[Senate Hearing 109-918]
[From the U.S. Government Publishing Office]
S. Hrg. 109-918
THE BOEING COMPANY GLOBAL SETTLEMENT AGREEMENT
=======================================================================
HEARING
before the
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
AUGUST 1, 2006
__________
Printed for the use of the Committee on Armed Services
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COMMITTEE ON ARMED SERVICES
JOHN WARNER, Virginia, Chairman
JOHN McCAIN, Arizona CARL LEVIN, Michigan
JAMES M. INHOFE, Oklahoma EDWARD M. KENNEDY, Massachusetts
PAT ROBERTS, Kansas ROBERT C. BYRD, West Virginia
JEFF SESSIONS, Alabama JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine JACK REED, Rhode Island
JOHN ENSIGN, Nevada DANIEL K. AKAKA, Hawaii
JAMES M. TALENT, Missouri BILL NELSON, Florida
SAXBY CHAMBLISS, Georgia E. BENJAMIN NELSON, Nebraska
LINDSEY O. GRAHAM, South Carolina MARK DAYTON, Minnesota
ELIZABETH DOLE, North Carolina EVAN BAYH, Indiana
JOHN CORNYN, Texas HILLARY RODHAM CLINTON, New York
JOHN THUNE, South Dakota
Charles S. Abell, Staff Director
Richard D. DeBobes, Democratic Staff Director
(ii)
C O N T E N T S
__________
CHRONOLOGICAL LIST OF WITNESSES
The Boeing Company Global Settlement Agreement
august 1, 2006
Page
McNulty, Hon. Paul J., Deputy Attorney General, United States
Department of Justice; Accompanied by Stuart Schiffer, Deputy
Assistant Attorney General, Civil Division; and Charles
Rosenberg, United States Attorney for the Eastern District of
Virginia....................................................... 10
McNerney, W. James, Jr., Chairman, President, and Chief Executive
Officer, The Boeing Company.................................... 40
(iii)
THE BOEING COMPANY GLOBAL SETTLEMENT AGREEMENT
----------
TUESDAY, AUGUST 1, 2006
U.S. Senate,
Committee on Armed Services,
Washington, DC.
The committee met, pursuant to notice, at 2:35 p.m. in room
SH-216, Hart Senate Office Building, Senator John Warner
(chairman) presiding.
Committee members present: Senators Warner, McCain,
Sessions, Talent, Graham, Thune, Reed, and Dayton.
Committee staff members present: Charles S. Abell, staff
director; Leah C. Brewer, nominations and hearings clerk; and
John H. Quirk V, security clerk.
Majority staff members present: Ambrose R. Hock,
professional staff member; Stanley R. O'Connor, Jr.,
professional staff member; Lynn F. Rusten, professional staff
member; and Scott W. Stucky, general counsel.
Minority staff member present: Peter K. Levine, minority
counsel.
Staff assistants present: Micah H. Harris and Jill L.
Simodejka.
Committee members' assistants present: Christopher J. Paul
and Pablo E. Carrillo, assistants to Senator McCain; Chris
Arnold, assistant to Senator Roberts; Arch Galloway II,
assistant to Senator Sessions; Clyde A. Taylor IV, assistant to
Senator Chambliss; Frederick M. Downey, assistant to Senator
Lieberman; Elizabeth King, assistant to Senator Reed; William
K. Sutey, assistant to Senator Bill Nelson; and Luke Ballman,
assistant to Senator Dayton.
OPENING STATEMENT OF SENATOR JOHN WARNER, CHAIRMAN
Chairman Warner. The committee meets today to receive the
testimony of Deputy Attorney General of the United States,
Department of Justice (DOJ), and from the Chairman, President,
and Chief Executive Officer (CEO) of the Boeing Company on the
recent Boeing Company Global Settlement Agreement. Mr. McNulty,
you and I have known one another for many years and I must say
that I am very proud of the career that you have had, beginning
in the United States Attorney's Office in the eastern section
of Virginia, and your recent recognition and elevation to this
important post is a testimony to your professional competence,
and I am delighted to have you before the committee.
We welcome the Deputy Attorney General, Mr. McNulty, and
Mr. McNerney, Chairman, President, and CEO of the Boeing
Company.
We meet today to discuss the results of two DOJ
investigations of the Boeing Company, both begun 3 years ago,
into allegations of improper use of proprietary information
obtained from a competitor to compete for launch services
contracts under the Air Force's Evolved Expendable Launch
Vehicle (EELV) program and an investigation of the
circumstances surrounding the hiring of Darleen Druyun, a
senior Air Force official, by Boeing.
On July 17, 2003, a grand jury indicted two Boeing
employees on charges of conspiring to conceal and possess trade
secrets in violation of title 18, United States Code. Both
remain charged, awaiting trial to begin in late 2006.
In April 2004, Ms. Druyun pleaded guilty to negotiating
employment with Boeing while she was participating personally
and substantially as an Air Force official overseeing the
negotiation of the proposed multi-billion dollar lease of
Boeing KC-767A tanker aircraft.
In February 2005, Michael Sears, Boeing Chief Financial
Officer (CFO), pled guilty to related charges. Both Druyun and
Sears were sentenced to terms in Federal prison. Although the
United States Attorney's Office decided not to seek criminal
charges against the company, the United States on June 30,
2006, entered into a global settlement with Boeing for $615
million.
I understand this included a $50 million monetary penalty
pursuant to a criminal deferred prosecution agreement and $565
million in resolution of civil claims. I have been informed
that this settlement was the largest ever by a Department of
Defense (DOD) contractor.
This entire matter brings into question a number of
concerns that are appropriate for discussion in this important
hearing. First and foremost, how does a company with the pride
and prestige of Boeing produce employees that are capable of
this kind of criminal behavior? Companies doing business with
the United States Government are expected to adhere to the
highest legal and ethical standards. We would expect nothing
less from a company of Boeing's stature and rich heritage.
My understanding is that Boeing employs some 55,000 men and
women in their workforce. I am quite sure that they would
prefer to work for a company that is fully committed to
operating at the highest standards of ethical behavior. It is
important that they understand the direct impact unethical
conduct can have on the company's bottom line.
I would like to insert here that I have had the opportunity
on two occasions recently to talk to the CEO of Boeing and I
think he is prepared in a very forthright manner to address in
testimony the very issues that I have just raised today.
We will be interested in hearing Mr. McNerney's views on a
cultural climate at Boeing, both past and present, that has
fostered criminal misconduct by some of its employees and what
steps he has taken to date and what he plans for the future to
restore Boeing's reputation and move the company in a new
direction.
It is my understanding that the Boeing Company has decided
not to seek a tax deduction for the $615 million in settlement
charges stemming from the settlement. That is an important
first step on the path of redemption. Boeing was not required
to abide by this decision as part of the settlement agreement,
but chose instead to pursue this path on its own initiative as
a part of their business strategy. I believe the Boeing Company
took a long-term approach in an effort to restore its
reputation and made a sound decision.
I would like to put in the record at the conclusion of my
statement here a letter that I and other members of this
committee, notably my distinguished colleague, Mr. McCain,
signed on this very issue prior to the decision with regard to
the tax.
Chairman Warner. Congress has pressed hard for real change
in defense acquisition and corporate ethics. The DOJ has said
much about the need for change and reform in defense
acquisition and ethics and corporate America as well. Under
your leadership, Mr. McNulty, when you were the United States
Attorney for the Northern Virginia region you took many
initiatives in this very area.
We will be interested in hearing the Department's reasoning
behind the remedies it considered and asserted against Boeing
in the global settlement agreement and why they are in the best
interests of the American taxpayer. Clearly, the United States
Attorney's Office could have pursued charges against the
company, but chose not to do so based on factors outlined in
the Department's Principles of Federal Prosecution of Business
Organizations. We need to hear from the Deputy Attorney General
the reasons why the Department chose this course of action, and
I thank you for your presence.
I would simply add that in my view this case will depend
largely on what has taken place to this moment and what will
take place in this hearing. But this case will serve as a model
for all America's industrial base and businesses to study
carefully. The learning that can come from this could be
enormous in helping to shore up the ethics and business conduct
of our very proud infrastructure of businesses in this Nation.
So I look upon it as an exceedingly important chapter in
our country.
[The prepared statement of Senator Warner follows:]
Prepared Statement by Senator John Warner
The committee meets today to receive the testimony of the Deputy
Attorney General of the United States Department of Justice (DOJ), and
from the Chairman, President and Chief Executive Officer (CEO) of the
Boeing Company on the recent Boeing Company Global Settlement
Agreement.
We welcome Deputy Attorney General Paul J. McNulty and W. James
McNerney, Jr., Chairman, President and CEO of the Boeing Company to
today's hearing. We meet today to discuss the results of two DOJ
investigations of the Boeing Company, both begun 3 years ago, into
allegations of improper use of proprietary information obtained from a
competitor to compete for launch services contracts under the Air
Force's Evolved Expendable Launch Vehicle program, and an investigation
of the circumstances surrounding the hiring of Darleen A. Druyun, a
senior Air Force official by Boeing.
On July 17, 2003, a grand jury indicted two Boeing employees on
charges of conspiring to conceal and possess trade secrets in violation
of title 18, United States Code. Both remain charged awaiting trial to
begin in late 2006. In April 2004, Ms. Druyun pleaded guilty to
negotiating employment with Boeing while she was participating
personally and substantially as an Air Force official overseeing the
negotiation of the proposed multi-billion dollar lease of Boeing KC-
767A tanker aircraft. In February 2005, Michael Sears, Boeing's Chief
Financial Officer (CFO), was convicted on related charges. Both Druyun
and Sears were sentenced to terms in prison.
Although the United States Attorney's office decided not to seek
criminal charges against the company, the United States, on June 30,
2006, entered into a global settlement with Boeing for $615 million. I
understand that this included a $50 million ``monetary penalty''
pursuant to a criminal deferred prosecution agreement and $565 million
in resolution of civil claims. I've been informed that this settlement
was the largest ever by the Department with a defense contractor.
This entire matter brings into question a number of concerns that
are appropriate for discussion in this important hearing. First and
foremost, how does a company with the pride and prestige of Boeing
produce employees that are capable of this kind of criminal behavior?
Companies doing business with the United States Government are expected
to adhere to the highest legal and ethical standards. We would expect
nothing less from a company of Boeing's stature and rich heritage.
It's my understanding that Boeing employs some 155,000 men and
women in their workforce. I'm quite sure that they would prefer to work
for a company that is fully committed to operating at the highest
standards of ethical behavior. It's important that they understand the
direct impact that unethical conduct can have on the company's bottom
line.
We will be interested in hearing Mr. McNerney's views on a cultural
climate within Boeing, both past and present, that has fostered
criminal misconduct by some its employees, and what steps he has taken
to date, and what he plans for the future, to restore Boeing's
reputation and move the company in a new direction.
It is my understanding that the Boeing Company has decided not to
seek tax deductions for the $615 million in settlement charges stemming
from the settlement. That's an important first step on the path to
redemption. Boeing was not required to abide by this decision as part
of the settlement agreement, but chose instead to pursue this path as
part of their business strategy. I believe the Boeing Company took a
long-term approach in an effort to restore its reputation and made a
good decision.
Congress has pressed hard for real change in defense acquisition
and corporate ethics. The DOJ has said much about the need for change
and reform in defense acquisition and ethics in corporate America as
well. We will be interested in hearing the Department's reasoning
behind the remedies it considered and asserted against Boeing in the
global settlement agreement, and why they are in the best interests of
the American taxpayer.
Clearly, the United States Attorney's Office could have pursued
criminal charges against the company, but chose not to do so based on
factors outlined in the Department's Principles of Federal Prosecution
of Business Organizations. We need to hear from the Deputy Attorney
General the reasons why the Department chose this course of action.
I thank you for your presence here today before the committee and
look forward to your testimony.
[The information referred to follows:]
Chairman Warner. I thank my good colleague, Senator McCain,
and I would now turn to you for opening remarks, and then we
will turn to Mr. Reed.
Senator McCain. Thank you very much, Mr. Chairman. I would
like to say how encouraged I am by Boeing's decision not to
write off any part of the payments it was required to make on
the settlement agreement. Many have boasted about how dedicated
they are to reform and new beginnings. Actions speak louder
than words and the fact of the matter is that Boeing did not
have to make the decision it made on deductibility, but it did.
When coupled with the internal changes the company has made,
what Boeing did here conveys to me how serious the company is
to truly reforming and starting fresh.
I welcome that change and look forward to working with the
company on addressing how we can reform a broken defense
procurement system. I have a few concerns that arise from this
global settlement agreement. First, why did the DOJ use a
deferred prosecution agreement in this particular case.
Deferred prosecution agreements under which the Department
agrees not to prosecute the wrongdoer in exchange for his
satisfying certain stipulations have been around for a while.
But its use in high-quantum corporate criminal cases is of
relatively recent vintage. While their increased use in such
cases may give rise to concern, unique concerns are raised by
their use to address defense procurement fraud and public
corruption.
Where a corporate wrongdoer might have conspired to commit
public corruption, are deferred prosecutions an appropriate
vehicle? Given consolidation in the defense sector, are major
defense firms in fact too few and too big to prosecute?
My other concerns relate to how the DOJ handled the
deductibility issue. In response to a letter that Chairmen
Warner and Grassley sent, the Department explained its policy
is not to address deductibility in its fraud settlement
agreements. I repeat, the Department said it was not its policy
to address deductibility in its fraud settlement agreements.
How then can you know whether the agreement is meaningful or
not?
While the DOJ's policy may make sense in relatively low-
quantum settlements, in high-quantum settlements it might not.
That is because how the government addresses corporate
misconduct that gives rise to settlements of $100 million or
more has policy implications. If the settlor is permitted to
recover what it pays to the Government from any third party,
that is either the taxpayer or its insurers, the deterrence
value and punitive effect of the settlement will be diluted.
In defense procurement fraud and public corruption cases
like this one, deterrence value and punitive effect are
everything. Therefore, in high-quantum corporate fraud
settlements the Department should revise its policy by
specifically allocating the payments under a given settlement
as either penalty or otherwise and specifically prohibit the
settlor from recovering penalty from any third party.
Particularly in defense procurement fraud cases, this could
really make a difference.
I thank you, Mr. Chairman, for holding this hearing.
Chairman Warner. Thank you very much, Senator McCain.
The letter to which I referred and you referred, dated June
29, signed by myself and you and Charles Grassley, has been put
in the record. The DOJ reply dated July 14 to our letter
likewise will be put into the record.
[The information referred to follows:]
Chairman Warner. My colleague from Rhode Island.
Senator Reed. Thank you very much, Mr. Chairman. I join you
in welcoming the witnesses today for this hearing. For the last
several years the Boeing Company has been operating under an
ethical cloud. First Boeing officials were determined to have
improperly obtained the proprietary information of a competitor
on the EELV program. Then Boeing officials were found to have
improperly hired a senior Air Force official and her daughter
while that official was making critical acquisition decisions
favoring the company on a series of Air Force programs.
These actions contributed to the collapse of the $25
billion Air Force tanker lease proposal and helped end the
public career of the then-Secretary of the Air Force.
The global settlement that our witnesses will discuss
brings to an end the criminal phase of this issue, at least as
it pertains to the Boeing Company. I welcome this development.
