```
                                                                 
Missile Defense: Events Related to Contractor Selection for the  
Exoatmospheric Kill Vehicle (27-JAN-03, GAO-03-324R).		 
                                                                 
You asked us, as a follow-on to our recent review of the early	 
sensor tests for the exoatmospheric kill vehicle (EKV), to look  
into the circumstances surrounding Boeing Lead Systems		 
Integrator's (LSI) selection of Raytheon's EKV device for further
testing. Specifically, you asked us to (1) determine whether	 
there was a misuse of Raytheon's proprietary information by the  
Boeing EKV team, as had been reported in the media, and whether  
these events affected the planned competition for an EKV	 
contractor; (2) determine whether a request for proposals (RFP)  
was ever prepared, whether proposals were submitted, whether	 
formal criteria were used to evaluate the two systems, and	 
whether a formal technical comparison or analysis of the two	 
systems was used to select between them; (3) describe the basis  
for the selection of Raytheon; (4) identify whether the decision 
was made by BMDO or Boeing LSI, and, if the decision was made by 
Boeing LSI, determine the extent to which BMDO was aware of the  
circumstances surrounding the decision; and (5) identify the	 
amount of money the U.S. government spent to develop the two EKV 
systems that were to be competed against each other and, if one  
of the contractors was excluded from the competition, determine  
whether any effort was made to recoup the money paid to that	 
contractor.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-324R					        
    ACCNO:   A06009						        
  TITLE:     Missile Defense: Events Related to Contractor Selection  
for the Exoatmospheric Kill Vehicle				 
     DATE:   01/27/2003 
  SUBJECT:   Competition					 
	     Competitive procurement				 
	     Military research and development			 
	     Research and development contracts 		 
	     Weapons research and development			 
	     DOD National Missile Defense Program		 

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GAO-03-324R

GAO- 03- 324R Missile Defense United States General Accounting Office

Washington, DC 20548

January 27, 2003 The Honorable Howard L. Berman House of Representatives

Subject: Missile Defense: Events Related to Contractor Selection for the
Exoatmospheric Kill Vehicle

Dear Mr. Berman: In February 2002, we issued a report regarding early
tests of the sensors being developed for the exoatmospheric kill vehicle 1
(EKV) planned for use in missile defense programs. 2 As described in that
report, the Department of the Army, acting on behalf of the Ballistic
Missile Defense Organization (BMDO) 3 was administering two parallel
research and development contracts for EKVs, one with Raytheon and one
with Boeing. BMDO*s plan was to conduct a competition between the two
teams developing an EKV to select one for further development and flight
testing.

By 1997, BMDO had decided to use a Lead Systems Integrator (LSI)
contractor to manage the National Missile Defense program, rather than
using the Army for this purpose. Boeing was awarded the LSI contract in
April 1998, and was directed to complete the competition to select an EKV
contractor by February 1999. Thus, in its capacity as LSI, Boeing was
tasked to select either Raytheon or another Boeing unit to build the EKV.
For this report, we will refer to the Boeing unit serving as the LSI
contractor as *Boeing LSI,* and to the Boeing unit competing for the EKV
subcontract as *Boeing EKV.* 1 The EKV is the intercept component of the
former National Missile Defense program. The EKV is mounted on a defensive
missile, is delivered by that missile to the midcourse (or exoatmospheric)

phase of an incoming missile*s trajectory, and uses a seeker in a separate
flight package to guide and propel itself into an incoming enemy warhead,
thus destroying the warhead above the earth*s atmosphere. During our
preparation of this report, the Missile Defense Agency announced, in
September 2002, that it was pursuing concepts for a new- generation EKV. 2
See Missile Defense: Review of Allegations about an Early National Missile
Defense Flight Test, GAO02-

125 (Washington, D. C.: Feb. 28, 2002). 3 On January 2, 2002, BMDO was
renamed the Missile Defense Agency. In addition, National Missile Defense
and several other programs have recently been renamed. National Missile
Defense is now referred to as the Ground- Based Midcourse System, which,
together with Sea- Based Midcourse Systems, comprise the Midcourse Defense
Segment. For this report, we will use the names in place at the time of
these events.

