by Eamon Javers
But the steel buyers already knew the answer. They did business with Arcelor every day. The word was that it was on the verge of scaling back its output to drive up prices—a move that Wall Street would welcome and that would boost the company’s stock price. Verbatim passed the intelligence on to a hedge fund client in late September. As it turned out, this was just a few days before Arcelor announced that it would idle two blast furnaces: one in Cleveland and the other in East Chicago, Indiana. As a result of this news, trading volume was nearly triple that of the previous day and the stock closed $1 per share higher, at $35.54. Anyone on Wall Street who knew about the move in advance could have raked in a tidy profit.
Verbatim, founded in 2001, gathers data on companies for more than twenty hedge fund clients by interviewing as many customers of the companies as its operatives can reach. Most of the companies that are being scrutinized have no idea what’s going on.
Verbatim’s techniques are based on the training that its managing partner John Strehle received as an intelligence officer in the U.S. Navy aboard the aircraft carrier USS Dwight D. Eisenhower. He says the challenges he faced as a young lieutenant in the 1980s and 1990s and his present work gathering intelligence on global companies have a lot in common: “You have to make sure you prioritize intelligence properly, you have to be used to changing deadlines, and you have to be able to reach conclusions based on less than complete information.”
Verbatim’s team members are analysts, the corporate equivalent of the CIA’s employees in Langley who pore over data trying to predict trends. For instance, they scrutinize economic and crop data to predict the next famine in the third world and its resulting political instability. Predicting is one of a spy’s most valuable skills. To do it, Strehle wants to hire smart, sociable people and trains them in elicitation techniques.
The software manufacturer Salesforce.com, which is based in San Francisco, makes so-called “customer relationship management” computer programs to help salespeople keep track of their accounts and contacts. A hedge fund client asked Verbatim to predict Salesforce’s quarterly earnings. In 2006 the company had released a new software product, and it was getting only tepid reviews in the press. Wall Street was betting that the quarterly earnings would be grim.
But Verbatim built its own prediction of what those earnings would be, going from customer to customer, and asking them all how many units they’d purchased that quarter, and matching the information against data it had gathered in previous cycles. Verbatim’s team took a systematic approach, calling large and small customers, and getting a wide geographic spread. They talked to the people at big companies who were responsible for buying Salesforce’s software. Unlike some of the other corporate intelligence outfits, Verbatim says it doesn’t engage in deception. The company insists that its analysts tell sources who they are and what they’re doing.
Although Verbatim doesn’t pay for interviews, Salesforce’s customers were motivated to talk anyway. Sometimes Verbatim’s interviewers knew more about what was going on at Salesforce than a customer did, and the customer could pick up valuable information of its own by chatting with them. What new products are coming out next? Are other customers getting discounts that we’re not? The interviewers probed for specifics in return: How many users at your company are working with the Salesforce software now? Which of Salesforce’s competitors have approached you—and what are they offering? What kind of discounting are the Salesforce reps offering?
The results were surprising. The customers liked Salesforce better than Wall Street thought they did. Verbatim turned over a report to its client, several weeks before the end of the quarter. The hedge fund managers saw aggregate results, answers to all the questions, and the names and phone numbers of Salesforce’s customers who had agreed to be identified to the hedge fund. The software company reported an unexpectedly strong quarter, and Verbatim’s client was well positioned when the quarterly numbers were officially released.
SPIES OFTEN SAY that 90 percent of a good intelligence operation is open-source information—stuff that’s in the newspapers, in government documents, or easily available with a phone call or two. Corporate spies also know that. And they know that the best material of all can exist in the narrow zone somewhere between public and private information.
On the afternoon of November 15, 2005, day traders chatting on Yahoo.com were scrambling for information. They couldn’t figure out why there was so much action in USG Corporation, a Chicago building-materials company that was mired in asbestos lawsuits. Its stock was trading at double the normal daily volume and would gain $2.12 to close at $61.55. But there didn’t seem to be any major news to motivate this.
The day traders exchanged anguished messages trying to figure out what was going on: I do not understand the volatility lately; is it the market-makers trying to get me to capitulate? wondered a trader going by the name ethylene_orion on the Yahoo! Finance message board for USG, where individual investors traded tidbits, opinions, and tips about the stock.
What ethelyne_orion and the regulars on the Yahoo! message board didn’t know was that behind the scenes, then-Senate Majority Leader Bill Frist of Tennessee (a Republican) had decided to override the qualms of the budget committee’s leaders and press ahead with a bill to create a $140 billion fund to relieve companies such as USG of their asbestos liabilities.1 It would be huge news in the small community of traders who bought and sold shares of companies affected by asbestos litigation—and almost any piece of news in that world tended to move the market. Frist wouldn’t announce his decision until November 16, but the news had gotten to key Wall Street traders a day early via a little-known pipeline: a small group of firms specializing in “political intelligence” that mine the capital for information and translate Washington wonk-speak into trading tips.