The ethical cloud hanging over Boeing has not been good for the
company, the Air Force, or the country. Boeing is our second
largest defense contractor, handling roughly $20 billion of DOD
contracts every year. Boeing is also a major player in the U.S.
economy, employing tens of thousands of workers around the
country in its commercial and defense businesses. We need the
goods and services that Boeing provides, but we cannot purchase
them at the expense of our legal and ethical standards.
Mr. Chairman, this settlement agreement does not end the
tanker lease scandal. The problems that we experienced with the
tanker lease laid bare significant shortcomings in DOD's
acquisition organization, workforce, policies, and practices.
The systemic problems still remain to be addressed. I hope that
we will have DOD officials at future hearings so that we can
hear about the steps that they are taking to resolve these
issues.
I look forward to the testimony of our witnesses. Thank
you, Mr. Chairman.
Chairman Warner. Thank you, Senator Reed.
In my opening comments I failed to recognize Mr. Rosenberg.
We welcome you, the current United States Attorney for the
Eastern District of Virginia, known as Mr. McNulty's successor.
Would that be correct?
Mr. Rosenberg. It is correct.
Chairman Warner. Would you introduce Mr. Schiffer?
STATEMENT OF HON. PAUL J. McNULTY, DEPUTY ATTORNEY GENERAL,
UNITED STATES DEPARTMENT OF JUSTICE; ACCOMPANIED BY STUART
SCHIFFER, DEPUTY ASSISTANT ATTORNEY GENERAL, CIVIL DIVISION;
AND CHARLES ROSENBERG, UNITED STATES ATTORNEY FOR THE EASTERN
DISTRICT OF VIRGINIA
Mr. McNulty. Yes, I will, Mr. Chairman. Stuart Schiffer is
with me today.
Chairman Warner. Speak into the mike with a little more
force, counsel.
Mr. McNulty. Thank you, Mr. Chairman.
Chairman Warner. Pretend you are in the courtroom and you
are ready to get the jury's attention. Here we go.
Mr. McNulty. He is the Deputy Assistant Attorney General
for the Civil Division. He is a 43-year veteran of the DOJ.
Mr. Chairman, Senator McCain, Senator Reed, I appreciate
the opportunity to appear before this committee regarding the
settlement with the Boeing Company. As I have just said, Chuck
Rosenberg, the U.S. Attorney from the Eastern District of
Virginia, whose office handled the Darleen Druyun-Michael Sears
portion of this case. Also Stuart Schiffer from the Civil
Division oversaw the civil settlement.
Mr. Chairman, I thank you very much for your kind support
and kind words today.
This enforcement action is the largest penalty ever paid by
a defense contractor and is one of the largest civil fraud
recoveries of all time. I would like to briefly describe the
Boeing investigation and the significant features of the
settlement agreements. The Boeing matter involves two
investigations, both begun more than 3 years ago. In September
2002, the United States Attorney's Office for the Central
District of California in Los Angeles opened an investigation
into allegations that Boeing had improperly used proprietary
information obtained from a competitor, Lockheed Martin
Corporation, to compete for launch services contracts under the
Air Force's Evolved Expendable Launch Vehicle program, known as
the EELV.
The investigation focused on allegations involving Kenneth
Branch, a former Lockheed employee, who was hired to work on
the EELV proposal of Boeing's predecessor, McDonnell Douglas.
Branch was hired by a Boeing employee by the name of William
Erskine. In June 1999 another Boeing employee reported to
Boeing management that Erskine had hired Branch in return for
Branch providing Erskine with Lockheed documents pertinent to
Lockheed's EELV proposal.
Boeing conducted an internal investigation and in August
1999 terminated Branch and Erskine. Boeing also informed
Lockheed and the Air Force that it had certain documents
proprietary to Lockheed in its possession. But little was done
at that time because Boeing identified only a few, relatively
insignificant documents.
In November 2001, in the course of civil litigation between
Lockheed and Boeing, Lockheed discovered that Boeing had
additional documents in its possession. This discovery prompted
Lockheed to refer the matter to the Air Force and the DOJ,
which triggered an investigation by the Defense Criminal
Investigative Service (DCIS), along with the Los Angeles U.S.
Attorney's Office. Boeing hired outside counsel to conduct an
internal investigation.
At the instigation of the DOJ, the EELV investigation
expanded into an investigation of similar launch service
contracts with National Aeronautics and Space Administration
(NASA) where Boeing and Lockheed were again competitors. The
NASA allegations involved a billion dollar task order that was
awarded to Boeing sole source. The issue there was whether
Boeing's alleged fraud in the EELV competition gave the company
an unfair advantage in the NASA procurement, so much so that
NASA was persuaded to award the task order to Boeing without
giving Lockheed even the opportunity to compete. The Air Force
Office of Special Investigations and the NASA Office of
Inspector General (IG) joined in the investigation.
On July 17, 2003, a grand jury indicted Branch and Erskine
on charges of conspiring to conceal and possess trade secrets
in violation of U.S.C. 1832, a few sections there. Both remain
charged, with their trial currently scheduled to begin in late
2006.
In September 2003, when I was the United States Attorney
for the Eastern District of Virginia, we opened an
investigation of the circumstances surrounding the hiring of
Darleen A. Druyun, a senior Air Force official, by Boeing. This
was about a year after the United States Attorney for the
Central District of California opened that office's
investigation. Druyun had been the Principal Deputy Assistant
Secretary of the Air Force for Acquisition and Management and
in that position supervised and oversaw the management of the
Air Force acquisition programs until her retirement in November
2002, when she was hired by Boeing.
In the summer 2003, and in large measure because of the
efforts of this committee, questions arose about the proposed
KC-767A tanker lease from Boeing and the contemporaneous hiring
of Druyun by Boeing in late 2002. This triggered an
investigation by the DCIS and the Federal Bureau of
Investigation in conjunction with the U.S. Attorney's Office in
Alexandria, Virginia, as well as an internal investigation by
the outside counsel hired by Boeing.
During the investigation it also came to light that in the
summer of 2000 Druyun had asked Boeing to hire her future son-
in-law and later her daughter. Boeing acceded to both requests.
During this period from 2000 to 2002, Druyun played a role in
the negotiation, award, and modification of numerous Boeing
contracts. Although Druyun has admitted bias as a result of
Boeing's favors, her admissions were insufficient to establish
any direct specific loss.
Boeing fired Sears and Druyun, both of whom pleaded guilty
to violations of conflict of interest laws and have served
terms in prison.
Now, the facts are far more complicated, but that is the
gist of the two investigations. On June 30, 2006, Mr. Chairman,
the United States entered into a global settlement with Boeing
for $615 million. This included a $50 million monetary penalty
pursuant to a criminal prosecution agreement and $565 million
in resolution of civil claims. As I said at the outset of my
statement, this settlement is the largest ever by the
Department with a defense contractor.
Now, I am going to briefly describe the criminal and civil
resolutions and I am not going to attempt to read everything in
the statement. The statement is very thorough with regard to
the details of those, so I am going to just highlight some
things.
Following the Los Angeles indictments of Branch and Erskine
and the criminal convictions of Druyun and Sears, the
Department turned its sights to holding the Boeing Company
accountable for the conduct of its employees. We entered into
lengthy discussions with Boeing. Based on the factors outlined
in the Department's Principles of Federal Prosecution of
Business Organizations, the United States Attorney's Office
decided to enter into an agreement with Boeing not to seek
criminal charges against the company. Those factors include
Boeing's timely and voluntary cooperation in the Druyun matter,
its willingness to cooperate in the investigations, the
company's policies and procedures in place at the time of the
conduct, the remedial actions taken by Boeing, including
efforts to improve and make more effective its corporate
compliance program, its termination of wrongdoers, and the
adequacy of other remedies, including civil settlement.
The criminal agreement obligated Boeing, among other
things, to pay a $50 million criminal monetary penalty and to
implement an effective ethics and compliance program, with
particular attention to the hiring of former government
officials and the handling of competitor information. In
addition, Boeing accepted and acknowledged responsibility for
the conduct of its employees in the EELV and Druyun matters.
The U.S. Attorney's Office may prosecute Boeing for the
Druyun matter or assess an additional monetary penalty if
Boeing violates the agreement during the next 2 years.
Meanwhile, as the facts were becoming known in these
investigations, the government's civil attorneys began
formulating theories of recovery. Now, in doing this the
government has several tools at its disposal, including the
False Claims Act (FCA) and the Procurement Integrity Act. These
tools come with a variety of penalties and remedies. The
monetary penalties are both compensatory and punitive. They are
not necessarily tied explicitly to the government's loss and
are not therefore entirely compensatory as that term is used
for tax deduction purposes. The statement that I have
submitted, Mr. Chairman, outlines those tools and remedies in
more detail.
Some of these remedies are mutually exclusive, which means
we can collect on one but not both. Others are cumulative.
Furthermore, different remedies or a different mix of remedies
can and do apply to different factual segments of the case.
For example, the remedies available to address Boeing's
alleged fraudulent procurement of the EELV and NASA contracts
are different than those to address contracts allegedly tainted
by the conflict of interest engendered by Boeing's negotiations
with Druyun in hiring her children.
Cases such as Boeing's are further complicated by the fact
the contracts at issue are critical to national security. They
cannot practically be terminated. The government must go
forward with the contracts and attempt to measure today the
impact of Boeing's fraud on the future. The Air Force and NASA
contracts at issue here are in their relative infancy. Boeing
is likely to continue to perform these contracts through at
least 2020. No doubt an element of the government's claim was
intended to address future impact, in contrast to past loss.
The point is that the government reaches its ultimate
demand through a careful analysis of many complex issues,
including the strengths and weaknesses of the facts and
overlapping legal theories of recovery.
Now, as a general matter the government initiates
settlement discussions by presenting its version of the facts
and asserting applicable claims and remedies. A company is then
given the opportunity to respond before a matter proceeds to
litigation. In this matter, Boeing availed itself of that
opportunity. From its own internal investigations, Boeing
presented additional and in some instances countervailing
facts, as well as legal arguments bearing on the matter.
In the statement I summarize the extensive differences that
exist on both the factual and legal matters. It gives a very
clear picture of the complexity of the investigation and the
negotiations in this civil enforcement action with regard to
Boeing.
The final amount of a civil settlement reflects the
uncertainty of certain provable facts and sustainable legal
theories. While there is give and take on both sides, the
compromise ultimately reached is in the amount of the
settlement, not in all the underlying facts and legal issues.
Indeed, if we were to insist on reaching agreement on the facts
and the law that supported the settlement, I fear that every
fraud investigation would drag out for years in court and leave
these matters for the judge and the jury to determine the facts
and the basis for liability.
It is important to remember that the goal of a civil
settlement is to protect the monetary interests of the
government. We do that best by insisting that the parties agree
to a settlement amount and that the government's claims are
paid.
Senator McCain has raised the tax issue and in the
statement I have a lengthy discussion as well of the tax matter
in this case. I will defer discussing that perhaps for the
question and answer time, and so I will just summarize that the
Department followed its longstanding policy with regard to the
tax issue here, which has been in place and which was
implemented in consultation with the Internal Revenue Service
(IRS), of deriving settlement amounts using tax-neutral
language.
In conclusion, Mr. Chairman, members of the committee, I
believe this was an outstanding resolution of an extremely
difficult case. Boeing has paid the United States $615 million
in penalties and damages. Boeing has accepted responsibility
and is taking action to ensure that such activity does not
impede its efforts to continue to do business with the United
States in the future.
The matter, while it was extensive and involved
considerable time, was expeditious in relation to litigation
and how litigation can often take a very long period of time,
especially when there are a number, a large number of issues at
stake. So we also believe that this matter was brought to a
resolution in a relatively timely way.
Finally, Mr. Chairman, I look forward to talking about
procurement fraud generally and the efforts by the DOJ and our
law enforcement partners to be as proactive as possible to
pursue procurement fraud, especially in the defense arena, as
aggressively as possible. You referred to the initiative in the
Eastern District of Virginia and now as Deputy Attorney General
I hope that we can have a national initiative that will really
emphasize a coordinated approach to combatting procurement
fraud.
Thank you very much, Mr. Chairman, for your attention, and
I look forward to your questions.
[The prepared statement of Mr. McNulty follows:]
Prepared Statement by Paul McNulty
Mr. Chairman, I appreciate the opportunity to appear before you to
address the committee regarding the recent settlement with The Boeing
Company. I think that by reaching a common understanding of the facts
and circumstances surrounding this agreement, you will agree that the
Department reached a good settlement in the interests of the American
taxpayer. Let me briefly describe the Boeing investigation and how the
Government negotiates settlements in such cases.
INVESTIGATION
In fact, Boeing involved two investigations, both begun more than 3
years ago. In September 2002, the United States Attorney's Office for
the Central District of California, in Los Angeles, opened an
investigation into allegations that Boeing had improperly used
proprietary information obtained from a competitor, Lockheed Martin
Corporation, to compete for launch services contracts under the Air
Force's Evolved Expendable Launch Vehicle Program (EELV). The
investigation focused on allegations involving Kenneth Branch, a former
Lockheed employee who was hired to work on the EELV proposal of
Boeing's predecessor, McDonnell Douglas. Branch was hired by a Boeing
employee by the name of William Erskine. In June 1999, another Boeing
employee reported to Boeing management that Erskine had hired Branch in
return for Branch providing Erskine with Lockheed documents pertinent
to Lockheed's EELV proposal. Boeing conducted an internal investigation
and, in August 1999, terminated Branch and Erskine. Boeing also
informed Lockheed and the Air Force that it had certain documents
proprietary to Lockheed in its possession, but little was done at that
time because Boeing identified only a few relatively insignificant
documents.
In November 2001, in the course of civil litigation between
Lockheed and Boeing, Lockheed discovered that Boeing had additional
documents in its possession. This discovery prompted Lockheed to refer
the matter to the Air Force and the Department of Justice (DOJ), which
triggered an investigation by the Defense Criminal Investigation
Service (DCIS) along with the Los Angeles United States Attorney's
Office. Boeing hired outside counsel to conduct an internal
investigation.
At the instigation of the DOJ, the EELV investigation expanded into
an investigation of similar launch services contracts with National
Aeronautics and Space Administration (NASA) where Boeing and Lockheed
were again competitors, and another Air Force procurement for the
Exoatmospheric Kill Vehicle (EKU). The NASA allegations involved a
billion-dollar task order that was awarded to Boeing sole source. The
issue there was whether Boeing's alleged fraud in the EELV competition
gave the company an unfair advantage in the NASA procurement, so much
so that NASA was persuaded to award the task order to Boeing without
giving Lockheed even the opportunity to compete. The Air Force Office
of Special Investigations and the NASA Office of the Inspector General
joined in the investigation.
On July 17, 2003, a grand jury indicted Branch and Erskine on
charges of conspiring to conceal and possess trade secrets in violation
of 18 U.S.C. Sec. Sec. 1832 (a)(1), (a)(3), and (a)(5). Both remain
charged with their trial currently scheduled to begin in late 2006.
In September 2003, when I was the United States Attorney for the
Eastern District of Virginia, we opened an investigation of the
circumstances surrounding the hiring of Darleen A. Druyun, a senior Air
Force official, by Boeing. This was about a year after the United
States Attorney for the Central District of California opened that
office's investigation. Druyun had been the Principal Deputy Assistant
Secretary of the Air Force for Acquisition and Management, and in that
position supervised and oversaw the management of the Air Force
acquisition programs until her retirement in November 2002, when she
was hired by Boeing.
