[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.
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    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.
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    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.
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    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.]

                                 
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