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US: Boeing May Avoid Criminal Prosecution

Boeing is in talks with the Justice Department to pay a fine and avoid criminal charges related to the scandals through a "deferred prosecution." The fine may be as high as $500 million.

by Jame Gunsalus and Cary O'Reilly Bloomberg
September 10th, 2005

The Boeing Co.'s James McNerney, who became chief executive of the second-largest U.S. defense contractor in July, may be closer to rebuilding relations with the Pentagon after a purchasing scandal that cost it billions of dollars in business.

Boeing is in talks with the Justice Department to pay a fine and avoid criminal charges related to the scandals through a "deferred prosecution," a person familiar with the discussions said. The fine, which The Wall Street Journal reported earlier Friday, may be as high as $500 million and could be the biggest ever imposed on a U.S. defense contractor for alleged procurement violations, the person said.

The case involves allegations that Boeing improperly acquired Lockheed Martin Corp. documents relating to rocket programs and recruited a senior Air Force official while she still supervised Boeing contracts worth billions of dollars. Under a deferred prosecution, the Justice Department would suspend plans to bring criminal charges after a period of time as long as Boeing avoids questionable behavior.

"A new CEO, a new approach to doing business, and clear up this kind of unfinished business -- that's the strategy here," said Richard Aboulafia, an analyst and aerospace consultant at the Teal Group in Fairfax, Va. "It's a steep price to pay, but markets hate uncertainty. It's a price worth paying for Boeing."

Brian Roehrkasse, a Justice Department spokesman in Washington, declined to comment. Boeing spokesman John Dern also declined to comment.

McNerney, 56, joined Boeing from 3M Co. after the ouster of the company's previous two chief executives. Phil Condit resigned in March 2004 and Harry Stonecipher was asked to resign in March.

Military contracts are the source of more than half of the revenue at Boeing. The company makes the F/A-18 Navy fighter jet, F-15 Air Force fighter and C-17 cargo plane.

Former Boeing Chief Financial Officer Michael Sears in February was sentenced to four months in prison for deceiving the government by offering a job to a Pentagon official as they negotiated a $23 billion defense contract.

Sears pleaded guilty Nov. 15 to conspiring to violate conflict-of-interest laws in employment talks with former Air Force weapons acquisition chief Darleen Druyun, who was sentenced to nine months in prison in October. She admitted she agreed to a higher price for the Boeing aircraft than she believed was appropriate.

Druyun represented the Pentagon in talks for the now-defunct deal for up to 100 Boeing refueling aircraft tankers. She later became a Boeing vice president. Boeing fired Druyun and Sears in November 2003 after learning they discussed a job offer for Druyun during the tanker negotiations.

Condit resigned a week after Druyun and Sears were fired. He hasn't been accused of wrongdoing. Stonecipher was forced out because of an affair with an employee. The company said Friday that lead director and former Chairman Lewis Platt died Thursday night.

In July 2003, three Boeing units were suspended by the Air Force from receiving new rocket launch contracts. The Air Force said the company improperly obtained documents from Lockheed that helped Boeing win a 1998 contract for a booster rocket program called the Evolved Expendable Launch Vehicle.





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