I answered that question. "I believed the man who signed my contract believed what he was signing." The chief technologist told me that the project did not involve high strength fibers and he had no interests whatsoever in making military components. My continuing statements were and have been that I knew that carbon was used in aerospace components as well as thousands of other uses. If that makes Mr. Ivanov a damn liar then so be it.

With BEPA Ltd. in business, Metcalf was happy. But Metcalf's American bosses back at Consarc Corp. in New Jersey were not.

Metcalf had formed BEPA , applied for and received the Commerce

Department approval and negotiated a new contract with the Soviets without notifying the parent company's directors.

When Metcalf finally cabled the board in early August, informing it of his new arrangement with the Soviets, he was promptly summoned to New Jersey to explain. According to the participants, there followed a tense board meeting in which officials were torn between their displeasure with Metcalf and the possibility of continued cash flow from the Soviet venture.

Metcalf was still a Consarc Corp. vice president at the time. He said he told the board members that his actions had benefited the company. He had allowed the Scottish subsidiary to withdraw from the Soviet contract without liability. The parent companies and the Scottish firm would be spared a blackballing by Moscow on future sales, he said.

Ray Roberts, president of Consarc in the United States, was skeptical. "Roberts thought he had been maneuvered and I had taken advantage of the situation for my own private account," Metcalf recalled. "He obviously saw me now making a considerable amount of money."

Metcalf said that Roberts told him to write a contract selling BEPA Ltd. - including its new Soviet contract - to Consarc for $l. Roberts later "offered to sue me if I didn't," Metcalf said.

The conflict between the two men did not sit well with Henry Rowan, Inductotherm's chairman. "Rowan didn't like it," Metcalf said. "{He} didn't like the way it felt, and said, 'What would "60 minutes" do with that one?'"

Rowan was a Reagan Republican who, Metcalf said, "all the time had big misgivings about us shipping things to Russia." But Metcalf said Rowan did not interfere with Roberts. As Metcalf put it, "Business is business."

Rowan and Roberts have different recollections of the episode, however. According to Roberts, Metcalf told the board that he had no intention of making a profit with BEPA Ltd. and had formed it merely as a vehicle to clear Consarc's Scottish subsidiary of possible liability with the Soviets. Roberts recalls that Metcalf then voluntarily offered to sell BEPA Ltd. "We said okay," Roberts said.

Rowan, too, recalls that it was Metcalf who broached the idea of selling BEPA Ltd. for a dollar. But, according to Rowan, the offer came only after the board had challenged Metcalf. As Rowan put it, there was "concern that he [Metcalf] might be going ahead on his own to start up shop so BEPA would become profitable." Whatever the case, Metcalf said that he refused to draft any contract to sell BEPA and the matter subsequently was dropped.

For all the corporate intrigue back in New Jersey, tiny BEPA Ltd. did not turn out to be a money machine. In the weeks after signing the contract with the Soviets, Metcalf said, he performed little work on the project. BEPA Ltd. grossed only about $23,000 in engineering fees and expenses, he said. Metcalf decided to subcontract the $700,000 supply contract to yet anther

Consarc subsidiary in Scotland called Calcarb Ltd. That firm was to supply

the Soviets with heat resistant insulation materials to surround the furnace chambers.

On Sept. 21, 1985, nearly three months after giving Metcalf permission to return to the Soviet plant, the U.S. Commerce Department did what Metcalf had anticipated all along. It reversed itself, ruling that Metcalf could no longer work on the embargoed equipment at the Soviet plant.

As Metcalf tells it, the reversal came only after he showed an official in the British Department of Trade and Industry the U.S. letter allowing him to continue work on the plant. The British official, still smarting from the intense American pressure to stop the Soviet project, "fell off a chair," Metcalf said. The official rushed off to Washington to demand an explanation.

Commerce officials were unable to confirm that account. Lee Mercer of Commerce suggested it was likely that Metcalf had been allowed to continue his work on the Soviet plant due to bureaucratic inertia at Commerce. "It's like the ocean when the wind blows," Mercer said. "There's a lot of waves and there's a lot of motion. But if you go down 4 or 5 meters, the ocean is still running pretty smoothly."

Even after Commerce ordered Metcalf to stop his efforts on the Soviet furnaces, Metcalf persisted. He asked the department whether he could work on equipment at the Soviet plant that was not specifically subject to the embargo. He says he never got an answer.

By now Henry Rowan, president of Inductotherm, was becoming increasingly annoyed at the indecision of both the United States and Britain.