In the summer 2003, Congress and the media had begun asking
questions about the proposed KC-767A tanker lease from Boeing and the
contemporaneous hiring of Druyun by Boeing in late 2002. This triggered
an investigation by the DCIS and the Federal Bureau of Investigation in
conjunction with the United States Attorney's Office in Alexandria, as
well as an internal investigation by outside counsel hired by Boeing.
During the investigation, it also came to light that in the summer
2000, Druyun had asked Boeing to hire her future son-in-law and later
her daughter. Boeing acceded to both requests. During this period--from
2000-2002--Druyun played a role in the negotiation, award, and
modification of numerous Boeing contracts. Although Druyun has admitted
bias as a result of Boeing's favors, her admissions were insufficient
to establish any direct or specific loss. Boeing fired Sears and
Druyun, both of whom pleaded guilty to violating the conflict of
interest laws and have served terms in prison.
The facts are far more complicated, but that is the gist of the two
investigations. On June 30, 2006, the United States entered into a
global settlement with Boeing for $615 million. This included a $50
million ``monetary penalty'' pursuant to a criminal deferred
prosecution agreement and $565 million in resolution of civil claims.
This settlement was the largest ever by the Department with a defense
contractor.
CRIMINAL RESOLUTION
The United States Attorney's Offices separately entered into
lengthy discussions with Boeing. In Los Angeles, a grand jury indicted
Branch and Erskine, the two Boeing employees responsible for securing
the Lockheed documents in an effort to win launch services contracts
under the Air Force's EELV program. Meanwhile, as I mentioned, the
investigation in Alexandria resulted in Boeing terminating Druyun and
Sears for cause in November 2003, and in their subsequent guilty pleas.
In April 2004, Druyun pleaded guilty to negotiating employment with
Boeing while she was participating personally and substantially as an
Air Force official overseeing the negotiation of the proposed multi-
billion dollar lease of Boeing KC-767A tanker aircraft. In February
2005, Sears was convicted on related charges. Both Druyun and Sears
were sentenced to terms in prison.
Following Sears' conviction, we entered into discussions with
Boeing concerning a resolution of the criminal case. After a period of
separate negotiations, the two United States Attorneys' Offices joined
forces to pursue a global resolution of the two investigations.
Based on the factors outlined in the Department's Principles of
Federal Prosecution of Business Organizations, the United States
Attorneys' Offices decided to enter into an agreement with Boeing not
to seek criminal charges against the company. Those factors include
Boeing's timely and voluntary cooperation in the Druyun matter; its
willingness to cooperate in the investigations; the company's policies
and procedures in place at the time of the conduct; the remedial
actions taken by Boeing, including efforts to improve and make more
effective its corporate compliance program; its termination of the
wrongdoers; and the adequacy of other remedies, including civil
settlement. The criminal agreement obligated Boeing, among other
things, to pay a $50 million criminal monetary penalty and to implement
an effective ethics and compliance program, with particular attention
to the hiring of former Government officials and the handling of
competitor information. In addition, Boeing accepted and acknowledged
responsibility for the conduct of its employees in the EELV and Druyun
matters. The United States Attorney's Office may prosecute Boeing for
the Druyun matter, or assess an additional monetary penalty, if Boeing
violates the agreement during the next 2 years.
CIVIL RESOLUTION
The Boeing investigations posed a complex set of facts and equally
complex issues of law. Although these issues also weighed into the
criminal agreement, we discuss them here as they have direct bearing on
the civil settlement amount.
As the facts were being developed, the Government's civil attorneys
began formulating theories of recovery. The Government's principal
civil fraud remedy is the False Claims Act (FCA). This statute enables
the Government to recover three times its actual damages, plus a civil
penalty of $5,500 to $11,000 for each false claim a ``person,'' which
includes a corporation, knowingly submits or causes to be submitted to
the Government. The single portion of the damages is intended to
compensate the Government for its out-of-pocket loss--restitution, if
you will--while the multiple and civil penalty portions are over and
above those costs. The multiple and civil penalty portions of the False
Claims Act are intended as a deterrent, signaling to those who might
commit fraud that the consequences are far more onerous than merely
paying the Government back money that wasn't theirs to begin with. They
also defray the costs of investigation and prosecution and address less
tangible injuries such as harm to the integrity of public programs and
contracts.
But the FCA isn't our only remedy. We have many others. The
remedies we considered and asserted against Boeing included the FCA,
the Procurement Integrity Act (PIA), common law claims for unjust
enrichment, fraudulent procurement of contracts, and inducing a breach
of fiduciary duty, as well as other statutory and common law remedies.
The PIA entitles the Government to recover ``civil penalties,'' as do
many other statutes. The common law remedies range from voiding
contracts and recovering consideration paid to recovering profits. As
you can see, these remedies are not tied explicitly to the Government's
loss. As such, they are not entirely ``compensatory'' as that term may
be used to determine deductibility for tax purposes. Rather, they are
measured by the wrongdoer's ill-gotten gains or designed to enable the
Government to rid itself of tainted contracts.
Some of these remedies are mutually exclusive, which means we can
collect on one but not both. Others are cumulative. Furthermore,
different remedies--or a different mix of remedies--can and do apply to
different factual segments of the case. For example, the remedies
available to redress Boeing's alleged fraudulent procurement of the
EELV and NASA contracts are different than those to redress contracts
allegedly tainted by the conflict of interest engendered by Boeing's
negotiations with Druyun and hiring her children. Cases such as Boeing
are further complicated by the fact that the contracts at issue are
critical to the national security. They cannot practicably be
terminated. The Government must go forward with the contracts and
attempt to measure today the impact of Boeing's fraud on the future.
The Air Force and NASA contracts at issue here are in their relative
infancy. Boeing is likely to continue to perform these contracts
through at least 2020. No doubt, an element of the Government's claims
was intended to address future impact, in contrast to past loss.
The point is that the Government reaches its ultimate demand
through a careful analysis of many complex issues, including the
strengths and weaknesses of the facts and overlapping legal theories of
recovery.
While the Government is performing its investigation and analyzing
possible remedies, the putative defendant is doing the same. As a
general matter, the Government initiates settlement discussions by
presenting its version of the facts and asserting applicable claims and
remedies. Putative defendants are then given the opportunity to respond
before a matter proceeds to litigation. In this matter, Boeing availed
itself of that opportunity. From its own internal investigations,
Boeing presented additional, and in some instances, countervailing
facts as well as legal arguments bearing on the matter.
Both parties vigorously advocated the facts and the law in their
favor. The contested issues in Boeing were legion and complex. In the
EELV matter, they included whether the documents contained ``bid or
proposal'' or ``source selection'' information within the meaning of
the Procurement Integrity Act; whether the documents were significant
and gave Boeing an unfair advantage, or were dated and irrelevant;
whether Boeing's final bid was derived independently by persons who had
never seen the documents or had access to the information and, if so,
whether that mattered. There were also issues in determining whether
the costs incurred by the Air Force in reallocating the launch missions
between Boeing and Lockheed were proximately caused by Boeing's conduct
and a proper basis for damages, or whether other factors, e.g.,
Lockheed's misguided proposal strategy and a failing commercial market,
warranted the reallocations. (In 1998, when the first 28 missions were
awarded, everyone anticipated a robust commercial market and bid the
missions accordingly, expecting that the volume would reduce the price
per launch. By 2003, when the Air Force reallocated the missions, it
was apparent that a commercial market had not materialized, resulting
in increased prices for the reallocated missions.) Finally, there were
issues of causation relating to whether Boeing's conduct with respect
to the EELV could fairly be said to have impacted on the NASA award.
The facts were relatively clear and undisputed in the Druyun
matter. Of course, the basic facts were set forth in the criminal plea
agreements of Druyun and Sears. Even so, the legal theories were
vigorously contested. These included whether Boeing's conduct
sufficiently tainted the contracts to give rise to civil penalties
under the FCA, whether there was evidence to demonstrate provable
impact on the contracts, and whether Boeing's favors in hiring Druyun's
children violated the gratuities statute or rose to the level of a
conflict of interest entitling the Government to common law remedies
for recovering Boeing's profits under the affected contracts.
The amount of a civil settlement reflects the uncertainty of
certain provable facts and sustainable legal theories. While there is
give and take on both sides, the compromise ultimately reached is in
the amount of the settlement, not in the underlying facts or legal
issues. Indeed, if we were to insist on reaching agreement on the facts
and the law that supported the settlement, I fear that every fraud
investigation would end up in court for the judge and the jury to
determine the facts and the basis for liability.
It is important to remember that the goal of a civil settlement is
to protect the monetary interests of the Government. We do that best by
insisting that the parties agree to a ``settlement amount.'' Likewise,
our concern is that the Government's claims are paid. Therefore, we do
not get involved in private agreements parties may have with third
party payers such as insurers.
Certainly, there are terms we include in every settlement agreement
to protect important Government interests. Although frequently
contested, these terms are not controversial. For example, consistent
with the Federal Acquisition Regulation, contractors agree not to
charge their attorneys' fees, their costs of investigation, and the
settlement payment to Government contracts. But we do not require an
admission of wrongdoing or, once again, agreement on the underlying
basis of the settlement. To do so, would impede negotiations without
serving the purpose of civil settlement. Moreover, the Government has
better and more beneficial ways of handling these issues.
TAX ISSUES
Regarding the tax issues raised by certain members, the Department
followed its longstanding policy, which has been in place for many
years and which was implemented in consultation with the Internal
Revenue Service (IRS), of characterizing settlement amounts using tax
neutral language. Attorneys negotiating our fraud cases use the
expertise and experience they have acquired as civil fraud attorneys to
protect the public interest that prompted the suit. In doing so, as
I've just discussed in relation to the Boeing settlement, they focus on
the legal and evidentiary merits of the particular case, and the
assessment of risk attendant to further litigation and trial. For
example, in negotiating the settlement of a fraud investigation, the
Department's attorneys consider applicable legal authorities of
differing relative weights, the strength of the evidence establishing
various fraudulent scenarios, and the various methods for measuring
damages and/or assessing penalties applicable to each circumstance.
There also may be disputed facts concerning the degree of a defendant's
culpability that would bear on the appropriate multiple of single
damages. In the end, the parties may agree on no more than a settlement
amount to resolve the investigation without agreeing on a value for the
individual parts of the investigation or the legal basis. In arriving
at the $565 million civil settlement in this case, Boeing was well
aware that the Government was asserting claims against it that were
well beyond seeking merely compensatory damages. I note from reports in
the press that Boeing has decided not to ``write-off'' the settlement
for tax purposes. NYTimes.com, Boeing Reports $160 Million Loss, http:/
/www.nytimes.com/aponline/business/AP-Earns-Boeing.html?ex=11545776
00&en=13abaf8551a80f14&ei=5070&emc=eta1 (last visited July 26, 2006).
The Department's ``tax neutral'' approach to these cases ensures
that the IRS retains sufficient latitude to evaluate the taxpayer's
obligation in its role as taxing authority and final arbiter of its
rules and regulations. In almost all fraud cases, such as the matter
involving Boeing, DOJ lawyers simply lack the necessary expertise in
the intricacies of the tax code, and the knowledge of a defendant's
particular tax situation, that would warrant substituting their
judgment for that of the IRS. Indeed, in its recent report on this
issue in which the Government Accountability Office (GAO) examined
large civil settlements attained by Federal agencies over a multiyear
period, the GAO noted that ``it may not always be clear which payments
are deductible, in part because the Internal Revenue Code does not
address the deductibility of all types of payments that may be made
pursuant to a civil settlement and the statutes imposing the payments
may be unclear regarding whether they are punitive, compensatory, or
both.'' GAO Report No. 05-747, Tax Administration: Systematic
Information Sharing Would Help IRS Determine the Deductibility of Civil
Settlement Payments, 1 (September 15, 2005).
After concluding its review of the DOJ's civil settlement process
(and that of other Federal agencies), the GAO did not conclude that
Department attorneys should negotiate the tax treatment of these civil
settlements. Rather, the GAO concluded that the solution was to be
found in systematic information sharing among Federal agencies and the
IRS that would be beneficial to ensuring the correct tax treatment of
the settlement amounts. The Department has for several years now worked
with the IRS to facilitate follow-on investigations of the tax
ramifications of our larger fraud settlements. In the wake of this GAO
report, we also have initiated meetings with IRS personnel to
facilitate a systematic sharing policy that can expand this process
into other enforcement areas within the jurisdiction of the DOJ.
I add two other points to this discussion: First, the Department's
current tax neutral policy encourages greater consistency of the tax
treatment of these settlements, since it avoids a tax treatment that
may vary among the Federal districts in which such settlements occur.
Again, these determinations are better left to the IRS and not to
individual lawyers within the DOJ who are positioned throughout the
country.
Second, I think it is fair to assume that many offers of settlement
that the Department receives from defendants such as Boeing are colored
by the defendant's own assessment of the subsequent tax treatment. It
seems likely that a defendant's settlement offer to the Government will
be less generous if it also had to agree that the full amount was
nondeductible. Likewise, a defendant's civil settlement offer may be
increased in recognition that at least a portion of the amount paid
directly to the Government will provide favorable tax treatment.
Assuming the subsequent treatment is permitted by the tax code, there
is nothing inherently wrong with such considerations. In fact, the
inherent uncertainty of that liability may result in more favorable
settlements for the Government. If, however, tax treatment were
required as part of the settlement process, the Government would be put
at a distinct disadvantage. Bear in mind that it is impossible for
Department attorneys to know the intricacies of our defendants'
financial affairs to such a degree that we can comfortably predict the
bottom-line impact a certain deduction will have on a defendant's tax
bill. So, if a defendant indicated in the course of a settlement that
its offer to the Government would be reduced by $X to accommodate the
ensuing tax bill it faced as a result of the negotiated tax treatment,
we simply lack the ability to meaningfully verify that. Such an
argument by defendants which, we can assume, would sometimes be
disingenuous or simply mistaken, could result in settlements less
beneficial to the Government since the Government attorneys could not
verify a key element of the negotiation. Only the IRS has the authority
and the technical skill to make such judgments, after receipt of the
necessary financial information from the taxpayer.
CONCLUSION
In conclusion, this was an outstanding resolution to an extremely
difficult case. Boeing has paid the United States $615 million in
penalties and damages--more than any other defense contractor in a
fraud matter. Boeing has accepted responsibility and is taking action
to ensure that such activity doesn't impede its efforts to continue to
do business with the United States in the future. Finally, the
Department's policy of remaining tax neutral--a longstanding policy
established in consultation with the IRS and recommended by the GAO--is
sound. That policy leaves civil fraud issues to the Government's fraud
experts and the tax implications of any settlement (often unknowable
during negotiations) to the Government's tax experts. I firmly believe
that ultimately, this policy is the only appropriate way to handle
these matters, the most efficient to resolve both civil fraud cases and
the tax ramifications of those cases, and the most beneficial to the
American taxpayer.
Chairman Warner. Thank you very much, Mr. McNulty. Do
either of your colleagues wish to supplement the written
statement?
Mr. McNulty. No, Mr. Chairman. They will just be here to
help with questions.
Chairman Warner. As I went back over this case in
preparation for this hearing, the decision which was extremely
difficult, you have outlined the reasons why you reached the
decision, no criminal charges against the company. But did not
the record reflect that Boeing's CFO was acting in every way to
benefit the company rather than himself when he hired Mrs.
