Broker, Trader, Lawyer, Spy (25 page)

She soon went to work for a private company as a security manager, and before long turned to the private sector to find operatives she could trust. And like Nick No-Name, Emma Shaw found that the market lacked military-grade surveillance expertise, and executives had almost no knowledge of the state of the art in the trade. In 1998 she set up shop as a consultant advising companies on how to hire surveillance operatives. That business eventually developed into “esoteric,” which provides surveillance services to companies and to spy firms.

For a fee, her company tails executives, and provides covert, but legal, video and audio surveillance. It also helps discover and destroy the same devices planted by a company’s opponents. Shaw’s employees offer electronic sweeping services, searching out cameras and listening devices in offices, executives’ homes, and corporate
jets and yachts. Esoteric says it can set up microwave-transmission cameras to watch specific locations for long periods of time, allowing the images to be monitored from a remote location. It advertises live vehicle tracking services, which are handy for companies that want to keep covert tabs on the whereabouts of their own sales staffs and vehicles. All her services, she says, are legal. And all of them are expensive. Electronic sweeps of a set of six offices costs between 4,000 and 5,000 pounds sterling. Surveillance costs 1,000 to 1,500 pounds per person per day—with teams that can be nine or ten strong. The costs add up.

Sitting at the conference table in her office, Shaw sounds more like a corporate marketer than a spy. “What we set out to do was provide our services to very high-end corporate organizations,” she explains. In fact, she herself is working on an MBA.

One of the few indications that there’s anything out of the typical corporate experience here is a small trapezoidal white box mounted on the ceiling, with a single blinking green light on the surface. The device, called E-room, was designed and built by Shaw’s team. It monitors radio frequencies inside the room. It sounds an alarm if it detects any unauthorized transmissions. E-Room can also send an e-mail to a designated computer, alerting the user of illicit eavesdropping attempts. Shaw says she knows there are no bugs in a visitor’s briefcase, because if there were any, the E-room system would have identified them already.

Shaw spends her day largely immersed in the ugliest side of the global economy, investigating theft, fraud, insider trading, breach of contract, and harassment on behalf of lawyers and corporate clients. She also handles straight competitive intelligence cases, in which her client is spying on another company to determine its secrets. Shaw says companies use surveillance for “anything where there is either a risk to employees, or a risk to the company or the intellectual property of that company.”

In one case, Shaw’s company went to work for a large research and development company that suspected a member of its senior
management was providing details of products to a competitor. Esoteric describes the results in its brochure:

In another case Shaw discusses, her company went to work for a real estate development firm at which several employees had recently quit at the same time. The bosses suspected that the departing employees had stolen client lists and client information. What’s more, the company suspected that the former employees were setting up a new business based on those stolen details.

Shaw began surveillance on the former employees with teams following four subjects for six to eight weeks. The surveillance operatives tailed the ex-employees to a printing shop, where one of the employees photocopied site plans. Esoteric’s operative, wearing a baseball cap in which a covert imaging device was embedded, approached the photocopier, getting close enough to take clear pictures—with the camera in his cap—of the site plans that the unwary ex-employee was busy photocopying.

Over the next few weeks, the spies discovered that the ex-employees were visiting potential real estate development sites, that they had leased space, and that they had hired people to work for their fledgling firm. On one day, one of Shaw’s surveillance teams followed an ex-employee to the bank, and using the same
camera cap, photographed the bank account manager. The operative moved in to get pictures of the documents on this manager’s desk, images which when enlarged revealed bank account numbers, financial figures, and transaction details. “We can get in quite close,” says Shaw, even in a security-conscious environment like a bank, but “not in all circumstances, not in all banks.”

The team leader phoned the client while the subject was still in the bank, reporting, “This is what’s going on right now. Is this of interest to you?” In hard-fought legal battles, there can be injunctions or prohibitions in place against certain activities. The surveillance team’s client may swing into action in real time to stop the suspicious transaction. In this case, all the details gathered were invaluable information for the client’s lawyers when the ex-employees’ former firm filed suit against their new company for breach of contract.

In every case, a surveillance operation produces a detailed log, in which the operatives note the dates, times, and addresses where surveillance took place. At the end of each day, the team members gather for a debriefing session. They go over the logs to check for any inconsistency, or add details that couldn’t be noted down on the fly. Each operative signs the log with a coded number, and stands ready to serve as a witness in a client’s court case, verifying in court that the activity noted in the report took place. “The client may have a summary report, but if they want it, they have access to and they can have a copy of the surveillance log itself,” says Shaw.

In the cases she describes, Shaw portrays her operatives as coming to the aid of a company that’s been wronged in some way. But she concedes that her firm also works for clients seeking, within the bounds of the law, to do harm to a competitor’s business, typically by ferreting out important information. In such cases, the surveillance isn’t defensive, to preserve the client’s standing in the market; it is offensive—to bring a competitor down.

To her credit, Shaw is unflinching in discussing this less
genteel side of her business. Industrywide, she estimates that the division between defensive and offensive intelligence gathering is about fifty-fifty. “Surveillance is a fact of life,” she says. “We’re all recorded I think an average of 300 times a day in the United Kingdom through [closed circuit television].” Indeed, in 2002 one report estimated that Londoners—who live in one of the most surveillance-heavy cities in the world—are monitored every day by more than 500,000 closed-circuit television cameras: about one camera for every fourteen people.
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What’s more, Shaw says, there’s an enormous and growing demand for competitive intelligence in the global economy. “Some companies want to find out what their competitors are doing; everybody does. And I think anybody that says they don’t want to know what their competitors are doing are not actually being truthful about it.” In Shaw’s mind, there’s nothing untoward about using veteran intelligence operatives to spy on the competition. Asked if spying on people’s business lives feels illicit or even creepy to her, she replies, “Generally, no. We deal with very legitimate investigations.”

