Booz Allen U.S. Contracts Seen at Risk With Leaked Secrets

Booz Allen Hamilton Holding Corp. relies on the U.S. government for 99 percent of its revenue. Now, the contractor and its No. 1 customer will need to apportion blame from a massive security breach.

Edward Snowden, a 29-year-old former employee of Booz Allen, disclosed to the U.K.’s Guardian newspaper that he provided journalists with documents describing a top-secret U.S. electronic surveillance program. The company said it fired him yesterday.

Snowden’s leak puts Booz Allen’s reputation at risk. It may affect contracts in the short term if the company, majority owned by the Washington-based private-equity firm Carlyle Group LP, is faulted for failing to protect classified information.

“If they can’t represent to government and other clients that their employees are properly vetted and secure, their business and credibility certainly will take a huge hit,” said Scott Sobel, president of Media & Communications Strategies Inc., a public relations firm in Washington. “They have to be scrambling right now.”

The company will bear the consequences even if it wasn’t at fault, Sobel said.

“I’m sure there’s a certain amount of risk that’s unavoidable,” he said. “But at the end of the day Booz Allen was the company that was on watch when this happened.”

Booz Allen fell 2.3 percent to close at $17.14 in New York after dropping 2.6 percent yesterday.

Government Dependence

Under Chief Executive Officer Ralph Shrader, its shares have risen 29 percent this year through June 7, almost double the 15 percent boost in the Standard & Poor’s 500 Index. The company’s sales have increased 12 percent since 2010. Among nine analysts who track the firm, two rate it a buy, five rate it a hold and two rate it a sell, with those ratings preceding reports about Snowden and Booz Allen.

The company is one of the most dependent on the U.S. government, the source of almost all its $5.76 billion in revenue in the year ended March 31, according to a regulatory filing. Some 23 percent, or $1.3 billion, of its fiscal 2013 revenue was from intelligence agencies.

The company, the 13th-largest federal contractor, competes with Lockheed Martin Corp., SAIC Inc., CACI International Inc. and other firms for U.S. intelligence contracts.

Carlyle Group acquired Booz Allen in 2008 and still holds 67 percent, according to data compiled by Bloomberg.

Technical Assistant

Snowden was a former technical assistant for the Central Intelligence Agency. He had worked for the National Security Agency in the past four years for contractors including Dell Inc., according to reports by the Guardian and the Washington Post, which said Snowden provided them with documents.

He copied the last set of documents he wanted to disclose three weeks ago at the NSA office in Hawaii where he worked as a Booz Allen contractor, the Guardian reported.

Booz Allen said Snowden was an employee for less than three months. In a statement today, the company announced he had been fired. Snowden had a salary of $122,000, the contractor said.

Like many federal contractors, Booz Allen has hired from the government. Its vice chairman, John “Mike” McConnell, was the national intelligence director under President George W Bush. James Clapper, the current director, is a former Booz Allen executive who previously was director of the Defense Intelligence Agency.

Security Vetting

Booz Allen’s prospects may hinge on the outcome of investigations into the breach. Any probe that shows the company was “running a slack operation” might make it difficult for Booz Allen to win contracts involving classified information in the short term, said Charles Tiefer, a University of Baltimore law professor.

“Booz Allen may well get taken to the woodshed by the government for sloppiness in how it protected classified information,” said Tiefer, a former member of the U.S. Commission on Wartime Contracting.

Booz Allen, though, may not be at fault. The government has the authority to issue and revoke security clearances.

“Fundamentally this is not a contractor problem,” Michael Hayden, former director of the NSA and CIA, said in an interview yesterday. “It’s a broader cultural problem, it’s a vetting problem and it’s how does somebody so junior” get access to compartmentalized intelligence, he said.

Raises Questions

Hayden said the leak raises questions about how a low-ranking member of the NSA team was able to access such “highly classified” material.

The number of contract workers with top-secret clearances was 483,263 in 2012, according to documents from the Office of the Director of National Intelligence.

William Loomis, an analyst at Stifel Nicolaus & Co. in Baltimore, said Snowden’s leak won’t have a long-term impact on Booz Allen shares if there wasn’t a “flaw in their system.” Such leaks, he said, can’t always be prevented.

“Frankly, if someone is willing to throw their life away and do something like this, it’s hard to stop,” said Loomis, who rates the shares hold.

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