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US: Boeing to Pay Fine of $615 Million


The company accepts responsibility but will not face charges in two contract scandals.

by Peter PaeThe Los Angeles Times
May 16th, 2006

Boeing Co. has reached a tentative agreement to pay $615 million to end a three-year federal probe into two high-profile Pentagon contracting scandals, the Justice Department said Monday.

It would be the largest financial penalty ever levied on a military contractor.

The settlement would end one of the more tumultuous periods for the aerospace company, whose reputation was tarnished by the cases.

The scandals involved allegations that Boeing improperly acquired thousands of pages of proprietary documents from rival Lockheed Martin Corp. to help it win rocket contracts, and that Boeing illegally recruited a senior Air Force procurement official while she was awarding contracts worth billions of dollars to the company.

Under terms of the agreement Boeing will not face criminal charges, but it will accept responsibility for the conduct of its employees that led to the ethical lapses, according to a senior Justice Department official. The deal is expected to be signed in a few weeks.

The scandals led to prison time for two Boeing executives and the resignation in late 2003 of Chief Executive Phillip Condit, who has not been charged with any wrongdoing.

The allegations against Boeing left a visible mark on the defense industry since first surfacing in 2003. Large defense companies have stepped up ethics and compliance training, particularly among senior executives.

In one controversial move, criminal investigators have also been covertly placed in Pentagon procurement offices.

"The $615-million [settlement] is a wake-up call to the industry," said Stuart B. Nibley, head of government contracts practice for Washington-based Thelen Reid & Priest. The scandals "stimulated a reexamining of the rules and regulations that govern ethics and procedures. [Defense contractors] want to make sure nothing like this happens to them."

Boeing will "maintain an effective ethics and compliance program, with particular attention to the hiring of former government officials and the handling of competitor information," the Justice Department statement said.

Douglas Bain, Boeing's lead counsel, said in a statement that the company would "make additional commitments regarding ongoing compliance."

Federal officials also reserve the right to prosecute Boeing during the next two years if a company executive commits federal crimes or if Boeing fails to report the misconduct, according to the agreement.

The tentative settlement was reported Monday by the Wall Street Journal.

A resolution would go a long way toward helping Boeing, the second-largest U.S. defense contractor, restore its tainted reputation. James McNerney has made a settlement to the cases a top priority since taking over as Boeing's chief executive in July.

Word of the tentative accord comes less than a week after Boeing announced it had hired Michael Luttig, a federal appeals court judge who had been on President Bush's short list of potential Supreme Court nominees, as its next general counsel.

Boeing, which has about 32,000 employees in Southern California, can easily afford the $615-million penalty; it represents only about 15% of Boeing's $4-billion annual cash flow, analysts said.

In recent months Chicago-based Boeing's stock has been trading near a record high, propelled by a boom in commercial aircraft sales and a sharp run-up in its defense business since 2001. Its military division has now overtaken its commercial aircraft sales.

This settlement marks "the end of that rather infamous chapter in Boeing's history," said Paul Nisbet, a longtime aerospace analyst for JSA Research Inc. "It would allow the company smooth sailing without that cloud hanging over them."

The scandal erupted in 2003 when federal prosecutors began investigating allegations that two mid-level Boeing rocket managers in Huntington Beach, Kenneth Branch and William Erskine, had stolen proprietary documents from rival Lockheed Martin Corp.

In the late 1990s the two companies were vying for a multibillion-dollar Pentagon contract to develop a new generation of rockets to lift military satellites into space. Boeing won a large portion of the contracts, but it was later forced to give up about $1 billion worth of business and was suspended for 20 months by the Air Force from receiving new contracts.

Branch and Erksine face criminal charges in federal court next month.

Then in the fall of 2003, Boeing faced another scandal when allegations surfaced that then-Chief Financial Officer Michael Sears illicitly offered a job to Air Force official Darleen Druyun as she and Boeing were negotiating a $23-billion contract for aircraft refueling tankers.

Druyun later became a Boeing vice president.

The company fired Druyun and Sears after learning they had discussed a job during the tanker deal. Druyun spent nine months in prison and Sears served four months.

The settlement also could clear the way for Boeing to win federal government approval for a joint venture with rival Lockheed to build military rockets. Boeing is eager to complete the oft-delayed deal, which includes Lockheed agreeing to drop a civil lawsuit stemming from the rocket scandal.

In addition, Boeing plans to make another bid to build aerial refueling tankers for the Air Force. The Pentagon, which canceled the Boeing contract in the aftermath of the Druyun affair, has said it will restart competition later this year.

Shares of Boeing fell $1.15 to close at $85.86.





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