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For many in the world of government contracting, the U.S. Air Force scandal over contracts with the Boeing Co. is more than just a cautionary tale. It’s a warning siren for them to re-evaluate the way they do business. “A scandal like this has the potential to change the entire nature of how the government interacts with its contractors,” says David Churchill, a government contracts lawyer in the D.C. office of Jenner & Block. “You have the real potential of the public’s and the Congress’ confidence in the system being shaken.” The ongoing scandal stems from revelations that the Air Force’s former top procurement officer, Darleen Druyun, pushed for billions in contracts for Boeing in exchange for jobs for herself and family members. It has led to the resignation of Boeing’s CEO, criminal charges against Druyun and another Boeing executive, Michael Sears, and the departure of the Air Force secretary and his top deputy. More details about the scandal could emerge next month, when Sears is scheduled to testify at his sentencing hearing. For many, the problems Boeing is facing hit close to home. Contractors routinely hire from the top levels of the Pentagon’s procurement offices, and the scandal is forcing them to take a hard look at how government contracts are let and how former officials move into private enterprise. “All of us in the defense industry benefit from having a process of integrity,” says Robert Hastings, a spokesman for BAE Systems, a top defense contractor. SPINNING WHEELS Last November, Boeing fired CFO Sears and Druyun, who had joined the company in 2003 as a senior executive. An internal investigation revealed that Sears and Druyun had discussed a job while she was still at the Air Force procurement office. At the time, Druyun was reviewing a proposed $23.5 billion contract to lease tankers from Boeing. Boeing’s discovery led to criminal charges for Sears and Druyun. Both have pleaded guilty to violating conflict-of-interest laws. According to court documents released by the U.S. Attorney’s Office for the Eastern District of Virginia, Druyun failed to recuse herself from the tanker-lease deal or any other Boeing-related work until two months after she had initiated job talks with Sears. The documents showed that Druyun had told Sears that it wasn’t legal for her to be talking with him, yet both proceeded with the job discussions. The scandal reignited in October after Druyun admitted at her sentencing that while with the Air Force, she’d favored Boeing on not one but four separate contracting decisions. Druyun said she was grateful to the company for providing jobs for herself, her daughter, and her son-in-law. Boeing has denied knowledge of Druyun’s motives. Within weeks of Druyun’s admission, the secretary of the Air Force and his top deputy resigned under fire from Congress. Druyun’s admission, industry observers say, dramatically broadened the scale of the fraud, and ensures that its impact won’t be limited to just the Pentagon and Boeing. Alan Chvotkin, a lawyer and executive at the Professional Services Council, a trade group of government contractors, expects the Druyun scandal to spur a general retreat from “relationship contracting.” He predicts that that strategy — of winning government work by relying on close ties between contract officers and their former colleagues in industry — will be replaced by a more arm’s-length approach. “[It's time] to take a step or two back from the gray area,” he says. For one top lawyer at a large government contractor, there’s little question that a range of companies push into dangerous ethical waters when hiring federal workers. “Of course they do. That’s human nature,” he says. “[But] I think you’ll see companies being very careful and much more orthodox in their hiring of government employees.” A host of federal statutes and ethics requirements governs the relationship between Pentagon staff and the defense industry, regulating issues as obscure as the value of a Christmas gift a government worker may accept from a contractor (less than $20) or the type of contractor-sponsored holiday party they can go to (those that are “widely attended” or open to the public). But the regulations also spell out specific rules for procurement officers such as Druyun. Among them: Before entering into job negotiations with a contractor, procurement officials must submit a letter to their supervisor recusing themselves from working on projects affecting that company. For contractors, the Procurement Integrity Act imposes civil penalties for conflicts of interest. Christopher Yukins, a government contracts professor at George Washington University Law School, says that prior to the scandal, it wasn’t clear that a criminal penalty could be imposed on contractors. “The Sears case shows it can,” he says. That, says John Douglass, president of the Aerospace Industries Association (of which Boeing is a member), means government contractors will be much more vigilant in vetting government employees for conflicts. “When someone comes in and says, ‘I was the assistant secretary of yiggedy-yag. Can I have a job?’ They’re not just going to hand it to him,” says Douglass, a former assistant secretary of the Navy during the Bill Clinton administration. “They’ll say, ‘Show me your recusal letter,’ and there will be more due diligence.” As it happens, the Druyun case wasn’t the first time Boeing had neglected its conflict-of-interest responsibilities. Last winter, the company commissioned an outside investigation of its government hiring practices, conducted by former Sen. Warren Rudman (R-N.H.) and attorneys from Paul, Weiss, Rifkind, Wharton & Garrison. Their report found that Boeing frequently didn’t conduct conflict-of-interest reviews of potential senior executives until after the company had already offered them jobs. The Rudman report concludes that the failure to enforce its own policies set the stage for the Druyun affair. But those in the industry say Boeing has hardly been alone in taking a relaxed approach to conflict-of-interest rules. The government’s post-employment regulations place a host of restrictions on high-level staff “switching sides.” For example, former federal workers are banned for life from ever appearing before their old agency on matters in which they participated “personally and substantially.” Former senior government officials are prohibited for one year from lobbying their old agency on behalf of a contractor. But as Scott Amey, general counsel of the Project for Government Oversight, points out, there are ways around those rules. Senior weapons buyers can find a “soft landing” on the board of directors of companies to which they’ve awarded contracts, he says. That, according to the Project for Government Oversight, appears to be exactly what Edward Aldridge, the Pentagon’s former procurement chief, received after greenlighting a deal for the troubled F/A-22 fighter in January 2003. Within months, he had left the Pentagon and had taken a seat on the board of the Lockheed Martin Corp., the maker of the F/A-22. Alternatively, contractors can hire former government procurement officials to work in a division of their company whose contracts the official hadn’t overseen. That was the case with Druyun, who had worked on a number of Boeing aircraft contracts, but who was hired as an executive in the firm’s missile defense division. “She walked through a loophole,” Amey says. “The problem is the revolving door has become such an accepted situation in the government and contracting world that nobody even questioned it.” But industry observers say a renewed focus on contractors’ hiring policies by itself won’t be enough to address all the problems raised by the Druyun affair. Robert Nichols, an attorney at Piper Rudnick who does work for Boeing, Lockheed, and a number of other defense contractors, says the Pentagon must address contracting procedures that allowed Druyun to improperly award multiple contracts over a three-year period. “The revolving door was only the motive part of the problem,” he says. “The tanker deal wasn’t fully transparent. Had this [contract] been negotiated more openly with greater competition, the risks of corruption would have been sharply reduced.” Indeed, Druyun wielded enormous clout over the Air Force’s spending decisions. Though nominally second in command of the procurement program, Druyun appears to have easily outmaneuvered her politically appointed bosses, who frequently served two years or less on the job. “She was king, queen, judge, and jury,” says Chvotkin of the Professional Services Council. In light of Druyun’s admissions, the Pentagon asked an outside commission to examine how it should restructure its weapons-buying process to avoid a repeat of the scandal. That committee is due to report at the end of January, but one source close to the group says one of its primary recommendations will be that Druyun’s position be replaced by a three-person panel. Such a recommendation would mark a step back from the trend over the past decade toward a more streamlined federal procurement system. “In the ’90s, there was a lot of talk about partnering [with contractors],” says Jenner & Block’s Churchill. “That talk may go away.” BOEING’S BATTLE Perhaps the biggest question looming over Pentagon suppliers is the fate of Boeing. With $17 billion in contracts last year, Boeing, along with Lockheed, holds a commanding position in the defense industry. Boeing’s firing of Druyun and Sears led the Pentagon to order the Defense Contract Management Agency to review all contracting decisions Druyun made in the last decade. That review could lead to Boeing losing several multibillion-dollar contracts. Already, three Boeing rivals have filed protests with government auditors over Druyun’s award of a $4 billion contract to upgrade the avionics of the Air Force’s C-130 aircraft. Congress is also reviewing Boeing’s contracts. And the Pentagon has not yet ruled out the “nuclear option” for Boeing: debarment from defense contracting. Much will depend on the testimony of former CFO Sears when he’s sentenced in Alexandria, Va., on Jan. 21. Boeing has maintained that Sears and Sears alone had improper contacts with Druyun — a position that has been met with some skepticism. “At this time, there’s not grounds to debar them,” says Air Force spokesman Doug Karas, but he adds that the Air Force is “waiting to hear the testimony of Mr. Sears.”

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