As the HP scandal shows, some gumshoes will do what
most executives either can't or won't
It was Spy vs. Spy. Jerry I. Treppel had begun to suspect that someone was going
through the garbage that he placed on the curb twice a week outside his central
New Jersey home. Engaged in a bitter feud with Canadian drugmaker Biovail Corp.,
Treppel, a former
pharmaceutical analyst for Bank of America Corp., even had an idea who might be doing it. To be certain, he hired a private
investigator.
Sure enough, in the wee hours of the morning during several weeks in the fall of
2005, the PI, positioned behind a fence, filmed two men as they drove up in a
gray minivan, grabbed Treppel's trash, and even put some replacement garbage
back in the cans to try to cover their tracks. "I live in Edison. The
garbage [they put in] was from Perth Amboy," Treppel says. (It included,
among other things, pieces of discarded mail.)
Trailing the men back to their homes, Treppel's gumshoe quickly identified the
pair as Michael Specht and Edward Wong, investigators who live in neighboring
towns on Long Island, N.Y. Figuring out who had hired the two men would prove
astonishingly easy. After Treppel subpoenaed Specht and Wong to appear for
depositions in a lawsuit he is pursuing against Biovail, an attorney for the two
responded in a letter, stating that they "were retained by counsel for
Eugene Melnyk," Biovail's chairman. In an e-mail comment to BusinessWeek,
a Biovail spokesman said the company wanted to determine if Treppel was
destroying evidence that might be relevant to the litigation. Treppel and Melnyk
have asserted claims against each other for defamation, growing out of Treppel's
coverage of Biovail.
Compared with the techniques employed by Hewlett-Packard Co. in trying to discover the source of its boardroom leaks, rifling through
someone's trash is pretty tame. "Dumpster diving," as it is commonly
known, is generally legal. Obtaining phone records through impersonation, the
way HP investigators did, may be a crime. But both the HP and Biovail situations
stand out as rarities: The victims actually found out they were being spied
upon. Most people whose private letters, bills, telephone records, and e-mails
are scrutinized by unscrupulous snoops never find out.
But as the HP surveillance scandal unfolds, and new details emerge about how the
tech titan pried into the lives of board members and journalists, it is becoming
clear that even the bluest of blue-chip companies are sometimes willing to hire
corporate spies. HP is hardly an isolated example. Several prominent Hollywood
bigwigs and attorneys used the services of Anthony Pellicano, the private
investigator whom federal prosecutors indicted in Los Angeles in February for
illegal wiretapping. And Oracle Corp. acknowledged in 2000 that it hired detectives who had attempted to obtain the
trash of a think tank that defended the aggressive business practices of its
archrival, Microsoft Corp.
Then there are the cases we never hear about. Even when a company catches a
rival spying, the matter is generally resolved quietly, says John A. Nolan III,
chief executive of the Phoenix Consulting Group Inc., a business-intelligence
firm in Huntsville, Ala. "The guys who are having their clocks cleaned
don't want their shareholders knowing," he says.
Executives who hire private investigators share some common characteristics. For
starters, they are often desperate to get their hands on sensitive information:
Who is leaking my company's secrets? Why is this person attacking my reputation?
When is my competitor releasing its new product? Where are my goods being
counterfeited?
Second, those who retain investigators are unable to get the answers to their
questions through ordinary means. That's where the corporate spies come in. They
do things that most managers either can't or won't: tail people, adopt false
identities, trespass on private property, and dig through arcane electronic
databases. "Our industry is useful and is needed," says Michael J.
Hershman, head of the Fairfax Group, an investigative firm in McLean, Va., that
he founded in 1983. "Corporations are under attack from many criminal
elements, both internal and external."
Finally, the managers who hire PIs often feel their foes are fighting dirty.
Defendants in asbestos suits, after years of paying off people with weak cases,
have increased their use of detectives to scrutinize suspicious claimants.
Targets of aggressive interest groups have also been big consumers of corporate
espionage services. The owners of Ringling Brothers & Barnum & Bailey
Circus, for instance, paid agents through much of the 1990s to infiltrate groups
such as People for the Ethical Treatment of Animals, according to court filings
and testimony of former employees.
Corporate demand for PI services has grown steadily since the 1980s. One reason
is globalization. There is heightened need for information about people or
companies in far-flung locations. Then there's the fact that the most valuable
asset of corporations these days is information -- a company's ideas and
innovations. That's a lot easier to steal than, say, a machine press. Foreign
companies in particular, Hershman says, "are extremely aggressive in
seeking out proprietary information to get an advantage." Employees,
meanwhile, may be more ready to give that information up, since many feel less
loyalty to their employers than workers used to. Finally, a wave of statutes,
from the Foreign Corrupt Practices Act to Sarbanes-Oxley, create potentially
severe penalties for companies that aren't aggressive about rooting out fraud.
The vast majority of work PIs undertake for business clients is routine and
aboveboard. A whole industry has arisen that specializes in routine background
checks for rank and file employees. But when big companies want to bring on a
top officer or a director, they'll often get a PI firm to do a deep dive on a
candidate's past. That may involve old-fashioned shoe-leather techniques,
including visits to neighbors and former colleagues.
