by Eamon Javers
They hadn’t. Ultimately, the weight of BIA’s argument began to convince even the skeptical Starr. He saw some potential in what Houston and Floyd were offering. Goldman, despite the disastrous pitch meeting, soon became a client of BIA. Of course, not everyone within Goldman is bullish on BIA. Asked about BIA’s intelligence techniques, Goldman’s global head of communications, Lucas van Praag, mocks the capabilities of veterans of U.S. intelligence: “If these guys were really that good, and the techniques worked as well as they said they did, how come we’re still in Iraq?”
Training in deception detection and eavesdropping on conference calls are just BIA’s baseline service. Prices, and services, get more elaborate from there. For about $50,000 per day, a client company can hire a team of CIA-trained interrogators to come to its offices and question subjects, typically when the company suspects some internal fraud or wrongdoing.
Perhaps BIA’s most important—and least known—client is Cascade Investment, LLC, a small outfit in Kirkland, Washington, which is just across Lake Washington from downtown Seattle and easily accessible by boat via an adjacent marina.11 In this bland suburban office park is one of the most powerful financial firms in the world, a firm that almost no one has heard of. Cascade isn’t just any private equity firm. It’s the personal private equity firm of one of the richest men in the world, Bill Gates. With just over $4 billion in assets under management, Cascade’s year-end 2007 filing with the Securities and Exchange Commission (SEC) showed that it owns shares of assets as diverse as Coca-Cola, Pacific Ethanol, and, of course, Berkshire Hathaway, the successful company owned by Gates’s friend and fellow billionaire, Warren Buffett.12
People familiar with Cascade say it uses BIA to help with due diligence. The old saying caveat emptor—let the buyer beware—was never more true than in the private equity industry, where money managers live in fear of investing $100 million in a company that turns out to be a lemon. Private equity investors need every scrap of information they can find to help them make a good decision. But BIA’s due diligence for Bill Gates’s team at Cascade goes beyond the information gathering you might find at lower levels of the financial stratosphere. For Gates’s team, BIA’s interrogators and investigators evaluate potential acquisitions.
Private equity firms such as Cascade often find themselves acquiring private companies. When you’re buying a privately held company, you can be in the dark about what you’re actually getting. People familiar with the relationship between them say that Cascade asked BIA to find answers to specific questions about companies that were potential acquisitions. For example, if a firm was founded by an entrepreneur, what is that person’s family like? Is the CEO’s son, who will inherit control of the company, a dysfunctional alcoholic? If so, the company might sell at a much lower price, since there’s no reliable successor to keep it going. Knowing even one piece of information could be worth millions.
In an acquisition of a private company, BIA’s team will investigate all the top executives of the company under scrutiny. Who are their professional contacts? What are their families like? What kinds of pressures are they under? The BIA team will also fan out to cover the target company’s customers, interviewing them about their transactions with the company. Are you going to re-up your contract for next year? Are you going to spend more or less money with the target company next quarter? The same with suppliers. A company needs certain raw materials to do business. BIA’s team approaches suppliers to find out how much the target company has been buying. What’s the trend line? Is the company buying more now than ever before? And what about price—is there an increase coming that could damage the target company’s profitability? Every tidbit helps form an overall picture of the company, and what Cascade should be willing to pay to buy it.
Such due diligence, of course, could be done by young MBAs, or even college graduates with specific training in corporate analysis. You don’t need veteran CIA spies to analyze a company. But having their expertise helps. The CIA experience can help BIA’s team spot a supply chain vendor who’s lying about whether he’s planning to raise prices next quarter. Their elicitation techniques can help draw that vendor out about when the hike is coming and how much it might be.
The secret, whether it’s a crime, intelligence, or the expected price of soybeans, devours the keeper.
BIA’s team of research analysts was, for a time, led by Jim Roth, a veteran of the CIA. Roth’s team offered investigative research, primarily to hedge fund clients. In one case, a hedge fund hired BIA to investigate a publicly traded home builder. The hedge fund investors had a hunch: the builder’s company might not make its revenue projections for the quarter, as it didn’t have enough land in the Los Angeles market to develop all the residences it was telling the market it would build. But how to prove that? The fund managers called BIA, which put Roth and his CIA-trained agents on the case. Roth’s team began working the phones. They called real estate agents in Los Angeles and asked about the local market. Who is buying land? Is the home builder a big buyer? Which plots does it already own? In each conversation, the BIA team used deception-detection techniques to spot dishonesty or uncertainty, and used their skills of elicitation to get the agents to reveal information about the market.
Roth’s team also called local real estate speculators and large landowners to find out who was buying up property. They did research into hard-to-find public records to find out who was making new land purchases. They talked to competitors to see if the home builder was buying land through proxies to avoid detection. After making hundreds of calls and poring over scores of documents, Roth’s team concluded that the hedge fund was right. The home builder didn’t own nearly as much land in Los Angeles as it was saying it did. There was no way the company could make its earnings targets in coming years.