GAO- 03- 324R Missile Defense Page 2

You asked us, as a follow- on to our recent review of the early sensor
tests, to look into the circumstances surrounding Boeing LSI*s selection
of Raytheon*s EKV device for further testing. Specifically, you asked us
to

determine whether there was a misuse of Raytheon*s proprietary information
by the Boeing EKV team, as had been reported in the media, and whether
these events affected the planned competition for an EKV contractor;

determine whether a request for proposals (RFP) was ever prepared, whether
proposals were submitted, whether formal criteria were used to evaluate
the two systems, and whether a formal technical comparison or analysis of
the two systems was used to select between them;

describe the basis for the selection of Raytheon;

identify whether the decision was made by BMDO or Boeing LSI, and, if the
decision was made by Boeing LSI, determine the extent to which BMDO was
aware of the circumstances surrounding the decision; and

identify the amount of money the U. S. government spent to develop the two
EKV systems that were to be competed against each other and, if one of the
contractors was excluded from the competition, determine whether any
effort was made to recoup the money paid to that contractor.

During the months of July through September 2002, we developed the facts
reflected in the narrative that follows using contemporaneous documents to
the extent possible. In some instances, we contacted by telephone
officials who could clarify contemporaneous documents. Finally, we
conducted interviews with the key individuals involved in these matters.
Our interviews included government officials and the contractor
decisionmaker charged with making the EKV selection decision.

Results in Brief

In late 1998* after 8 years of funding and administering parallel research
and development contracts for an EKV for National Missile Defense and 2
months prior to the scheduled completion of the competition* BMDO
abandoned its planned competition to select the most promising EKV for use
in follow- on missile defense programs. This decision was made by Boeing
LSI, with BMDO*s concurrence. This decision was made shortly after Boeing
disclosed to the government that employees of its EKV team had obtained
and misused proprietary information developed by the other EKV competitor,
Raytheon.

Our review has not located any document memorializing the selection of
Raytheon to build the EKV, and both BMDO and Boeing have advised us that
no such document was created or exists. As a result, we have reviewed
contemporaneous e- mails and correspondence exchanged between Boeing and
BMDO discussing these events, and near- contemporaneous descriptions of
the selection decision prepared by

GAO- 03- 324R Missile Defense Page 3

government officials involved in the subsequent discussions about whether
the component of Boeing responsible for its EKV effort should be debarred
from federal government contracting, 4 and about the pursuit of a
financial settlement. We have supplemented these contemporaneous materials
with interviews of the decisionmakers. This review has led us to the
following findings:

The planned competition was abandoned after BMDO, Boeing LSI, and Raytheon
learned of the Boeing EKV team*s misuse of Raytheon proprietary
information, specifically a plan for testing Raytheon*s EKV*s software
that was submitted by Raytheon to the Army and later discovered in the
offices of the Boeing EKV team.

The final RFP was not issued, proposals were not submitted, no formal
criteria were used to evaluate the two systems, and there was no formal
technical comparison or analysis used by the decisionmaker to select the
EKV.

Raytheon received the award -- after Boeing LSI and BMDO were unable to
mitigate, to Raytheon*s satisfaction* which BMDO made a condition of
moving forward* the possible competitive harm arising from the Boeing EKV
team*s misuse of Raytheon*s proprietary information;

-- after Boeing LSI and BMDO concluded that failing to obtain Raytheon*s
concurrence might hamper BMDO*s ability to complete the testing of
National Missile Defense in time for a planned presidential

deployment decision in June 2000; and -- after Boeing LSI and BMDO
concluded that any risk in selecting Raytheon without a technical
comparison with Boeing*s EKV could be mitigated by continuing to fund
Boeing*s EKV, at a lower amount as a *hot back- up.* 5 Both the decision
to abandon the planned competition and the decision to

award to Raytheon by default were made by Boeing LSI, with BMDO*s
concurrence.

