Boeing: Not Out of Scandal's Clouds

It's jail for its ex-CFO, who illegally wooed a senior Pentagon official. But the prosecutor's criticism of top execs could spawn more probes

By Stanley Holmes

The sentencing to prison of former Boeing (BA ) Chief Financial Officer Michael Sears on Feb. 18 is a "watershed moment" in the outfit's efforts to settle charges of wrongdoing in winning Pentagon contracts, says CEO Harry C. Stonecipher. But does Sears' penalty for illegally recruiting senior Pentagon official Darleen Druyun while she was awarding billions of dollars in Air Force contracts to Boeing put an end to the company's travails?

Don't bet on it. Stonecipher told investors on Feb. 2 that the worst was over. But that was before the U.S. Attorney said Boeing's top executives seemed to have treated Sears' illegal efforts to hire Druyun as "business as usual," according to court papers made available Feb. 17. The prosecutor's criticism of Boeing's senior management could spawn further federal probes of individual executives at the Chicago-based aerospace goliath. And it could significantly boost the cost of any settlement in negotiations between Boeing and the Pentagon.


  U.S. Attorney Paul McNulty said the actions of Sears and Druyun -- and the lack of action by some senior Boeing executives -- caused "significant harm" to the Air Force and Defense Dept. The planemaker is negotiating with the Pentagon to pay as much as $700 million to settle all the various ethical charges.

The U.S. Attorney's latest criticism certainly won't help Boeing's efforts to restore its tarnished image sooner than it had hoped. Senators John McCain and John Warner, Republicans serving on the Armed Services Committee, were already calling for more investigations of contracts tainted by Druyun's involvement. This could spur them to seek stiffer penalties on Boeing.

An early casualty could be the Air Force rocket-launch business. Stonecipher said earlier that he was hoping the Air Force would lift Boeing's suspension from the rocket-launch business, where it had lost $1 billion in launch contracts for possessing nearly 30,000 pages of stolen Lockheed-Martin (LMT ) documents.

U.S. Attorney McNulty seems to believe Boeing's top execs could have done more to question Sears' clandestine meeting with Druyun. He met her secretly in Orlando, Fla., on Oct. 17, 2002, to discuss a six-figure executive position for Druyun, who had been instrumental in steering the $20 billion tanker-refueling contract to Boeing. That contract has since been put on hold.


  On the day after that meeting, Sears, 57, then sent an e-mail in which he described this "nonmeeting" to members of the defense contractor's Office of the Chairman. In his e-mail, the exec discussed salary, bonus, and the position that he would offer Druyun but never mentioned her by name. Sears has pleaded guilty to aiding and abetting a conflict-of-interest law violation. A federal judge on Friday sentenced him to four months in federal prison and ordered him to pay a $250,000 fine. Druyun is serving nine months in federal prison for improperly steering billions of dollars in defense contracts to Boeing.

Boeing's senior executives should have confronted Sears, McNulty wrote in Sears' presentence court documents. "The senior management of Boeing did not confront the obvious legal and ethical issues presented by these employment negotiations," the federal prosecutor wrote. "Rather than reacting with concern to a questionable "nonmeeting" with a senior government official, these Boeing executives appear to have accepted the negotiations as business as usual."

A Boeing spokesman said on Feb. 17 the company's senior executives believed Sears and Druyun were following the appropriate laws and processes.


  Though Boeing execs face no criminal charges, the defense contractor can't be certain what other ongoing investigations at other agencies may unearth. So far, the results have been contradictory and complicated. In probing two key Boeing defense programs following complaints by Lockheed Martin, the Pentagon found no wrongdoing and said it would allow the C-130 upgrade and small-diameter bomb deals to stand. But on Feb. 14, the Defense Dept. announced that it would investigate eight more contracts handled by Druyun.

Of the eight potentially tainted contracts worth about $3 billion, four went to Boeing, and two were awarded to Lockheed Martin. One Boeing win was a $1.5 billion deal to maintain KC-135 refueling tankers. Other Boeing contracts include an environmental satellite system valued at $400 million and two involving airlift aircraft -- a C-40 lease program worth about $244 million and a C-22 replacement program valued at $62 million.

Moreover, the Government Accountability Office, the Defense Science Board, and the Senate Armed Services Committee are continuing to probe what committee Chairman Warner called "this atrocious mismanagement and waste, top to bottom."

For now, Druyun is behind bars, and Sears soon will be, too. But this ugly chapter in Boeing's history is far from ended.

Holmes is a correspondent in BusinessWeek's Seattle bureau

Edited by Beth Belton

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