On the basis of Roth’s written report and other information it had developed on its own, BIA’s hedge fund client shorted the home builder’s stock. In the case of the home builder, the client told people at BIA that it pocketed $20 million as a result. Compared with the tens of thousands it had spent on Jim Roth’s work for BIA, that’s a huge return on investment.
Jim Roth has since left BIA and recently was working at his own consulting firm, doing the same kind of work for hedge funds. He is secretive about his new operation, called the Langley Group, in a nod to the site of the CIA’s headquarters. Roth’s firm’s Web site at www.thelangleygroup.net betrays no other hint of the intelligence background of its founder. The firm has an unlisted phone number. The Web site registration is privacy protected. E-mails sent to the address listed on the site bounce back.
That’s OK, though. The well-networked hedge funds know how to get in touch.
CLIENTS WHO HAVE BIA on a retainer of as much as $400,000 to $800,000 per year are entitled to another service: undercover operations. For its highest-paying clients, BIA sends its CIA-trained interrogators to investors’ conferences or meetings under the guise of traditional business consultants or simply as unidentified “colleagues” traveling with a client.
On one occasion, a team of BIA’s deception-detection experts traveled to Palo Alto, where they went with a client to an investors’ conference sponsored by the investment bank Morgan Stanley. At these events, start-up companies make pitches to an audience packed with potential investors. The companies need money, and the investors are looking to pick winners that will generate returns on their capital. The executives who make presentations at these gatherings put the best spin on their companies—what they do, how they make money, and what their prospects are. Because the pressure is on to dazzle the moneymen in the room, the temptation to exaggerate or even lie is enormous. Why not paper over that bad quarter? No need to bring up the big customer who just canceled his contract. But the unflattering details are the ones that can make or break a wealthy investor’s decision to place his money in a company. If the start-up company’s executives are lying, investors need to know it immediately so they don’t waste t
heir time and money.
As they sat through the series of presentations by hopeful corporate executives, BIA’s team of analysts watched all the presenters for signs of deception. Were they using red flag terms like “frankly” and “honestly”? What were their hands doing while they were presenting the financials? Did they rock on the balls of their feet as they detailed new customer acquisitions? Each time BIA spotted a cluster of telltale signs, one of its analysts would nod subtly to the client. Instantly, the client could home in on the touchiest issues for each company. If the executives were lying about material issues, BIA’s client knew not to invest.
For the executives making presentations at a conference like Morgan Stanley’s, it can be stressful enough to run through the financial details with the fate of the company on the line. Imagine how stressed they’d be if they knew that they were being scrutinized by the CIA’s best human lie detectors. But they never knew.
Spies who’ve spent the best years of their careers grilling suspected members of Al Qaeda might not seem like people who’d be interested in spending their time in hotel conference rooms watching corporate suits sweat out a pitch meeting. But it’s steady work, and safe. Also, it can pay much better than government work.
Generally, CIA officers work at the same government pay scale as employees of the Department of Transportation or the Department of Education. Known as the General Scale (GS), the system has fifteen grades of seniority, each of which is divided into ten “steps.” In 2008, entry-level government employees made just over $17,000 per year. The most senior GS-15 employees earned $124,010.13 Even for elite CIA leaders, pay tops out at around the highest level for the government’s so-called Senior Executive Service (SES), $172,200 in 2008. The government allows minimal adjustments for cost of living in expensive areas of the country. CIA officers sometimes get hardship pay for particularly difficult work. And overseas, CIA officers also get one other nice perk: paid housing.
Although $124,000 sounds like a lot of money to most Americans, it is not much if we consider the amount of education, training, and valuable experience these people have. The private sector pays a lot better.
For relatively junior CIA officers making GS-10 to GS-12 wages of between $43,000 and $57,000 per year, a jump to business intelligence can be lucrative. One person familiar with the way CIA veterans are compensated in the private sector says CIA officers at the GS-10 to GS-12 levels can leap to $120,000 to $150,000 as a base salary, with the potential to rise well into the $200,000 range as they develop more corporate experience. Depending on when in their career they make the move to the private sector, veterans of the CIA may also bring with them a generous government pension that pays them a percentage of their highest salary for the rest of their lives. Most people cannot resist the opportunity to double or triple their wages, and the CIA’s veterans are no different.
Ironically, BIA is known as one of the stingier private-sector employers of CIA talent. Its former CEO Don Carlson recalls that CIA veterans at the firm topped out at roughly between $180,000 and $210,000 when he ran the operation in 2005. Not many of the CIA veterans there asked for or received equity in the firm, he recalls. For all their talent and training, Carlson says, “I think we dramatically underpaid people.”
One way for employees of the CIA to bolster their earnings is to moonlight for corporate intelligence firms like BIA. CIA officers routinely ask their bosses for permission to work at BIA on the side to boost their government incomes. According to a government official knowledgeable about the practice, to apply for permission for outside work CIA employees must fill out a form stating who they’re going to work for and what they’re doing. Permission must be granted by a group of vetters that includes the CIA’s ethics lawyers.
Indeed CIA employees must fill out a standard form to disclose any outside affiliations at all, whether it’s a summer job or volunteering for a local Boy Scout troop. One of the considerations the CIA uses to decide whether or not to grant permission to moonlight is whether the work will interfere with the officer’s responsibilities at the CIA. Permission is granted on a case-by-case basis.
