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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 6)

His name was Hunt. He grew up in the Bronx and landed a job at M.D. Sass Investor Services, a private New York money management firm with billions in accounts. He was working as a clerk, and by age 27 was arranging wire transfers for the firm's clients. When clients requested cash, he would call the brokerage houses where the money was invested and instruct them to deposit the funds in Barclays, Sass' custodial bank for cash management accounts. Then he would order Barclays to transfer the cash to his clients' account.

He soon discovered he could siphon off millions. According to investigators, he realized he could request more money than his clients demanded and pocket the difference. He would instruct Barclays to wire the money into a Sass profit-sharing account at the brokerage house Bear Stearns. From there, he could fax instructions to Bear Stearns to wire the funds to one of his own accounts. The instructions required a signature from Sass' chief financial officer, which he photocopied and placed on the letter. Clients wouldn't notice the losses because he could hide them in the firm's multi-layered accounting system. Investigators said he tested the plan slowly and found it virtually flawless.

He started living the fast life. He bought two large houses in the Hamptons, where neighbors said he held huge parties. He took gambling trips to Las Vegas and Atlantic City and spent thousands on concerts and sporting events. He bought more than 30 sports cars, including a Porsche, Lamberghini, a Jaguar and several Grand Prix racing cars. He competed in races and operated his own racing company. He was "a magnet for women," investigators said.

Sass coworkers noted that he frequently wore new Giorgio Armani suits to work. But he was always "meticulously" dressed, said a former colleague, and the company had no reason to suspect he led such a dashing double life. He tripped up, though, when he sold two sports cars to an auto leasing company in Atlanta. The FBI was investigating the car buyer and his leasing company for a separate fraud matter when agents discovered a transfer of more than $200,000 to one of his Merrill Lynch accounts. They froze the account, and Merrill Lynch notified his bosses at Sass. A little digging revealed that he may have embezzled millions. But the firm didn't know the scope of the scam, or how it had transpired. A decision was quickly made: Call Kroll Associates, New York's leading white-collar detective agency.

On an early August afternoon in 1996, Kroll's New York office received a "panic call" from M.D. Sass. The investment firm expressed grave concerns. The FBI had frozen some of the suspect's bank accounts, so he knew he was under investigation. But the company was reluctant to confront him or call the police without getting more details. The situation was urgent because Sass feared that he might try to flee in a take-the-money-and-run scenario. The lawyers wanted Kroll's advice, fast.

After reviewing the case, Kroll's operatives quickly came up with a strategy. The best tactic, they reasoned, would be to try to strike a deal with the suspect. They would be there for backup, and could try and persuade him to surrender peacefully. By hitting him with the evidence they had--and intimating that they would soon discover more--he might be persuaded to cooperate.

The plan worked. The suspect and his attorney sat down with Kroll agents and Sass lawyers. He admitted to the theft and agreed to help recover the stolen funds.

Kroll's detectives soon uncovered a nearly $14 million loss. Along with the accounting firm Deloitte & Touche, they located more than 50 accounts that he had set up with banks and brokerage houses using separate or similar names. They discovered he laundered loot through front companies listed as Q2 Projects and Grand Prix Motor Sports. They found a note suggesting that he'd secreted $3 million to an offshore bank account. They scoured thousands of his papers, unearthing payments to friends, casinos and a cash flow through dozens of shell companies in different states. They recovered more than $5 million. Most of the rest, they concluded, had simply been lost or spent.

Five months later, Hunt pleaded guilty to one count of bank fraud and was sentenced to six years in prison.

Foraging along the paths of stolen millions isn't unusual for Kroll Associates. The detective agency has tracked and nabbed assets plundered by some of the world's most notorious thieves--from Saddam Hussein to former Russian government officials who plundered state enterprises. Kroll clients include some of the biggest names in corporate America: Time Inc., General Motors, KMart, Goldman Sachs. The U.S. government has even been known to call on Kroll. When federal prosecutors were planning a sting against Charles Keating's Lincoln Savings and Loan empire, Kroll handled the job: in 1989, a Kroll SWAT team, led by a former Green Beret commando, raided two of Keating's Arizona hotels, securing computer data, financial documents and paintings worth millions. In the mid-'90s, Orange County, California, paid Kroll to investigate its management procedures after county officials lost more than $1.7 billion trading derivatives.

Based in New York, Kroll has 26 offices worldwide, with 350 employees and a support network of more than 1,000 freelance investigators. With its recent merger with the O'Gara Co.--an armored-vehicle maker and security services firm--it is at the center of a burgeoning service industry for corporate America. For Kroll and hundreds of other detective agencies, corporate investigations are booming. Though clients rarely admit hiring detectives, demand for PIs has grown sharply. The number of licensed U.S. private investigators rose 28 percent between 1990 and 1994, to more than 90,000. Expenditures on private eyes is expected to top $4.6 billion by 2000, up from $850 million in 1980, according to the American Society for Industrial Security. Some firms, which once earned most of their cash tailing wayward spouses, now report 70 percent of their income from corporate investigative work.

