Scarred by the Air Force contract scandal and resulting criminal convictions, Boeing has yet to repair its damaged credibility on Capitol Hill.

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This morning’s scheduled sentencing for former Boeing Chief Financial Officer Michael Sears could be the last criminal prosecution stemming from the scandal over Boeing’s illegal hiring of Air Force procurement official Darleen Druyun.

Boeing Chief Executive Harry Stonecipher hopes so; he told Wall Street analysts last week the company would move forward now that its legal cases were soon to be “completed.”

But Boeing still faces deep difficulties on Capitol Hill, where it has failed to repair its antagonistic relationships with key lawmakers and has left even its defenders struggling to support it. Indeed, Stonecipher’s comments may have been “a red flag” further provoking critics of the company, said one Washington, D.C., defense attorney.

Jim Albaugh, CEO, Boeing Integrated Defense Systems

Those attitudes could be critical in coming months, with Boeing’s previous $29.8 billion contract to supply 767 refueling tankers to the Air Force declared dead because of the Druyun scandal and prospects for a renewed deal uncertain.

Sears pleaded guilty in November to arranging a job for Druyun while she was in charge of Air Force contracts for Boeing. Druyun, convicted for violating federal conflict-of-interest rules, is serving nine months in federal prison.

The sentencing memo on Sears, released yesterday by the Justice Department, slams Boeing’s top management for failing “to confront the obvious legal and ethical issues” inherent in his negotiations to hire Druyun.

The good news for Boeing is that the memo’s wording suggests there will be no criminal indictments of the company or other executives.

Ex-Air Force official Darleen Druyun is in prison.

Showdown ahead

But the prosecution’s public attack on Boeing’s ethical lapses guarantees the company a nasty confrontation on Capitol Hill with two powerful Republican senators. TV-news highlights in the next few months are likely to feature scenes of uncomfortable Boeing executives being excoriated in Senate hearings.

Even elected representatives predisposed to help the hometown company say Boeing acted far too slowly to mend fences.

“They [Boeing] have been slow to recognize the problems they created for us. This undermines our credibility as members of Congress,” said Rep. Adam Smith, D-Tacoma, who fought for the tanker deal.

“After the indictments [of Sears and Druyun] came, they told us in a meeting, ‘Don’t worry, we won’t embarrass you,’ ” Smith said. “I was stunned. ‘You mean you won’t embarrass us any further,’ I thought. We had just lobbied hard for a $25 billion contract, and now their people were headed to jail.”

Boeing’s sheer size as a defense contractor may save it from draconian punishment. However much Congress or the Justice Department would like to penalize the company, neither can do much without affecting Pentagon programs and possibly creating more costs for taxpayers.

“The government’s options are limited,” though they can be painful, said aerospace analyst Richard Aboulafia of the Teal Group.

When Druyun was sentenced in October, she rocked Boeing and the Air Force by testifying she had favored Boeing in other deals besides the tanker program. Boeing officials hope Sears’ statements today won’t contain more explosives.

Boeing CEO Harry Stonecipher says trouble near end.

Help like this

Lobbyists, defense attorneys and crisis-management experts say Stonecipher didn’t help Boeing by confidently telling Wall Street analysts its troubles were almost over. They say he should save his talking for powerful Sens. John McCain, R-Ariz., and John Warner, R-Va., who have been sharply critical of Boeing and the tanker deal.

“This is what drives lawyers crazy, when management acts like PR people,” said Victoria Toensing, a former deputy assistant attorney general and now a white-collar criminal lawyer. “If you’re the prosecutor, you are annoyed, because you know it’s all a PR move. It’s like waving a red flag in front of a bull.”

Aboulafia agreed. “When dealing with prosecutors and politicians who want to look like clean-broom types, never declare victory. Always go with the ‘we’ll do better’ instead of ‘it’s over.’

“Even if they can’t find you guilty, they can make you miserable,” he said, as the prosecution memo on Sears shows. “But there’s this natural tendency to want to reassure the Street.”

Boeing’s biggest problem on Capitol Hill is that it has generated a lot of anger from McCain, who is to take over the Armed Services subcommittee that controls Air Force procurement.

McCain has complained that executives in Boeing’s Washington, D.C., offices stalled his tanker-deal investigation for two years, and he has said that during a meeting with Stonecipher last February, he’d reached agreement that executives such as Rudy deLeon, Boeing’s top lobbyist in D.C., would be disciplined. Boeing never followed through, and the result is deLeon remains unwelcome in McCain’s office.

To smooth things over with Congress, Boeing is counting on old friends of McCain, such as former White House Chief of Staff Ken Duberstein; former Sen. Warren Rudman of Vermont, who conducted an internal investigation of company ethics for Boeing last year; and the retired head of Boeing’s D.C. office, Stan Ebner.

Stonecipher, through a spokesman, declined to discuss the frosty situation.

Sen. John McCain, R-Ariz., leading critic of tanker deal

Contract review

The company may have misstepped again this week when a Pentagon procurement panel released its review of hundreds of contracts Druyun had supervised. Initial news stories, reflecting Boeing’s view, suggested the company’s legal troubles on the contracts were essentially over.

Instead, Aboulafia said, Boeing should have tried to downplay any good news from this week’s contract review until it had patched everything up on the Hill. Politicians don’t want to think that Boeing will get off lightly.

Indeed, just hours later, McCain pounced on the Pentagon announcement that eight additional contracts involving Druyun would be investigated further for “anomalies,” and suggested other people must also have been involved.

Worse, the normally low-key Warner, who chairs the Senate Armed Services Committee, issued an unusually strong statement excoriating the contract mess.

It is likely that his committee will bring in Stonecipher and James Albaugh, the chief of Boeing’s Integrated Defense Systems, to grill them on their knowledge of the Druyun-Sears negotiations and other contracts.

Additional scrutiny could soon come from another corner. The U.S. attorney whose jurisdiction includes the Pentagon, intends to announce an initiative today to stop defense-procurement fraud; it is likely Congress will jump aboard, using Boeing as the poster child for procurement gone bad.

In this atmosphere, who can make the case for new tankers?

The prosecution memo’s comments about Boeing management could endanger a new plan by Rep. Norm Dicks, D-Bremerton, to speed up tanker procurement by having the Pentagon issue a request for proposal (RFP) for new tankers at the same time it releases to Congress its overdue analysis on whether the Air Force needs new tankers at all.

Timing important

That analysis is perhaps as much as nine months away, and Dicks’ move would help Boeing, which plans to determine this summer whether to end its 767 line.

There also is pressure on the Air Force to open any new tanker procurement to others, including EADS, the parent company of Boeing rival Airbus.

Dicks is emphatic that the Air Force needs new tankers and should save money by simply modifying the existing Boeing 767. “We gotta have an RFP,” he said. “The Defense Department can do it, if they want to.”

Such a two-track, simultaneous process is unusual, said one government specialist on military-procurement rules.

Dicks acknowledges he will face serious opposition and can’t afford any more Boeing bombshells.

Dicks noted that Boeing has made its supporters cautious about public displays of affection. “The Air Force is afraid to even come to the net” and press its case on the tankers, he said.

Looking back on the deal that came undone when the Druyun-Sears scandal broke, Dicks added, “to have this blow up in my face because of misconduct by the Boeing Company” just makes it harder to resume making the case for tankers.

Alicia Mundy: 202-662-7457 or