Druyun?
Mr. McNulty. I think that is a fair characterization, Mr.
Chairman, that the actions of corporate officers in these kinds
of cases normally involve benefit to the company. In fact, that
provides the legal basis for the DOJ to pursue the company.
Now, whether the Department or the government prosecutes the
company or reaches a resolution of another sort is determined
on a case-by-case basis. But the very fact that we can go
against the company is based upon the legal fact that the
senior official has taken actions which benefit the company and
the official is acting on behalf of the company.
Chairman Warner. He may have been eligible for a bonus or
something for getting Druyun to come over and join the company.
So there may have been some benefits to him personally.
Mr. McNulty. Sure.
Chairman Warner. But here he primarily was acting on behalf
of the company when he did that and the company was the direct
beneficiary.
Mr. McNulty. That is right, Mr. Chairman.
Chairman Warner. Do you not impute in some respects the
wrongdoings of a person in his position to the company as a
basis for proceeding with a criminal charge?
Mr. McNulty. That is correct. You have essentially stated
the legal basis for why the government proceeds against
companies and not just individuals. Now, that then presents the
question, should the company be charged criminally or not. You,
I am sure, have heard of what has become rather well known now,
the Thompson Memo.
Chairman Warner. That was my next question.
Mr. McNulty. Okay. Then I will pause.
Chairman Warner. Let us talk about that Thompson Memo,
which provides the guidelines for prosecution of corporations,
and why they were established and if they were used in this
case.
Mr. McNulty. Just to summarize that point, my predecessor,
Larry Thompson, Deputy Attorney General, at the beginning of
the corporate fraud initiative of this administration, which
has succeeded in prosecuting nearly 1,000 corporate executives
over a period of 4 years, sent out a direction to all United
States Attorneys giving guidance on what should be considered
when making the decision as to whether the corporation, the
business organization, should be prosecuted. It laid out nine
factors, and that has received considerable attention more
recently because some in the legal community have raised
objections to some of the factors to be considered.
But that kind of consideration is what is at work in all of
these cases when looking at the question of charging the
corporation criminally, not just the individuals. In my
statement when I talked about the facts involved in reaching a
settlement with Boeing, I referred to the self-reporting, the
cooperation, the nature of the conduct in relation to the
company, and the efforts to try to police, monitor, and
establish new procedures. All those things are a part of the
Thompson Memo for consideration and what we found to be present
in some regard in this case, which led to the decision not to
prosecute but to enter into an agreement, a deferred
prosecution agreement.
Chairman Warner. I think it would be helpful for the
committee if you took the Thompson Memo, as you say, there are
nine basic criteria, and state each criteria and beneath that,
the reasons why you felt it was or was not applicable in this
decision process, so that this decision should be supported by
a very complete record.
[The information referred to follows:]
Chairman Warner. On the question of suspension or
debarment, the civil settlement agreement excepts from the
release by the United States any suspension or debarment
action. To your knowledge, has any such action been instituted
against Boeing by the Air Force or any other agency or
department of the government?
Mr. McNulty. I may have to defer to Mr. Schiffer on this. I
know there have been a number of actions taken in different
matters and so I want to make sure we are very clear on that.
Mr. Schiffer. Mr. Chairman, the three Boeing units that
were involved in the rocket matters were suspended for almost 2
years, July 2003 until May 2005.
Chairman Warner. Is that the full scope of the actions,
then, to the best of your knowledge?
Mr. Schiffer. Yes, to date that is what has occurred.
Chairman Warner. Mr. McCain, I must absent myself for a
moment and I will be back. Will you take the chair.
Senator McCain [presiding.] Thank you, Mr. Chairman. Do you
want to go to Senator Reed, sir?
Chairman Warner. That is all right. Why do you not go
ahead.
Senator McCain. Senator Reed.
Chairman Warner. All right, let Senator Reed go.
Senator Reed. Thank you, Mr. Chairman.
Thank you, Senator McCain. I appreciate that.
Thank you, gentlemen, for your testimony today. Prior to
your current position, Mr. McNulty, you were the Eastern
District of Virginia Federal Attorney, and you had there a task
force on contract fraud. So you have had a lot of experience,
not just in this case but other cases. Is it your impression
that this type of conduct is unique to Boeing or is it more
widespread within the industry, requiring a much more
aggressive posture?
Mr. McNulty. It is an interesting question because
certainly there is a significant amount of fraud involved in
government contracting. By that I mean a certain percentage has
been determined to exist in government contracts as a general
matter, whether that is 5 percent, 6 percent, 7 percent of all
government contracts. So that the more contracting that is
going on, the more potential there is for fraud.
My hesitancy is that the facts of this case are unique. You
have the question here of a revolving door, the conflict-of-
interest associated with someone who is working in the
government and then comes to the company for employment. That
matter was of significant concern to the DOD as a result of the
Druyun case and led to an initiative by the DCIS under the IG's
office to actually look at senior officials who were leaving
DOD and see where they were going. I think that is an ongoing
matter for the DCIS.
So then you have that set of circumstances, then you have
the proprietary information question in this case, and there
are many other instances of proprietary information falling
into the hands of individuals in questionable ways, so I think
you see conduct here that in some ways is a bit unusual, other
conduct that is not so unusual, and probably not hard to find,
given the large amount of government contracting that is going
on.
Senator Reed. Thank you. Specifically regarding the Boeing
case, the settlement calls for the adoption of many measures:
training employees, disciplinary action for employees who
violate these ethics standards, establishing ethics standards.
Do you have adequate tools to ensure that these provisions will
be enforced?
Mr. McNulty. That is a challenging question and something
we are looking at. You may have heard of the corporate fraud
task force which was set up 4 years ago this month to bring
together the Federal agencies associated with the whole
corporate fraud enforcement effort. We met just last week and
we discussed this very question of how we can work better
together to monitor and to enforce these agreements.
One of the critical points of these provisions is that they
have self-reporting and self-monitoring requirements. Now, that
is stronger than it sounds, because these are outside entities,
firms, that are brought in as independent monitors to these
companies to oversee the conduct, and failure to report conduct
that is identified in that way is a violation of the agreement
and could cause the agreement to be set aside and criminal
penalties and prosecution would follow.
I think that the structure or the mechanics of these
agreements for purposes of monitoring is sound. But I do think
we have to do as much as we can and to make sure we have
adequate resources for government oversight, as well as this
outside third party oversight of the provisions in these
agreements. It is a strain to find enough resources to do that,
because it is hard enough to find the resources to investigate
the cases, let alone then monitor them in an ongoing way.
Senator Reed. I understand that the agreement expires after
2 years. Is there anything to ensure that these principles
developed continue on after the expiration of the agreement?
Mr. McNulty. There is a lot of incentive for having these
kinds of principles in place. We were talking a moment ago with
the chairman about the Thompson Memo and the factors to be
considered there. If a company has had the self-governing
oversight mechanisms in place and then has a violation or
misconduct occur, it is more likely to be seen as making good
faith efforts to avoid such conduct because of having those
kinds of compliance agreements or monitoring mechanisms in
place.
So there is a strong incentive for the company to keep
those things going when they have created them. I think that
the practice of corporate governance has embraced this process
more and more and it is becoming a standard way of proceeding.
Senator Reed. Let me ask a final question which touches on
your response to my first question about the perception that
this problem goes beyond one company. That is that in
particular respect to Iraq there has been evidence accumulating
of fraud, mismanagement, and many other unfortunate things in
contracting out there. Several cases were filed under the FCA.
Only a few have really gotten into the stage of discovery and
trial and settlement. That is in one respect because they are
sealed until the DOJ makes the decision whether they will
participate or not and it essentially freezes the activity.
I understand there are numerous cases like this that have
been brought and are currently being reviewed by the DOJ. I
also understand that you have had referrals from the Defense
IG, the Special IG for Iraq Reconstruction. But not many of
these cases seem to be making it past DOJ review.
Can you give some insights as to what is happening and
whether there is going to be an aggressive attempt to try to
come to grips with what seems day after day gross mismanagement
and out and out fraud?
Mr. McNulty. Yes, Senator. I believe you are talking mostly
about the qui tam process, where individuals can bring
allegations of fraud, misconduct, to the attention of the
government. Under that law the government has a specified
period of time in which to take the case and pursue it or to
decline it. But if it declines the case then the relator, the
person who has brought the information, is free to pursue the
case in Federal court.
So the qui tam process does not result in claims not being
able to move forward. It is really a question of how claims
will move forward. Will they move forward with the government
pursuing the claims on behalf of the relator or the relator go
directly into court?
One of the issues we have addressed in some of these cases
is the nature of the FCA's application to the conduct that has
occurred in Iraq because of the nature of the funds. The issue
more specifically is whether or not the moneys involved
constitute the types of funds that are payments under the FCA,
and that has been litigated. I think it continues to be
litigated, as to how to treat those moneys. That may account
for what may be perceived as a failure to move as aggressively
as possible. But it is more of a legal hurdle than it is a
reflection of a lack of commitment to doing that.
There have been some cases. I know of a number of
investigations going on and these investigations are very
complicated, complicated by the fact of witnesses, the trail of
evidence not being easily found or traced, given the nature of
the conduct itself. But there are a number of investigations
that are ongoing and some charges have been brought.
Do you want to say anything more about the qui tam matter?
Mr. Schiffer. Senator, I should at the start mention that I
have seen numbers in the press about qui tam cases that remain
under seal and at least some of the numbers I have seen are
rather grossly exaggerated. There are a number of these cases.
As the Deputy Attorney General has said, they are complicated.
The place where the conduct occurred, the nature of the money,
the nature of the entity that awarded the contracts, whether
these are government bodies or not, such as the Coalition
Provisional Authority (CPA).
We do seek extensions of time, as the statute permits. We
only obtain those when a judge finds that we have shown good
cause for the extensions. We are getting ready to announce in
the next few days one settlement with a subcontractor. It is
going to be a small amount of money when one considers the
overall funding, but I think it shows that we take these cases
seriously, and we will continue to pursue them.
Senator Reed. Thank you very much, gentlemen.
Thank you, Senator McCain.
Senator McCain. Mr. McNulty, in 2005, as U.S. Attorney for
the Eastern District of Virginia, you testified about your
forming a procurement fraud working group, a multi-agency
working group focused on procurement reform. Is that working
group still in existence?
Mr. McNulty. Yes, it is.
Senator McCain. You mentioned you hope you can form a
national task force on procurement fraud. Does that mean you
are going to or does it mean you just hope, or what?
Mr. McNulty. No, Senator. It is an intention to do so. In
fact, the Assistant Attorney General for the Criminal Division,
Alice Fisher, is working with me on a plan right now.
Senator McCain. When do we expect that to happen?
Mr. McNulty. I would say that in the next 60 days we will
have the details of our initiative worked out.
Mr. McNulty. Thank you.
Senator McCain. Now, you reached a civil agreement of $565
million and $50 million in civil criminal agreement, right, on
the Boeing case?
Mr. McNulty. Right.
Senator McCain. Now, is not the purpose of reaching these
agreements to punish the wrongdoers, to reach a settlement so
that it is a form of punishment? Otherwise they would not have
to pay anything, right?
Mr. McNulty. In large measure it is punishment. It is also
getting the moneys lost to the government back.
Senator McCain. Now, in this case, much to their credit,
Boeing decided to assume these expenses. Suppose that they had
decided to write it off in a tax writeoff. You in your
statement say ``The Department's tax-neutral approach to these
cases ensures that the IRS retains sufficient latitude to
evaluate the taxpayer's obligation in its role as the taxing
authority and final arbiter of its rules and regulations.''
If they write it off, then who pays for that, Mr. McNulty?
It seems to me the taxpayer does, because then it is taxes that
the company does not pay. So if it is to settle a case but also
to enact some punishment on a corporation, how in the world do
you duck the obligation to determine whether that fine can be
laid off on the taxpayers or not?
Mr. McNulty. We certainly agree that we do not want the
effect of the penalty to be lost by the ability to be deducted.
In fact, if it is a penalty.
Senator McCain. That has happened in the past, that they
have deducted the penalties from their taxes in other cases.
Mr. McNulty. Penalties are not deductible. Compensation,
restitution to the government, would be. Congress has
determined that compensatory damages would be deductible. So
the question is whether or not it is that or it is a penalty.
It is our position when we go into these discussions.
Senator McCain. Does it not matter whether they write it
off or not?
Mr. McNulty. Of course it does.
Senator McCain. Then how can you remain neutral on it and
then make it relatively penalty-free?
Mr. McNulty. The term ``neutral'' does not mean it is
penalty-free.
Senator McCain. If they are able to write it off, what is
the penalty?
Mr. McNulty. The term ``neutral'' means that it is going to
be resolved. The question is how is it going to be resolved,
not that we do not agree that they should not be able to get
away and write off the payment. It is a question of how that is
going to be determined. Is it going to be determined in the
negotiations with the company, by the DOJ, or by the IRS, who
has the expertise to determine whether or not it is
appropriate.
Senator McCain. It seems to me if you are going to punish
somebody then they should pay the fine and do the time or not.
I do not see how you can settle it with that kind of aspect of
an agreement outstanding. I guess maybe we ought to have to
pass some law that if you penalize somebody for wrongdoing and
settle with them and absolve them of all criminal conduct with
these payments or civil misconduct, that the taxpayers should
not be picking up the bill.
Mr. McNulty. We agree. You will not need to do that because
we are in full agreement with what you are saying. Again, the
question is how do we get there? What process makes the most
sense to achieve the policy that you are describing here today?
Senator McCain. I do not think you get there.
Prior to entering into this settlement, did the DOJ find
that other executives or members of the board know or should
have known about then-CFO Michael Sears' illegal communications
with Ms. Druyun?
Mr. McNulty. Senator, that was certainly a significant
aspect of the investigation, to determine to what extent anyone
else had knowledge that would be sufficient for purposes of a
criminal charge. The fact is that in this investigation such
knowledge was not determined to exist, and that is why no other
charges were brought.
Senator McCain. According to the Thompson Memo, as you
mentioned, there is nine criteria. One of them is to make
witnesses available. Did Boeing do so here?
Mr. McNulty. Yes, it did.
Senator McCain. Did it disclose the complete results of its
internal investigation?
Mr. McNulty. To the best of my knowledge they did, Senator.
Senator McCain. Did they waive attorney-client privilege
and work product protection?
Mr. McNulty. In order to make that report available, they
had to, yes.
Senator McCain. How did you come up with the $50 million
amount in the criminal agreement and the $565 million in the
civil agreement? In other words, what is the relationship
between that amount and damages that the government actually
incurred in these matters?
Mr. McNulty. That is very difficult to explain. What
happens in this type of case is that the government seeks a sum
of money that represents the fullest extent it can hope to gain
or to negotiate. The company has a very different mind set, and
there is an effort to go back and forth and try to explain
figures that would be connected to loss.
The effort here is a sort of best faith that was put
forward in order to try to determine what would be both
punitive and compensatory in terms of government losses, while
at the same time resolving the matter. So that is how $615
million was derived.
Senator McCain. One more time. Boeing announced that it
believed that it could deduct these payments. Does that not
trouble you? They decided not to, but it could deduct these
payments.
Mr. McNulty. That it could, in other words, that it was
making the case.
Senator McCain. Yes.
Mr. McNulty. That is fine if the company believed that.