The media still labels them muckrakers of the flashbulb-and-trenchcoat set. But they are more than Sam Spades in suits. Out in the field, they sport hacking software, laptops and cell phones. They also boast advanced degrees and impeccable crime-fighting credentials. Their ranks include forensic accountants, former organized-crime prosecutors, attorneys versed in environmental and securities law, computer security experts and Ph.Ds in the behavioral sciences. Top firms attract some of the nation's top law enforcement officials. The president of I.G.I.--a well-connected Washington, D.C.-based agency--is Larry Potts, a former deputy director of the FBI. And until last May, Kroll's president was Robert McGuire, a former New York police commissioner.

Industry analysts say companies hire private eyes as part of standard "risk management." Investigators sell peace of mind: a background check on a job candidate; an assurance that executives aren't padding expense accounts. "Companies don't want to be found negligent for failing to do a background check," says one New York investigator. "That can have consequences for insurance claims and could expose companies to criminal liability, civil penalties and risk to their business reputation." He points out that a routine legal pre-transaction assignment--like a due diligence report for a new business partnership--now often requires extensive profiles of the target firm's senior managers, their medical histories, financial backgrounds and personal relationships.

Of course, companies caught bankrolling private eyes to dig dirt on their enemies risk a public relations nightmare. In the mid-'60s, the media pounced on General Motors when detectives for the automaker were caught trying to discredit consumer advocate Ralph Nader, who was publicizing defects in GM's ill-fated Corvair. Recently, claimants in a class-action lawsuit against Texaco sued the company and its private investigator for privacy and civil rights violations. The investigator allegedly obtained claimants' telephone logs, work histories and records of unpaid traffic tickets, among other personal facts, in an attempt to sabotage their litigation claims.

Why are some of the nation's largest corporations hiring PIs? "Companies have learned that if they're victimized and do nothing about it, they may be victimized again," says Bart Schwartz, president and chief executive officer of Decision Strategies/Fairfax International, a New York-based agency. "They're afraid of the schemes that are out there."

Schwartz is an ex-Kroll executive and a former U.S. Attorney under Rudy Giuliani in New York. He opened his shop as a solo practitioner in 1991 and now has dozens of investigators on staff. Last August, he merged his firm with The Fairfax Group, a Virginia-based agency. The new company will operate from 20 offices around the world and supply an array of fraud detection and investigative services.

Part of the reason for the industry's growth, Schwartz says, is that corporations think they're more vulnerable to in-house crimes. At scores of large companies, layoff waves from the early 1990s left more power consolidated among fewer employees. With fewer checks and balances in the system, opportunities for kickback schemes, money laundering and plain old pilfering have mulitplied. Employees haven't necessarily become more dishonest, says Schwartz. There are just more ways for them to take advantage of loopholes in labyrnthine accounting systems. "The crimes are more complicated," says Schwartz, "and companies don't want to spend the money retraining their own security departments."

Corporate detectives also seem to be capitalizing on the wave of U.S. companies setting up joint ventures abroad. Firms want to know if their foreign business partners may be fronts for money laundering, if their factories are producing counterfeit goods (a problem rampant in the fashion industry), or if government contracts have been won through bribes or kickbacks. Detectives aren't the only ones investigating such matters. Consulting firms such as Price Waterhouse, with their own investigative divisions, also proffer "business intelligence." But detective agencies are often employed for their surveillance expertise and international espionage network. The breakup of the Soviet Union left thousands of former Cold War spies jobless, and many now conduct covert operations for private eyes. With contacts in intelligence agencies, former spies can develop information on local business leaders and government officials that detectives may then sell to their customers.

Naturally, not all jobs involve extensive espionage. Agencies such as Decision Strategies are often hired just to stamp clients with a clean bill of health. In 1996, for instance, Schwartz conducted an eight-month internal probe for Western Beef, the $300 million publicly traded supermarket chain. Investors were avoiding the company because of allegations that it had links to the Gambino crime family. The company's chief executive, Peter Castellana Jr., enlisted Schwartz to investigate the company's books and records and help clear his name. Schwartz's detectives scrutinized the financial dealings of top managers and executives and analyzed accounting records. Their report found no evidence of wrongdoing and the company's stock rose considerably once the findings came out.

For firms such as I.G.I., cracking so-called "whitemail campaigns" has proved lucrative in recent years. In such cases, clients suspect an enemy of spreading rumors about their business or stock, and hire detectives to locate the culprit. "We now have a division with five full-time investigators working on these kinds of cases," says I.G.I. chairman Terry Lenzner. "We've handled cases where Silicon Valley companies have been targeted by short-sellers [traders who profit when the stock price falls]. They short massive amounts of the stock, and if it doesn't go down they leak negative information to the press or tip the FBI that the company may be a mob front. Usually the allegations are false and they can be charged with market manipulation or violating securities laws."

