A Tale of Urban Greed

By Richard Stengel

Once upon a time the story of the Wedtech Corp. seemed to be a modern urban fairy tale, a kind of parable showing that America was still the land of opportunity. The story began in New York City in 1965, when John Mariotta, a diemaker, high school dropout, and the Manhattan-born son of Puerto Rican parents, invested $3,000 to start a small manufacturing company in a renovated brick garage in a desolate area of the South Bronx. Five years later Mariotta struck up a partnership with Fred Neuberger, a mechanical engineer who as a boy had escaped Nazi persecution in Eastern Europe. The firm, then known as Welbilt Electronics, struggled to survive, winning only a few small contracts.

Then the partners discovered they were eligible for loans from the Small Business Administration to minority-owned companies. By the early 1980s Welbilt had become the beneficiary of an SBA program allowing minority firms to obtain federal contracts without competitive bidding. The once two-bit machine shop began winning million-dollar military contracts for Army smoke- grenade launchers and Navy pontoon bridges. Within a few years 95% of its business came from these "set-aside" contracts.

The company, which changed its name to Wedtech in 1983, moved to a large, low-slung red brick factory in the shadow of Yankee Stadium. Expanding quickly, it hired more than 1,000 black and Hispanic workers from the neighborhood, a blighted area that had lost 40% of its manufacturing business during the previous decade. Wedtech's profits jumped from $8 million in 1981 to more than $72 million for the first six months of 1986, and the company became a potent symbol of minority achievement. On a 1984 visit to New York City, Ronald Reagan lauded Wedtech's success. "People like John Mariotta," said the President, "are heroes for the '80s."

But in recent months federal and local prosecutors have made clear that Wedtech is not a fable of small-business success but a morality tale of outsize greed and corruption and the perversion of good intentions. Wedtech prospered, prosecutors say, as a result of promiscuous bribery of city, state and federal officials and a conspiracy to win government contracts by fraudulently depicting itself as a minority-owned business. Wedtech's rise and fall is more than just another example of New York's current convulsion of corruption; the company's overreaching may have stretched even to the White House. A special prosecutor is investigating the possibility that former Presidential Aide Lyn Nofziger violated Government ethics laws in lobbying for Wedtech, and Attorney General Edwin Meese has been forced to explain his efforts on behalf of the company.

Thus far, four former Wedtech executives, including Chairman Neuberger, the former treasurer, the chief financial officer and a senior vice president, have pleaded guilty to a range of charges, including bribery and mail fraud. Mariotta, booted out of the company in February 1986, has not been indicted.

Payoffs were so routine at Wedtech, state prosecutors allege, that the company maintained a secret bank account for depositing kickbacks from contractors and greasing public officials. Earlier this month, former Bronx Borough President Stanley Simon was indicted on federal charges that he extorted more than $50,000 from Wedtech. Bronx Congressman Robert Garcia is said to be under investigation for accepting bribes, and federal officials suggest that as many as 20 public and private figures will eventually be indicted. Wedtech's tentacles groped upward and outward.

From the beginning of their partnership, Mariotta and Neuberger were proud that they made a good product for a good price. But they felt that procurement officials in the Defense Department sneered at the company and did not give it a fair shake. Their plan of attack, according to investigators, was to shower money on virtually everyone they thought could help the company win contracts. Not all these efforts were illegal, but they illustrate how Wedtech spent its way to success.

When Wedtech set its sights on a multimillion-dollar Army contract for 6- h.p. engines in 1981, for instance, San Francisco Attorney E. Robert Wallach was hired as a Wedtech consultant. Wallach, an old friend and lawyer of then Presidential Counsellor Edwin Meese's, was allegedly given some $500,000 worth of company stock over several years in addition to a retainer for his services. For several months Wallach sent detailed memos to Meese concerning Wedtech's efforts to win the engine contract.

Wedtech also retained Nofziger, who had left the White House in January 1982 to set up one of Washington's ubiquitous consulting firms. In May, Nofziger wrote a letter on behalf of the company to Meese's chief deputy, James Jenkins; the letter appears to have violated a law that prohibits former federal officials from lobbying their old agencies for a year after leaving the Government. In response, Jenkins set up a White House briefing on Wedtech that was attended by top Army officials and SBA representatives. Soon afterward the Army dropped its objections to the Bronx firm. Wedtech got the first of many military contracts. Jenkins subsequently left the White House and in October 1985 began consulting for Wedtech. Last week Meese acknowledged interceding on Wedtech's behalf, but said he acted no differently in this instance than in "dozens of similar matters that came to my attention at the White House."

With military orders flowing in, Wedtech's revenues grew to $72.3 million by 1984. The company went public with a $30 million stock offering, making millionaires of Mariotta, Neuberger and other executives. But the stock sale almost killed the goose that laid the golden egg: since Mariotta was no longer the majority stockholder, Wedtech ceased to qualify as a minority-owned company. When the local SBA office began proceedings to remove the company from the set-aside program, Wedtech's officers quickly worked out an agreement to transfer 1.8 million shares of stock to Mariotta's nominal control. Wedtech turned to the law firm of Richard Biaggi, son and former partner of South Bronx Congressman Mario Biaggi. Biaggi's firm received more than $1 million in fees and stock over the years for representing Wedtech. The SBA later approved Wedtech's stock transfer and allowed it to remain eligible for minority contracts.

The company's downfall began when Mariotta was ousted as Wedtech's chairman and replaced by Neuberger after disputes about management policies. The stock that Mariotta supposedly controlled was returned to the company, and Wedtech yielded its status as a minority-owned business. The stock dropped from $11.44 a share in March 1986 to $6.50 in October. Soon after, New York City newspapers began linking the firm to corruption investigations. Wedtech officials admitted they had forged invoices to speed up payments from the Army. By year's end the company had laid off 1,000 workers and filed for bankruptcy. Debts were listed at $212 million.

The Wedtech scandal is a blot on the minority set-aside program, which conservatives have criticized for being ineffective and poorly administered. Many of those who support the program agree that it needs reforming. Massachusetts Congressman Nicholas Mavroules, a member of the House Small Business Committee, has introduced legislation that would increase the penalties against minority front companies and require set-aside contractors to report to the Inspector General on their use of consultants. Mavroules wants to reform the set-aside, not eliminate it. Says he: "I believe the program is still very much needed to encourage the growth of fledgling minority-owned business."

Wedtech, meanwhile, is attempting to resurrect itself. A new management team has in its pocket a $500,000 loan from Chemical Bank and $38 million in Government contracts, none of which are the subject of investigation. Gone are the Cadillacs and limousines used by Wedtech's former officers. A $305,000 Manhattan condominium purchased in 1985 for "entertainment" purposes is on the market. Eventually, Wedtech's officers hope to rehire many of its former workers.

The biggest crime of all, says Wedtech's new president, Joe Felter, is that the scandal "cast a terrible aspersion on our minority work force that was grossly undeserved." For the moment, though, the sophisticated computer- controlled machines on the shop floor are mostly silent. For the South Bronx, Wedtech is one more example of hopes betrayed.

With reporting by Joseph N. Boyce/New York and Anne Constable/Washington