In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, examines the D&O underwriting issues that can arise in connection with defense contractors and other companies for whom national defense and security considerations might affect their public disclosure statements. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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On July 28, 2025, a securities class action was filed in the United States District Court for the Southern District of New York against Lockheed Martin Corporation (Lockheed) and certain of its executives, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (Lockheed SCA). The Lockheed SCA, brought on behalf of investors who purchased Lockheed securities between January 23, 2024, and July 21, 2025, alleges unexpected losses tied to classified defense programs negatively affected Lockheed’s share price.
Lockheed is a global aerospace and defense company engaged in research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. According to its 2025 Annual Report, Lockheed’s core business segments include Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space, serving primarily U.S. and allied government customers.
As the daughter of a veteran, I can appreciate why government contractors, particularly those that support U.S. armed services, may provide opaque descriptions regarding their operations in public filings. However, for shareholders and D&O underwriters evaluating government contractor risk, misaligned disclosures can be challenging to foresee when classified programs are subject to shifting geopolitical pressures or sudden changes in government strategy.
The following discusses the Lockheed SCA, prior SCAs involving government contractors (including a 2013 Lockheed SCA), and D&O risk drivers to consider when underwriting companies where “loose lips sink ships.”
Lockheed SCA
According to the complaint, Lockheed repeatedly assured investors that its disclosure controls and internal oversight of classified programs were effective and that it accurately monitored cost, schedule, and technical risks. Plaintiffs allege these statements were materially false. In October 2024, Lockheed disclosed an $80 million loss on a classified aeronautics program, prompting a 6% stock drop. The Lockheed SCA further alleged that in January 2025, the company reported an additional $1.7 billion in losses on classified aeronautics and missile programs, causing shares to further drop 9.2%.
In July 2025, Lockheed disclosed an additional $1.6 billion in pre-tax losses, including $950 million tied to an aeronautics program facing “design, integration, and test challenges.” According to the securities class action, quarterly earnings plunged to $342 million, and Lockheed’s stock dropped 10.8%. Lockheed’s shareholder plaintiffs claim Lockheed failed to disclose that it lacked effective internal controls over risk-adjusted contracts, overstated its ability to deliver on cost and schedule commitments, and downplayed the likelihood of significant losses. The Lockheed SCA contends these omissions rendered the company’s positive statements misleading and left investors blindsided when the losses surfaced.
The recent Lockheed SCA demonstrates the potential D&O risk for defense contractors managing classified programs that may result from regulatory disclosures. All while balancing the sensitive nature of anticipated projects.
Previous litigation
Lockheed SCA 2013
Lockheed has previously faced similar allegations to the 2025 Lockheed SCA from its shareholders.
In July 2013, Lockheed settled a securities fraud class action for $19.5 million. The underlying litigation was filed in February 2012 on behalf of investors who purchased Lockheed’s common stock. The shareholder plaintiffs alleged that Lockheed and its executives misled investors about the performance and profitability of certain government programs and contracts during the April through July 2009 shareholder class period. In particular, the 2012 securities class action alleged that Lockheed made overly optimistic statements about its ability to secure and perform valuable U.S. government contracts while concealing adverse information about cost pressures and risks on those same contracts.
The 2012 Lockheed SCA case proceeded through extensive discovery and motion practice. It is interesting to note that, in approving the parties’ July 2013 settlement under Rule 23, the court emphasized the shareholder plaintiffs faced substantial risks in establishing liability and damages, and that the recovery (about 10% of plaintiffs’ best-case damages) fell within a reasonable range given the weaknesses in the Lockheed shareholders’ case. Whether the Southern District will have similar thoughts about the 2025 Lockheed SCA remains to be seen.
Notably, there may be challenges for shareholder plaintiffs when national security is at risk with the disclosure of confidential intelligence. On the flip side, government contractors may not be able to provide transparent disclosures regarding contracted work and government projects to D&O programs. In addition, military conflicts are not always planned in accordance with regulatory filing deadlines.
Furthermore, along with potential exposure from less descriptive regulatory filings, another potential risk that government contractors may face stems from False Claims Act (FCA) litigation. D&O underwriters can consider the 2023 FCA and securities case against Booz Allen Hamilton (Booz Allen) as one such example.
FCA v Booz Allen Hamilton
In 2023, Booz Allen Hamilton settled a Qui Tam False Claims Act case with the United States $377 million under the False Claims Act stemming from alleged improper billing. Booz Allen provides a range of management, consulting, and engineering services to the government, as well as commercial and international customers. A whistleblower revealed that from approximately 2011 to 2021, Booz Allen improperly charged costs to its U.S. government contracts and subcontracts that should have been billed to its commercial and international contracts, effectively overstating its services. On the news of the DOJ criminal and civil actions stemming from its purported violations of the FCA, a securities class action lawsuit was also filed against Booz Allen.
As readers of the D&O Diary are aware, FCA criminal and civil actions may be used by the U.S. government as a tool to impose liability for failing to pay money to the government. Currently, it is being leveraged for tariff reimbursement, which may also apply to contractors that develop, build, and supply the U.S. military. The matters filed against Booz Allen for improperly billing provide another example of an affirmative action by the U.S. military for services reimbursement.
Discussion
D&O risks stemming from underwriting U.S. government contractors, as both securities class actions against Lockheed and the litigation against Booz Allen demonstrate, may include disclosure and transparency challenges. Public companies contracting with the government must still disclose material financial information to investors; however, classified contracts limit transparency. In the recent Lockheed SCA, Lockheed allegedly reported large, sudden losses tied to classified programs, without investors or D&O underwriters having visibility into the nature of the programs.
Also, the Booz Allen FCA involved years of alleged improper billing that may have gone undiscovered due to the nature of the government contracts that Booz Allen was servicing. Thus, the possibility of a significant alleged “fraud” on the government involving owed payments may be greater for a government contractor because it can go on for longer if “classified.”
Finally, another D&O risk consideration involves the nature of the business. Government contractors rely heavily on government relationships. Disclosure about “ongoing discussions” or “potential restructures” of classified programs may have both an immediate impact on the government contracts moving forward and a company’s share price. Keeping state secrets secret may, more often than not, end up being the priority over disclosure.
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