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Thursday, May 4, 2006 - Page updated at 12:00 AM

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Boeing suit to enrich lawyers

Seattle Times aerospace reporter

A lawsuit filed by shareholders over Boeing's procurement scandals has yielded a proposed payment of nearly $12 million for their lawyers, but little else.

The suit against Boeing, its top officers and board of directors alleged the individuals had been reckless and negligent in overseeing company operations, leading to scandals such as the use of stolen Lockheed Martin documents in a bid for a 1998 Air Force rocket-launch contract, and the illegal offer of a job in 2002 to an Air Force procurement officer who oversaw a refueling-tanker contract.

But the proposed settlement may raise some eyebrows. It would require Boeing to spend an extra $29 million over five years to enhance director and management oversight of its ethics and compliance procedures.

Such changes were already under way, thanks to Boeing's internal investigation, and to new federal laws, such as Sarbanes-Oxley, that affected corporate governance.

Apart from that, the settlement's only other result would be to pay up to $11.9 million to the national law firms that litigated the case, including Labaton, Sucharow & Rudoff; Lasky & Rifkind; and Milberg Weiss Bershad & Schulman.

"It's nice business for the attorneys," said John Coffee, professor of corporate law and director of the Center on Corporate Governance at Columbia Law School.

Court documents state that the lawyer fees were agreed upon through mediation but give no specifics.

Individual shareholders would receive no award from the settlement. In so-called "derivative" lawsuits such as this, shareholders don't seek money for themselves, but rather damages — on behalf of the company — from defendants they believe hurt the company.

The lawyers' fees would be paid by Boeing's insurance policy for its directors and officers.

Boeing stockholders, including many local employees, recently received notice of the proposed settlement and have until June to file objections. If the circuit court in Cook County, Ill., finalizes the settlement at a hearing June 21, all future shareholder claims of a similar nature will be barred.

Boeing declined to discuss the case, citing terms of the settlement. But in a statement at the end of March, it said, "The settlement is not an admission of wrongdoing by any officer or director. The company entered into the settlement to avoid the further expense and distraction of litigation."

Various federal investigations into the same procurement scandals are expected to end soon with a global settlement between Boeing and the government.

A lawyer close to the case said he expected an agreement in about two weeks, with Boeing paying a fine on the order of $700 million. "We're still arguing over money," the lawyer said.

Next to that, the shareholder suit counts as small potatoes.

"Derivative lawsuits are viewed by most public corporations as nuisance suits that justify some tinkering changes but not major structural reform," said Coffee of Columbia Law School. "This settlement is likely to be greatly overshadowed by the more substantive reforms you'll see in the government's proceedings."

After the scandals initially became public, Boeing embarked upon a major revamp of its ethics procedures and procurement oversight. As early as July 2003, Boeing commissioned an independent report from former U.S. Sen. Warren Rudman.

That report, released the following November, included a raft of recommendations Boeing quickly implemented to strengthen ethics oversight and compliance.

In addition, following corporate financial scandals at Enron, WorldCom and other companies, the Sarbanes-Oxley Act of 2002 made the boards and executive management of all corporations explicitly accountable for company and financial oversight.

Coffee said the reforms mandated in the shareholder settlement may just be "rearranging the deck chairs," because "between Sarbanes-Oxley, the New York Stock Exchange rules and the earlier Rudman report, I would expect you would have already addressed most of the corporate-governance practices."

Boeing's imminent global settlement with the government may mandate even stricter governance and oversight provisions. Coffee said the plaintiffs' lawyers may have settled now, in advance of that outcome, because it would be more difficult afterward to argue their settlement had achieved anything.

Because Boeing is registered as a corporation in Delaware, Coffee said it would be more usual to bring a shareholder suit there. If that were the case, the lawyers' fees might have been more modest.

"Cook County is a different world than Delaware," Coffee said.

"In Delaware, you'd get more scrutiny of whether the plaintiffs' attorneys had achieved much, and that would go into the measurement of the appropriate attorney's fees."

One of the plaintiffs' lawyers, who asked not to be named because the proposed settlement restricts what he can say, insisted the lawsuit has resulted in "a wholesale change in the manner in which [Boeing] will do business."

Reached at home in Connecticut, Paul Gardner, one of the plaintiffs, recalled a loss on Boeing stock in 2003. He said he became involved in the suit after mentioning to a lawyer his concern Boeing was not being straightforward with shareholders.

"I'd forgotten about the whole thing," Gardner said. "I don't remember much about it."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Seattle Times researcher Gene Balk contributed to this report.

Copyright © 2006 The Seattle Times Company

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