In the wake of the HP scandal, some of the more established private
investigative firms are arguing that most legal and ethical abuses are committed
by smaller outfits. HP assigned the leak probe to Security Outsourcing
Solutions, a tiny Boston PI firm. Some of the work was then subcontracted out to
other firms. The PI field is bedeviled by "cowboys," who "will do
whatever needs to be done to make the client happy, whether it's illegal or
not," says the Fairfax Group's Hershman. "We're constantly battling
the folks who are on the edge, and frankly there are a lot of them."
The behemoth of the corporate intelligence world is New York-based Kroll Inc., a
unit of Marsh & McLennan Cos. With nearly 4,000 employees in 25 countries, Kroll reported 2005 revenues of
$946 million, though only a portion of that came from PI work, since the firm
offers many other services. Hundreds of midsize and boutique firms such as
Fairfax, some bristling with former prosecutors or federal agents, also cater to
the market. They typically charge by the hour, with rates ranging from about
$125 to $400 an hour.
All in all, about 60,000 private investigator licenses are active in the U.S.,
according to an estimate by PI Magazine. It is not uncommon for a
license to be issued in the name of a firm, which means many individuals may
operate under it. "There's also a huge, unlicensed market out there,"
says Bruce Hulme, legislative director for the National Council of Investigation
& Security Services.
Big companies often turn to obscure players to do their digging. Consider Spyro
Contogouris. He is "an operative for short-selling hedge funds that pay him
to drive down the price of stocks [and] otherwise to secure material nonpublic
information," according to a complaint filed in New Jersey's Morris County
Superior Court by Fairfax Financial Holdings Ltd. , a Toronto-based insurer. In addition to Contogouris, defendants include a
host of hedge funds and individuals.
SLEAZY ANTICS
On May 31, according to Fairfax' complaint, Contogouris "lied his way past
security" at a Fairfax subsidiary in London by stating that he was a
reporter conducting a survey. The next day, Contogouris, who also hands out
business cards stating that he is a "special situations research
consultant" for "MI4 Reconnaissance," hand-delivered an unmarked
package to Fairfax' former chief financial officer, Trevor J. Ambridge. It
contained a letter that tried to induce Ambridge to divulge inside information,
Fairfax' suit alleges. "I would like to lay out a series of maps, flow
charts, and related exhibits which I have put together that I feel are missing
some critical pieces," the letter stated, according to an excerpt in the
complaint. Then came what Fairfax alleges was a "veiled threat that failure
to cooperate would result in Ambridge's criminal prosecution." Ambridge
alerted Fairfax. "The charges in the lawsuit are without merit," said
a spokesman for Contogouris.
The alleged antics of Contogouris may seem sleazy, but hiring big, brand-name
investigative firms is no guarantee of avoiding controversy. For the past three
years, several Russian businesses have been battling for control of a 25% stake
in Megafon, a large Russian mobile-phone company. Much of the wrangling has
taken place in arbitration proceedings in Switzerland, but part of it recently
landed in U.S. courts. Two prominent American investigative firms have been
caught in the fray.
In a complaint in federal district court in Washington in June, IPOC
International Growth Fund alleges that Diligence Inc., a Washington-based
investigator, infiltrated a confidential examination of IPOC's affairs being
conducted by KPMG Financial Advisory Services for the Bermuda Finance Ministry.
IPOC alleges that Diligence did this through "impersonation of United
States and/or British intel- ligence agents," and that it obtained
confidential documents from KPMG's inquiry through "fraud and
bribery."
Founded in 2000, Diligence is a relative newcomer to the corporate
investigations business. But it is nothing if not well connected. Richard Burt,
a former assistant Secretary of State and U.S. ambassador to Germany, is
executive chairman, and the firm's advisory board includes William Webster,
former head of both the CIA and FBI, and Thomas F. "Mack" McLarty,
former chief of staff to President Bill Clinton. Diligence did not return a call
seeking comment.
In Geneva, meanwhile, in May, 2004, Bernard F. Meyer-Hauser, the chairman of the
arbitration panel hearing part of the Megafon dispute, announced to the parties,
each represented by prominent U.S. law firms, that he had filed a criminal
complaint with the Swiss police. The reason, he said, was that he had "been
shadowed by several investigators" who had "watched my house" and
"taken photographs of all my contacts within the last four weeks."
Meyer-Hauser said local Private Investigators told him and the police that they had been retained
by Kroll out of its London office. He said they appeared to be looking for
evidence that he had been bribed. (He denied receiving any bribes.) Meyer-Hauser
also said that an effort was made to get access to his personal bank account by
someone who spoke English and said he was calling from London. The person knew
Meyer-Hauser's Visa account number and wife's name but tripped up by giving the
bank representative a partially incorrect address. In an e-mail, Meyer-Hauser, a
Zurich attorney, declined to comment. A spokeswoman for Kroll said: "We
don't break the law and don't ask others to do it for us."
Big firm or little firm, the bottom line is clear: Any client who hires a
corporate detective is taking a chance. That's because the PI industry is full
of people who are not aware of the many legal, ethical, and public relations
traps that surround big companies. Detectives frequently come from law
enforcement, where "few people would disagree that it's O.K...to lie to
suspects who are rapists and murderers and child molesters to trick them into
giving information," says Alex Kline, a solo investigator in San Francisco
who has worked for a number of larger agencies. But when these people transfer
to a private setting, "it can lead to disaster if they don't use good
judgment."
