In a kind of sad coda to the litany of claims, charges, investigations and litigation surrounding the tragic crashes in 2018 and 2019 of two Boeing 737 MAX airplanes and the heartbreaking deaths of 346 passengers, the SEC announced last week, as discussed in this Order, that the Boeing Company had agreed to pay $200 million to settle charges that it made materially misleading statements following the crashes, including statements assuring the public that the 737 MAX airplane was “as safe as any airplane that has ever flown the skies.” (As discussed in this order, the CEO will pay $1 million to settle charges.) Of course, that settlement pales against the $2.5 billion settlement agreed on last year with Department of Justice to resolve a criminal charge related to a conspiracy to defraud the FAA in connection with the FAA’s evaluation of the Boeing’s 737 MAX airplane. Also last year, as reported by the NYT, Boeing’s directors reached a $237.5 million settlement of Caremark claims filed in Delaware, which asserted that, as a result of the directors’ “complete failure to establish a reporting system for airplane safety,” and “their turning a blind eye to a red flag representing airplane safety problems,” the board consciously breached its fiduciary duty and violated corporate responsibilities and, as a result, should bear some responsibility for Boeing’s losses. (For a discussion of that case, see this PubCo post.) According to SEC Chair Gary Gensler, “[t]here are no words to describe the tragic loss of life brought about by these two airplane crashes….In times of crisis and tragedy, it is especially important that public companies and executives provide full, fair, and truthful disclosures to the markets. The Boeing Company and its former CEO, Dennis Muilenburg, failed in this most basic obligation. They misled investors by providing assurances about the safety of the 737 MAX, despite knowing about serious safety concerns. The SEC remains committed to rooting out misconduct when public companies and their executives fail to fulfill their fundamental obligations to the investing public.” How do these things happen? The facts of the Boeing case may be instructive.
Background. According to the Boeing Order, the 737 MAX was designed in 2011 after Boeing “faced intense competition from one of its rival commercial airplane manufacturers.” The plane quickly “became the best-selling plane in Boeing’s history.” Although the plane was based on the design of its predecessor, changes in the design altered the aerodynamics of the 737 MAX, causing the plane to pitch up. To address that issue, Boeing introduced a computerized control, MCAS, which was designed to operate only at high speeds and would adjust the plane downward when it pitched up.
Because the 737 MAX was based on the design of another plane, Boeing took the position with the FAA that pilots needed “only a short computer-based training (‘CBT’) course, as opposed to more extensive, simulator-based training.” The use of CBT-only was important for sales and even guaranteed in some cases. In advocating for CBT to the FAA, two senior Boeing technical employees presented MCAS to the FAA “as a feature that could only activate in a very specific, high-speed scenario that was outside the normal flight envelope and therefore unlikely to ever be encountered by a commercial pilot.” On that basis, among other things, the FAA provisionally accepted Boeing’s proposal of CBT-only and the omission of MCAS from the differences training and flight manuals. However, Boeing learned that the plane pitched up at even lower speeds than originally anticipated. As a result, following, and contrary to, the representations made by the two Boeing employees to the FAA, Boeing widened the speed range within which MCAS could operate to include speeds at which a commercial flight would regularly travel.
The SEC alleged that these two Boeing employees responsible for communicating with the FAA “understood, as evidenced by internal emails, that the FAA’s provisional determination was contingent on there being ‘no significant systems changes to the airplane,’ and that the subsequent disclosure of additional differences to the FAA-AEG ‘would be a huge threat to that differences training determination.’” When the two employees later learned that MCAS was in fact operating at lower speeds and “running rampant in the sim[ulator],” one of the employees acknowledged in an “electronic chat” that he had “basically lied to the regulators (unknowingly).” But the employees did not advise the FAA of the change in the operational speed range of MCAS, and, according to the Order, effectively doubled down on the misstatement by reminding the FAA “to delete any references to MCAS from the FSB Report, saying ‘Flight Controls: Delete MCAS, recall we decided we weren’t going to cover it in the [manuals] or the CBT … since it’s way outside the normal operating envelope.’” Accordingly, “MCAS was not described in the 737 MAX flight manuals or pilot training materials, and was not part of the required differences training for pilots transitioning to the 737 MAX when the 737 MAX entered into service in mid-2017.”
The misleading statements that were the subject of the SEC charges were included in a press release following the first crash of the Lion Air 737 MAX in 2018 and in an analyst call and press conference following the second crash in 2019, this time of an Ethiopian Airlines 737 MAX.
The first crash and related November press release. The first crash of the Lion Air plane occurred in October 2018. According to the Order, investigators identified as a cause of the crash “repeated unintended activations of MCAS” that were triggered by erroneous data from a malfunctioning sensor. In November 2018, Boeing’s internal Safety Review Board determined that the “high crew workload” required to address “repeated unintended MCAS activation,” together with the “limited amount of time a crew might have to do so before the airplane became unrecoverable,” created an “‘airplane safety issue’ that required remediation.” In the interim, Boeing and the FAA directed pilots, in the event of an “uncommanded nose-down movement,” to follow the procedures in the flight manuals for a similar type of malfunction. In mid-November, Boeing engineers concluded that MCAS should be redesigned, but that the fleet could continue to operate in the meantime. The FAA reached similar conclusions, but with a much shorter timeline for redesign.