4 Debarment and suspension are discretionary sanctions available to
government agencies, under policies set forth at Federal Acquisition
Regulation (FAR) Subpart 9.4, which permit a finding that a government
contractor should be deemed ineligible for the award of future contracts
as a means to protect the government*s interest in awarding contracts to
responsible contractors only. FAR S: 9.402. The debarment and suspension
process anticipates *prompt reporting, investigation, and referral to

the debarring official of matters appropriate for that official*s
consideration.* FAR S: 9.406- 3. The process also anticipates providing
contractors an opportunity to respond to proposed debarments. Id. 5 This
back- up funding of Boeing*s EKV continued at a rate of approximately $4
million per month until

3 months after the fourth EKV flight test, which took place in January
2000.

GAO- 03- 324R Missile Defense Page 4

At the point when the competition was abandoned, the U. S. government had
spent approximately $400 million each, or a total of $800 million, to
develop and test the Raytheon and Boeing EKVs. Although several government
officials recommended debarring a component of Boeing from federal
government contracting, or pursuing a financial settlement from the
company, all such recommendations were ultimately withdrawn.

With respect to the decision to award the EKV subcontract to Raytheon,
both Boeing LSI and BMDO decisionmakers told us, during interviews
conducted during the summer of 2002, that the decision was made after they
concluded that either system was sufficiently advanced to permit its
selection for further flight testing. In addition, although not reflected
in any contemporaneous documents we have seen, the Boeing LSI
decisionmaker told us that his decision was also based on his concern that
software development and testing for the Boeing EKV was lagging behind
schedule. He explained that this caused him to be concerned that selection
of Boeing*s EKV might delay the program*s ability to complete sufficient
testing in time to permit a presidential deployment decision planned for
June 2000.

Regarding the efforts to recoup the monies paid to Boeing to develop an
EKV for the abandoned competition, we learned that the Department of the
Army and BMDO explored the potential for a financial recovery from Boeing,
but the effort was ultimately abandoned. Consideration was also given to a
civil or criminal prosecution of Boeing, which was declined by a U. S.
Attorney, and to debarment of a component of the company, which was also
abandoned. Boeing terminated, or otherwise reprimanded, several of the EKV
team employees involved in the misuse of Raytheon*s proprietary
information, and three of the Boeing employees were subsequently debarred
by the Air Force from participating in government contracts* one for 2
years, and two for 1 year. EVENTS RELATED TO CONTRACTOR SELECTION FOR THE
EKV

In October 1990, the Department of the Army*s Space and Missile Defense
Command (acting as an agent for BMDO) awarded three parallel contracts for
the design, development, and demonstration testing of sensor designs for
an EKV to be used in National Missile Defense. These contracts
contemplated one or more *downselects* to eventually choose one contractor
to build an EKV using the successful design. The original awardees were
Martin Marietta (eliminated in an initial *downselect* in 1995), Hughes
Missile Systems Company (now Raytheon), and Rockwell International (now
Boeing). 6 By 1997, BMDO had decided to choose an LSI contractor to
integrate and manage the

various components being developed for the National Missile Defense
system. These components included an Upgraded Early Warning Radar, an X-
Band Radar, the

6 As illustrated above, none of the entities originally selected to design
EKV sensors for National Missile Defense exist in the same form today due
to consolidations in the defense industry during the 1990s.

GAO- 03- 324R Missile Defense Page 5

Ground- Based Interceptor, and Battle Management/ Command, Control and
Communications capability. The Ground- Based Interceptor is the *weapon*
of the National Missile Defense system; it consists of the EKV discussed
above, a booster rocket to deliver the EKV to the approximate intercept
location, and ground command and launch equipment. Upon award of this
integration and management contract (the LSI contract described above),
BMDO planned to consolidate the management of each component of National
Missile Defense under its control using its LSI contractor.

