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CB Exit Case - Part A - Ethical Reasoning:

DOJ and Boeing Settle 737 Max Fraud and Safety Charges for $2.5 Billion (Part I of III) Michael Volkov Boeing's long and tragic scandal surrounding its 737 MAX safety concerns and FAA disclosure violations has come to an end. DOJ announced a settlement early this year, on January 7, 2021, which included a three-year deferred prosecution agreement (DPA) in exchange for total payments of $2.5 billion, consisting of: a $243.6 million criminal penalty, $1.77 billion in compensation to its airline customers, and $500 million to establish a crash victims' beneficiary fund to compensate families of the 346 people killed in two crashes involving Boeing's 737 Max. The criminal information charged Boeing with one count of conspiracy to defraud the United States. Boeings 737 Max was involved in two crashes in 2018 and 2019 before being grounded. In October 2018, Lion Air flight 610 crashed in the Java Sea, killing 189 people, and in March 2019, Ethiopian Airlines flight 302 crashed shortly after takeoff, killing 157 people. The United States ordered the planes grounded shortly after the Ethiopian Airlines crash. As part of the settlement, Boeing admitted that it withheld critical information about the 737 MAX jets' Maneuvering Characteristics Augmentation System and the impact it had on the plane's flight control system. Boeing agreed to cooperate with the DOJ in any ongoing or future investigations and prosecutions, and is obligated to report any evidence or allegation of a fraud violation involving any government agency (including the FAA). Boeing further agreed to strengthen its compliance program, and to a specific reporting obligation requiring Boeing to report to DOJ every three months and submit an annual report concerning its remediation efforts, any compliance program testing results, and its efforts to ensure an effective ethics and compliance program. DOJ reached the settlement based on numerous factors under the Corporate Enforcement Policy, including the nature and seriousness of the offense; Boeing's failure to timely and voluntarily self-disclose its conduct to DOJ; Boeing's prior history including a civil FAA settlement agreement in 2015 relating to safety and quality issues concerning its commercial airplane business. Boeing did not earn full cooperation credit. DOJ specifically cited its failure to cooperate during the first six months of the investigation which frustrated DOJ's investigation.

DOJ cited Boeing's remedial efforts, including: Creation of a permanent aerospace safety committee of the Board of Directors to oversee Boeing's policies and procedures governing safety and its interactions with the FAA and other government agencies and regulators; Creation of a Product and Services Safety organization to strengthen and centralize the safety-related functions that were previously located across the Company; Reorganization of Boeing's engineering function to have all Boeing engineers, as well as the Company's Flight Technical Team, report through the Company's chief engineer rather than to the business units; and Implementing structural changes to Boeing's Flight Technical Team to increase the supervision, effectiveness, and professionalism of the Company's Flight Technical Pilots, including moving the Company's Flight Technical Team under the same organizational umbrella as the Company's Flight Test Team, and adopting new policies and procedures and conducting training to clarify expectations and requirements governing communications between the Company's Flight Technical Pilots and regulatory authorities, including specifically the FAA. Boeing also made significant changes to its top leadership since the offense occurred. DOJ determined that an independent compliance monitor was not was unnecessary because (i) the misconduct was neither pervasive across the organization, nor undertaken by a large number of employees, nor facilitated by senior management; (ii) although two of the Company's 737 MAX Flight Technical Pilots deceived the FAA about MCAS by making misleading statements, half-truths, and omissions, others in the Company disclosed MCAS's expanded operational scope to different FAA personnel who were responsible for determining whether the 737 MAX met U.S. federal airworthiness standards; and (iii) Boeing's remedial improvements to its compliance program and internal controls. Based on all the factors, DOJ agreed to a $243,600,000 criminal penalty, which reflected a fine at the low end of the Sentencing Guidelines range. DOJ also cited Boeing's agreement to allocate $1,770,000,000 to compensate Boeing's airline customers and $500 million in additional compensation to families and relatives of the crash victims of $1,770,000,000 in compensation to the Company's airline customers; $500,000,000 in additional compensation to the heirs, relatives, and/or legal beneficiaries of the crash victims of Lion Air Flight 610 and Ethiopian Airlines Flight 302.

