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Friday, January 08, 2021, 14:03
Boeing settles 737 Max fraud charge with US$2.5b agreement
By Bloomberg
Friday, January 08, 2021, 14:03 By Bloomberg

The Boeing Co. 737 Max airplane taxis after landing during a test flight in Seattle, Washington, US, on Sept 30, 2020. (PHOTO / BLOOMBERG)

Boeing Co. reached a US$2.5 billion agreement to settle a criminal charge that it defrauded the US government by concealing information about the 737 Max, the ill-fated jet model involved in two fatal crashes that killed 346 people.

The planemaker entered into a deferred prosecution agreement Thursday in the Northern District of Texas. In turn, the Justice Department will dismiss the charge against Boeing after three years if the company cooperates with the government, including by making current and former officials available to testify before a federal grand jury or in trials.

While aircraft designs have often been cited as contributing to accidents, it’s extremely rare for such issues to be linked to intentional deception by company officials

“The tragic crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302 exposed fraudulent and deceptive conduct by employees of one of the world’s leading commercial airplane manufacturers,” David Burns, acting assistant attorney general of the Justice Department’s Criminal Division, said in a statement.

READ MORE: Air Canada Boeing 737-8 MAX suffers engine issue

The settlement caps a two-year criminal investigation into the Max, which crashed twice in a five-month span and devastated Boeing’s reputation for engineering prowess. The company’s admissions are highly unusual and stand in stark contrast to decades of airline accident investigations. While aircraft designs have often been cited as contributing to accidents, it’s extremely rare for such issues to be linked to intentional deception by company officials.

Boeing fell less than 1 percent to US$211.26 after the close of regular trading in New York.

“Entering into this resolution is the right thing for us to do -- a step that appropriately acknowledges how we fell short of our values and expectations,” Boeing Chief Executive Officer Dave Calhoun said in a message to employees. “This resolution is a serious reminder to all of us of how critical our obligation of transparency to regulators is, and the consequences that our company can face if any one of us falls short of those expectations.”

Robert Clifford, a lawyer representing relatives of the crash victims, said family members were insulted by the pact. The settlement will have no bearing on pending civil litigation, he said.

“The allegations in the deferred prosecution agreement are just the tip of the iceberg of Boeing’s wrongdoing -- a corporation that pays billions of dollars to avoid criminal liability while stonewalling and fighting the families in court,” Clifford said in an emailed statement.

The action is the latest to hit the planemaker’s bottom line. Boeing has estimated it faces more than US$20 billion in Max-related expenses, while losing market share to rival Airbus SE as sales faltered during the jet’s lengthy grounding.

ALSO READ: Boeing's 737 Max jet resumes flying in US

Settlement Funds

Most of the money in the settlement will go to airlines and lessors. Of the US$2.5 billion, Boeing has already set aside US$1.77 billion to reimburse Max customers. The company will also establish a $500 million fund for victims’ beneficiaries.

In addition, Boeing will pay a US$243.6 million criminal penalty. That represents the money the company saved by avoiding the need to require 737 pilots to undergo full flight-simulator training before flying the Max, according to the deferred prosecution agreement. Sidestepping such training requirements was a key cost consideration as Boeing marketed the plane against an upgraded version of Airbus’s A320 jets.

With the penalty and the fund for relatives, Boeing said it expected to incur an additional US$743.6 million charge for the fourth quarter of 2020. The Chicago-based company is scheduled to report earnings for the quarter on Jan. 27.

The financial hit to Boeing is “less severe than the headline suggests,” Cai von Rumohr, an analyst with Cowen & Co., said in a note to clients. He estimated that Boeing would face an after-tax charge of US$1.10 a share, or US$634 million, net of estimated tax savings from the victims’ compensation payments.

Record Grounding

The Max was banned from the skies for 20 months, the longest jetliner grounding in US history, while the FAA and regulators in other nations oversaw design changes to address problems revealed in investigations. The FAA lifted its grounding on Nov. 18, provided that airlines complete a list of repairs and put pilots through simulator training.

The Max was banned from the skies for 20 months, the longest jetliner grounding in US history, while the FAA and regulators in other nations oversaw design changes to address problems revealed in investigations

The Max tragedies spurred the criminal investigation and separate probes by the US Congress and the Securities and Exchange Commission. Several investigative reports have found that the company altered a flight control system, but didn’t fully explain the changes to Federal Aviation Administration inspectors.

An FAA spokesman said the agency wouldn’t comment on the Justice Department action.

The deferred prosecution agreement focuses on the actions of two former Boeing employees, whose colorful and sometimes crass messages sparked outrage at the FAA and on Capitol Hill. The two deceived FAA staff by providing “misleading statements, half-truths, and omissions,” according to the agreement.

“The misconduct was neither pervasive across the organization, nor undertaken by a large number of employees, nor facilitated by senior management,” the agreement said.

The deception involved a flight-control feature known as the Maneuvering Characteristics Augmentation System, the government said. In the accidents, a malfunctioning sensor caused MCAS to repeatedly make the jets dive. While the system could be disabled, pilots hadn’t been instructed in how MCAS worked and in both crashes they eventually lost control.

The two former Boeing employees, who helped draft the pilot training materials, learned that MCAS had been expanded to respond to a greater range of flight conditions, but never alerted their FAA counterparts, according to a statement of facts attached to the Boeing agreement.

Although the men aren’t identified in the filing, one of them is Mark Forkner, Boeing’s chief technical pilot for the 737 Max program, said a person familiar with the matter.

During a November 2016 simulator test, Forkner recognized that MCAS was activating at a lower-speed operation than the company had described to the FAA. He complained to his colleague in an internal chat that the system had been “running rampant in the sim on me.”

Forkner added: “so I basically lied to the regulators (unknowingly).”

The other employee responded: “it wasn’t a lie, no one told us that was the case,” according to the agreement.

A lawyer for Forkner, David Gerger, said when the messages were disclosed that the pilot believed the plane was safe and he didn’t mislead the FAA. At least part of the reason Forkner had expressed concerns was the result of software in a simulator and not the plane itself, Gerger said. Gerger didn’t immediately respond to an email and phone message seeking comment on Thursday’s announcement.

Training Materials

Forkner later proposed that regulators delete a reference to MCAS in a document outlining the FAA-mandated training requirements for the plane. The final version published by the agency lacked information about MCAS. Aircraft manuals and pilot-training materials also didn’t have information about the system.

The criminal investigation into how the plane was designed and approved began after the Oct. 29, 2018, crash off the coast of Indonesia of a Lion Air flight.

The deception continued after the accident, Boeing admitted. One of the Boeing employees led the company to give “a false and misleading presentation” to FAA officials about the crash, the manufacturer acknowledged. In the presentation, Boeing had said that changes to MCAS had earlier been discussed with FAA officials when they hadn’t.

The second Max crash occurred in Ethiopia on March 10, 2019, near Addis Ababa.

“This case sends a clear message,” US Attorney Erin Nealy Cox for the Northern District of Texas said in a press release. “The Department of Justice will hold manufacturers like Boeing accountable for defrauding regulators -- especially in industries where the stakes are this high.”

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