BMDO completed the competition for an LSI contractor on April 30, 1998,
with an award to Boeing. 7 One of Boeing*s first, and most pressing, tasks
was to develop a plan for, and to complete, the competition for a single
EKV contractor. Since one of the EKV development contractors was also a
component of Boeing, award by BMDO of the LSI contract to Boeing created
an inherent organizational conflict of interest. BMDO*s contract with
Boeing LSI directed the company to take steps to address this conflict of
interest, and to do so as part of its planning to complete the EKV
competition. 8 On July 9, 1998, just over 2 months after winning the LSI
contract, Boeing submitted

to BMDO a draft plan for the EKV competition. This plan outlined a formal
competition between the EKV contractors, addressed the evaluation of
technical and cost proposals, and identified certain safeguards to
ameliorate the conflict of interest inherent in permitting Boeing LSI to
select between the Boeing and Raytheon EKV teams. Although Boeing LSI
revised and resubmitted this plan for the EKV competition based on input
from BMDO officials, the plan was never used, proposals were neither
requested nor received, and the anticipated evaluation of the competing
EKV systems was never made. Instead, because of the developments set forth
below, BMDO directed Boeing LSI not to request proposals.

The Disclosure and Misuse of Raytheon*s Proprietary Information

As Boeing LSI and BMDO were working through the details of a formal source
selection plan, the Raytheon and Boeing EKV teams were continuing their
research under the contracts administered by the Army*s Space and Missile
Defense Command. Both teams were also actively preparing for the upcoming
competition.

On July 8, 1998, in support of ongoing EKV testing, Raytheon provided to
Army representatives a document titled *Software Test Plan for the Hover
Test of the Exoatmospheric Kill Vehicle Subsystem.* This 68- page document
was provided during a meeting between Raytheon and Army officials in
Tucson, Arizona. The face of the document indicated that it was prepared
by Raytheon for the Army, and every page of the document contained the
legend, *Unclassified/ Competition Sensitive.*

7 Boeing*s competitor for the LSI contract was a joint venture of
Lockheed- Martin, Raytheon, and TRW. 8 In addition, both competitors for
the LSI contract were required to address in their proposals their plans
for handling the organizational conflicts of interest that would arise
while serving as the LSI contractor. BMDO*s Director told us that Boeing
was selected for the LSI role, in part, based on the strength of its
response in this area.

GAO- 03- 324R Missile Defense Page 6

Less than 2 weeks later, on Monday, July 20, a member of the Boeing EKV
proposal team telephoned an attorney in Boeing*s Law Department to report
that he had just found the above- described Raytheon Software Test Plan on
the floor of the Boeing EKV team*s conference room, within Boeing*s
Downey, California, facility. After securing the document and conducting a
preliminary review, the Boeing attorney notified Raytheon of the
discovery, in a July 28 letter, advising that the document had been found
in an unmarked envelope, appeared to have been slipped under the
conference room door, and that the company had been unable to determine
how it arrived. 9 In addition, the Law Department began a more detailed
in- house review of the discovery of the document.

In response to Boeing*s notification to Raytheon that Raytheon*s Software
Test Plan had been discovered in the offices of Boeing*s EKV proposal
team:

-- Raytheon complained to Army officials, in an August 3 letter, about the
disclosure and requested an investigation;

-- the Army*s Procurement Fraud Division requested a review by the Army*s
Criminal Investigation Command regarding how a Raytheon document provided
to the Army less than 2 weeks earlier ended up in a Boeing conference
room; and

-- BMDO attempted to address, in a September 29 letter, Raytheon*s
*heightened* concerns that discovery of its proprietary materials in
Boeing*s EKV offices highlighted the problematic conflict of interest
caused by using Boeing LSI to select between the Boeing and Raytheon EKV
teams.

