Broker, Trader, Lawyer, Spy (21 page)

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.

C
LIENTS 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 their 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.

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 OrbView-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.

The first steps were to notify the government, the client expecting to take delivery of that day’s fresh images; and then to notify the company’s licensing authority, the National Oceanic and Atmospheric Administration in suburban Silver Spring, Maryland, which granted GeoEye—a private-sector company—the right to operate a satellite in the first place. Calls also went out to the National Geospatial Intelligence Agency, and to GeoEye’s customers around the world.

By the end of the day, GeoEye had a diagnosis. The problem was with the camera. And the camera was on the satellite, zipping around the edge of the Earth’s atmosphere. It had been designed with “single string” components, so there were no backup systems on board. There was no way to fix it.

This was a serious blow to GeoEye, whose stock was traded on the NASDAQ exchange. Wall Street securities regulations meant the company was duty-bound to disclose the event to the investing public, as it did in an 8-K filing with the SEC on Thursday, March 8. The document said the company could control the satellite, but couldn’t get pictures from it. GeoEye couldn’t tell the markets whether the satellite could be fixed, or when its fate might be known. In the meantime, GeoEye would try to service its customers with an older satellite, IKONOS.

Investors were startled by the news, and GeoEye’s stock fell sharply, dropping from $18.28 on Thursday to $16.25 by the time the markets closed at 4
P.M.
Friday. It had been a lousy week for Bobby Ferraro, but such is life in the high-stakes satellite game.

Ferraro and his team spent much of the next month trying to think up a way to fix the camera. They worked on the problem over and over again until late April. Then they finally gave up.
*

W
HEN THE SATELLITE
OrbView-3 went down, U.S. intelligence agencies weren’t the only ones inconvenienced. GeoEye, which has more than 400 employees worldwide and generated more than $180 million in revenue in 2007, estimates that almost half of its business comes from the private sector. Companies use GeoEye’s three satellites for all kinds of monitoring.

Oil companies can check on the status of their rigs in the Gulf of Mexico. Agricultural giants can generate false-color images of fields, in which red areas show healthy growth and yellowish areas show crops that need help. Developers can generate topographical maps of real estate they might want to buy. Google buys images for use in its popular satellite application GoogleEarth.

GeoEye also sells satellite images of the ocean to fishermen. The pictures identify heavy underwater concentrations of phytoplankton, where the fish will go to feed. Every day, GeoEye’s technicians e-mail satellite maps of these places to ship captains on bridges of trawlers around the world. It’s hardly sporting, but satellite images can save a ship’s captain as much as 10 or 15 percent in fuel costs. Instead of wandering around the ocean hoping to bump into a rich school of fish, the captain steers directly for the best spots.

The commercial satellite industry is still small. GeoEye has only one American competitor: DigitalGlobe, which is based in the Colorado Rockies. DigitalGlobe flies a QuickBird spacecraft that was launched into orbit 450 kilometers above the surface of
the Earth in 2001 and captures 75 million square kilometers of imagery data each year.

Overseas, there are several more image providers, including the French company Spot Image, which boasts that its FORMOSAT-2 is the only high-resolution satellite that can take pictures of the same location each day—other satellite companies must wait days before the orbits of their spacecraft bring them around again to reshoot a given location.

But it is the American company GeoEye’s newest satellite that demonstrates the astonishing overlap between government and corporate intelligence technology. It’s not just that the private sector has access to the same types of satellite technology as U.S. spy agencies. In this case, companies will be using the
same satellite
as some of the nation’s most sophisticated intelligence operatives.

GeoEye participates in a program called NextView run by the federal government’s spy satellite operator, the National Geospatial-Intelligence Agency (NGA). The program is designed to allow the federal government to pick up much of the cost of developing the next generation of spy satellites, which cost millions to design, build, and launch. Under the NextView program, GeoEye developed a new satellite, and the NGA kicked in $237 million federal tax dollars to help build it. The contract allows GeoEye to use the satellite for its commercial clients, too.

Here’s what GeoEye said in its May 2008 quarterly filing with the Securities and Exchange Commission (SEC): “The Company anticipates that NGA will account for approximately half of the satellites’ imagery-taking capacity during this time, with the remaining capacity available to generate commercial sales, including sales to international ground station customers and municipal customers.”
¹

The company launched the new satellite, GeoEye-1, from Vandenberg Air Force Base in California in late August 2008. Boeing rockets were used. Technicians from General Dynamics prepped the satellite. GeoEye-1 spends much of its time taking pictures for
the CIA and the Department of Defense, and the rest taking pictures for paying clients, which have included Wal-Mart, commodities traders, and commercial fishermen.

