Sept. 11, 2018, © Leeham News: The Boeing Co., Boeing Capital Corp, Marsh & McLennan and its subsidiary, Marsh, a major insurance firm, have been sued for trade secret theft in lawsuits filed in Chicago and New York.
The dispute centers around the roles of Boeing, BCC and the insurers in creating Aviation Finance Insurance Consortium (AFIC). AFIC was created following years of the US Congress’ refusal to reauthorize the US ExIm Bank.
Xavian Holdings and Xavian Insurance Co. allege in the lawsuits that The Boeing Co., through its Boeing Capital Corp unit, and Marsh signed trade secret and confidentiality agreements that precluded the companies from acting on the concept for an ExIm replacement financing guarantee vehicle.
“Boeing and BCC waited until their need for those trade secrets became critical – and then
misappropriated them,” the Boeing lawsuit charges.
Xavian was founded by several Wall Street professionals in aircraft finance and some bankers from ExIm, led by attorney Thatcher A. Stone. Stone now lectures on aviation law at the University of Virginia School of Law. Xavian was backed by venture financiers and had received a significant financing commitment from Lightyear Capital, led by Don Marron, former chairman of Paine Webber and UBS.
AFIC was launched in June 2017. In its first seven months, it provided financial guarantees for 16 Boeing aircraft to four airlines and a lessor. The aircraft had a value of $1.5bn in financing guarantees.
One person told LNC that Boeing’s profits from the sale could be around $800m. The lawsuits don’t specify a damage claim, which is normal in federal courts.
Despite the trade secret and confidentiality agreements, Xavian charges in the lawsuit that BCC’s Kostya Zolotusky, Tim Myers, now president of BCC but a VP at the time, and Robert Morin, then still employed by ExIm but a part of Xavier’s effort, were privy to then Xavian plans. Also privy was BCC officer Scott Scherer, now retired, the lawsuit says.
Morin now works for Marsh, the insurance manager for AFIC.
At the annual Airfinance Journal conference in January in Dublin, Morin, by then an employee of Marsh, described the venture’s structure. He took credit for and gave credit to Boeing for creating concept that became AFIC.
Xavien was conceived years earlier, with Boeing’s and Morin’s involvement, the lawsuits charge. The research done by Xavian allowed the private insurance model to move for forward with a major US rating agency review, the lawsuit alleges.
AFIC was named AFJ’s Deal of the Year and Morin received the Aviation Finance Person of the Year award, both at AFJ’s annual North American Conference in Miami last May. Scherer received AFJ’s lifetime achievement award at the same event.
“This is the liability side of insurance companies,” Morin told the AFJ Dublin audience. “This is the actuary side. These are the guys like to build [financial] models trying to figure out the probability of default and the depth of the loss.”
Xavian in its lawsuit says this was the structure and concept Stone and his partners created, to which Boeing and Morin had access through a non-disclosure and trade secrets agreement.
Morin went on to tell the Dublin audience, “When we presented the data to them, whether it was from the experience of ExIm Bank of the experience of the European ECAs who supported Airbus, or even the experience of EETC investors, particularly as it relates to financing new aircraft, they couldn’t believe it. ‘You must be cooking the data, Bob.’”
Morin continued, “Financing new aircraft is very good business, even if you are financing aircraft to less than stellar credits, even if it is to what appears to be risky jurisdictions.”
Morin said the actuaries never focused on this or thought about it, “but now that it has been explained to them and the supporting data has been provided to them, they are basically saying bring it on.”
Xavian alleges that it put the actuarial analysis together, and charges that Morin and Boeing stopped communicating with Xavian, took the data, marketed it to insurance companies and created AFIC in violation of the NDA-trade secrets contract.
This forms the crux of the allegation that Boeing stole Xavian’s trade secrets.
Morin said at the Dublin conference that the creation of AFIC “was the result of a multi-year development effort by Boeing and Marsh. Out of a sense of loyalty to Boeing who helped educate the insurance and finance and aircraft values, we’re limiting it to Boeing aircraft.”
AFIC’s underwriters are the insurance companies Allianz; AXIS Capital; Fidelis; and Sompo International (formerly Endurance).
Xavian alleges that an insurance consortium like AFIC would be used by Xavian to commence operations before Lightyear’s commitment and the independent rating agency evaluation would be finalized, given the ExIm closure.
Morin’s public speech was in January. In May, Airfinance Journal revealed Marsh—Morin’s employer—would launch a similar financing vehicle to service Airbus aircraft.
“The European manufacturer and aircraft broker Marsh will, this year, co-launch Balthazar, an insurance-guaranteed product designed for bank and investors that fund new aircraft purchases from Airbus,” the magazine wrote. It’s not clear if this is now open for business.
If the Balthazar program is like AFIC, then it may also be in violation of Xavian’s trade secrets. Xavian has filed a separate lawsuit against Marsh in New York federal court. Xavian alleges that it signed a variety of agency and other agreements with Guy Carpenter, a division of Marsh, which make it similarly responsible like Boeing.
Xavian seeks an unquantified amount of damages from Boeing and Marsh, including the disgorgement of profits Xavian claims Boeing has admitted publicly it would not have received had it not sold the airplanes without AFIC.
Exemplary (punitive) damages and legal fees are also sought. Under certain circumstances, the damages could be doubled and fines of up to treble the value of the stolen trade secrets could be imposed.
Even if found liable, it may not make make much of a dent in Boeing’s financials. The company had free cash flow in the first half of this year of $7.8bn and cash and marketable securities on hand at June 30 of $9.8bn. It paid $1bn in dividends in the second quarter. Full year revenues in 2017 were more than $92bn.
This isn’t the first time Boeing was on the receiving end of a trade secrets theft complaint. In the early 2000s, a Boeing employee hired from Lockheed Martin was alleged to have brought thousands of pages of documents with him. Boeing was barred by the government from competing on a $1bn contract and the company paid a $612m fine, a record at the time.
Marsh & McLennan Companies’ 2017 revenues were $14bn. Net income was $1.5bn.
ExIm was created under President Franklin D. Roosevelt to support US exports to credit-challenged foreign countries and businesses.
In recent decades, a majority of ExIm’s funding guaranteed financing for Boeing aircraft, although Boeing, GE (engines) and Pratt & Whitney were only three of thousands of companies that benefited. The big ticket nature of airplanes and engines accounted for the vast majority of ExIm’s guarantees on a dollar basis.
Critics of ExIm, nearly entirely Tea Party politicians and the most conservative Republican members of Congress, called the agency “Boeing’s bank” and an example of corporate welfare. The guarantees enabled Boeing to sell more airplanes, create and support thousands of jobs and compete with Airbus’ reliance on European Credit Agencies that provided similar guarantees.
The Tea Party members teamed with Republicans in Congress to block reauthorization of ExIm Bank, closing financing guarantees for Boeing aircraft. In the meantime, Airbus continued to use ECA support, giving it an advantage over Boeing in certain sales campaigns.
Then Airbus ran into its own problems with the ECAs. Airbus self-disclosed that it failed to follow requirements to reveal the use of third party consultants in ECA-backed deals. Britain’s Serious Fraud Office launched an investigation. The UK export agency suspended its participation in Airbus financing guarantees. German and French ECAs later followed suit.
This eventually led to the Balthazar product.