The active-duty CIA part-timers became particularly helpful for BIA, says another person familiar with the firm, when the new crop of college graduates flooded into the big four accounting firms each year. BIA provides training in deception detection for all the firms, and the influx of new employees in the summers meant BIA, too, had to staff up. Typically, the firm did that by relying on moonlighting CIA officers who could train the new accountants in TBA and then return to the CIA. At one point before he arrived at BIA, Carlson says, the firm had twelve to fifteen active-duty CIA officers employed part-time as analysts.
Still, BIA is careful to make a distinction between itself and the CIA. In a brochure distributed to clients, “Strategic Information Collection for Investors,” BIA included this disclaimer on the first page: “This is to advise that Business Intelligence Advisors Inc.’s training is in no way connected to or endorsed by the United States government or any agency thereof, BIA’s instructors are acting solely in their capacity as private citizens and not as representatives of any federal governmental agency.”14
In later years, BIA began to bring in entry-level college graduates and train them in TBA. These young employees staffed a boiler room of sorts, where they listened in on corporate conference calls, pored over transcripts, and even looked at companies’ press releases and SEC filings, in order to spot clusters of indicators of deception for BIA’s many clients. At one point, BIA tried to develop a training program to teach corporate clients how to lie. “We wanted to be able to say, ‘Here’s how you can get away with it,’” recalls Carlson. But BIA ran up against the fundamental barrier of cognitive dissonance. It could never figure out how to coach a liar to conceal the telltale signs of his lies. BIA never sold training in how to lie.
BIA advises that there are also certain indicators that a person is telling the truth. Because the truth is less useful to an interrogator in the early stages of an interview, BIA training tells clients to ignore the truthful behavior; but the firm does provide a handy list of the things that reveal when someone is telling the truth: direct answers, spontaneous answers, attentive and interested behavior, and consistency.
The truth, it seems, is easier to tell than a lie.
CHAPTER EIGHT
The Eddie Murphy Strategy
Monday, March 5, 2007, dawned cool and clear in the Virginia countryside outside Washington. As Bobby Ferraro made his morning commute past the strip malls and open fields, he didn’t see anything in the sky that hinted of a problem, or of the multimillion-dollar riddle he’d need to solve in just a few hours.
Ferraro is the director of satellite operations for GeoEye, a company in Dulles, Virginia, that flies spy satellites for government and corporate customers. Begun with the merger of two smaller companies just over a year earlier, in January 2006, GeoEye was heading into its busiest season yet. It had just renegotiated a government intelligence contract to provide images taken by the company’s satellites.
That weekend, OrbView-3, one of GeoEye’s satellites in low orbit, had been photographing the Earth’s surface and beaming pictures to ground stations located around the world. From those points all over the globe, the images had been sent to GeoEye’s nondescript headquarters building in Virginia, where they were stored in a raw data form called “level zero” on a bank of high-speed computers. As Bobby Ferraro steered into the parking lot of his office complex, made his way to his fifth-floor office, and settled into his morning routine, the pictures awaited processing by GeoEye’s Monday-morning shift workers.
Ferraro left his regular 9 A.M. meeting and strode down the hall past the company’s flight operations center, a dark room crammed with the computers that control the satellites. Michael Schmidt, the company’s processing manager, walked up to him.
“We’ve got a problem with the images,” Schmidt said.
The pictures taken by OrbV
iew-3 over the weekend had been fine for a while. But then the images taken on Sunday went black. One minute, this 670-pound satellite had been sending down photos from over the Caspian Sea, and the next, nothing.
“Oh, no,” murmured Ferraro. This could be bad.
At age forty-three, the normally cheerful Ferraro knew his way around satellites. He’d begun his career in the air force, and he had worked on research and development for the Strategic Defense Initiative, an effort in the 1980s to develop a missile system to protect the country from incoming Soviet ICBMs. Later, he’d worked at the command and control facility for the Global Positioning System (GPS).
Ferraro knew that any one of a number of problems could cause the images to turn out black. There could be a problem inside the GeoEye computers in Virginia, causing them to misread the data from the image files. There could be trouble with the transmission from the ground stations. There could be a glitch in the equipment that had initially received the pictures from the satellite.
Or, the problem could be with the satellite itself. This would mean that the multimillion-dollar machine was a total loss. There would be no way to get a repair crew to the satellite to fix even minor damage. The machine had been launched in 2003 and was supposed to last at least five years. Many satellites had lasted for a decade or more. It was far too soon for OrbView to conk out.
Ferraro walked down the hall to talk with the company’s head of spacecraft engineering.
“We may need to get a tiger team together,” Ferraro said.
Soon, GeoEye’s offices were crawling with engineers, operations specialists, and technical advisers from the vendors who had built OrbView-3 and its key components. Those included Orbital Sciences Corporation and Northrop Grumman. Collectively, they formed a “tiger team,” of elite satellite mechanics to perform what they called “anomaly resolution.” They’d work over every inch of the system, from the headquarters building up to the satellite, to find the problem.