In mid-November, according to the Order, the CEO and other senior executives were advised of the SRB’s conclusions, and, at the same time, Boeing’s communications team began preparing a press release. Early versions of the press release “generally confirmed the plane’s safety”; some versions “also noted that Boeing was working with the FAA to ‘expedite the development and certification of a flight control software update’ for MCAS.” During this period, Boeing was the subject of extensive negative publicity, including “allegations that Boeing had withheld information from pilots, airlines, regulators and the general public regarding MCAS.” By November 20, the stock price had fallen over 11%. The CEO complained “in an email that ‘[w]e are spending too much time playing defense… [we] need to start playing some offense.’” After reviewing a draft of the NTSB’s preliminary report on the accident investigation, the CEO directed that the draft press release be modified to reflect some of the facts described in the NTSB report and also “suggested removing discussion of the planned MCAS software redesign from the Draft Press Release.” The press release was approved and issued on November 27.
According to the Order, the November press release highlighted facts from the NTSB report “suggesting that pilot error and poor airplane maintenance by Lion Air had contributed to the crash. The November 2018 Press Release did not mention that the SRB had identified an ongoing ‘airplane safety issue’ associated with MCAS or the planned software redesign—indeed, it did not mention MCAS at all. The final November 2018 Press Release also contained the statement: ‘As our customers and their passengers continue to fly the 737 MAX to hundreds of destinations around the world every day, they have our assurance that the 737 MAX is as safe as any airplane that has ever flown the skies.’” Although Boeing had provided drafts to the FAA and NTSB, it wasn’t until after the press release was issued that a senior official at the NTSB complained to Boeing that the press release was “not appropriate” and omitted certain facts and highlighted others to lead the reader to Boeing’s analytical conclusion. After the issuance of the press release, Boeing’s stock price increased 4.8%.
In the Order, the SEC charged that Boeing failed to exercise reasonable care in connection with the November press release: the release was misleading under the circumstances, especially the statement that “the 737 MAX is as safe as any airplane that has ever flown the skies,” in the absence of “any discussion of an ‘airplane safety issue’ that required remediation by fixing the MCAS software.” A reasonable investor would have considered these statements and omissions to be material, the SEC contended.
Boeing’s certification compliance review, the second crash and April statements. Beginning in late November, Boeing also undertook a compliance review of the 737 MAX certification process focusing on MCAS. The review concluded that the certification process was compliant with FAA regulations, but identified several documentation gaps and inconsistencies, including the absence of documentation of any “supporting rationale for the decision to remove MCAS from the differences training and flight manuals.” According to the SEC, the compliance review team was not aware of the confessional electronic employee chat, and these gaps in documentation raised the question of whether the FAA knew about and was able to evaluate the expansion of MCAS to operate at slower speeds. When the DOJ also began an investigation into the certification process, Boeing’s legal department uncovered the employee chat and advised the CEO, who viewed it as “concerning.” The SEC alleged that the documentation issues and the chat raised issues about the adequacy of disclosures to the FAA and omissions from the manuals.
The second crash occurred in March 2019. Investigations again determined that the accident involved “repeated unintended activations of MCAS” triggered by faulty software data. The FAA grounded the 737 MAX fleet (which lasted for over 20 months). The stock price fell. On an April earnings call, when asked how the problems with MCAS slipped detection by Boeing and the FAA, the CEO denied that there was a “technical slip or gap here…. [T]here was no surprise or gap or unknown here or something that somehow slipped through a certification process. Quite the opposite. We know exactly how the airplane was designed. We know exactly how it was certified. We have taken the time to understand that…” The CEO made similar statements during a press conference at a later point.
The SEC charged that the April 2019 statements were misleading under the circumstances, and would have been considered material by a reasonable investor, absent any discussion of the questions raised by the discovery of the employee chat and the adequacy of Boeing’s disclosures to the FAA found in the certification compliance review. Accordingly, the SEC charged that Boeing failed to exercise reasonable care in connection with the April 2019 statements.
The Order alleged that, when Boeing sold debt securities on multiple occasions in 2019, it did not modify any of the statements in the press release or modify any of the April statements.
The SEC charged that Boeing and the CEO each violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, which can be based on negligence. The SEC imposed a civil penalty of $200 million on Boeing and of $1 million on the CEO.
According to Gurbir S. Grewal, Director of the SEC’s Enforcement Division, Boeing and the CEO “put profits over people by misleading investors about the safety of the 737 MAX all in an effort to rehabilitate Boeing’s image following two tragic accidents that resulted in the loss of 346 lives and incalculable grief to so many families….But public companies and their executives must provide accurate and complete information when they make disclosures to investors, no matter the circumstances. When they don’t, we will hold them accountable, as we did here.” According to the NYT, in a statement, “Boeing said that it had improved ‘safety processes and oversight of safety issues’ since the crashes and that the settlement was part of a ‘broader effort to responsibly resolve outstanding legal matters’ related to the Max. ‘We will never forget those lost on Lion Air Flight 610 and Ethiopian Airlines Flight 302, and we have made broad and deep changes across our company in response to those accidents,’ Boeing said.”