The industry started with a couple of cottage firms in the early 1970s. But now it’s been propelled to new levels of intensity as information-hungry hedge funds hire squadrons of former lobbyists and journalists to ferret out tidbits of information, such as the details of Frist’s decision. “What hedge funds do is look for inefficiencies in the market,” says one hedge fund manager who buys several firms’ reports. “And Washington is the world’s greatest creator of [market] inefficiencies.”
Unlike lobbyists, political intelligence outfits are not required to disclose their clients or annual revenues, so the size of this very quiet business is masked. One veteran estimates that there are more than half a dozen contenders collectively raking in $30 million to $40 million a year. The business stretches well beyond Capitol Hill, into every aspect of the federal government. “We analyze public policy—macroeconomics, the Fed, budget, trade, currency—that affects overall financial markets, sectors, or companies,” says Leslie Alperstein, a founder of the firm Washington Analysis. And although leaks such as Frist’s news about asbestos are welcome, Alperstein says his business is mostly about explaining trends. “If we only dealt in [hot tips], I wouldn’t be living in Potomac,” he says, referring to a pricey suburb in Maryland. “It doesn’t happen often enough.”
It happens enough, however, to trouble some legislators. A few days after the rise in USG stock, Representative Brian Baird of Washington (a Democrat) asked the House ethics committee to issue guidance for staffers sitting on some of the capital’s most valuable information. “The possibility of direct kickbacks [is] enormous,” says Baird. He worries that the trafficking comes “very close” to insider trading.
But experts in ethics say no one’s breaking the current rules. Staffers on Capitol Hill and government employees are forbidden to profit personally from confidential data and can’t share information that’s classified or deemed secret by their employers. But within those loose guidelines, political intelligence is just another legal way for investors to perform due diligence. The intelligence operatives say that Congress, where decisions are made publicly, is fair game. It’s what’s known in intelligence as an open source—where infor
mation is available to any member of the public.
In theory, ethelyne and his day-trading colleagues could have called Frist’s office and asked staffers what was going on, too—just as one of the hedge fund intelligence shops did. But of course that’s not how the world really works. An individual investor trying to get information out of the Senate Majority Leader’s office is far more likely to end up in voice mail hell than he is to get a hot tip. It takes trained insiders like former Frist staffers, veteran journalists with Capitol Hill rolodexes and other players to really work Washington’s open sources: Hey, buddy, what’s going on today?
Ethelyne_orion and his pals don’t stand a chance, and that hasn’t escaped the notice of some very shrewd players around the world: As the value of their product rises, the political intelligence firms themselves are becoming fair game. Alperstein sold Washington Analysis in July 2005 to China’s Xinhua Finance, which is partly owned by an entity controlled by the communist government: Xinhua News Agency. Xinhua picked up Washington Analysis for an undisclosed amount just as the bidding war between Chevron and China’s CNOOC over the acquisition of Unocal was reaching its apogee in the summer of 2005. Chevron outmuscled CNOOC for that deal. The failure indicated that the Chinese didn’t fully understand life inside the Beltway.
Maybe that’s why the Chinese were interested in a savvy Washington firm. Years ago, foreign governments depended on their embassies and their networks of spies to obtain inside information on the latest maneuverings in the American political and economic scene. Today, they can hire a private firm to do the work.
THE MOST DANGEROUS people aren’t always the ones working for the other side. Sometimes, they’re the ones who are supposed to be on your side. Defending against them is called counterintelligence. Companies, too, are constantly looking within for signs of treachery from their own employees. To do that, they lean on counterintelligence experts fresh out of government agencies.
Doctor Eric Shaw was sitting in his office in Washington, D.C., when he got a call from a distraught client at a large oil company several years ago. An unbalanced executive at this company had begun making sinister comments to colleagues about his AK-47 assault rifle. The man’s wife was dying of cancer, and he was going on long drinking binges and getting into fistfights. The client was worried. Clearly, this man’s mental health presented a potentially explosive situation. The client reached out to Shaw, a clinical psychologist and a veteran of the CIA’s psychological profiling shop who now consults for a private investigative firm, Stroz Friedberg. Shaw specializes in finding internal threats to companies: leakers, drunks, disgruntled employees, and staffers on the verge of a violent outburst. The work gives him a cool, unemotional bearing, in stark contrast to the people he studies. “They’re all kind of crazy,” he says. “But I usually don’t get called unless they’re totally crazy.” Shaw’s work is the corporate equivalent of counterintelligence: the shoe leather that goes into spotting and stopping the threats coming a company’s way.
Shaw dug into the details, trying to discern just what type of dangerous personality this man had. As with any other kind of intelligence, the key to detecting a threat, Shaw says, is information. There are dozens of different kinds of threats, and each one calls for a different response. Act too soon, or on too little information, and a situation can spiral out of control. After talking to the unstable executive’s colleagues, and reviewing detailed reports of the incidents, Shaw concluded that the man was going through a temporary crisis. If handled correctly, he wouldn’t pose a long-term threat. In the end, Shaw’s advice to the oil company seemed counterintuitive. He told the company not to fire the man and not to go to law enforcement. Instead, the man’s bosses should tell him he couldn’t come back to work until he had completed a course of therapy, which the company would pay for.
