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The Seattle Times November 25, 2003

Scandal rocks Boeing; CFO fired

By David Bowermaster
Seattle Time aerospace reporter

Boeing fired two top executives, Chief Financial Officer Mike Sears and Darleen Druyun, vice president of missile-defense systems, as it scrambled yesterday to get ahead of Pentagon and congressional investigations into Boeing's military business practices.

Boeing's board of directors took the dramatic action after concluding Sears improperly offered Druyun a job in the fall of 2002 when Druyun was a top acquisitions official for the Air Force.

At the time, Druyun was reviewing a $21 billion proposal for the Air Force to lease 100 Boeing 767 airborne-refueling tankers.

Boeing hopes the firings will convince Congress, the Defense Department and Wall Street that Boeing can act decisively to right its ship.

But Boeing's $25 billion Integrated Defense Systems division is already operating under a cloud of suspicion that will only darken after yesterday's dismissals.

Druyun's ties to Boeing have been under scrutiny since July, when Sen. John McCain, R-Ariz., alleged that when Boeing was battling to secure the tanker deal, Druyun improperly gave Boeing details of a competing bid from Airbus, Boeing's European rival.

The Pentagon took $1 billion worth of satellite launches away from Boeing earlier this year after an investigation showed the company used trade secrets stolen from Lockheed Martin, its chief competitor, to help win the launches.

In March, Boeing Satellite Systems acknowledged it made improper technology transfers to China in the wake of two failed satellite launches in 1995 and 1996, when the division was known as Hughes Satellite Systems.

"Boeing has sold itself for years as a systems integration company, as somebody who can be trusted with the government's money," said John Pike, director of Globalsecurity.org. "For the last several years, we keep peeling back the layers on why we can't trust that company."

President Bush gave the controversial tanker deal the power of law yesterday when he signed the $401 billion Defense Department budget for 2004.

After extended wrangling on Capitol Hill, the Air Force will lease the first 20 tankers and buy the next 80 planes.

Michael O'Hanlon, senior fellow of foreign-policy studies at the Brookings Institution, an independent think tank in Washington, D.C., said Boeing "may have gotten awfully lucky" with Bush signing the defense bill yesterday, as he does not expect it to be reopened.

O'Hanlon believes the process of awarding of major defense contracts is more legal than political, so he thinks Boeing should be able to bounce back from its recent problems and maintain its stature as one of the world's largest defense contractors if it can convince critics it is acting properly.

Nonetheless, he said, the parade of scandals will increase scrutiny of Boeing when it battles for defense projects for 2005 and beyond.

"At some point, it begins to be cumulative and begins to sink in a little with people," O'Hanlon said.

Yesterday's firings were unique in that they stemmed from an internal rather than an external probe of Boeing's conduct, said John Dern, a Boeing spokesman.

The inquiry continues, Dern added, though he declined to comment on its contents.

A source familiar with the investigation, however, said Boeing is examining communications between Sears and Druyun's daughter, Heather McKee, who works for Boeing's military division in St. Louis, Mo. McKee's husband, Michael McKee, also works at Boeing.

Druyun's daughter reportedly contacted Sears to let him know of her mother's plans to leave her Pentagon job.

"We expect to wind it up soon," said one Boeing official familiar with the investigation.

The in-house inquiry began about the same time McCain began asking whether Druyun had improperly given Boeing pricing data on the Airbus tanker bid.

The Boeing board of directors voted unanimously over the weekend to fire Sears and Druyun after a team of external and in-house lawyers presented evidence from e-mails and interviews that Sears had improper contacts with Druyun about coming to work for Boeing in October 2002.

According to a company statement, Boeing found "compelling evidence" the past two weeks that Sears and Druyun tried to hide the improper contacts from company investigators, further angering the board.

McCain was not mollified by yesterday's dismissals.

The senator, who demanded thousands of internal Pentagon documents about the deal, said the firings reinforced his long-standing opposition to the 767 tanker deal.

"This development is what I feared would happen based on our review of the documents," he said in a statement.

McCain said he was waiting for the completion of an Air Force investigation into the 767 deal, but "it strains credulity to assume that this action has nothing to do with the tanker lease deal."

The Air Force said it "deplores behavior that jeopardizes the integrity of government procurement activities." Its statement added that the Air Force may ask an "appropriate authority to investigate the alleged impropriety."

The Pentagon inspector general's office is already investigating communications between Druyun and Boeing about the tanker deal.

Because he was fired for cause, Boeing said Sears, 56, will get no severance pay, but he will get a pension worth between $672,000 and $840,000 at age 65, according to a proxy filing, and any other vested benefits.

James Bell replaces Sears as acting chief financial officer.

A 32-year Boeing veteran who began his career with the company's Rocketdyne division, Bell received an upbeat welcome from investment analysts who follow the company.

"We have high confidence in James Bell... and believe he would be a strong candidate for the permanent position," wrote Chris Mecray, a Boeing analyst with Deutsche Bank Securities, in a research note to clients.

The state's senior senator, Patty Murray, said she never asked about the Druyun hire.

"I'm not part of Boeing's employee policies. That's not part of my purview," she said. "I'm not here to defend Boeing's practices, but I think Boeing did the right thing (by firing the two executives)."

Despite yesterday's announcements, Murray said she remained confident the Air Force will put the finishing touches on the tanker deal in the next month.

George Behan, chief of staff to Rep. Norm Dicks, D-Bremerton, one of the company's biggest supporters on Capitol Hill, was at a loss to say how the improper contact between Sears and Druyun could affect the company's image in Washington, D.C.

"I don't know, but it's not good," said Behan. "This is uncharted waters."

Seattle Times staff reporter Alex Fryer and Reuters contributed to this report.


Copyright 2003, The Seattle Times Company