That does not necessarily dispose of that question. That is a
question for the IRS to determine.
Senator McCain. But it has happened in other cases where
they have deducted the case of civil penalties. So the
precedent has been set. That is, I am sure, why the CEO of
Boeing announced that he could.
It is very troubling that we as the taxpayers end up
footing the bill for a civil penalty that you impose on a
corporation.
Mr. McNulty. But we do not, Senator.
Senator McCain. If they can deduct it, do we not?
Mr. McNulty. But not because of something the DOJ does or
does not do.
Senator McCain. It is because the DOJ is silent.
Mr. McNulty. No, Senator. It is because at some point in a
payment like this there is a compensatory part of the payment.
That is just a fact. So long as there is a compensatory part of
the payment, that is making the government whole with regards
to its loss, then there is going to be a deductibility
argument. That is not something the DOJ decided. That is the
Federal tax law.
Now, the question is how much is compensatory, how much is
punitive, and who determines that. The Department's position is
that should be determined and it should be determined in a way
that is absolutely consistent with all the facts and all the
tax information of that taxpayer. But the IRS is in the best
position to know all of that tax information and to make the
best assessment as to what is compensatory here and what is
punitive here. We are not the tax experts as much as we are the
civil enforcement experts, to try to get some resolution of the
claim.
Senator McCain. Under the criminal agreement, the
government will forgo prosecuting Boeing on, among other
matters, quote, ``Boeing retention of a retired U.S. Air Force
general officer and his activities while retained by Boeing
relating to the tanker program or otherwise.'' Who is the Air
Force general officer?
Mr. McNulty. We have not named that individual publicly. I
would prefer not to name someone publicly who has for reasons
of privacy not been disclosed.
Senator McCain. Did this person discuss employment with
Boeing while he was still with the Air National Guard?
Mr. McNulty. Senator, it is an ongoing matter.
Senator McCain. I prefer to, because we are talking about
whether people have violated the law or not. The information we
have, e-mails here, which I would be glad to share with you,
show clearly that this individual engaged in lobbying in
violation of the law requiring that person to abstain from
doing so for a period of time.
Mr. McNulty. It is a matter of ongoing criminal
investigation, and I understand the importance of looking at it
thoroughly. I just am reluctant to speak.
Senator McCain. Is it still being looked at?
Mr. McNulty. Yes, sir, it is.
Senator McCain. How could that be when you have reached a
total, a final agreement?
Mr. McNulty. We still have the ability to pursue any matter
of wrongdoing with regard to any individual and with regard
even to the company. We are just limited by the Druyun matter
and the EELV-NASA matters as they are defined in the scope of
the agreement. But in terms of ongoing investigations, that is
actually the purpose of the agreement, to get cooperation to do
that.
Senator McCain. My time has expired.
Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
Because of another commitment, I cannot stay. I do not have
any questions of this witness. I do want to say, prefacing the
appearance of the next witness, that I do not in any way
condone the actions that occurred. I am glad the DOJ has
prosecuted this matter to the maximum extent possible.
I have known Mr. McNerney for a number of years. He was the
CEO of a great Minnesota company, 3M Corporation, which was
throughout his tenure known for continuation of innovative
production, employing thousands of Minnesotans and other
Americans that performed that work with great integrity and
honesty. I think it should be noted that, as far as the
information I have, the misdeeds at Boeing preceded his taking
this office, and I think for him to come here today and
confront these issues directly is commendable. Again, I
separate that entirely from the inexcusable misdeeds of others
in that corporation that preceded his time here.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Senator McCain. Thank you, Senator Dayton. I know that I
speak for many members of this committee when we share your
view of the integrity of the new management team at Boeing and
the job that they are doing to make significant and fundamental
beneficial changes, attributable to Mr. McNerney's leadership,
and we share your view.
Senator Sessions.
Senator Sessions. Thank you, Senator McCain.
I would just join with Senator Dayton in saying that the
new management team at Boeing represents a new day and is in
place I guess in large part because of the problems that have
occurred in the past, and that is good.
Let me ask you, Mr. McNulty, to get this straight. I was a
Federal prosecutor for a number of years. There has always been
this vagary about what can be deducted and what cannot be
deducted in these cases.
First, when you say ``write-off,'' is this a dollar-for-
dollar write-off against profits? Or is it in effect the means
that tax rate that they would pay? They would write off a third
of it, I guess, so the 37.5 percent that they normally pay in
profits on their corporate tax returns? Is that what we are
talking about? Is it a 100-percent write-off of the $615
million, or would it be a third or 35 percent of that amount?
Mr. Schiffer. I should preface the answer, Senator, by
noting that we stay tax neutral in part because of our specific
lack of expertise on the tax laws.
Senator Sessions. Mr. Schiffer, I was reading your memos in
the DOJ almost 20 years ago, so you ought to know. Tell us what
you think?
Mr. Schiffer. First of all, we are talking about a
deduction, not necessarily a dollar-for-dollar loss. Precisely
one reason that we stay, in the DOJ at least, tax neutral is
because the company may well know which portions are deductible
and which are not, but the company would of course know its own
tax situation.
We would have no way until the end of a company's tax year
when the IRS would get into the act of knowing in fact what
kind of loss carry-forwards the company would have, what the
exact impact of any deduction would be. So that is something
that ultimately gets worked out between the IRS and the
company.
But again, as Mr. McNulty mentioned, only that portion
which was regarded as compensation and therefore by definition,
I should stress, it would be amounts on which taxes had already
been paid by the company. In other words, to the extent that
the company is simply paying back what it wrongfully obtained,
and leaving aside penalties for a moment, those are amounts on
which the company already paid taxes. So it really is an offset
against that which they paid previously.
Senator Sessions. How long have you been at the DOJ?
Mr. Schiffer. Much too long, Senator, I am sure.
Senator Sessions. Come on, give me the number.
Mr. Schiffer. It is 43 years, sir. I am starting to wonder
about my next promotion, where it is coming from.
Senator Sessions. That is worse than I thought. [Laughter.]
Now, so the $50 million, the criminal penalty, is not
deductible, correct, and the other would be deductible,
depending on what IRS concludes? My question is, this seems
like it is a constant problem. Based on your experience, is it
something that we can legislate? Is it a policy the DOJ could
adopt that would deal with this? Or is it, as Mr. Schiffer
suggests, just one of those things that, because of the nature
of tax laws and the nature of different corporations' tax
liability and so forth, may be impossible to right?
There has always been this discussion. I remember
settlements, people arguing over whether it would be taxes, and
the DOJ always took the position: Go see the IRS; they will
tell you what taxes you owe.
Mr. McNulty. I would like to make two points. First, if we
shifted this discussion or negotiation to the U.S. Attorneys,
or to the DOJ, the question of how much the company was going
to pay in a settlement would bring the tax issue actually into
the picture, because now the company is going to have to try to
negotiate an amount anticipating or dealing with the U.S.
Attorney or the DOJ's assessment of what is going to be tax
deductible or not. We would still have the figures being
affected by that consideration.
Second, we would have of course different U.S. Attorneys
taking different positions as to what the law would require or
not require, and we would have kind of a patchwork quilt around
the country of tax treatment of these matters.
Senator Sessions. Why would we not just make it so that all
of this is not deductible? That would fix it, would it not?
It would take statutory special action to do that.
Mr. McNulty. That is a statutory issue, absolutely.
Senator Sessions. Why would we not do that? Why would we
not just, Congress, as Senator McCain suggested, say that all
of this cannot be deducted?
Mr. McNulty. I am not familiar at all with the policy
considerations that go into the original decisions to make
compensatory payments deductible or not. So I would not want to
take a stab at that.
I do want to say, Senator, that the Government
Accountability Office (GAO) looked at this matter, and I have
referenced this in my testimony, looked at this very question
not long ago, and determined that the DOJ process was not in
error or not a problem. Instead what it said was, we have to
make sure that we are providing an adequate amount of
information to the IRS so that the IRS can make the proper
assessment here and when the IRS is making it, they are doing
it in a uniform way, so that we have the companies being
treated the same under tax law, not based upon where they are
in the country or who they are negotiating with, but rather
they are getting an analysis from the IRS that is consistent.
Senator Sessions. I would have to agree. That is what I
used to say when I was a United States Attorney. This is what
the penalties are; you have to talk to the IRS about how much
taxes you owe; I cannot enter into agreement with you that will
set your tax liability; I do not have that authority; that is
the authority of the IRS.
Is that basically the way you do these cases?
Mr. McNulty. That is right, and you do not have the
information to know.
Senator Sessions. It just does leave a lot of uncertainty
and it has always been there, and I am not sure we could not
fix it.
I would just say this. With regard to the penalties that
were imposed here, there were debarment actions taken that I
know probably required EELVs to be transferred to Lockheed
Martin in debarment for several years. Was that part of this
penalty that the Boeing Corporation would have sustained, Mr.
Schiffer?
Mr. Schiffer. Certainly the costs that were incurred in
reallocating launches were elements of the claims we asserted,
Senator.
Senator Sessions. I think it was about a billion dollars
worth of work that was being done at that fabulous EELV
facility in Alabama, that did not get done. I do not know how
much that cost them on the bottom line. Would those be economic
losses that the corporation sustained in addition to this $500
million, $600 million?
Mr. Schiffer. I am not sure I follow the question.
Senator Sessions. As I understood, there were some
debarments that occurred. They had won competitions to produce
certain EELV rocket launches and they were required to give
those up and not be able to bid in the future for some period
of time.
Mr. Schiffer. These units, the units associated with the
rocket contracts, were suspended for a period of time. I cannot
tell you an exact number of business they might have lost. But
yes, those would be losses presumably.
Senator Sessions. Mr. Chairman, thank you for your
leadership.
Chairman Warner [presiding]. Senator McCain.
Senator McCain. Mr. McNulty, thank you for being here.
Just a point of clarification. By its terms, the deferred
prosecution agreement suspends the prosecution of the ``Druyun
matter,'' which includes the issue about the general officer.
So that issue is currently pending only in the sense that DOJ
can pick it up if Boeing violates the agreement. Is that true?
Mr. McNulty. I do not believe so, sir. It is under
investigation and it is not prohibited from being so as a
result of the deferred prosecution agreement.
Senator McCain. My staff was told by Boeing's lawyers that
the DOJ found that this general officer did not violate the 1-
year cooling off period.
Mr. McNulty. I am not sure what the company has told the
staff, but I will say that the matter is not closed. It may be
that the company has some reason to believe that it is not
going to result in a charge, and I do not want to give you the
impression that it is, but I am just saying that is their
impression.
Senator McCain. The thing that troubled me most about this
whole affair, Mr. McNulty, was the very heavy involvement of
uniformed military personnel, Air Force officers, in this
effort. I understand and appreciate the fact that civilian
appointees are not only free, but in many ways obligated to
advocate for their Service that they oversee and to do whatever
they can to see it is best equipped. But when you see military
officers engaged in some of the activities that I saw, it is
very disturbing to me.
That is why I have some interest in this and other
activities on the part of the uniformed personnel, including
generals coming before the committee and volunteering
statements which were not cleared by anybody, but they just
felt compelled to do so, while advocating this tanker lease
business. That is why I am interested in this issue.
I thank you, Mr. Chairman. I thank Mr. McNulty, Mr.
Rosenberg, and Mr. Schiffer. We will try and get you promoted
again. How many times have you been promoted in 40 years?
Mr. Schiffer. It has been a long time. I really cannot
remember.
Senator McCain. I thank you for your outstanding service to
our country. We are grateful for you.
Chairman Warner. Senator McCain, I might note, having had a
modest career in the law myself, there is the term ``career
Justice public servant'' and I think we see one over here. It
does not make any difference; administrations come and go and
there is a cadre in the DOJ that stays on, fortunately,
dedicating their lives to careers of being civil servants and
judging each case on its merits, politics be damned. I think
there is one that sits there. Would that be correct?
Mr. McNulty. That is the strength of DOJ. There is a very
thin political leadership and it really relies day-in and day-
out on that 99 percent of the career folks, who really are the
premier law firm in the world.
Mr. Chairman, I would like to just make one clarification
in an answer I gave to Senator McCain earlier. He asked me
about Boeing's waiver of attorney-client privilege, and I know
that they made materials, everything we asked, available to us,
but I want to be able to give you an accurate answer. I said
yes and I am not sure that is correct. So I am going to draft a
letter to you to answer that question.
[The information referred to follows:]
Senator McCain. Thank you very much.
Chairman Warner. Before you step down, gentlemen, I want to
join my colleague, Senator McCain, in his observations about
the conduct of certain military officers. I would like to put
in today's record a letter of May 13, 2005, signed by myself
and my distinguished ranking member, Carl Levin, reciting some
of these incidents and how concerned we were about it.
It is all laid out in here, and perhaps you will have an
opportunity to examine that letter in the context of your
ongoing work.
Thank you very much, gentlemen. We will now receive the
next panel.
[The information referred to follows:]
Mr. McNulty. Thank you, Mr. Chairman, Senators.
Chairman Warner. Mr. McNerney, we welcome you and thank you
for the opportunity to have had two discussions with you. I
note the presence of the former distinguished Judge Luttig of
the Fourth Circuit, who has joined your company. While we
certainly are sorry that he left the Federal judiciary, he did
serve 15 distinguished years. This opportunity came along and
the fact that Boeing reached out and found in its search an
individual of his quality and standing certainly documents
clearly the many steps that under your leadership have been
taken to restore Boeing's hopefully, I say, rightful place in
the industrial base of America as one of our leading
corporations, manufacturing products which are essential to our
balance of payments. Certainly the aircraft that this company
has turned out over the years has helped that, and also many
military programs.
We thank you for coming today and the floor is yours.
STATEMENT OF W. JAMES McNERNEY, JR., CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER, THE BOEING COMPANY
Mr. McNerney. Thank you very much, Mr. Chairman and members
of the committee. It is my privilege to represent the 155,000
men and women of Boeing. While I regret the circumstances that
bring me here before you, I appreciate all the same the
opportunity to testify.
I have been asked to address the recent global settlement
of two high-profile investigations, which I will do. But in
that context I hope also to discuss why, going forward,
Congress and the taxpayers of this country can place their
trust in Boeing. Companies doing business with the U.S.
Government are expected to adhere to the highest legal and
ethical standards. I acknowledge that Boeing did not live up to
those expectations in the cases addressed by the settlement we
are discussing here today.
We take full responsibility for the wrongful acts of the
former employees who brought dishonor on a great company and
caused harm to the U.S. Government and its taxpayers. Boeing is
accountable for what occurred and we have cooperated with the
government throughout this process.
This settlement is tough but fair. It has been widely
reported as probably the largest monetary settlement of its
kind, a sad distinction we must live with and learn from.
Chairman Warner. Could I interrupt just to ask, what was
the threshold date at which your statement, Boeing fully
cooperated with the government? What is the threshold date of
that measure of cooperation?
Mr. McNerney. I do not have a specific date in mind, Mr.
Chairman. We have attempted to cooperate throughout the
process, and I was referring here to the settlement
discussions.
Chairman Warner. Would you amplify for the record then the
stages at which Boeing did begin to cooperate in the
investigation and the like?
Mr. McNerney. I think there are antecedent investigations,
the EELV, where the cooperation, as I have been informed, was
full and proper.
Chairman Warner. I suggest that you work on that for the
record and have the benefit of your colleagues and the facts
when you put it in our record.
