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UPDATE 2-U.S. Air Force says L-3 monitored emails

 * L-3 unit in question suspended from new contracts
 * Analyst calls L-3 admission "shocking"
 * Air Force memo says federal criminal probe ongoing
 (Adds analyst comments in paragraph nine and fifteen,
congressional reaction, background)
 WASHINGTON, June 10 (Reuters) - A unit of defense
contractor L-3 Communications Holdings LLL.N that has been
suspended from receiving new federal contracts has admitted to
monitoring emails to assist its commercial interests, according
to a U.S. Air Force memo obtained by Reuters on Thursday.
 The Air Force memo said the company's actions were
inappropriate, adding "there is an ongoing federal criminal
investigation" into the actions of the L-3 unit.
 "L-3 is cooperating fully with the government and has no
other comment at this time," the company said in a statement.
 New York-based L-3 disclosed in a regulatory filing on
Wednesday that it received notice from the Air Force that its
Special Support Programs Division, formerly known as L-3 Joint
Operations Group (JOG), has been temporarily suspended from
receiving new orders or contracts from U.S. agencies amid a
probe of alleged improper use of email.
 The June 3 memo from the Office of the Deputy General
Counsel of the Air Force said the U.S. Special Operations
Command used a third-party vendor to audit email applications
used at the command that were managed by L-3 JOG.
 The audit showed the L-3 unit "purposefully and
intentionally" monitored emails of employees of L-3, workers
with other contractors and U.S. government employees, it said.
 The L-3 unit arranged to have specific emails copied to and
kept on an L-3 monitored database, then released and sent to
recipients in such a manner that neither the government, nor
those whose emails were monitored, would know communications
had been copied, according to the memo.
 "L-3 JOG says it used the SOCOM network willfully and
deliberately in an attempt to discover whether its employees
had shared its information with another contractor," it said.
 L-3 ADMISSION SHOCKS INDUSTRY CIRCLES
 The memo raised eyebrows in Congress and industry circles.
 "This is a shocking abuse of contractor discretion," said
Lexington Institute analyst Loren Thompson. "Illegal monitoring
of traffic in the military communications network is almost
unheard of, except in the case of foreign spies. It suggests a
complete breakdown of ethical standards at L-3."
 The memo also said L-3 obtained information tied to a
competition for follow-on contract work and collected material
that involved a bid protest to which the company was a party.
 The Air Force memo did not identify the protest, but L-3 in
March 2009 filed a protest with the Government Accountability
office against a nine-year, $5-billion logistics deal awarded
to Lockheed Martin Corp LMT.N by Special Operations Command.
 GAO, the congressional agency that rules on contract
protests, said it dismissed the matter a month later after the
command said it would reevaluate the submitted proposals.
 The new competition is still under way, and L-3's contract
continues through the first quarter of 2011.
 Lockheed declined comment. "As a matter of policy, we do
not comment on matters under government investigation," said
spokeswoman Nettie Johnson.
 The Air Force memo said there was "adequate evidence" to
establish that L-3 committed "criminal offenses in connection
with obtaining, attempting to obtain or performing a public
contract or subcontract" and added there was "adequate
evidence" that L-3 "committed theft."
 An Air Force letter to L-3 informing it of the suspension
said the defense contractor could submit information opposing
that move within 30 days after receipt of the notice. A copy of
the letter was also obtained by Reuters.
 L-3, a provider of explosive-detection devices and aviation
products that had 2009 sales of $15.6 billion, said in its
Wednesday filing with the U.S. Securities and Exchange
Commission that it was providing information to the Air Force.
 It said it could not assess the outcome or impact of the
proceedings, and noted the Air Force was also considering
whether to suspend L-3 Communications Integrated Systems LP,
the parent of the special support programs division.
 JP Morgan analyst Joseph Nadol forecast minimal impact on
L-3's near-term revenue, but said its ability to bid for the
recompeted contract was a bigger issue.
 "We continue to see the loss of the JOG contract as the
largest risk ... and L-3 may not be able to bid on the contract
recompete as a result of the hold," he said in an analyst note.
He added an expansion of the investigation to the parent would
clearly be "an important negative development."
 Jefferies & Co analyst Howard Rubel said the issue
underscored the need for improved cybersecurity. The L-3 JOG
contract is expected to generate about $450 million in revenue
annually, contributing about 2 percent, or 15 cents, to
per-share earnings, he wrote in a research note.
 Shares of L-3 Communications closed nearly 1 percent higher
at $79.88 on Thursday, underperforming the broader market which
was up about 2.5 percent.
 (Reporting by Andrea Shalal-Esa; Additional reporting by Karen
Jacobs in Atlanta; Editing by Tim Dobbyn and Sofina
Mirza-Reid)


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