I.G.I. is considered one of the country's top three agencies (along with Kroll Associates and Decision Strategies/Fairfax) for large corporate investigations. Lenzner co-founded the firm in 1984, after a storied career as a Watergate prosecutor and private litigator--training that made him an ideal corporate sleuth. As deputy chief counsel for the Senate Watergate committee, he tracked millions in illegal contributions to president Richard Nixon's reelection campaign fund. After Watergate, as an attorney in private practice, he issued a massive report to the state of Alaska in 1977, documenting corruption and $1.5 billion in cost overruns in the building of the Alaska pipeline. He spent most of the next decade litigating claims against the contractors; when the suits finally ended, in 1986, the state had won more than $1 billion in settlements.

As a private detective, Lenzner works mainly for corporate interests. His 1992 report on corruption at the United Way of America brought down the charity's longtime president, William Aramony. The same year, he was hired by Martin Marietta and Lockheed to help prevent the LTV Corp. from selling its $300 million missile division to the French electronics giant, Thomson CSF. Both American companies had bid unsuccessfully for the business, and to persuade the Bush Administration to block the sale, they commissioned I.G.I. to investigate Thomson's sale of equipment to Iraq and Libya during the 1980s.

Aside from the corporate work, Lenzner has snooped for clients ranging from The Beatles, to Teddy Kennedy, to Ivana Trump, who commissioned him to look into the affairs (mostly business) of her ex-husband during their divorce proceedings. Then there was the case of one of America's greatest art heist: the 1991 theft of 13 paintings, including a Vermeer and Rembrandt's only known seascape, from the Isabel Gardner Museum in Boston. The paintings are still missing. But Lenzner says he has some new leads. "There are now two men in jail who claim to know where the paintings are being kept and are demanding the $5 million reward along with immunity against prosecution," he says of the ongoing case. "We're investigating their background to see if they're legitimate."

Last year, Lenzner landed another plum assignment: investigating contributions to President Clinton's 1996 reelection campaign, mainly due to his Watergate experience. Lenzner won't comment on his discoveries, but he did confirm that his client, the Democratic National Committee, returned "several million" in contributions to questionable donors based on money trails he uncovered.

For obvious reasons, I.G.I. and other agencies won't divulge their investigative methods. When asked how Kroll Associates gathers its "business intelligence," Ernest Brod, executive managing director, would say only, "We are out there not only working from the databases and the records in the way that consulting firms or investment banks are. We talk to former employees of companies. We look into the backgrounds of principals and executives of potential joint venture partners. We look into integrity issues, and operating strengths and weaknesses."

Like other agencies, Kroll says it operates under a strictly enforced code of conduct. To ease clients' concerns about unethical practices, Kroll has for years employed an in-house monitoring staff that polices the company's detectives. Other agencies vaunt similar claims. They say their business hinges on an understanding with clients that their stealthy ways won't jeopardize company secrets or kindle a criminal or civil suit for invasion of privacy. "That is our worst nightmare," says Decision Strategies' Schwartz.

Yet even top firms such as Kroll sometimes defend their snooping ways in court. In 1984, Philips Petroleum hired Kroll to dig up dirt on the corporate raider T. Boone Pickens, who was planning a hostile takeover of the oil giant. Pickens persuaded a Texas judge to issue a temporary restraining order against Kroll detectives. In court transcripts, his attorney claimed they were harassing members of his country club, former employees and family members in his home town of Amarillo, Texas. The order was overturned within 48 hours by a judge, who ruled that Kroll's questions were warranted.

In another 1980s case, Kroll agents working for Goldman Sachs were accused of impersonating a journalist and police officer when investigating Martin A. Siegel, the financier prosecuted for insider trading. When asked recently about the case, Kroll refused to comment. However, in a 1994 New York Times interview, Jules Kroll conceded that detectives working for the firm had occasionally skirted company policy by obtaining bank and telephone records of a target. Kroll told the Times that the company's "biggest black eye" came in 1990, when a Delaware judge forbade Kroll operatives from misrepresenting themselves while interviewing employees of a chemical company. Kroll's defense today: "It was a clever tactic by companies on the other side to chill our investigation," says Brod. "Nevertheless, we took it seriously, and we continue to take steps to make sure no one connected to our company oversteps the law."

Perhaps led by Kroll's example, the industry as a whole is trying to clean up its seamy public image. Many firms now operate out of well-heeled office towers, their sleuths as anonymous as Fortune 500 executives. The term "private investigator" has been replaced with tonier titles such as "investigative consultant" or "risk management specialist." And agencies are expanding their product lines, aggressively marketing them for corporate buyers. Kroll, for instance, offers a travel advisory service which alerts executives to politically unstable regions and terrorist threats in nearly 300 cities around the world. Another specialty from Kroll is classes in terrorism-avoidance for selected business clients (some tips: don't travel alone, vary driving and walking routes, carry a working cellular phone, don't accept drinks from strangers).

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.


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