The full extent to which Boeing*s EKV team*s employees had misused
Raytheon*s data, however, was apparently unknown to any of the parties
until late October 1998. During follow- up interviews conducted at
Boeing*s Downey, California, facility, during the week of October 19, the
company*s in- house attorneys learned*

apparently for the first time* that a small group of its EKV proposal team
members had actually discovered the Raytheon software test plan on Friday,
July 17* not Monday, July 20, as previously disclosed. In addition, the
in- house attorneys determined from their interviews that Boeing EKV team
employees had misled the company*s Law Department about when the document
was found, how it was handled, and whether the employees had surrendered
all copies.

9 The source of the Raytheon document found in the offices of the Boeing
EKV team has not been established, even though the matter was investigated
by several entities, including the Army Criminal Investigation Command.
The contracting officer*s debarment report, as well as other materials

reviewed (including the Army Criminal Investigation Command report),
states that Army personnel, and independent contractor personnel, visited
Boeing*s Downey facility from July 14 to 16, 1998, for a software
readiness review in the offices of the Boeing EKV team. Since the document
at issue involved Raytheon*s software testing plans, and since the Army
team was meeting with the Boeing EKV team about Boeing*s plans for testing
its software, Army officials opined that the document may have been
inadvertently left behind by a member of this team.

GAO- 03- 324R Missile Defense Page 7

Specifically, the in- house review revealed that: -- certain Boeing EKV
team employees had prepared an analysis of Raytheon*s software test plan
over the weekend prior to advising Boeing attorneys of its discovery on
Monday;

-- these employees had not turned over all of the copies of the test plan
to the Law Department, but had retained a copy of the test plan and of
their analysis; and

-- these employees had used these materials surreptitiously for several
weeks after Boeing*s disclosure of the discovery of the document to
Raytheon, and after Boeing had represented to Raytheon that the document
had been secured.

In Boeing*s own words, *[ t] he assumptions about Raytheon*s avionics
design reflected in the analysis were thereafter reflected in several
program- wide briefings addressing, among other things, Raytheon*s
anticipated Avionics design.* 10 During the last week of October 1998, the
President of Boeing*s Space and

Communications Group telephoned the Director of BMDO to advise him of the
misuse of Raytheon*s proprietary data by Boeing*s EKV proposal team that
had been uncovered during the in- house review.

Efforts to Preserve the Competition

Once the Director of BMDO was notified in late October that the Boeing EKV
team had misused Raytheon*s proprietary data, the fact that Boeing LSI was
poised to release the RFP to implement the competition triggered a need
for near- immediate resolution of the controversy. Both contemporaneous
materials and our interviews indicate that BMDO needed to quickly complete
the selection of an EKV contractor and proceed to flight tests of the
device to have any hope of complying with the *3+ 3* acquisition strategy
that had been adopted for National Missile Defense. This strategy called
for 3 years of development and demonstration of the feasibility of the
system to permit a presidential deployment decision planned for June 2000.
If the President decided to deploy the system in June 2000, the program
allowed 3 years for deployment (which was later extended to 5 years).

Letters and e- mails generated among the government, Boeing, and Raytheon
during November 1998 show two major efforts. First, Boeing attempted to
persuade BMDO that its EKV team had a sufficient record of integrity and
business ethics to be considered a responsible prospective contractor
appropriately eligible for the award

of future contracts. Second, both BMDO and Boeing attempted to convince
representatives of Raytheon that Boeing LSI could appropriately address
the conflict of interest raised by using Boeing LSI to select between the
Boeing and Raytheon 10 *Report Re Raytheon Document Incident,* Office of
the General Counsel Memorandum, The Boeing Company, at 3.

GAO- 03- 324R Missile Defense Page 8

EKV teams, as well as take steps to mitigate the harm to the competition
caused by the misuse of Raytheon*s proprietary information.