GeoEye’s corporate spokesman is Mark Brender, an amiable former ABC News Pentagon producer. Sitting in a conference room at GeoEye’s headquarters, he flashes a picture on a display screen of the first spy photo ever taken. It is a grainy image taken by the highly classified spy satellite Corona on August 18, 1960. You can barely make out an airstrip at a base called Mys Shmidta on the Far East coast of what was then the Soviet Union. A parking area is also visible, but that’s about all.
²
Still, the image was revolutionary at the time. Military leaders could now see what the enemy was building, and where. Piecing together the observed activities, military officers could infer the Soviet Union’s overall strategy. Brender flashes more images on the screen. Today’s commercial satellites can see individual people walking on the ground. They can see cars well enough to pick out the make and model. They can see coral reefs underwater in the ocean.

“For forty or fifty years, the intelligence community kept their overhead intelligence capabilities highly secret,” Brender says. “This technology was the family jewels of U.S and Soviet intelligence. It was developed in order for two cold war rivals to be able to watch each other very carefully.”

The doctrine of the time, Brender points out, was called mutually assured destruction. Neither side wanted to attack first, because the other side had the ability to strike back with devastating consequences.

Now, though, the technology is in corporate hands. “Now we’ve moved into an era of mutually assured observation,” Brender says. “Governments used this technology to better understand the capabilities of the enemy. There’s no reason companies can’t use this technology to better understand the capabilities of a competitor.”

GeoEye plans to launch a fourth satellite in 2011. GeoEye’s IKONOS satellite, launched in 1999, orbits the Earth from the
north pole to the south pole and back again every ninety-eight minutes—“It’s moving fast,” says Brender, about 17,000 miles per hour. That’s about four miles every second. Because the Earth rotates underneath the satellites as they orbit at an altitude of more than 680 kilometers above its surface, each lap around the planet takes place a little farther to the east. As a result, GeoEye’s satellites can see any spot on the planet once every three days.

The flagship spacecraft, GeoEye-1, is two stories tall; in orbit, this whole satellite can tilt, pivoting about fifty degrees in any direction to shoot specific targets as it whizzes by. It makes twelve or thirteen orbits each day. It maintains what’s known as a “sun-synchronous” orbit: that is, it can pass over a given area at 10:30
A.M.
local time every day. In a single pass, it can capture two images of the same target from different points in space, and so it has the ability to create three-dimensional pictures.
*
It will be able to capture images of up to 700,000 square kilometers per day, and more than 225 million square kilometers per year. It is expected to last for ten years, but as GeoEye found out with OrbView-3, this doesn’t necessarily mean it will.

To download pictures from satellites in orbit, GeoEye maintains ground stations with satellite receivers in places as remote as Barrow, Alaska, and Tromso, Norway. It maintains an unmanned station at the Troll research station on the antarctic ice sheet. In this regard, GeoEye is better positioned than the U.S. government. As the result of international treaties, the military and intelligence agencies aren’t allowed to build their own ground stations at the bottom of the world. But GeoEye can.

Despite its advanced capabilities, GeoEye doesn’t know how its customers are using the images they buy. Brender says clients simply give GeoEye the location they’re after, and the satellite snaps the
picture. The provider doesn’t know why the client wants the picture, or who the client is snooping on. All the company gets is the location. And that’s all it needs: whether the client is spying on a competitor or looking at its own assets is irrelevant to GeoEye—the company gets paid either way. To GeoEye, every location is the same. “It’s all Earth,” says Brender with a shrug.

He points to a satellite image of a strip mine in West Virginia. The mining company has chopped off the entire top of a mountain, clearing hundreds of feet of earth to get at the precious coal beneath. A picture of the mine’s progress would be somewhat helpful for the mining company, but the executives there already know how the dig is going—they walk the site every day.

The image would be truly helpful, Brender says, to the mining company’s competitor. Mining bosses at a rival company don’t have access to the site. “If you were the competitor to that mining company, you might be able to watch that mine to see how much progress they’re making,” says Brender. The competitor could figure out how much coal had been found, how much it would cost to recover the environmental damage done by the massive excavators, and how much profit would be generated. With a sufficiently knowledgeable observer, you might be able to get a pretty good sense of whether or not the mining company would hit Wall Street’s estimates of its quarterly earnings.