Mr. McNerney. Okay.
Chairman Warner. Thank you.
Mr. McNerney. I will do that. Thank you.
[The information referred to follows:]
Mr. McNerney. Coupled with the loss of $1 billion worth of
EELV launch vehicle business and the huge toll these matters
have had on our reputation, the settlement serves as a stark
reminder of the direct impact that unethical conduct can have
on our bottom line.
Further, we recognize that the mistakes were ours and ours
alone, and the problems that enabled those mistakes are ours to
correct. Accordingly, we are not taking tax deductions for the
$615 million in settlement charges that we have paid to the
U.S. Government. Beyond the very real financial consequences of
the settlement, I think it is important to note that the events
themselves have caused an immense amount of introspection at
Boeing. How could a company with a history of reliability and a
self-image of unquestioned integrity have made these mistakes?
This introspection set us on a course of building one of the
most robust ethics and compliance programs in corporate
America. That is the lasting legacy and silver lining of this
dark cloud in our history.
Ultimately, our goal is to make ethics and compliance a
clear competitive advantage for Boeing. Our people and their
values, along with our leading-edge technology and products,
are why our customers choose or choose not to do business with
us. So we aspire to do more than just stay out of trouble. To
do that, we are making ethics and compliance part of our
leadership agenda and expect this will become a powerful
discriminator for our company.
To strengthen our culture, we have been changing in three
major ways. First, we are getting committed and getting
aligned. For example, every employee each year personally
recommits to ethical and compliant behavior three ways: by
going through each year a thorough training regimen, re-signing
each year the Boeing Code of Conduct, and each year
participating in one of our ethics recommitment standdowns with
his or her business or function.
Also, in November 2003 Boeing established a new
organization, the Office of Internal Governance (OIG), which
reports directly to me and has regular and routine visibility
with our board of directors. OIG's role includes: one, acting
as a strong check and balance for key functional disciplines.
An example would be monitoring and tracking such things as
potential conflicts of interest through our hiring, transfer,
and proposal processes.
Two, providing significantly greater visibility into and
oversight of specific ethics and compliance concerns and cases
for our top leaders.
Three, consolidating in one organization our various
investigative, audit, and oversight resources. This way we are
able to identify potential problems and take corrective actions
earlier.
Next, we are opening up the culture, and this is critical.
We are creating a work environment that encourages people to
talk about the tough issues and to make the right decisions
when they find themselves at the crossroads between meeting a
tough business commitment and doing the right thing. There
simply can be no tradeoffs between Boeing's values and Boeing's
performance. We want people to know it is okay to question what
happens around them because that is what surfaces problems.
Silence that ignores the misconduct of fellow workers is not
acceptable.
Finally, we are driving ethics and compliance through our
core leadership development model, not just off to the side of
other things we do every day. At the end of the day, the
character of an organization, its culture, comes down to the
behavior of its leaders. I believe this is key. Ethics and
compliance must be and must be seen to be a central part of the
whole system of training and developing leaders and of the
whole process of evaluating, paying, and promoting people.
When I joined the company a little more than a year ago,
Boeing was already well along in addressing the weaknesses that
a combination of internal and external reviewers had
identified. But I wanted us to go even deeper, back to the
basics of who we are, to mold the kind of leadership that we
want to take Boeing into the future.
So first, we defined how we want leaders to behave both in
terms of performance and values. We have six basic leadership
attributes that we work off of: A leader will chart the course;
set high expectations; inspire others; find a way; live Boeing
values; and at the end of the day, deliver results.
Now we are modeling, teaching, and expecting these
behaviors as we move toward measuring and rewarding them. Today
we are familiarizing people with these attributes, helping them
understand that ``find a way'' does not mean find any way. It
means find a way within the Boeing value system or that setting
high expectations does not mean that inappropriate or
intimidating behavior is acceptable in any way.
Starting with the top of the company, we have also begun to
directly measure and factor into the whole pay and promotion
process the kind of behavior we want in our people.
Mr. Chairman and members of the committee, in my 14 months
as the company's chairman, president, and CEO, I have made it
my mission to understand and correct the root causes of what
went wrong in years past, and I can attest that those former
employees referred to in the settlement do not represent the
people of Boeing, who are devoted to conducting their work
ethically and in the best interests of our customers and our
country.
Boeing is fully committed to operating at the highest
levels and standards of ethics and compliance. I will continue
to do everything in my power to ensure that the company never
finds itself in a situation like this in the future.
Thank you very much.
[The prepared statement of Mr. McNerney follows:]
Prepared Statement by W. James McNerney, Jr.
Thank you, Mr. Chairman and members of the committee.
It is my privilege to represent the 155,000 men and women of
Boeing. While I regret the circumstances that bring me before you, I
appreciate all the same the opportunity to testify.
I have been asked to address the recent ``global settlement'' of
two high-profile investigations--which I will do. But in that context,
I hope also to discuss why, going forward, Congress and the taxpayers
of this country can place their trust in Boeing.
Companies doing business with the U.S. Government are expected to
adhere to the highest legal and ethical standards. I acknowledge that
Boeing did not live up to those expectations in the cases addressed by
the settlement we're discussing here today. We take full responsibility
for the wrongful acts of the former employees who brought dishonor on a
great company and caused harm to the U.S. Government and its taxpayers.
Boeing is accountable for what occurred. We have cooperated with
the Government throughout this process.
This settlement is tough--but fair. It has been widely reported as
probably the largest monetary settlement of its kind--a sad
``distinction'' we must live with and learn from. Coupled with the loss
of $1 billion worth of Evolved Expendable Launch Vehicle business and
the huge toll these matters have had on our reputation, the settlement
serves as a stark reminder of the direct impact that unethical conduct
can have on our bottom line.
Further, we recognize that the mistakes were ours and ours alone.
The problems that enabled those mistakes are ours to correct.
Accordingly, we are not taking tax deductions for the $615 million in
settlement charges that we will pay to the U.S. Government.
Beyond the very real financial consequences of the settlement, I
think it is important to note that the events, themselves, have caused
an immense amount of introspection at Boeing. How could a company with
a history of reliability and a self-image of unquestioned integrity
have made these mistakes?
This introspection set us on a course of building one of the most
robust ethics and compliance programs in corporate America. That is the
lasting legacy--and silver lining--of this dark cloud in our history.
When I joined the company little more than a year ago, Boeing was
already well along in addressing five areas of weakness that a
combination of internal and external reviewers had identified:
management engagement;
law department investigations;
hiring practices;
procurement integrity; and
our ethics program and associated training.
But I wanted us to go even deeper, back to the basics of who we
are, to mold the kind of leadership that we want to take Boeing into
the future.
Ultimately, our goal is to make ethics and compliance a clear
competitive advantage. We aspire to do more than stay out of trouble.
We are making ethics and compliance part of our leadership agenda and
expect this will become a powerful discriminator for our company. After
all, our customers depend on our people even more than on our products
and technologies.
To strengthen our culture, we have been changing in three major
ways. We are:
1. Getting committed and aligned;
2. Opening up the culture; and
3. Driving ethics and compliance through our core leadership
model, not just off to the side of other things we do every
day.
To get us committed and aligned:
Every employee, each year, recommits to acting
ethically in two ways: by signing the Boeing Code of Conduct;
and by participating in one of our Ethics Recommitment stand-
downs with his or her business or function.
Also, in November 2003, Boeing created the Office of
Internal Governance (OIG), which reports directly to me and has
regular visibility with our board of directors. OIG's role
includes:
1. Acting as a strong check and balance for key
functional disciplines. An example would be monitoring
and tracking such things as potential conflicts of
interest through out hiring, transfer and proposal
process.
2. Providing significantly greater visibility into--
and oversight of--specific ethics and compliance
concerns and cases for our top leaders.
3. Consolidating, in one organization, our various
investigative, audit and oversight sources. This way,
we are able to identify potential problems earlier and
take corrective action earlier.
In addition, we have been fortunate to attract an
individual with sterling credentials and a peerless reputation
for integrity--Judge Michael Luttig, formerly of the U.S. Court
of Appeals for the Fourth Circuit--to lead our legal department
as senior vice president and general counsel.
On the second point: To open up the culture, we are creating a work
environment that encourages people to talk about the tough issues and
to make the right decisions when they find themselves at the crossroads
between meeting a tough business commitment and doing the right thing.
There simply can be no tradeoffs between Boeing's values and Boeing's
performance. We want people to know that it's OK to question what
happens around them, because that's what surfaces problems early.
Silence that ignores the misconduct of fellow workers is not
acceptable.
That commitment starts at the top with leadership. At the end of
the day, the character of an organization--its culture--comes down to
the behavior of its leaders. I believe this is key: Ethics and
compliance must be--and must be seen to be--a central part of the whole
system of training and developing leaders and of the whole process of
evaluating, paying and promoting people.
So, first, we defined how we want people to behave in the form of
six leadership attributes: Chart the course, set high expectations,
inspire others, find a way, live the Boeing values, and deliver
results. Now we are modeling, teaching and expecting these behaviors,
as we move toward measuring and rewarding them.
Today, we are familiarizing people with the attributes--helping
them understand that ``find a way'' doesn't mean ``find any way;'' it
means ``find a way within the Boeing value system;'' or that ``setting
high expectations'' doesn't mean that abusive or intimidating behavior
is condoned in any way.
Starting with executives, we have also begun to directly measure
and factor into the whole pay and promotion process the kind of
behavior we want in our people.
Mr. Chairman and members of the committee, in my 14 months as the
company's chairman, president, and Chief Executive Officer, I have made
it my mission to understand the root causes of what went wrong in years
past. I can attest that those former employees referred to in the
settlement do not represent the people of Boeing, who are devoted to
conducting their work ethically and in the best interests of our
customers and our country.
Boeing is fully committed to operating at the highest standards of
ethics and compliance. I will continue to do everything in my power to
ensure that the company never finds itself in a situation like this in
the future.
Chairman Warner. Thank you very much.
Now, I listened carefully and it may well be that you
covered this, but I would like to focus on it. We have learned
through experience in our Federal Government that problems
happen, and we have instituted a whistleblower protection act.
Actually, it is a Federal statute. Carefully in there is
protection for any retaliation or reprisal. I did not hear as
crisply as I would like to what you have as a component of this
overall and very impressive program you laid out, that tried
and I think tested concept.
Mr. McNerney. We try to make as broad a set of provisions
and mechanics available to our people who want to bring forward
problems that they have identified in the company. Just as
background, we get 12,000 inquiries a year into our ethics
hotline, so to speak, which can be reached either via phone or
via the web. Most of these are inquiries about issues, how to
do the right thing, information to help them do their jobs
better. Some are serious matters.
Chairman Warner. That 12,000 is internal?
Mr. McNerney. Internal.
Chairman Warner. Internal to the company.
Mr. McNerney. This is Boeing people often asking questions,
trying to figure out how to do the right thing.
Chairman Warner. That has been in place how long?
Mr. McNerney. That has been in place 2 years, I believe, at
least since 2003.
[The information referred to follows:]
It should be noted that Boeing's ethics hotline was originally
instituted more than 10 years ago as part of Boeing's participation in
the Defense Industry Initiative on Business Ethics and Conduct.
Mr. McNerney. But the point is that some of these are
serious matters, occasionally anonymous. One of the mechanisms
we have that directly bears on your question, Mr. Chairman, is
we have a tracking system that we implement after someone comes
forward. They are often concerned about some kind of
retaliation or intimidation post the disclosure. We have an
actual tracking system where we work with people, regularly
check in with them, and ask them in their view are they
experiencing any kind of retaliation. We track for a long time.
Everybody in the company knows we do that. So that has been
very helpful to get at that issue.
Chairman Warner. Could you address the protection of any
reprisal against them or adverse?
Mr. McNerney. That is a punishable offense in and of itself
in our company. Anybody caught even looking like they are
performing some kind of reprisal against somebody, it is a very
serious matter, and that is an offense in and of itself and we
deal with it.
Chairman Warner. Is that laid out in this plan as a part of
it?
Mr. McNerney. Yes, it is.
Chairman Warner. Are you able to supply that to the
committee?
Mr. McNerney. Yes.
Chairman Warner. I think it would be helpful if it were
made a part of the record. Thank you.
Mr. McNerney. Yes.
[The information referred to follows:]
Chairman Warner. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Welcome, Mr. McNerney. I have not had the privilege of
meeting you, but Senator Dayton's personal commendation is
quite impressive and I wish you well on your leadership of a
great company.
One of the things that intrigues me is I am sure if we
flash back about 4 or 5 years ago the leaders of Boeing would
point to their very strong ethics policy, their procedures, et
cetera, and it did not work. I wonder if you might shed some
light on why you think it did not work and why this approach
that you are adopting will in fact work?
Mr. McNerney. I think that back then there were a number of
sincere leaders that felt that the company was on the right
path. As you look back on it, I think it was not as clear to
all of our employees in a very explicit way the values we
expected of them. So you cannot just deal with ethics as a
stump speech. It has to get into the fabric of the company in
every way, and that is what we have tried to do differently
here. It is part of pay, it is part of promotion, it is part of
our Leadership Development Center outside of St. Louis. It is
part of values statements that we sign up for. It is embedded
in everything. It is part of our leadership assessment of
people.
So it is not any one thing. It is in everything, combined
with some strong leadership from the top in terms of leading it
and modeling it and displaying it, there is no one thing you
hang your hat on. You embed it in everything. That is what has
to happen in my experience in leading large organizations.
Senator Reed. Is this a topic, ethics, that is periodically
reviewed by the board of directors in a detailed way, so that
they are also involved in this process?
Mr. McNerney. Yes. The OIG, led by Bonnie Soodik to my
right here, routinely shows up. It is part of the board agenda.
There is a report. There is time for questions and answers. On
top of that, in every audit committee meeting cases are brought
forth that are discussed. We have a hotline that comes in
through our board of directors that gathers some of these
inquiries or accusations.
So it is very visible to our board of directors at the case
level, and we think that is important.
Senator Reed. As I mentioned in my questioning of the
Assistant Attorney General, this agreement expires in 2 years,
so the precise legal requirement to continue this program will
disappear. But how can you ensure that it is permanent?
Mr. McNerney. I think what we are doing now makes us a
stronger company. This is not a matter of we are either
competitive or we are an ethical company. The fact is the same
kind of open culture that a company has that fosters a good
ethical program is also good business. It is a free forum of
ideas. The best ideas are the ones that make it, not
hierarchically determined ideas. In the same fashion, ethics is
something that should be discussed irrespective of the
hierarchy and dealt with irrespective of the hierarchy.
So I am bound and determined to make our pursuit of all the
mechanics and cultural change that we are driving for, make it
a fundamental discriminator for us on the positive side. So we
are going to keep building this program regardless of any legal
requirement.
Senator Reed. You point out that you are trying to develop
a culture in which ethics factors into compensation, into the
mix of values that you treasure in the company. How do you
measure that in a practical way? I know it is a complicated
question.
Mr. McNerney. We tried to make it simple, because it is
complicated. I think we have striven to make it something that
is easily understandable and is directly part of the
measurement. We started with the top of the company. We took
those six leadership attributes I described and embedded in
each of them is an element of ethics and compliance, as well as
one of them which explicitly deals with it. I tried to point
out that embedded in each of the others there is a piece of it.
We assess our people. I did that with my team last year and
they did it with theirs. Now we are going to roll it down
through the company.