With respect to whether the Boeing EKV team could be considered a
responsible government contractor, the Director of BMDO delegated the
decision to Boeing LSI. In a November 2 letter, BMDO*s Director asked
Boeing LSI to provide a written assessment of the Boeing EKV team*s
responsiblility, identify what measures might be taken to mitigate the
harm to the competition, and identify what alternatives remained if the
competition could not be restored.

One of the first of many responses to BMDO*s November 2 letter was
described in a November 6 letter from a Boeing vice president to the Air
Force*s Debarment Authority. 11 This letter advised that Boeing was
terminating 3 employees for their involvement in the misuse of Raytheon*s
software test plan and that a fourth employee was being suspended for 30
days without pay. 12 Based on these actions and others* including an
advisory review of the Boeing EKV team*s responsibility by an outside law
firm* Boeing LSI*s project manager eventually provided BMDO, in a December
7 letter, a written finding that its EKV team should be considered a
*presently responsible offeror.* By December 7, however, it appears the
*downselect* decision had already been made; thus, the responsibility of
the EKV team was relevant to the continuation of Boeing as a back- up
source, not as the provider of the EKV for future flight tests.

With respect to the second major effort during November 1998* that of
convincing Raytheon that the misuse of its data could be remedied and the
competition should proceed* BMDO*s and Boeing*s efforts reached an
impasse. By November 11, Boeing LSI*s Project Manager represented to the
Army Major General serving as BMDO*s National Missile Defense Program
Executive, via e- mail, that Raytheon was no longer willing to discuss
Boeing*s approach to implementing a *firewall* between Boeing LSI and the
Boeing EKV team. In this e- mail, Boeing LSI*s Project Manager also
advised the National Missile Defense Program Executive that Boeing had
decided to resolve any remaining firewall issues in Raytheon*s favor; to
proceed with release of the RFP to the two EKV competitors, despite
Raytheon*s objections; and to do so at 3 p. m. on November 12, *unless we
receive a request from the government not to do so.*

Both Boeing LSI*s Project Manager and BMDO*s National Missile Defense
Program Executive confirmed during interviews that BMDO directed Boeing
not to release the RFP, pending the outcome of Boeing*s efforts to resolve
the impasse with Raytheon. In fact, our review shows that, from this point
forward, BMDO made Raytheon*s

11 The Air Force*s Debarment Authority was involved in this matter in his
capacity as the Department of Defense official charged with monitoring
Boeing*s compliance with government ethics requirements. The Air Force*s
role as a monitor of Boeing had been established by an administrative
agreement between the Air Force and Boeing, which was designed to address
the company*s ongoing responsibility as a government contractor given
earlier ethical issues unrelated to this matter that involved companies
subsequently acquired by Boeing. 12 Three of these employees were
subsequently debarred by the Air Force from participating in government
contracts.

GAO- 03- 324R Missile Defense Page 9

concurrence with Boeing*s attempts to mitigate the harm to the competition
a condition for resuming the competition. 13 During our interviews, both
decisionmakers stated that after halting the RFP and

attempting again to persuade Raytheon to acquiesce to plans to move
forward with the competition, their last- ditch efforts failed and it
became increasingly clear that there was no other choice but to abandon
the competition. Thus, the RFP was never released. 14 The *Downselect*
Decision

With respect to the selection decision itself, we have not located a
contemporaneous document memorializing the downselect decision, and both
Boeing and BMDO have advised us that none exists. Instead, both Boeing and
BMDO advised that the selection decision is evidenced by the subcontract
that was eventually negotiated between Boeing LSI and Raytheon.