The limits Shaw puts on herself are broad, but they are definable. Her company won’t do anything illegal, she insists. “If you can observe somebody in public space, in public activity without infringing on their privacy or without going illegally into their premises, by breaking and entering or stealing and things like that, then people will be prepared to do that. There are also people who will be prepared to go that little bit farther and do that breaking and entering, but that’s not something we’re involved in.”

Shaw also restricts her team from placing families of subjects, particularly children, under surveillance. And she insists that if in the course of following a subject her operatives come across information that’s not relevant to the business question at hand—say, if a subject stops off at a hotel for a quick tryst before heading home to his wife—her investigators will not record that information or
provide it to their client. “You don’t go recording that person when they’re with their family in their private space; you don’t go trying to put cameras inside their house whilst they’re inside their own home. That’s certainly not the work that we get involved in.” She may have her limits, but not everyone in her industry does.

S
OMETIMES, SURVEILLANCE IS
used not for business, but for pleasure. In one case, several sources say that a high-living hedge fund executive used a corporate spy firm to conduct intelligence operations against a Hollywood actor. Why did he do it? Reportedly, the hedge fund executive had fallen in love—or lust—with the actor’s model girlfriend.

The financier—who will remain nameless in this account—was up against some steep competition, and he’d need every advantage he could get. The Israeli model who caught his eye was Bar Refaeli, a globe-trotting beauty who was dating the Hollywood actor Leonardo DiCaprio, who had starred in
Titanic
and
The Departed.
Soon DiCaprio would become a target of corporate spies, the sources claimed.

Bar Refaeli, the first Israeli model featured in
Sports Illustrated
’s famous swimsuit issue, was born in 1985 in Hod HaSharon. She began dating DiCaprio soon after she attained stardom, and tabloid reporters reveled in the details when the photogenic couple strolled along Paris’s beautiful Champs-Élysées holding hands.

At the same time, the financier, too, began to take an interest in Refaeli. In late 2005 or early 2006, recalls Bar’s mother and manager, Tzipi Refaeli, the money man met the model, and asked her to lunch. Tzipi says she spent one entire evening at the financier’s side, and came away unimpressed: “He’s nothing to write home about,” she says. She found him shallow and materialistic. “All he can do is buy, buy, buy. Not many people will say no.”

According to her mother—who, like many mothers, may not have all the details—Bar Refaeli is one person who did say no to
the financier, rebuffing his romantic overtures and telling him that she’d rather just be friends. Undeterred, the sources claim, he hired a well-known private spy firm to dig up dirt on DiCaprio that could be used to drive a wedge between the actor and the model.
Does DiCaprio have any bad habits? Is he sleeping around?

According to one account, the spy firm conducted surveillance on DiCaprio in Cape Town, South Africa, where he was filming the movie
Blood Diamond
in the spring of 2006. According to another story told by insiders, the spies tried to get photos of DiCaprio with other women during a trip to the Caribbean. The ultimate prize would be a photograph of DiCaprio in the arms of anybody other than Bar Refaeli, which could be leaked to the media or mailed to Bar. Presumably, if she was confronted with evidence of DiCaprio’s treachery, Bar would be more easily lured into the waiting arms of the financier.

It is important to note that one spy in a position to know denied the existence of the project. In any event, the project, if it existed at all, seems to have fizzled, and DiCaprio and Refaeli continued dating until their reported breakup in the spring of 2009. For as much as two years longer, though, the financier continued to send e-mails to Bar Refaeli, although her mother says she gave up replying to them. “She’s very loyal,” Tzipi Refaeli says. Tzipi says that Bar never received suspicious photographs or other evidence against DiCaprio, and was never aware that the spy team was interested in him. But Tzipi doesn’t doubt the story, either.

“I am not objective,” Tzipi says; but “she is beautiful. She is really a very good girl. She’s pretty, nice, intelligent, young, Jewish, Israeli, and successful. It’s very easy to be in love with her.”

A collection of random facts—even random secrets—isn’t worth much unless you can put it together so as to understand what the data tell you about the real world. Beckett Brown faced that problem with the reams of data coming in from its surveillance of Mars, Inc. How do you know what’s important, and what’s not? Which information is going to move markets, or affect the competitive picture?

One company that specializes in the analysis side of the private intelligence business is Verbatim Advisory Group, based in Boston. Verbatim’s squadron of analysts gather information and weave it together to produce what the government calls “actionable intelligence.” The firm’s theory is that investigators need enough data points confirming a thesis before they’ll recommend any action. It’s not enough to have one source telling you something. You want to hear it over and over again from people in the know before you act on it.

In September 2006, four different steel buyers around the world got calls from Verbatim’s analysts. The analysts were fishing for specifics:
What’s the Arcelor Mittal steel company up to now? What kind of capacity does it have? And what about pricing?
That fall, Arcelor Mittal, a London-based company with roots in India, faced
uncomfortably high steel prices—and Verbatim’s analysts wondered what Arcelor would do about this.

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.

S
PIES 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 information 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.

T
HE 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.