So there are two reasons why you get certain kinds of
bonuses, which are significant pieces of their compensation.
One is performance against objectives and the other is this
leadership assessment. They will both bear on it. Until you do
that, people are not convinced, in some cases, you are serious
about all this.
Senator Reed. Thank you very much.
Mr. McNerney. You are welcome.
Senator Reed. Thank you, Mr. Chairman.
Chairman Warner. Senator McCain.
Senator McCain. Thank you, Mr. Chairman.
Mr. McNerney, was Senator Rudman and his team's work
helpful to you?
Mr. McNerney. Excuse me?
Senator McCain. Senator Rudman's?
Mr. McNerney. Yes, it was helpful to us.
Senator McCain. Last week you stated that Boeing would
``not write off'' these payments despite that it concluded that
it could do so. On what basis did you conclude that most of the
payments payable to the government under the agreement are tax
deductible?
Mr. McNerney. You are never certain. We had outside counsel
who offered a view that $565 million was deductible, and that
was the input that I had.
Senator McCain. So that was an analysis from outside
informants?
Mr. McNerney. Yes.
Senator McCain. First of all, I would like to thank you for
your stewardship of this wonderful corporation that fell onto
some hard times, and we look forward to working with you.
I believe that we are about to face a serious crunch in
defense spending. We are looking at unfunded repair and
replacement costs for the Army which are I think $17 billion.
We are looking at already cuts being made in the appropriations
process in defense spending, looking at increased funding
requirements for a number of weapons systems as they mature.
No matter the individual feelings of the members of this
committee, we think that history shows that there is probably
going to be reductions in defense spending and budgets, as
opposed to what we have enjoyed in years past. This makes the
argument for procurement reform even more compelling. I think
that we are going to reform procurement one way or the other. I
do not think we can continue the way we are, given the premise
that I just stated.
If we are really going to seriously reform procurement, we
are going to have to have a partnership with the defense
industry. I think we are very powerful here in the Senate, in
Congress, and in the executive branch, but I am not sure how
much we really achieve unless we work together with the
corporations that do most of the defense production in this
Nation.
I would like you to start thinking about it. The chairman
and I, Senator Reed and others, all feel that we are going to
have to address this issue, and I believe that, given your
position and your record, that you can help us a great deal as
we embark on this effort, facing what I believe may be a real
crisis in our ability to fund this Nation's defense
requirements and national security requirements.
Mr. McNerney. We would be glad to participate in that
debate, because I think we share goals here.
Senator McCain. Thank you.
Chairman Warner. First I would say, Senator McCain, I thank
you. You have been on the cutting edge of all the initiatives
of recent here on this question of reforming our procurement
process, and I look forward to the next Congress and working
with you on that important subject.
Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman.
I would like to say that I do agree with Senator McCain
that there seems to be some inertia in this procurement
process, that contracts just seem to grow. We are going to have
a tight time. It is just going to be tighter, and we have a lot
of very expensive programs out there. I think every defense
contractor has to know that they are going to be expected to
perform on time, on budget, and we are going to be looking for
ways to do things better at less expense than maybe the initial
expectation by some would be.
I just would want to say that I am aware that Boeing
Company did lose some substantial work in addition to the $600
million plus in fines and penalties you paid and it impacted
your facility in Alabama. I am glad that it does appear that
Lockheed and Boeing have reached an accord on that EELV
project, which may well have saved a plant that might otherwise
have been closed, primarily as a result of these penalties and
debarments that you got hit with.
I think it is clear to anyone that the company has paid a
substantial penalty and substantial losses. I do think perhaps
we should consider, Mr. Chairman, how to handle these matters
that are categorized as compensatory payments. Apparently the
tax code must not be exactly clear, but apparently if they are
truly compensatory and not penalties they become deductible by
any defendant that pleads guilty. Really we could in Congress
clarify that. We could just say, bam, it is going to be this
way.
But I can say in somewhat defense of Mr. McNulty and his
team, I remember back when I was a prosecutor 20 years ago the
position of the DOJ always was that the IRS will decide how
much taxes you pay, this is what the fine is. They would try to
negotiate: can you make this tax deductible? That is not part
of our discussion.
Maybe it is time for us to confront that. I am not sure why
it needs to be so vague. Mr. McNerney, would you have a
comment? Obviously you had advice that indicated you may could
deduct it. You chose not to out of a commitment, I guess, to
demonstrating to the world Boeing's determination to reach
higher and further than it has before. Do you have any thoughts
about that?
Mr. McNerney. I only have thoughts about our situation. I
think you fairly characterized it. We wanted to do the right
thing. We did not think the taxpayers should bear the brunt of
our wrongdoing.
Senator Sessions. One thing, when you know it, Mr.
Chairman, you know it. The government knows it is going to be
deductible or the government knows it is not going to be
deductible. The defendant company knows it is not going to be
or is going to be, and all that can enter into reaching a fair
and just penalty. I think it might be better if we could
clarify.
I have heard excellent things about your leadership. I was
with a lawyer recently who defended a big case and he was
telling me that these kind of training programs are good. He
even suggested we in Congress ought to do it, that if you do
not have a good training program you are far more susceptible
to legitimate criticism than if some lower official violated a
clear, unequivocal policy and teaching of the company. It seems
to me that probably few companies in America at this point are
more committed to teaching to the lowest level of your company
the highest standards of ethics, and I salute you for that.
Thank you, Mr. Chairman.
Chairman Warner. Thank you, Senator Sessions.
I have one other question. Do you have anything?
Senator Reed. No, I do not, Mr. Chairman.
Chairman Warner. The criminal settlement agreement contains
language standard in such settlements to the effect that Boeing
undertakes not to commit any of the certain Federal criminal
offenses during the term of the agreement. However, the
agreement also provides that, for purposes of determining
compliance with the agreement, only criminal conduct by Boeing
employees at the level of executive management will be imputed
to the company, although the company is required to conduct a
significant ethics and compliance program for all employees.
Why was this restriction on liability included, and how
many Boeing employees are at the level of executive management?
Mr. McNerney. This refers to about 1,800 executive level
employees in the company. I think it is my understanding that
one of the reasons the settlement centered on that group is
that is where the wrongdoing occurred and that was the source
of the wrongdoing in one of the cases. So I think it settled
that way.
That does not provide immunity, by the way, for wrongdoing
by others at the company. I think it just refers to the
potential opening up of the original charges.
[The information referred to follows:]
Chairman Warner. I tell you what. I am going to leave this
question here and you could collect it and look at it and
perhaps amplify it for the record. I would also ask my chief of
staff that that question go to the DOJ also, so that they can
have an opportunity to put this in the record, because this is
an issue that is being raised by a number following this
important case.
[The information referred to follows:]
The Boeing Company also notes that the Druyun matter involved
misconduct at the executive management level.
Chairman Warner. We have our colleague from Missouri,
Senator Talent.
Senator Talent. Thank you, Mr. Chairman.
I appreciate your testimony, Mr. McNerney, and your
attitude toward this whole issue. I could not agree more that
if we are going to do what we need to do to fund America's
military we are going to have to work closely with the major
defense contractors in making the dollars stretch and we are
going to have to have relationships of trust. It seems to me
that you are building in that direction on behalf of a great
company that, notwithstanding this incident, Mr. Chairman, I
think has had a very strong record on balance over the years of
efficient delivery.
I just think of these programs that are the mainstay of
naval aviation, Mr. Chairman, and so many other fine platforms
that this company has produced. It really is the best work
force producing military aircraft in the world.
If I understood your testimony, let me sum it up and you
tell me if this is right, that you and your team are
inculcating at Boeing the idea that, look, if you are working
on a project and you get a good business result, but you do it
the wrong way, that is not a good business result. Similarly,
if you get what would normally be thought of as a bad business
result, but you did it the right way, that is a good business
result.
In other words, that preserving the reputation and the
integrity of the company is more important than the business
bottom line result in a particular case. Would you agree? Is
that an accurate summary of what you are saying? Maybe if you
want to just reflect a little bit, because you have a history
before Boeing, obviously, on just your general approach and
maybe how your past experiences bore on how you approach this
issue.
Mr. McNerney. I think the essence of what you are saying is
how you do things is just as important, if not more important,
than what you do. Obviously, you want a company where you both
perform and do it right. As I pointed out in response to
Senator Reed's comments, if it does not count in the way people
are paid and promoted eventually, people think you do not mean
it.
So you have to measure it, which leads to the other issue
of bringing it into the actual evaluation process. I think that
is learning I have taken from other situations. You have to
have an open culture that questions things, that makes self-
questioning alright, that makes the strength of ideas more
important than the hierarchical source of them. You have to
measure things and get them into the fabric of what people are
concerned about every day. If you do not do that, you do not
have an effective ethics program. That is what we strive to do.
Senator Talent. I appreciate that. It is like a whole lot
of these kinds of initiatives. If the support is not there at
the top, everybody realizes it, no matter what people may say.
So I appreciate very much your testimony and your attitude.
That is really all I have, Mr. Chairman. Thank you.
Chairman Warner. I would like to just make an observation.
This has been an unusual hearing. I am privileged to be in this
committee for 28 years now and we have never had a hearing
quite like this one. My colleague, Senator McCain, and I,
together with others, we weighed very carefully what was our
objective in having it and what did we hope to have adduced at
the hearing. I believe that, certainly speaking for myself,
those expectations were reached today, because I felt we were
not here to further inflict any adverse publicity or punishment
or however people wish to judge the actions of Congress as to
the private sector. It was a constructive thought on the part
of us to have this hearing to show how a company which had
literally sunk to its knees from a lofty height is now making
its way back up under your leadership. I presume the board and
others who have a deep, abiding respect for this company and
the need to restore it, not just for their own self-interest
but for the national interest to have Boeing viewed as the
premier among the premier of our industrial base. I think we
have achieved that today.
If I could just gratuitously give one little bit of advice,
I look back on my own career. I was fortunate enough to go to
two schools. One was my father's old school, Washington and Lee
University, founded by George Washington and later General Lee
was president in the aftermath of the tragic Civil War; and the
University of Virginia, founded by Jefferson.
I am deeply affected every day of my life by many of the
things that I learned at those two institutions, among them the
honor code. As I have tried to put together my humble career,
that has been a guiding light and I am sure that it has spared
me some grief along the way that I have witnessed others
suffer.
All this to say to you, I would hope that you would find
the opportunity to visit one or more of the preeminent business
schools in America, where the young industrial leaders to be
are anxiously learning and receiving the guidance from their
elders, and imbue in them what you have learned and what you
are trying to achieve in the hopes that the coming generation
of industrial leaders in our Nation will have the benefit of
the learning that you can provide. I just add that by way of a
personal thing, out of recognition for coming to get to know
you and the sincerity with which you approach your task.
Mr. McNerney. Thank you.
Chairman Warner. Thank all who are in attendance today. The
hearing is concluded.
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator John Warner
IMPUTATION OF CONDUCT
1. Senator Warner. Mr. McNulty and Mr. McNerney, the criminal
settlement agreement contains language standard in such settlements to
the effect that Boeing undertakes not to commit any of certain Federal
criminal offenses during the term of the agreement. However, the
agreement also provides that, for purposes of determining compliance
with the agreement, only criminal conduct by Boeing employees at the
level of executive management will be imputed to the company, although
the company is required to conduct a significant ethics and compliance
program for all employees. Why was this restriction on liability
included?
Mr. McNulty. Boeing argued that conduct by lower level employees,
unknown and unapproved by executive management, should not trigger the
draconian remedy of prosecution of the company under the deferred
prosecution agreement. The United States Attorney's Offices for the
EDVA and CDCA accepted that argument, but insisted that it was
important for all Boeing employees to participate in ethics and
compliance training to create the proper ethical environment in the
company.
Mr. McNerney. It is important to note at the outset that the
agreement does nothing to restrict the government's right to prosecute
the company or any individual employee (regardless of level) for the
commission of any Federal offense. One of the goals of the global
settlement was practical finality. A settlement that could be reopened
based upon any misconduct by any individual among Boeing's 155,000
employees would be inconsistent with finality. Another goal, addressed
through the requirement that Boeing maintain its enhanced ethics and
compliance program and improved investigation processes, was to reduce
the risks of such misconduct or, in any event, to encourage proactive
company action to detect and report it. It is fully consistent with
those goals to restrict the trigger for possibly reopening the Druyun
matter to those situations in which the remedial measures required by
the settlement agreement have arguably proven ineffective--i.e., where
it is believed that senior management engaged in serious criminal
misconduct and the company failed to timely detect and report it.
2. Senator Warner. Mr. McNulty and Mr. McNerney, how many Boeing
employees are at this level?
Mr. McNulty. Approximately 1,900 Boeing employees are in executive
management.
Mr. McNerney. As of August 7, 2006, there were 1,991 officers and
employees at this level.
3. Senator Warner. Mr. McNulty, please provide the analysis
supporting the Department of Justice's (DOJ) consideration of the
Thompson Memo guidelines as used in determining the none-prosecution
agreement in this case.
Mr. McNulty. Based on the factors outlined in the Department's
Principles of Federal Prosecution of Business Organizations, the United
States Attorney's Offices in the EDVA and CDCA reached the decision to
enter into an agreement with Boeing not to seek criminal charges
against the company. Those factors included Boeing's timely and
voluntary cooperation, particularly in the Druyun matter; its
willingness to continue to cooperate in the investigations; the
company's policies and procedures in place at the time of the conduct;
the remedial actions taken by Boeing, including efforts to improve and
make more effective its corporate compliance program; its termination
of wrongdoers; and the adequacy of other remedies, including the civil
settlement.
______
Questions Submitted by Senator John McCain
CHIEF FINANCIAL OFFICER MICHAEL SEARS
4. Senator McCain. Mr. McNulty, prior to entering into this global
settlement, did the DOJ find that other executives or members of the
board contemporaneously knew (or should have known) about then Chief
Financial Officer (CFO) Michael Sears' illegal communications with Ms.
Druyun?
Mr. McNulty. As outlined in the statement of facts filed in the
U.S. District Court in the Eastern District of Virginia on November 15,
2004, at the time of Michael Sears' plea, senior management of Boeing
was aware that Michael Sears sought to hire Darleen Druyun as a Deputy
in Boeing's Integrated Defense System Missile Defense Systems located
in Washington, DC. However, there was no evidence developed in the
investigation, or cooperation of Michael Sears, that senior management
other than Michael Sears was aware that Darleen Druyun had not
disqualified herself from acting on Boeing matters prior to her
negotiations with Michael Sears for employment by Boeing.
THE THOMPSON MEMO
5. Senator McCain. Mr. McNulty, under the Thompson Memo, the
prosecutor gauges the extent of a company's cooperation by considering
several factors. One of those factors requires the prosecutor to
consider whether the business organization ``[w]aived attorney-client
privilege and work-product protection''. How were waiver issues handled
regarding information needed for the DOJ to conduct its independent
investigation, leading up to the agreement?
Mr. McNulty. Boeing did not completely or formally waive the
attorney client privilege and work product protection in connection
with the two investigations in the EDVA and CDCA. However, Boeing did
agree to a limited waiver as to the investigation conducted by outside
counsel of the Druyun matter, providing the entire investigation with
an agreement that the materials would be protected under the grand jury
secrecy provision of rule 6(e) of the Federal Rules of Criminal
Procedure. In connection with the Evolved Expendable Launch Vehicle
(EELV) investigation, Boeing did not waive the privilege but worked
with investigators and the U.S. Attorney's Office of the CDCA to
provide documents and witnesses for interview.