Both the Boeing LSI Project Manager and BMDO*s National Missile Defense
Program Executive advised us that the selection decision was ultimately
made by Boeing LSI*s Project Manager; that the decision was conveyed to
BMDO*s National Missile Defense Program Executive, by telephone, on or
about December 1, 1998; and that BMDO concurred with the decision. In
addition, both decisionmakers defended the decision to select the Raytheon
EKV for flight testing, and to fund at a lesser- level the Boeing EKV as a
*hot back- up* until 3 months after the fourth flight test. 15 Both
decisionmakers expressed the view that either device was sufficiently
advanced to permit its selection for further flight testing, that the
decision was a reasonable resolution of the matter given the time
pressures associated with the need to complete testing of the system to
permit the June 2000 presidential deployment decision, and that the
decision represented a sound attempt to mitigate the risk associated with
selecting the Raytheon device without the benefit of a formal competition.

Although not reflected in any contemporaneous documents, Boeing LSI*s
Project Manager stated during our interview that the selection decision
was also based on his concern that software development and testing of the
Boeing EKV was lagging behind schedule. He explained that this led him to
have concerns that selection of Boeing to

13 As early as November 12, an e- mail from the Boeing Vice President
mentioned above, to the Air Force Debarment Authority, advised that Boeing
had indicated its willingness to withdraw but was still trying to
implement BMDO*s stated desire to preserve the competition if possible. 14
Draft RFPs were released and discussed with the parties on August 21 and
October 21, 1998. A bidder*s conference was held on September 16. The
discussion above involves the release of the final RFP, which would have
triggered the requirement to submit proposals.

15 As indicated above, the fourth flight test took place in January 2000.
BMDO*s National Missile Defense Program Executive advised that he agreed
to fund the Boeing EKV as a *hot back- up* to the Raytheon device; the
funding was at the level of approximately $4 million per month, until 3
months after the fourth flight test. In addition, the selection plan
prepared for BMDO by Boeing LSI anticipated funding the unsuccessful EKV
contractor as a back- up prior to the disclosure of the Boeing EKV team*s
misuse of Raytheon*s proprietary information.

GAO- 03- 324R Missile Defense Page 10

build the EKV might delay the program*s ability to complete sufficient
testing in time for the June 2000 presidential deployment decision.

Finally, while it appears, as indicated above, that there was no written
documentation of the selection decision, other contemporaneous documents
support the timeframe and events that were recounted in our interviews
with the decisionmakers. No letter or e- mail we have seen, created prior
to November 30, 1998, suggests that the situation had been resolved, while
several items generated after this date indicate that the decision had
been made. In fact, in a handwritten annotation on the face of a December
9 letter from the Director of BMDO to the President of Boeing*s Space and
Communications Group, BMDO*s Director thanks Boeing for resolving this
issue.

Thus, we find, based on our review of the record, that the decision to
select Raytheon to build the EKV for National Missile Defense

-- was made on or about December 1, 1998; -- was made after the
competition was abandoned; -- was made without soliciting or reviewing
proposals from the EKV competitors;

-- was not based on any formal comparison of the relative technical merit
or proposed cost of the two EKVs;

-- was driven primarily by the inability to mitigate the competitive harm
caused by the misuse of Raytheon*s proprietary data and concerns that
failure to either select* or satisfy* Raytheon would cause significant
slippage in the planned schedule designed to permit a presidential
deployment decision in June 2000; and

-- was made after Boeing LSI and BMDO concluded that either system was
sufficiently advanced to permit its selection for further flight testing
and that any risk in selecting Raytheon without a technical comparison
with Boeing*s EKV could be mitigated by continuing to fund the Boeing
system, at a lower amount, as a *hot back- up.*

Efforts to Recover Funds

Between January 1999 and July 2002, the Department of the Army and BMDO
explored the potential for a financial recovery from Boeing, but the
effort was ultimately abandoned. In addition, consideration was given to a
civil or criminal prosecution of Boeing, and to the possibility of
debarring the business unit of Boeing responsible for the EKV effort. Each
of these considerations are set forth in greater detail below.

In February 1999, representatives of the Army's Procurement Fraud Division
and its Criminal Investigation Command met with representatives of the U.