"Apparently no one in the U.S. government or the British government has the authority, power or inclination to order us not to send personnel to complete the contract or to start up the equipment," Rowan wrote Metcalf on Oct. 4, 1985. "On the other hand, they seem very anxious that these activities not go forward ... In view of all of this confusion, it would appear that we have to make the decision."

The decision: "No Consarc personnel ... are to do any further work on the .... contract either in Scotland or in the U.S.S.R. and nothing is to be done that will contribute toward the operation and startup of this equipment."

The Rowan ultimatum ended Metcalf's involvement, for he was anxious to continue his relationship with Consarc (for whom he now consults l00 days a year.)

Enter Thomas Dick, formerly managing director of Scottish Consarc and a partner in BEPA Ltd. with James Metcalf. Dick was intimately involved with the Soviet project from the beginning. He had recently retired from Consarc and saw an opportunity to pick up the loose ends on the Soviet deal for himself. Like many others in specialized industries, Dick had set up his own consulting firm to continue peddling his expertise to former clients. He called his firm Vacua-Therm Ltd.

Dick moved to fill the void left as Consarc and BEPA Ltd. dropped out of the Soviet project. Vacua-Therm started providing the technical and sales service to make the machines at the Soviet plant work, with an okay from the same British Department of Trade and Industry that reportedly had demanded to know why the United States had allowed Metcalf to continue his work at the plant. Department of Trade officials, citing the Official Secrets Act and confidential communications between the department and the British companies, declined to be interviewed on any aspect of the case.

But an authoritative British source said the Department of Trade cannot, under British law, prevent engineers from working in the Soviet Union, even on sensitive projects. "Our laws control the export of goods and diagrams and tangible things," he said. But they do not forbid an engineer from taking his know-how abroad. "We are a free society," he said.

In a telephone interview, Thomas Dick defended his work at the Soviet plant, which continues to this day. "All of this waffle and piss and bloody rubbish about nosecones, that's is just a load of hogwash," he said.

"What's happening in Russia (at the plant) I can live with," he said when asked what the Soviets were producing with the furnaces. "I know exactly what they are doing ... and it does not offend me in any way as regards the safety of my country. That's all I will give you."

Later, Dick said he believed that the first commodity to be processed will be carbon brakes for aircraft, and that the plant will only process commercial products.

As might be expected, official agencies are now keeping a nervous eye on Dick's enterprise. Callum Dick, Dick's son and a director of Vacua-Therm, confirmed that the British Department of Trade and Industry and the British customs service have been taking considerable interest in the operations of Vacua-Therm.

In May, customs officials pulled a surprise inspection of equipment bound for the Soviet Union. "The containers were opened and searched" without a company official present, an incident Callum Dick described as unusual. The shipment was allowed.

Late last month, seven customs officials inspected a small isostatic press that Vacua-Therm was shipping to the Soviet Union. The laboratory press - with a work chamber less than five inches in diameter - meets the requirements of the toughened export regulations in Britain and the United States.

Experts say it is entirely possible that work on the small, laboratory sized press will give the Soviets useful "process" information that can be applied to the larger-scale equipment previously acquired from Consarc.

In the immediate aftermath of the Consarc sale, there was little controversy. Officials in both the British and American governments publicly declared that the embargo had been slapped on the equipment in time.

Informed of Newsday's findings, John Reid, a Labor member of Parliament from the Glasgow area, said that he would ask for a parliamentary investigation. "If the substance of the allegations are true," he said, "it seems quite incredible that we seemed to be financing and subsidizing Soviet . . . offensive systems through western expertise and the free-market operation. The irony is exceeded only by the incompetence of the Department of Trade."

Even some of the company officials express bewilderment at the whole episode. "It blows my mind," said Roberts. Referring to flip-flops by British and American authorities in the case. Roberts said, "If there is stupidity in all this, it is after the embargo. If both governments had taken steps at that time to shut everybody off, then the embargo would have accomplished its end. The Russians would have had a dickens of a time [putting the equipment to work] without the assistance of the people who had the knowledge of how the equipment was designed and what was intended."

Adm. Bobby R. Inman, a former deputy director of the Central Intelligence Agency who has taken a special interest in technology transfer, said that the Consarc case suggests how difficult it can be for governments to decide what manufacturing processes need strict controls.

"It's pretty easy to identify a particular weapons system - a radar or a sensor - and get the wraps put on it." Inman said. It is much harder to do that with a process, " he said, particular when equipment used in the process has commercial applications as well.

Inman said that the Consarc sale might have been prevented if partners in CoCom, the international Coordinating Committee for export controls, had done a better job of deciding "what are the very specific things to look out for" with carbon-carbon processing. "You've got to get that all defined at a very early stage, " Inman said.