Boeing's 737 MAX Scandal: A Review of Boeing's Deception of the FAA (Part II of III) Michael Volkov Boeing's criminal conduct, as described in the settlement papers, centered on two of its 737 MAX Flight Technical Pilots, who deceived the FAA about an important aircraft part called the Maneuvering Characteristics Augmentation System (MCAS) that impacted the flight control system of the Boeing 737 MAX. Because of their deception, a critical document published by the FAA lacked information about MCAS, and in turn, airplane manuals and pilot-training materials omitted information about MCAS. The two tragic plane crashes were the result of the MCAS system and the failure to ensure awareness of and training for use of the MCAS in certain flight situations. The two employees have not yet been charged criminally for their conduct. Given the focus on these two pilots and the basis for Boeing's admission under the doctrine of respondeat superior, it is surprising that the two pilots have not been charged individually for their criminal conduct. DOJ may intend to indict the pilots; if the pilots are not charged, such an omission would raise serious questions as to DOJ's resolution of this significant fraud case. A review of the facts certainly raises serious questions about their individual liability, particularly in light of the devastating impact of the 737 MAX crashes. Boeing began to develop the 737 MAX in June 2011. In order to operate the 737 MAX, the FAA was required to approve the airplane for commercial use. To make this decision, the FAA had to determine (i) whether the airplane met U.S. federal airworthiness standards; and (ii) what minimum level of pilot training would be required for a pilot to fly the airplane for a U.S.-based airline. These two determinations were made by entirely different groups within the FAA. The FAA Aircraft Evaluation Group ("AEG") was principally responsible for determining the minimum level of pilot training required for a pilot to fly the airplane for a U.S.-based airline. To make that determination, the FAA AEG compared the new version of the 737 MAX to a prior version of the airplane to determine what level of training would be required for pilots to operate the new 737 MAX. The FAA AEG assigned a specific training range from "Level A" through "Level E," with Level A being the least intensive and costly and Level E being the most intensive and costly. For example, Level B training required computer-based training, which could be completed from any laptop anywhere, and Level D training

required flight-simulator training, which required buying multi-million dollar equipment and required pilots to take time from flying to train on costly flight simulator equipment. The FAA's evaluation of the new airplane training requirements published in a Flight Standardization Board Report ("FSB Report"). The FSB Report contained relevant information about certain airplane systems and parts that had to be incorporated into manuals and pilot-training materials. Boeing's 737 MAX Flight Technical team was responsible for identifying and providing the FAA AEG all relevant information in connection with the publication of the 737 MAX FSB Report. This group was separate from the Boeing group that provided information to the FAA to determine airworthiness. Employee 1 was a Technical Pilot and eventually became the Chief Technical Pilot. Employee 1 left Boeing in 2018. Employee 2 was a Technical Pilot and became Chief Technical Pilot in 2018 after Employee 1 left Boeing. Employee 1 and Employee 2 conspired to defraud the FAA AEG relating to its 737 MAX FSB Report and its difference-training determination for the Boeing 737 MAX. Boeing's objective was to secure an FAA determination to require no greater than Level B training. Employee 1 and 2 shared this objective and knew they would be blamed if they did not secure Level B or better training. The 737 MAX used larger engines than prior models, which altered relevant aerodynamics of the 737 MAX. To fix the impact of this change in maneuverability, Boeing developed the MCAS system to cause the airplane's nose to pitch down during a specific high-speed, wind-up turn. During a 2015 briefing of the FAA AEG, Employee 1 described MCAS as needed had limited operational scope during a specific maneuver. Subsequently, Boeing expanded MCAS's operational scope, including the speed range from high-speed flight to nearly the entire speed range for the 737 MAX, and landing and take-off speeds. Boeing disclosed this change to the FAA staff involved in determining airworthiness but Employee 1 and 2 did not inform the FAA AEG personnel for publishing 737 MAX FSB Report and making the training-related determination. In 2016, the FAA AEG reached a preliminary Level B determination but was unaware of the full scope of MCAS's operational scope. Employees 1 and 2 congratulated the internal team and knew that the determination was based on the FAA's misunderstanding concerning the scope of the MCAS system. On November 15, 2016, during a test flight in a simulator, Employee 1 recognized the MCAS operating at a lower speed and that this was different from the representation made to the FAA AEG. In an internal electronic chat, Employee 1 and 2 discussed the test flight and how it was different from what they had told the FAA. Employee-1: Oh shocker alerT! [sic] / MCAS is now active down to [Mach] .2 / It's running rampant in the sim on me / at least that's what [a Boeing simulator engineer] thinks is happening Employee-2: Oh great, that means we have to update the speed trim description in vol 2 Employee-1: so I basically lied to the regulators (unknowingly) Employee-2: it wasn't a lie, no one told us that was the case

