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The Digital Detectives

The Burgeoning World of Corporate Security Has Gone From Cloak and Dagger to Computers and Databases
Daren Fonda
From the Print Edition:
Denzel Washington, Jan/Feb 98

(continued from page 3)

Imagery aside, corporate detectives still do the occasional "dumpster dive." If an employer suspects an executive of embezzlement, he might ask detectives to conduct an operation known as "tossing an office." The procedure involves entering the suspect's work space late at night, rifling through file cabinets, desk drawers and yes, trash bins, looking for scribbled phone numbers and scraps of evidence. Usually, however, hacking into a hard drive and trolling for digital footprints--log-in records, deleted letters recoverable from the system's memory banks--is more fruitful. While white-collar thieves may be scrupulous about shredding hard copies, say investigators, they rarely cover all their digital tracks. Bart Schwartz says he recently investigated a case in which a plant manager was suspected of stealing computer programs essential to the company's manufacturing process. Schwartz's detectives discovered that the manager had copied the programs from an internal computer network onto his laptop. But he had negelected to delete a backup file of the transfer, which Schwartz's agents discovered, thus pinpointing the theft. Schwartz said the case is pending in court.

Detective work like that can be dicey, however. Inept snoops who don't cover their own tracks--say, by forgetting to re-order icons on a suspect's computer screen--could jeopardize a long-planned sting or ignite a spate of nasty legal actions. But for much of the routine corporate investigative work, detectives need never venture beyond their computer terminals. Agencies typically subscribe to hundreds of private and commercial databases, enabling armchair hunters to cross-check an individual's credit card purchases, say, with property titles and checking accounts in different states. Prior bankruptcy filings, medical records, hotel bills, even what videos a suspect rented, are all available at the click of a mouse. Since many corporate detectives hail from federal law enforcement backgrounds, they can often access government databases through inside contacts. The result is that PIs now travel less, conduct fewer phone interviews or face-to-face meetings, and can cut down on surveillance operations that can be both costly and nerve-racking to clients. As one investigator quipped: "Staying in-house makes clients less nervous."

In 1972, when Jules Kroll opened his shop with a single New York office, the corporate investigative business barely existed. The dominant player was still the granddaddy of them all: the original Pinkerton's Detective Agency, where the hardboiled novelist Dashiell Hammett apprenticed before the First World War. The rest of the field was made up mostly of solo practitioners, who provided private security and did the occasional matrimonial or missing persons jobs. None, though, were offering corporations the kinds of services Jules Kroll plied. Unlike the former beat cops and ex-police detectives who staffed many agencies, he carried a set of credentials that corporate powerbrokers could appreciate: a graduate of Cornell University and Georgetown Law School; a former assistant district attorney in Manhattan. He wore the trappings of a well-bred executive and came armed with legal knowledge, boardroom negotiating skills and expertise in workplace crime.

Kroll started out advising companies on how to prevent fraud and kickback schemes in their purchasing departments. He brought in professionals of every creed: investigative accountants, district attorneys, FBI agents. The business was as much fraud detection as prevention, and by the early 1980s, Kroll expanded to the more lucrative field of due diligence--checking out a company's assets or holdings for potential buyers. Wall Street started paying attention, as Kroll got press for derailing a number of hostile takeover attempts during the mergers and acquisitions craze. In one celebrated case, Kroll fended off an attack by the Miami raider Victor Posner on Foremost McKesson, a pharmaceuticals and liquor distributor. Kroll obtained aerial photographs showing that Posner overstated the assets of his takeover company. The pictures caught the attention of the IRS, which then prosecuted Posner for tax evasion, forcing him to retreat from his assault. In another well-known case, Kroll had a hand in rebuffing Amway's $2.1 billion takeover bid of Avon. Kroll investigators discovered that Amway's chief operating officer, William W. Nicholson, was a defendant in a $1.8 million embezzlement suit and had been sued numerous times for allegedly defaulting on bank notes. The revelations reportedly dislodged Amway's board, prompting the company to drop its bid for Avon. By 1989, Kroll's services were so popular that in the $25 billion battle for RJR Nabisco, the company's detectives were reportedly forced from the game: all the competing parties were clients.

As the takeover and merger accounts dried up, Kroll used its muscle to expand overseas. Particularly noteworthy were Kroll's international asset investigations. In one case, Kroll, working for some Utah banks, identified more than $100 million in hidden assets held by the Saudi financier Adnan Khashoggi. The findings prompted Khashoggi to settle a $32 million debt with the banks. Kroll also grabbed headlines for locating millions stolen by Philippines dictator Ferdinand Marcos and for tracking Haitian dictator "Baby Doc" Duvalier's off-shore fortune, reportedly stashed in several European and U.S. bank accounts.

Another high-profile case came in 1991, when the Russian government hired Kroll to locate billions believed to have been siphoned from the treasury by party officials. Kroll reportedly sought records from Russia's major food and oil suppliers and discovered legions of shell companies and secret accounts. The information was then turned over to Russian Prime Minister Yegor T. Gaidar. (Sources say actual recovery successes were never fully disclosed.) Around the same time, Kuwait paid Kroll more than $100,000 a week to hunt down Saddam Hussein's immense stash of assets, worth an estimated $10 billion. According to a 1991 Time article, the trail included a $3.5 million Beverly Hills mansion and a Panamanian shell company called Montana Management, which Hussein used to buy an 8.4 percent stake in the magazine publisher Hachette.

Today, however, Kroll faces a tougher sell for its services. The Big Six accounting firms are all expanding their investigative units. Price Waterhouse, for instance, more than doubled its forensic accounting and investigative staff in the past two years to 600 members. "White-collar investigations is the fastest growing segment of our practice," notes Frank Piantidosi, a Price Waterhouse regional managing partner. Competition from the Big Six is also forcing Kroll to defend its steep fees--which critics charge are among the industry's highest. Many of Kroll's investigations last two to three weeks and cost about $10,000 to $15,000, and analysts say clients get a shock when their bills arrive. Kroll's Ernest Brod denies that charge--arguing that clients may request a flat fee for services. He also says that 75 percent of Kroll's revenues come from repeat business.

Nevertheless, Kroll's problems have been compounded by reports that the firm is hemorrhaging top talent. Managing directors have quit from Kroll's London, Los Angeles and New York offices. Some went to accounting agencies such as Coopers & Lybrand; others, like Bart Schwartz, left to form their own shops. Though harmful in its own right, the attrition may also have hindered Jules Kroll's attempts to cash in on his firm's success by selling the agency or merging with another one.

Kroll had posted what some describe as a "for sale" sign since at least 1991. That was when the company announced plans to merge with Business Risks International, a Nashville-based detective agency. The deal collapsed, however, as did talks with other detective agencies and Coopers & Lybrand. Finally, in April 1997, Kroll seemed to locate a worthy suitor in the insurance data-collection firm, Choicepoint--a recent spinoff of Equifax Inc., the consumer credit-reporting company. Analysts say that the merger would have been perfect for Kroll, combining the company's investigative expertise with Choicepoint's massive databases of consumer credit information. "It would have been a brilliant acquisition for both sides," says a source close to the deal.

But Jules Kroll stunned the industry a few months later when he shunned Equifax's $70 million bid, choosing instead to merge with the O'Gara Co. Kroll told the Times that O'Gara lured him with more money and greater control. O'Gara offered 6.75 million shares of its stock--valued at about $81 million at the time--plus $14 million to wipe out the company's debt. O'Gara also enticed Kroll by agreeing to make him chairman and chief executive officer.


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