S. Attorney's

GAO- 03- 324R Missile Defense Page 11

Office of Public Corruption and Government Fraud, Central District of
California, in Los Angeles, to request review of the case for possible
civil or criminal action. According to the Army's Criminal Investigative
Command report, the U. S. Attorney declined to pursue a civil action, and
in a May 11, 1999, letter, the U. S. Attorney declined to pursue a
criminal prosecution "based on insufficient evidence of criminal
wrongdoing."

Concurrently, the Army recommended debarment proceedings against the
Boeing employees involved in the wrongdoing, and against Boeing's
Electronics Systems and Missile Defense Group. The Army also considered
the alternative recommendation of a monetary settlement commensurate with
the damages suffered by the government.

The Army*s assessment of damages focused on: the loss of the integrity of
a planned competition that had been carefully maintained for 8 years at
great administrative expense; the loss of the benefit of a head- to- head
*best value* comparison of two technical approaches developed at the cost
of approximately $400 million each; and the loss of the potential savings
that might have been achieved by the abandoned competition, which the Army
suggested should be valued at approximately 25 percent of the cost of
Raytheon*s EKV. However, given the difficulty of computing damages, the
Army never assigned a precise quantum to the monetary recovery objective.

In concurrence with long- standing Department of Defense policy to place
responsibility for debarment decisions in the hands of the agency with the
greatest financial interest in the outcome, this matter was referred first
to BMDO, with responsibility for action ultimately assigned to the Air
Force debarment official. BMDO recommended against debarring any division
of Boeing* noting that the employees involved had been terminated and were
the subjects of individual debarment actions by the Air Force. In contrast
to the Army, BMDO assigned a precise quantity to its proposed financial
settlement, although all agreed that the BMDO- recommended settlement was
lower than that wanted by the Army. Specifically, BMDO argued for
recoupment of $6.6 million to $13.5 million. BMDO*s proposed recoupment
was described as an estimate of the additional potential award fee payable
to Boeing LSI as a result of paying higher costs for the Raytheon EKV
subcontract than would have been paid had Raytheon*s costs been subjected
to the downward pressure of competition.

In July 2002, BMDO (now the Missile Defense Agency) abandoned recovery
efforts because of litigation risks associated with proving damages, as
well as significant anticipated litigation costs, and the belief that
litigation was inconsistent with its partnership with Boeing as the LSI
contractor. 16 In addition, BMDO determined that the termination and
debarment of the employees involved had largely resolved the matter.

16 For the record, we note that BMDO*s decision to abandon pursuit of
monetary damages was based, in part, on advice received from the Army that
the resources required to prevail in any litigation against Boeing,
together with the *very difficult evidentiary issues,* created *the risk
of unsuccessful litigation.* Earlier, the Army had endorsed the
recommendation to pursue either debarment of a component of Boeing, or
alternatively, a financial settlement.

GAO- 03- 324R Missile Defense Page 12

- - - - - A draft of this report was given to representatives of the
Department of Defense. The Department did not elect to provide formal
comments. Instead, the Department*s official representative provided, via
e- mail, informal technical comments, portions of which were accepted
where their inclusion would improve the accuracy of the report. As agreed
with your office, unless you publicly announce its contents earlier, we
plan

no further distribution of this report until 30 days from the date of this
letter. We will then send copies to other appropriate congressional
committees; the Secretary of Defense; and the Director, Missile Defense
Agency. We will make copies available to others upon request. In addition,
the report will be available on GAO*s webpage at http:// www. gao. gov.

If you, or your staff, have any questions about this report, please
contact me at (202) 512- 5400, or Ralph White, Deputy Assistant General
Counsel, at (202) 512- 8278. In addition, Adam Vodraska, Senior Attorney,
and David Hand, Senior Analyst, made key contributions to this report.

Sincerely yours, Anthony H. Gamboa General Counsel
*** End of document. ***
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