Deal With U.S. Would Let Boeing Avoid Prosecution

Published: May 16, 2006

Boeing, the nation's second-largest military contractor, has agreed to pay $615 million under a tentative deal with federal prosecutors that will allow the company to avoid criminal charges, Boeing and senior Justice Department officials said yesterday.

The agreement, which is expected to become final in a few weeks, would end a three-year investigation into wrongdoing by Boeing employees and would require the company to pay $565 million to cover civil claims and $50 million to end a criminal inquiry. Senior Justice Department officials, who asked on a telephone news conference not to be identified, said they believed this was the largest fine ever imposed on a military contractor.

While avoiding criminal charges, Boeing will agree to "accept responsibility," the Justice officials said, for the actions of its employees. One case involved the theft of proprietary data from a rival, the Lockheed Martin Corporation. The other involved Boeing's hiring of a former Air Force official who oversaw Boeing contracts at the Pentagon.

Boeing will also be monitored by the Justice Department for two years and be required to maintain a federal ethics and compliance program as well as to cooperate with federal investigators in any future investigations. Should Boeing violate these provisions, it could be prosecuted and fined up to $10 million, according to the settlement.

"Boeing does accept responsibility for the actions of its employees," said the senior Justice Department official, who added that the $615 million figure reflected "money that was lost to the government due to Boeing's illicit activities."

Boeing declined to comment, but said in a statement that "Boeing will accept responsibility for the conduct of its employees and make additional commitments regarding ongoing compliance."

News of the settlement was first reported yesterday by The Wall Street Journal.

Analysts estimate that the settlement will depress Boeing's 2006 earnings by 59 cents to 75 cents a share, but say the agreement will lift a taint of corruption from Boeing and better position it to bid on Pentagon business. Boeing's stock, which had been rising for two years, closed at $85.86 yesterday, down $1.15.

"This is a heck of a penalty," said Howard Rubel, an aerospace analyst with Jefferies & Company. "But it has eliminated the 'bad citizenship' knock from being on the company. It pushes into the past things that were done in the past. And it gets rid of the uncertainty that a defense contractor could have been convicted of fraud or a felony."

Settlement of the charges also reflects efforts by the chief executive of Boeing, W. James McNerney Jr., who was hired last year after the two previous Boeing chief executives resigned under fire. Mr. McNerney responded to the ethical controversies by reorganizing the company's military business, putting a new emphasis on training and pressing for a resolution of the investigations.

"McNerney inherited a company in crisis," said Loren B. Thompson, a military industry analyst at the Lexington Institute, a Washington-area research group. "There was a danger that all these controversies would distract the company from getting business. His top goal was to eliminate these distractions. To announce that this controversy is behind them would be a major breakthrough."

The settlement grew out of two investigations into the company. In one, Boeing employees were found to have stolen thousands of pages of proprietary documents from Lockheed in the late 1990's and used them to help bid for government rocket-launch business.

To penalize the company, the Pentagon stripped Boeing of $1 billion in Pentagon rocket-launch business in 2004. In March, it was allowed to bid for rocket-launch business after a 20-month suspension, the longest for any major military contractor.

In the other case, Boeing was found to have improperly recruited an Air Force contracting official, Darleen A. Druyun, while she was still at the Pentagon, where she was overseeing billions of dollars in Boeing business. Ms. Druyun later admitted to steering contracts to Boeing to help her get a job with the company. Ms. Druyun was fired from Boeing, and then pleaded guilty to conflict-of-interest charges and was sentenced to a nine-month prison term. Michael M. Sears, Boeing's former chief financial officer who had met with Ms. Druyun to recruit her, was also fired, and later jailed.

Those scandals also led to the resignation of Philip M. Condit, then Boeing chief executive. His successor, Harry C. Stonecipher, was fired last year after an extramarital affair with a Boeing employee.

Mr. McNerney has taken several steps to clean up the company. He allowed Boeing's in-house counsel, Douglas G. Bain, to make a blistering presentation to Boeing executives at a meeting in Orlando, Fla., this year about unethical behavior.

He reorganized Boeing's military division to provide for greater accountability. He has brought in J. Michael Luttig, who resigned last week from the United States Court of Appeals for the Fourth Circuit, based in Richmond, Va., to replace Mr. Bain, who is retiring. Mr. Luttig's name had surfaced as a possible candidate for the Supreme Court.

In addition, the Boeing board recently altered the company's executive compensation plan to put more emphasis on ethical behavior.

"One by one, McNerney has addressed all the issues getting in the way of running the company smoothly," Mr. Thompson of the Lexington Institute said.