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US: Boeing Punished for Stolen Data

by Renae MerleWashington Post
July 25th, 2003

The Air Force stripped Boeing Co. of $ 1 billion in potential revenue as a penalty for possessing documents stolen from Lockheed Martin Corp. during a competition for a large contract to launch military satellites.

The Air Force also suspended three Boeing space subsidiaries from winning new government contracts for an unspecified period, delivering a sharp blow to the company's already battered space and communications operations. Those divisions account for about one-fifth of Boeing's revenue.

The penalties stem from an Air Force inquiry that found that Chicago-based Boeing violated federal law during a 1998 competition for a $ 1.8 billion contract to launch weather, spy and communications satellites. Two former Boeing employees, William Erskine and Kenneth Branch, possessed stolen Lockheed Martin documents while working on Boeing's proposal, the Air Force found. Erskine and Branch, a former Lockheed employee who arrived at Boeing with the documents, have been indicted by a Los Angeles grand jury.

Boeing also faces a lawsuit by Bethesda-based Lockheed and a Justice Department investigation.

The ruling reallocates the planned launches under the rocket contract, giving the majority to Lockheed and resulting in the $ 1 billion loss of business for Boeing. Under the original contract, Boeing was awarded 19 launches to Lockheed's seven. Yesterday, the Air Force boosted Lockheed's launches to 14 and decreased Boeing's to 12.

"We do not tolerate breaches of procurement integrity, and we hold industry accountable for the actions of their employees," said Peter B. Teets, undersecretary of the Air Force. Boeing committed "serious and substantial violations of federal law," he said.

The Air Force also disqualified Boeing from competing for three additional launches under the program and awarded them to Lockheed.

Teets said he was staggered by both the number of Lockheed documents -- 25,000 -- in Boeing's possession during the competition and the quality of them. Boeing was not forthcoming about the quantity of the documents and did not turn them all over for four years, he said.

"I have never heard of a case of this scale," Teets said.

The suspension of future contracts for the Boeing space units will remain in place -- possibly for 60 to 90 days -- until the Air Force is satisfied the company has changed its ways and atoned for its misdeeds, he said.

As part of its ruling, the Air Force will help Lockheed finance the development of a $ 200 million West Coast launchpad that it needs to fulfill the contract. Lockheed had scrapped plans for the facility after the company was originally awarded so few launches, saying it could not afford it.

The ruling "is a stunning rebuke to Boeing from its most important customer," said Loren B. Thompson, a defense industry analyst for the Arlington-based Lexington Institute. "It means the company will have to rethink whether it wants to be in the launch business."

"Boeing has invested billions of dollars in trying to become the global leader in space," Thompson added. "Right now it is not so clear they are ever going to make a good return on that investment."

Philip M. Condit, Boeing's chairman and chief executive, struck a contrite note yesterday, saying he understood why the penalties were necessary.

"We are extremely disappointed by the circumstances that prompted our customer's action, but we understand the U.S. Air Force's position that unethical behavior will not be tolerated," Condit said in a statement. "We apologize for our actions."

Last week, Boeing appointed former senator Warren B. Rudman (R-N.H.) to lead an independent review of the company's policies on ethics and the handling of competitive information.

The ruling comes as Boeing is suffering from a weak market in aircraft sales, its core business, and is seeking to offset the sluggishness with an expansion of military contracts. The Air Force made the announcement after the stock markets closed. Shares of Boeing fell 49 cents yesterday to close at $ 32.20.

The reallocation of the launches and the establishment of a Lockheed facility on the West Coast even the playing field but do not permanently impair Boeing, said Marco A. Caceres, a senior analyst and director of space studies at Teal Group Corp., a defense research firm.

"What has happened is that Boeing has lost its huge advantage over Lockheed, but it's not at a disadvantage," he said. "It's not a bad deal for Boeing given that they are guilty of something."

Lockheed said it would continue to pursue its lawsuit against Boeing. "We have said from the very outset that honest and fair competition is a bedrock principle of business in the United States," said Thomas J. Jurkowsky, a Lockheed spokesman. "Our role is to now execute [the Air Force's] decision by providing high quality and reliability in our launch services."

The Pentagon was under pressure to take tough action against Boeing in part because this was not the first time the company has been accused of using a competitor's documents in a bidding competition, industry analysts said.

The General Accounting Office found that Boeing used proprietary Raytheon Co. documents during a competition in the late 1990s to provide the "kill vehicle" that is key to the U.S. missile defense system. The vehicle soars into space on a booster rocket, homes in on an enemy warhead and destroys it. The Air Force found that Boeing had studied Raytheon's approach after inadvertently obtaining the documents. Boeing then bowed out of the competition, and Raytheon received the contract.

In a recent study, the Project on Government Oversight, a government watchdog group, found that Boeing committed 50 acts of misconduct and paid $ 378.9 million in fines and penalties between 1990 and 2003.





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