6. Senator McCain. Mr. McNulty, how are waiver issues handled under
the agreement regarding information that the DOJ and the Special
Compliance Officer may need to assure that Boeing is abiding by the
agreement, going forward?
Mr. McNulty. The Criminal Agreement provides in paragraph 7 that
Boeing is required to report the status of ongoing legal
investigations, as that is defined, both to the United States Air Force
(USAF) under the Interim Administrative Agreement (IAA) and to the U.S.
Attorney's Offices if an investigation involves a defined offense.
Neither the IAA or the Criminal Agreement requires Boeing to waive
attorney client privilege in providing those reports.
7. Senator McCain. Mr. McNulty, I understand that under the
Thompson Memo, among the factors that guide the Department's
prosecution of a business organization, is evidence of ``pervasive
wrongdoing within the corporation''. Did the DOJ find that there was
``pervasive wrongdoing'' within Boeing during the relevant period?
Mr. McNulty. The two criminal investigations did not find pervasive
wrongdoing as set forth in the Principles of Federal Prosecution of
Business Organizations. In the case of the hiring of Darleen Druyun,
while the guilty Boeing employee, Michael Sears, was in a senior
position, other senior management was not aware of his illegal conduct.
When the illegal conduct was discovered, Sears was promptly terminated
for cause by Boeing. In the case of the EELV investigation, the guilty
employees were at a relatively low level in the corporation. Their
conduct was not condoned by senior management.
INTERNAL REVENUE SERVICE INVESTIGATIONS
8. Senator McCain. Mr. McNulty, in your written testimony, you
state that, rather than negotiate beforehand the tax treatment of its
civil settlements with the settlor, the Department works after-the-fact
with the Internal Revenue Service (IRS) to ``facilitate follow-on
investigations of the tax ramifications of our larger fraud
settlements.'' You also cite ``initiat[ing] meetings with [the IRS] to
facilitate a systematic sharing policy that can expand this process
into other enforcement areas [with the DOJ].'' What exactly does these
mean? Please describe these measures more thoroughly.
Mr. McNulty. Since 2003, the DOJ has cooperated with a compliance
project established by the IRS to focus on the deductibility of
payments made in settlements involving fraud, primarily those resolving
liability under the False Claims Act (FCA). This cooperation has
consisted of personnel in the DOJ Civil Division promptly informing IRS
of any FCA settlement that exceeds $10 million and providing the IRS
with information and documents from such settlements that may be
pertinent to the determination of tax liability. In addition, personnel
from the Department have conducted formal in-depth training of IRS
personnel in the area of FCA liability and our attorneys often engage
in discussions with IRS managers and agents to discuss the issues
attendant to these settlements.
9. Senator McCain. Mr. McNulty, how exactly do these measures help
assure that, after the DOJ enters into one of its ``tax neutral''
settlements, the IRS properly characterizes and treats payments
required under the settlement, for tax purposes?
Mr. McNulty. After these settlements are achieved by the Department
and the IRS initiates its review, a technical advisor within the IRS
calls designated personnel within the Department to identify the
appropriate DOJ attorneys to contact for in-depth information about the
matter. Department attorneys then provide information that may support
the various components of the settlement amount, such as restitution,
fines, penalties, and multiple damages under the False Claims Act. This
information may include correspondence or presentations submitted to
the Department by the settling party that reveal an awareness that a
settlement consists of amounts over and above restitution. It may also
consist of correspondence or presentations made by the Department to
the settling party revealing similar information, and internal records
revealing the actual disposition of amounts received by the Department
in those settlements. Simply put, to the extent permitted by law and
within parameters governing the preservation of our various privileges,
the Department strives to provide the IRS with any and all information
that will effect our mutual goal of assuring the proper tax treatment
of these settlements.
10. Senator McCain. Mr. McNulty, under the agreement, which covers
a 2-year period, Boeing agrees not to commit any crimes related to
stealing other companies' sensitive procurement information or
otherwise violate the laws governing Federal bribery, graft, and
conflict of interest. But, here, the agreement contains a stipulation
that provides that, if a non-executive level Boeing employee commits
the covered offense, that it's not a violation of the agreement by
Boeing. Has such a provision ever been included in a deferred
prosecution agreement, or non-prosecution agreement, in the past? If
so, please identify those agreements and describe those provisions.
Mr. McNulty. Yes, the deferred prosecution agreement between the
U.S. Attorney's Office for the EDVA and AOL which was entered December
14, 2004. That agreement defined Federal crimes which would violate the
agreement as certain offenses similar to the offenses that were
deferred, and required that certain of those offenses would have to be
committed by AOL officers or directors at or above the level of senior
vice president to violate the deferred prosecution agreement.
11. Senator McCain. Mr. McNulty, under this provision, what if a
Boeing executive knew or should have known about the fact that the non-
executive employee committed a covered offense?
Mr. McNulty. While this is a hypothetical question, the outcome of
which would turn on the facts of such a case, an ``Executive
Management'' employee under the agreement, who knew of covered criminal
conduct by a non-executive management employee and did not report the
crime, could be in violation of the agreement. The Responsible
Corporate Officer Doctrine would result in criminal liability for the
``Executive Management'' employee who did not report or prevent the
criminal conduct of the lower level corporate employee. This criminal
liability of the ``Executive Management'' employee would violate the
agreement.
12. Senator McCain. Mr. McNulty, would this be a violation of the
agreement, or not? If not, why doesn't the agreement cover
circumstances where Boeing's executives knew or should have known about
the offense committed by the non-executive employee? In other words,
please explain the rationale behind this provision.
Mr. McNulty. See answer to question 11.
13. Senator McCain. Mr. McNulty, under the criminal agreement, the
Government will forgo prosecuting Boeing on, among other matters,
``Boeing's retention of a retired USAF General Officer and his
activities while retained by Boeing relating to the tanker program or
otherwise.'' What is the current status of any investigation arising
from the activities of this individual, as to this individual
personally?
Mr. McNulty. This is the subject of an ongoing criminal
investigation.
14. Senator McCain. Mr. McNulty, what is the current status of any
investigation arising from the activities of this individual, as to the
company?
Mr. McNulty. See answer to question 13.
15. Senator McCain. Mr. McNulty, if there are no investigations
pending arising from the activities of this individual, please describe
the circumstances surrounding Boeing's retaining him.
Mr. McNulty. See answer for question 13.
16. Senator McCain. Mr. McNulty, if there are no investigations
pending arising from the activities of this individual, did this
individual ever discuss employment with Boeing while he still was with
Air National Guard?
Mr. McNulty. See answer for question 13.
17. Senator McCain. Mr. McNulty, what ``activities while retained
by Boeing relating to the tanker program or otherwise'' is the
agreement referring to?
Mr. McNulty. See answer to question 13.
18. Senator McCain. Mr. McNulty, what did you find regarding
``Boeing's retention of this USAF General Officer and his activities
while retained by Boeing relating to the tanker program''?
Mr. McNulty. See answer to question 13.
GLOBAL SETTLEMENT AGREEMENT
19. Senator McCain. Mr. McNerney, last week you stated that Boeing
wouldn't ``write-off'' payments that it was required to make under the
global settlement agreement, despite that it concluded that it could do
so. On what legal basis did Boeing conclude that most, if not all, of
the payments payable to the Government under the agreement were tax
deductible?
Mr. McNerney. With respect to the $615 million payment, our
conclusion, based upon the advice of outside experts, was that the $565
million payment under the Civil Settlement Agreement was not a non-
deductible ``fine or similar penalty'' within the meaning of Internal
Revenue Code Section 162(t), but rather qualified as a payment of
deductible compensatory damages. That determination was based on the
underlying facts and an analysis of the relevant provisions of the
Internal Revenue Code and of the U.S. Treasury regulations, legislative
history, pertinent court decisions, published rulings of the IRS, and
such other authorities as were considered relevant.
20. Senator McCain. Mr. McNerney, under the deferred prosecution
agreement, the Government will forgo prosecuting Boeing on, among other
matters, ``Boeing's retention of a retired USAF General Officer and his
activities while retained by Boeing relating to the tanker program or
otherwise.'' Please describe the circumstances surrounding ``Boeing's
retention'' of him?
Mr. McNerney. I am advised that the referenced USAF General Officer
retired effective on February 1, 2002, having commenced terminal leave
in November 2001. On May 2, 2002, he was retained for a 6-month term as
a Boeing consultant. His consultancy was renewed in November 2002 and
in subsequent years. (He is no longer a Boeing consultant.)
21. Senator McCain. Mr. McNerney, when did discussions between
Boeing and General Weaver about this begin?
Mr. McNerney. I am advised that the discussions between Boeing and
the retired General Officer began in April 2002. We have not
ascertained the precise date.
22. Senator McCain. Mr. McNerney, while this General Officer was
still with the USAF, did anyone from Boeing talk to this General
Officer about possibly working for Boeing as either an employee or
independent contractor and what was discussed?
Mr. McNerney. We are not aware of any discussions between Boeing
and the retired General Officer, prior to his retirement, concerning
possible employment by or retention as a consultant for the company.
TANKER PROGRAM
23. Senator McCain. Mr. McNerney, what ``activities while retained
by Boeing relating to the tanker program or otherwise'' is the
agreement referring to?
Mr. McNerney. For the purpose of defining matters that were
investigated and for which a decision not to prosecute Boeing was made,
the referenced language in the agreement refers to the consultant
services performed on Boeing's behalf by the retired General Officer
and any other activities in which he may have engaged during the period
of his consultancy. At the time the retired General Officer was
retained, his primary focus was to engage with State Adjutants General
(TAGs) regarding the KC-767 Tanker program. After his retention, he
provided consultant services, including attending TAG events,
participating in Boeing strategy sessions, and attending meetings on
Capitol Hill.
24. Senator McCain. Mr. McNerney, did any executive or member of
Boeing's board know that then CFO Michael Sears was negotiating with
Darleen Druyun for a job, while she was negotiating with Boeing on the
tanker program?
Mr. McNerney. To the best of our knowledge after extensive inquiry,
the answer is no. The company's internal investigation, which included
interviews of the members of senior management, developed no evidence
showing that anyone, other than Sears, was aware that Druyun had not
disqualified herself from USAF matters involving Boeing at the time he
and she discussed possible employment. As you may recall, Mr. McNulty
testified at the hearing with respect to the government's
investigation:
``[T]hat was certainly a significant aspect of the
investigation, to determine to what extent anyone else had
knowledge that would be sufficient for purposes of a criminal
charge. The fact is that in this investigation such knowledge
was not determined to exist, and that's why no other charges
were brought.''
______
Questions Submitted by Senator Lindsey O. Graham
UNITED STATES TRADE REPRESENTATIVE SETTLEMENT
25. Senator Graham. Mr. McNerney, your predecessors pushed hard for
United States Trade Representative (USTR) to file a World Trade
Organization (WTO) case against the European Union (EU) regarding
subsidies to Airbus. You have been widely quoted as wanting a
negotiated settlement. Are you working with USTR to negotiate a
settlement? If so, what progress has been made to date?
Mr. McNerney. The Boeing Company's goal is to address the market
distortions resulting from European government subsidies to Airbus.
These subsidies, particularly launch aid (at least $15 billion in no-
or low-interest loans, repayment of which is dependent on the success
of a particular airplane model under development), shift the commercial
and financial risk of aircraft development from Airbus to European
governments. As such, the commercial aircraft playing field is not
level, and the cost to Boeing, the American aerospace industry, and
American workers of having to compete with the European governments has
been high. The Boeing Company welcomes competition. Airbus, however, is
a mature company, with a full fleet of aircraft and strong market share
that, in our view, should stand on its own and not be receiving
European government subsidies.
Ideally, the U.S. and EU could resolve this dispute through a
negotiated solution that establishes rules that would apply on both
sides of the Atlantic. We have worked with the administration to
achieve such a solution from the beginning. Indeed, the administration
endeavored to negotiate a solution well before it filed its WTO case.
In January 2005, the terms of reference for a negotiated solution were
agreed with the EU, which provided a potentially strong basis for
further talks. Unfortunately, those terms of reference did not hold
during negotiations and the administration, with Boeing's support,
filed the pending WTO case.
We understand that the administration continues to explore whether
a negotiated solution is achievable that would, in fact, level the
playing field and ensure fair, commercial competition. Such a
negotiated solution remains elusive today. We welcome the
administration's continued efforts in this regard; but what is critical
is that the subsidies be eliminated. If that cannot be achieved through
negotiation, then the Boeing Company fully supports the United States
pursuing the WTO case to conclusion.
SETTLEMENT AGREEMENT
26. Senator Graham. Mr. McNerney, it is my understanding that the
DOJ settlement restricts the definition and reach of corporate
wrongdoing to your senior executives. Under the terms of this
agreement, if any other employee is found guilty of stealing
proprietary information, the settlement terms are not triggered. Do you
believe this a correct interpretation of the terms negotiated?
Mr. McNerney. The settlement agreement with the DOJ provides that
Boeing agrees not to commit specified Federal crimes during the term of
the agreement. Commission of any such crime would constitute a breach
of the agreement. As defined in the agreement, the specified Federal
crimes are limited, among other things, to those committed by employees
at the level of executive management, such that only specified crimes
committed by employees at that level would trigger the settlement
terms. It is important to note, however, that the agreement expressly
preserves the right of the government to prosecute any future crimes
committed by Boeing that could otherwise be prosecuted absent the
agreement (regardless, for example, of the level of the employee
involved). Neither Boeing nor any employee would be protected from
prosecution for the commission of any such crimes.
______
Questions Submitted by Senator Hillary Rodham Clinton
INSPECTOR GENERAL'S REPORT ON THE TANKER DEAL
27. Senator Clinton. Mr. McNulty, in reaching its settlement with
Boeing, did the DOJ take into consideration the Department of Defense
(DOD) Inspector General's (IG) report on the tanker deal, and if so,
can you tell me why so much of the text--literally dozens of pages in
total--have been redacted?
Mr. McNulty. We did review the May 13, 2005, Report of the
Inspector General on Management Accountability Review of the Boeing KC-
767A Tanker Program. The DOJ did not prepare the report and is not
responsible for the redactions.
28. Senator Clinton. Mr. McNulty, do you think the redacted
sections should be made public?
Mr. McNulty. That is a decision for the DOD, Office of IG.
29. Senator Clinton. Mr. McNulty, is anyone in the DOD or at the
White House, or for that matter in Congress, being protected by the
redactions?
Mr. McNulty. The content of the redactions is a question for the
DOD, Office of IG which prepared the report. Without commenting on the
specific content of the redactions, which is a matter for DOD to
address, I can certainly say that the DOJ has been determined to seek a
full and complete resolution of all aspects of this incident. We
believe that the $615 million recovery reflects the scope of our
investigation and vindicates the public interest.
30. Senator Clinton. Mr. McNulty, would you agree with me that
because of the irregularities on this matter that the public has a
right to know this information?
Mr. McNulty. The determination as to the material to be released in
the DOD, Office of IG's report is more properly directed to DOD since
the DOJ did not prepare the report.
31. Senator Clinton. Mr. McNulty, would you support an effort to
get all the facts on the table?
Mr. McNulty. See answer to question 30.
[Whereupon, at 4:36 p.m., the committee adjourned.]