As it turns out, the crisis passed and the executive went back to work, with no harm done to the company or its employees. Soon afterward, he landed a new job at a labor union working against the company—not a great situation for management, but a healthy channel for the man’s anger. It was a far better outcome than the violent outburst that might have ensued if the company had fired him. Shaw says most companies don’t handle internal threats this well, and their ham-fisted efforts to respond to minor problems can set off even more damaging outbursts. When a manager spots a problem and leaps into action, reprimanding or firing the employee, that event can trigger a blowup.
Doctor Marisa Randazzo is an expert in assassins, stalkers, and school shooters. She spent ten years with the United States Secret Service as chief research psychologist at the National Threat Assessment Center, developing elaborate profiles of potential killers. Today, she heads Threat Assessment Resources International, a firm based in Sparks, Nevada, just outside Reno. It offers a threat assessment training package for companies to help protect themselves from internal threats. The training includes walking executives through case studies of workplace shootings and insider sabotage, showing them the basic principles of threat assessment in the workplace, and conducting a mock emergency drill to hone crisis-response skills.
Shaw and Randazzo describe several key traits of dangerous insiders. Many have a medical issue, such as a psychiatric problem, alcoholism, or a high level of anxiety. Others are on the extreme end of the personality spectrum—the office oddballs who are extremely shy, who require high maintenance, or who otherwise cause their colleagues to be uncomfortable around them. And many people who cause problems have a history of minor rule violations preceding a major incident. They may have broken rules regarding technology, or personnel. Many dangerous insiders are already on the radar screen of the human resources department even before they do major damage. And in about one-third of serious cases, a dangerous insider has a social network in place—other people who know in advance what the person is planning.
People who fit this pattern don’t always cause problems—they can do their jobs for years without trouble. It’s when people with these characteristics hit a problem in life that they start displaying what psychologists call “concerning behaviors.” They may have a personal or professional disappointment. A demotion, the death of a spouse, or a move to a new location can all trigger damaging behavior. And when that cycle starts, there’s no sure way to tell just how much damage will be done.
That’s why the services of intelligence specialists like Shaw and Randazzo can be so valuable: it’s much cheaper to head off a problem early than it is to pay to clean up the mess.
CHAPTER ELEVEN
Is This a Great Country, or What?
In April 2008, about a dozen lawyers and investment bankers gathered over muffins and coffee in a small room on the third floor of the Princeton Club on West Forty-third Street in Manhattan to hear from a spy.
They were there for a briefing sponsored by Veracity Worldwide, a one-year-old corporate intelligence firm with close connections to the CIA. And although the people in the room represented some of the top American investment banks, they weren’t there for anything to do with the New York Stock Exchange or the NASDAQ stock market. They were concerned about markets on the other side of the globe: the Tokyo Stock Exchange in Japan and the Korea Exchange in Pusan, South Korea.
The American corporate reps wanted to know what was going on in North Korea, the unpredictable communist enclave just across the Sea of Japan from the Tokyo market. The North Korean ruler Kim Jong Il had been acting increasingly erratically as his country’s economy collapsed and famine stalked his people. North Korea’s pursuit of nuclear weapons was an open secret. No one knew how stable Kim Jong Il’s control over the country was.
For the western businesspeople, those weren’t just interesting political issues. They were important business concerns. A collapse of the North Korean government, a surprise nuclear test, or a mass famine could destabilize the region and cause capital to flee from the Japanese and South Korean stock exchanges. An adroit banker, though, would be well positioned to get his m
oney out first. Or, better yet, he could bet in the markets that the Japanese and South Korean exchanges would decline, hoping to profit from political disaster.
All the participants that morning were Americans, but their business and intelligence interests spanned the globe. This multinational mind-set is increasingly the norm in the private-sector intelligence business. Today’s corporate intelligence industry has firms operating in nearly every country and finds clients all around the world. Old political enemies can find themselves working closely together in the private sector, and traditional allies sometimes become bitter rivals. The ethical question in this, as it always is for spies, is where true loyalty lies. Is it loyalty to a country? To a company? Or to any client that can pay the fee?
The stories of six corporate intelligence operations around the world show how intelligence is becoming increasingly interconnected with the global economy:
Veracity, which hosted the meeting in New York, does business for clients all over the world.
TD International, an intelligence firm that is run by several veterans of the CIA and is based in Washington, D.C., represents a sheikh who is based in Dubai.
Johann Benöhr is a private investigator in Berlin, where he deals with strict government regulations and the German public’s angst about spying of any sort.
Hakluyt, a firm based in London, once hired a German spy to penetrate Greenpeace on behalf of global oil companies.
Hamilton Trading Group is a small consultancy founded by a former CIA officer and a former KGB operative who ran into serious trouble with the Putin government in Russia.