Classified Information Disclosed On JASSM

Lockheed Martin Corp. [LMT] will pay a $4 million civil penalty for unauthorized actions the company took to sell Hellfire missiles to the United Arab Emirates (UAE), under a consent agreement with the State Department, the department announced.

Lockheed agreed to make the payment, which State sought under two measures, the Arms Export Control Act, or AECA, and the International Traffic in Arms Regulations, or ITAR.

According to the department, Lockheed took unauthorized actions to sell Hellfire missiles to the UAE, including an unauthorized proposal to sell Significant Military Equipment. That involved the unauthorized export of classified and unclassified technical data, the failure to comply with requirements for safeguarding classified information, and the failure to obtain a Non-Transfer and Use Certificate, according to State.

In a separate issue, Lockheed also was involved in unauthorized export of classified information on the Joint Air-to-Surface Standoff Missile, or JASSM, according to the department.

On the one hand, the department stated that it credits Lockheed for voluntarily disclosing these matters, seeing that as a "mitigating factor," and also found other factors favoring Lockheed, so that administrative debarment of the firm from business with the government wouldn’t be appropriate at this time, State decided.

However, the department continued, that still doesn’t change the fact that these are viewed as serious matters. "[G]iven the national security and foreign policy interests involved, specifically classified information and violations that may have caused harm to U.S. national security and foreign policy interests, the [State] Department decided to take action against Lockheed," the department explained.

Therefore, State decided to take these steps:

• Lockheed is assessed a civil penalty of $4 million, of which $1 million is suspended as long as it is used for carrying out remedial compliance measures.
• The largest defense contractor on the planet is required to appoint an internal special compliance official to work for a minimum of two years.
• The official will oversee implementation of compliance measures outlined in the consent agreement between Lockheed and State.
• Lockheed also "must conduct an internal review of AECA and ITAR compliance resources throughout four of its ITAR-regulated business units within its Electronic Systems (ES) business segment, and establish the necessary actions to ensure that sufficient resources are dedicated to compliance."
• Within six months, Lockheed must "provide to the [State Department] Director of the Defense Trade Controls Compliance (DTCC), and then semi-annually thereafter, status reports by ES ITAR-regulated business units on ITAR compliance program enhancements and resources and their effect on ensuring ITAR compliance."
• Further, Lockheed within two years must have an audit conducted by an outside consultant that will provide a thorough assessment of the ES business units’ corrective actions taken to address each of the issues that were addressed in Voluntary Disclosures, as well as the effectiveness of any such actions."

According to the State Department, Lockheed acknowledged "the seriousness [of] its conduct and has cooperated with the Department’s investigation, expressed regret for these activities and taken steps to improve its compliance programs. Lockheed has also undertaken to make amends by paying a cash penalty, and implementing the remedial compliance actions specified in this Consent Agreement. For these reasons, the Department has determined that an administrative debarment of Lockheed is not appropriate at this time."

However, Lockheed spokesman Jeffrey A. Adams said Lockheed neither admits nor denies the violations. He also said that:

• Lockheed voluntarily disclosed its actions to the government.
• Any disclosure of classified information or violation of arms selling laws was unintentional.
• Lockheed employees mistakenly assumed that further approval wasn’t required for these actions because the UAE already holds Hellfires in its military.

Lockheed also faces problems in another missile program area, regarding legal actions related to the Short Range Attack Missile (SRAM), a program led by The Boeing Co. [BA] as prime sponsor.

Regarding "falsified and inflated invoices submitted to us that were passed through to the government," Lockheed provided details in a June 29 filing, a 10-Q statement submitted to the Securities and Exchange Commission (SEC). "We dispute the allegations and are defending against them," Lockheed stated.

The filing outlines legal environmental actions revolving around a former Lockheed facility at Redlands, Calif.

"The contract for the SRAM program, which formed a significant portion of our work at the Redlands facility, had special contractual indemnities from the U.S. Air Force … ," Lockheed noted. While the United States denied the claim in 2004, Lockheed is appealing that decision, an action pending with the Armed Services Board of Contract Appeals, the company noted in the filing.

In 2003, the Department of Justice had alleged that Lockheed "committed violations of the Resource Conservation and Recovery Act at the Paducah Gaseous Diffusion Plant by not properly handling, storing, and transporting hazardous waste and that we violated the False Claims Act by misleading Department of Energy officials and state regulators about the nature and extent of environmental noncompliance at the plant. We dispute the allegations and are defending against them."

Lockheed said it cannot know in advance what cleanup costs might amount to at the site, but gave some figures.

"We consider these and other factors in estimates of the timing and amount of any future costs that may be required for remediation actions, which generally results in the calculation of a range of estimates for a particular environmental site," Lockheed stated in the SEC filing. "We record a liability for the amount within the range which we determine to be our best estimate of the cost of remediation or, in cases where no amount within the range is better than another, we record an amount at the low end of the range. We do not discount the recorded liabilities, as the timing of cash payments is not fixed or cannot be reliably determined. At June 29, 2008 and December 31, 2007, the aggregate amount of liabilities recorded relative to environmental matters was $619 million and $572 million. We have recorded assets totaling $520 million and $480 million as of the same dates for the portion of environmental costs that are probable of future recovery in the pricing of our products and services on U.S. Government contracts."

Legal and ethical problems can have a significant effect on a company.

For example, Boeing in 2003 received a $23.5 billion lease-purchase deal where the Air Force would acquire 80 to 100 aerial refueling tanker planes. But because the Air Force procurement officer negotiating the deal, Darleen Druyun, then was hired by Boeing for $250,000 a year, Sen. John McCain of Arizona, now the putative Republican presidential candidate, led a drive to have the deal discarded and recompeted. Boeing lost its second attempt to win the work to Northrop Grumman Corp. [NOC], which offered a European Aeronautic Defence and Space Co. plane made by Airbus Industrie. But Boeing successfully protested to the Government Accountability Office watchdog agency, so a further contract review is being held.

In this case, Boeing unearthed the situation. The company also disclosed it to the government. Further, Boeing fired Druyun and the CFO who hired her, Michael Sears. (They later served prison time for their acts.) Boeing also paid a civil fine.