L-3 Faces Criminal Probe Over E-Mail, Air Force Says (Update2)

June 10, 2010, 8:00 PM EDT

(Updates with analyst’s comments in seventh paragraph.)

June 10 (Bloomberg) — an L-3 Communications Holdings Inc. unit is facing a criminal probe into use of a military computer network to conduct e-mail surveillance of its workers and those of the government and other contractors, the Air Force said.

The unit, which managed the network, copied and stored e- mail traffic without the knowledge of the government or the workers, helping the company collect information relevant to competitions on which it wanted to bid, according to a June 3 memo by the Air Force deputy general counsel’s office.

L-3 “admitted to conducting the surveillance,” according to the memo, which was provided today by an Air Force spokeswoman, Lieutenant Colonel Karen Platt. The company checked e-mails “willfully and deliberately in an attempt to discover whether its employees had shared its information with another contractor,” the memo said.

The memo detailed why the Air Force acted last week to temporarily bar L-3’s Special Support Programs Division from new federal contracts or orders. New York-based L-3 disclosed the suspension yesterday in a filing that cited “inappropriate use” of an e-mail system without mentioning the criminal probe.

L-3 “is cooperating fully with the government and has no other comment at this time,” Jennifer Barton, a spokeswoman, said in an e-mail.

L-3 rose 72 cents to $79.88 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 7.9 percent over the past year.

‘Penny or Two’

The suspension of new contracts means “a penny or two” of 2010 earnings per share may be at risk at the maker of airport scanners and military-aircraft surveillance cameras, wrote Joseph Nadol, a JPMorgan Chase & co. analyst in New York who has a “neutral” rating on the stock.

The Special Support Programs Division will have revenue of about $400 million this year, and the suspension doesn’t hurt the company’s ability to conduct — and be paid for — business that’s already under way, Nadol wrote.

L-3’s ability to compete in new bidding in January on a contract for the unit is a “concern,” Nadol wrote. There’s also a risk that the inquiry may expand to cover the unit’s parent, Integrated Systems, which is “a significant business” for L-3, according to Nadol.

Evidence of the surveillance was uncovered by a secret audit by the U.S. Special Operations Command, which was working with L-3, the Air Force said.

L-3’s actions weren’t “appropriate under the terms of its contract or the standards of ethical business conduct” and are under an “ongoing federal criminal investigation,” the Air Force said.

The surveillance by the Special Support Programs Division was to assist the unit’s “own private, commercial interests,” the Air Force said. The L-3 division is based in Lexington, Kentucky.

Unauthorized access of electronic communications is a crime under the federal Electronic Communications Privacy Act and the Computer Fraud and Abuse Act, said Matt Zimmerman, senior staff attorney at San Francisco-based Electronic Frontier Foundation, an online privacy advocacy group.

L-3’s other businesses include making video-surveillance systems used in police vehicles, and it’s the largest supplier of translators to the U.S. Army. Chief Executive Officer Michael Strianese told analysts at a conference in December he is seeking to add sales in commercial avionics as well as defense.

–With assistance from Karen Gullo in San Francisco and Gopal Ratnam in Washington. Editors: Ed Dufner, James Langford

To contact the reporters on this story: Anthony Capaccio in Washington at acapaccio@bloomberg.net; Susanna Ray in Seattle at sray7@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.

L-3 Faces Criminal Probe Over E-Mail, Air Force Says (Update2)