Rather than sharing information about this change with the FAA AEG, Employee 1 and 2 concealed this information and deceived the FAA AEG about MCAS. As a result of this deception, the FAA deleted all information about MCAS from the FSB Report, airplane manuals and pilot training materials. Pilots flying the 737 MAX were given no information, training or materials relating to MCAS, despite the fact that the MCAS system operated at the full range of 737 MAX speeds, especially at take-off and landing speeds. On October 29, 2018, the Lion Air Flight 610 crashed after takeoff into the Java Sea killing all 189 passengers and crew. Following the crash, the FAA AEG learned that MCAS activated during the flight and may have caused the crash. The FAA AEG learned for the first time about the change to the MCAS, including the information Boeing concealed from the FAA. Employees 1 and 2 continued to mislead others at Boeing and the FAA about their prior knowledge of the change to MCAS. Five months later, on March 10, 2019, Ethiopian Airlines Flight 302 crashed shortly after takeoff, killing all 157 passengers and crew on board. The FAA AEG learned that MCAS was activated during the flight. Three days later, Boeing's 737 MAX was grounded. DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specfic legal advice based on particular situations. Boeing's 737 MAX Scandal: A Fair Resolution? (Part III of III) Michael Volkov Boeing's settlement with DOJ raises more questions than answers. While I understand that a criminal case against Boeing requires DOJ to identify one or more individuals who have committed a crime that can be fairly attributed to the Boeing corporation. The doctrine of respondeat superior is the mechanism by which this legal attribution occurs. Boeing has been praised for its remediation efforts and its end result. It clearly could have been a lot worse. In my view, it should have been a more severe enforcement action against Boeing. When misconduct results in a loss of life, the prosecution and eventual result should reflect the seriousness of the matter. DOJ found that Boeing's misconduct was not pervasive through senior management. Based on this finding, DOJ stood down from a more comprehensive or rigorous settlement. While senior management may not have been engaged in misconduct themselves, DOJ did not answer (and may not have to answer this question) whether Boeing's culture contributed to an environment in which the two Technical Pilot's committed misconduct, and failed to disclose their misconduct after the Lion Air accident occurred. Even more significant questions should be addressed, as I outline below, about Boeing's culture of ethics and compliance, and the adequacy of its safety controls. Let me outline my argument. Of course, I recognize that I am not privy to all the facts and the considerations. Culture of Ethics and Compliance: Boeing's safety violations were committed by two Technical Pilots is only part of the story in this case. The two pilots clearly violated the law by withholding critical information about the MCAS operations that would have resulted in pilot training on MCAS and potentially avoided the two Boeing 737 MAX crashes. Their conduct is even more reprehensible when their deception continued after the Lion Air crash occurred and the MCAS was identified as a possible reason for the crash. Their silence after the Lion Air crash is a terrible face since the pilots knew full well what the risk was but they chose to keep quiet. We can all agree on condemning their conduct, but their failure to act and speak up occurred in a corporate culture that did not prevent them from continuing their criminal conspiracy. My question is where was Boeing's culture of compliance? What commitment did the board and senior management make to this issue?

How could such blatant misconduct occur in a culture of compliance? My questions are somewhat rhetorical but spring from several well-established principles. Companies that maintain an ethical culture suffer reduced rates of misconduct in comparison to less ethical companies. Where did Boeing fall on this spectrum of corporate culture and why? In prior postings and a podcast episode on the Boeing scandal, I highlighted evidence suggesting that Boeing's culture elevated profitability over safety. That is not surprising. Yet, DOJ makes no mention of Boeing's culture, its failure to embed the importance of compliance, and the leadership failure at Boeing to ensure implementation of a culture of ethics and compliance. Safety Controls: Boeing's safety controls, interactions with the FAA, and regulation of training manuals and materials were circumvented through the actions of two employees. It is significant that there were no safety controls to verify and corroborate the issues determined and advocated by the two Training Pilots. Given Boeing's business and the importance of safety issues, it is difficult for me to accept that Boeing's safety controls could be easily circumvented by two actors. Basic safety controls should not be so easy to circumvent, and Boeing's safety controls appear deficient on their face. DOJ and Boeing tout Boeing's remediation efforts to re-organize and prevent future safety violations. These improvements are structural and are positive. Two of the measures - the creation of a permanent aerospace safety committee and a product and services safety organization, while laudable, should have been in existence prior to the 737 MAX scandal. Boeing's obsession should have been safety and its failure to maintain a robust safety compliance organization at the board level and in the organization is nothing to applaud or credit for remediation purposes. Boeing's remaining structural changes to its engineering function and its Flight Technical team is a positive step. To be effective, however, structural changes are unlikely to prevent and detect future violations unless those changes are coupled with a serious and significant effort to improve Boeing's culture of ethics. Boeing is one of the largest companies in the United States, and its ethics and compliance program, safety controls and financial controls should reflect its status. Safety is its core risk and its controls should have reflected this basic fact. These are issues that should have been addressed prior to a glaring and tragic scandal resulting in significant loss of life. A company committed to ethics and safety would have avoided this scandal - hindsight is 20/20 but these issues should have been addressed before the 737 MAX tragedy. Absence of an Independent Corporate Monitor: DOJ's decision not to require the appointment of an independent corporate monitor is questionable. Boeing's culture and compliance program failed on many levels, more than just the illegal conduct of two Technical Pilots. Boeing's culture is clearly deficient, and the proposed structural changes are unlikely to mitigate the potential for recurrence of safety issues. In this case, DOJ should have appointed an independent compliance monitor to ensure that Boeing's culture and controls are remediated throughout the organization. Given the stakes of another safety scandal, DOJ was remiss in failing to take this basic step to protect Boeing customers and passengers from future safety violations.