Boeing Facing Possible Ban on Military Work
The Justice Department is investigating allegations that Boeing Co. illicitly used documents obtained from rival Lockheed Martin Co. to win a multibillion-dollar contract to build rockets for military satellites, Boeing said Monday.
In addition, the Air Force is conducting an administrative inquiry that could result in Boeing being suspended or banned from certain military work, a Pentagon official said. Boeing, based in Chicago, is the world’s largest commercial aircraft maker and the nation’s third-largest defense contractor, with about 35,000 employees in Southern California.
“I can confirm that we are under investigation by the Justice Department and that the Air Force is doing a review,” Boeing spokesman Dan Beck said. “We are fully cooperating, but because of the ongoing status of the investigation we can’t comment.”
The scrutiny by the Justice Department and the Air Force was first reported Monday by the Wall Street Journal. The revelation sent Boeing’s stock lower Monday. Shares closed at $27.62, down $1, on the New York Stock Exchange.
Investors are particularly concerned that any finding of wrongdoing could hurt Boeing’s $25-billion-a-year defense business, which has helped counter sagging commercial aircraft sales during a worldwide slump in air travel. Last quarter, Boeing for the first time reported that revenue from its diverse defense products -- including C-17 transport jets, spy satellites, smart bombs and rockets -- exceeded sales from its commercial aircraft unit.
“It will depend on how they want to penalize Boeing,” said Marco A. Caceras, senior space analyst for Teal Group. “And that will depend on what the investigation reveals. Was it an isolated case or a company conspiracy?”
Federal investigators declined to discuss the scope of the inquiries Monday, but sources familiar with them said they were focused on documents obtained by a former Boeing employee who was hired away from Lockheed in 1997. At the time, the two competitors were gearing up to bid on an order for satellite rockets.
The Air Force in the early 1990s launched a winner-take-all competition to develop a cheaper but more reliable and powerful rocket to carry some of the nation’s most sophisticated satellites into orbit. Boeing and Lockheed, two of the world’s largest defense companies, vied for a potential windfall of $40 billion over 20 years.
In 1997, Kenneth Branch, a former Lockheed rocket program engineer, went to work on the new Delta IV rocket project for McDonnell Douglas Co. Boeing acquired McDonnell Douglas later that year.
Investigators believe that Branch’s hiring may have given Boeing an unfair competitive advantage because Branch brought with him thousands of pages of documents, including detailed specifications and cost rundowns of Lockheed’s rocket, a government source said.
Two years later, Boeing fired Branch and a supervisor, William Erskine, for violating company policy against possessing a competitor’s sensitive information.
An internal Boeing investigation found that Branch had in his possession the thousands of pages of Lockheed documents, many of them stamped “proprietary,” according to court documents.
Boeing alerted Lockheed and Air Force officials about the documents in 1999.
By then, the Air Force had changed its mind and decided to award most of its rocket engine contracts to one primary supplier, with a second company getting a smaller number of launches.
The military considered it crucial to keep two companies in the business of making reliable launch vehicles.
Boeing’s Delta IV rocket beat out Lockheed for the bulk of the rocket contracts.
In September 2000, Branch and Erskine filed a lawsuit against Boeing alleging wrongful termination.
They were fired to “cover up Boeing’s illegal activities,” their lawyer said.
“They did what they were asked to do, and after it appeared that certain matters were going to come out, they were essentially sacrificed,” said Natasha Roit, the Los Angeles attorney representing Branch and Erskine.
Neither Branch, who lives in Florida, nor Erskine, who lives in Northern California, could be reached for comment Monday.
In July 2002, the lawsuit was dismissed by a U.S. District Court in Orlando, Fla.
In his ruling, U.S. Magistrate Judge David A. Baker said Branch and Erskine “completely fail to show any logical connection between the termination of their employment and any actual or attempted violation of federal procurement policy by Boeing.”
But the documents obtained during the discovery phase of that case shed light on Boeing’s activities, an industry source said.
Investigators were surprised to discover that Boeing had far more proprietary documents than previously thought, the source said.
Shortly after firing Branch and Erskine, Boeing turned over to Lockheed two sets of Lockheed documents, a government source said.
Then, last week, Lockheed was given 11 boxes filled with Lockheed materials, according to a source familiar with the investigation.
“Branch didn’t have anything like that ... ,” Roit said. “We’re curious about that as much as anyone.”
In a regulatory filing with the Securities and Exchange Commission on Monday, Boeing said the Air Force notified it in March that the Pentagon was reviewing the company’s “present responsibility as a government contractor in connection with an incident in 1999.”
Lockheed Martin’s shares fell 72 cents to $49.50 on Monday on the NYSE.
