Insight: Boeing pleads “not guilty” in 737 MAX fraud case

As we outlined

earlier, the deferred prosecution agreement that was hammered out between the Department of Justice and Boeing in 2021 has been re-opened by a Federal judge in Texas because the victims were not represented in that agreement. The arraignment for a potential trial began today with Boeing pleading “not guilty” to charges of conspiracy to commit fraud with respect to the certification of the 737 MAX aircraft.

The two crashes of the MAX, Lion Air 610 in 2018 and Ethiopian Airlines 302 in 2019 were both a result of a flawed system that relied on a single angle of attack sensor, and had dire consequences should a sensor fail, which is why two are installed on an aircraft. Boeing’s failure was not to connect both systems to each other to double check readings, resulting in pilots needing to react almost instantaneously to shut down the system before it could activate and overpower the pitch trim controls on the airplane.

The allegations were that Boeing knew of the potential risks during the FAA certification process and committed conspiracy to defraud a regulatory agency by not revealing said risks. In a post-crash filing with the SEC, Boeing settled charges that it “negligently violated the antifraud provisions” of securities regulations for a $200 million penalty in actions afterwards, but not in conjunction with the certification.

Under the existing deferred prosecution agreement, Boeing agreed to pay $2.5 billion, of which $243 million was a fine, $500 million was to go to victims families, and the remaining $1.76 billion to airlines in compensation. But since compensation to airlines was already contractually required under their sales agreements, many observers and victims families felt this was a slap on the wrist to Boeing rather than meeting out justice.  The groundings did end up costing Boeing about $20 billion before all was said and done and the MAX returned to service.

The families of the accident victims complained that the deferred prosecution agreement was not justice, and in their filing stated that Boeing “committed the deadliest corporate crime in US history.”

So what happens now? That’s the big question. Boeing cannot afford to either plead or be found guilty of fraud because the Department of Defense bans companies convicted of fraud from key defense contracts. That could, if taken to the extreme, lead to Boeing spinning off its defense business from its commercial airline business. Boeing has pleaded not guilty, and, as it did with the DOJ, accepting fines without admitting guilt to protect its sister business.

While it would seem the SEC settlement Boeing made admits “inadvertent” fraud, that characterization may have enabled DoD contracts to continue, as Boeing may simply be too big and too important to ban from DoD contracts. Nonetheless, albeit small, major risks do appear from overturning the deferred prosecution agreement.  

Will there be additional fines? Will the victims demand an admission of guilt from Boeing? These things are yet unknown. Interestingly, two airlines have joined with the plaintiffs, claiming they were not appropriately compensated by Boeing. One of them, LOT Polish Airlines, is a customer of both the 737 MAX and 787. Could both victim and airline compensation be revisited and increased?

Typically, when the DOJ negotiates a deferred prosecution agreement, things are finalized and cast in concrete. This case opens new ground, and could be unpredictable. The entire gamut of possibilities exists, including leaving the existing agreement in place with no changes all the way to finding Boeing guilty, imposing additional fines or sanctions, and potentially impacting massive contracts with the Department of Defense.

The Department of Justice, for its part, like Boeing, doesn’t want the agreement re-opened either, as it would reflects poorly on their initial deal, particularly from a political standpoint. But not prosecuting Boeing could be even worse from a PR situation. This is a no win situation for both the DOJ and Boeing, neither of whom want the agreement re-opened. But since they jointly excluded the victims the first time around, Pandora’s box has been opened.

Now that the arraignment has occurred. Motions will be filed, and eventually, without a prior settlement among the parties, Boeing may eventually go on trial.  We are observing an unprecedented legal situation. Were I to guess at an outcome, I’d probably have to flip a coin.  Stay tuned, as this case could get interesting before it is over.