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  • CIA Operatives Moonlight In Corporate World

    CIA OPERATIVES MOONLIGHT IN CORPORATE WORLD
    by Eamons Javers

    Politico.com
    Monday, February 1, 2010

    This article is adapted from the author's forthcoming book, 'Broker,
    Trader, Lawyer, Spy: The Secret World of Corporate Espionage.'

    In the midst of two wars and the fight against Al Qaeda, the CIA is
    offering operatives a chance to peddle their expertise to private
    companies on the side - a policy that gives financial firms and hedge
    funds access to the nation's top-level intelligence talent, POLITICO
    has learned.

    In one case, these active-duty officers moonlighted at a hedge-fund
    consulting firm that wanted to tap their expertise in "deception
    detection," the highly specialized art of telling when executives
    may be lying based on clues in a conversation.

    The never-before-revealed policy comes to light as the CIA and
    other intelligence agencies are once again under fire for failing to
    "connect the dots," this time in the Christmas Day bombing plot on
    Northwest Flight 253.

    But sources familiar with the CIA's moonlighting policy defend it
    as a vital tool to prevent brain-drain at Langley, which has seen an
    exodus of highly trained, badly needed intelligence officers to the
    private sector, where they can easily double or even triple their
    government salaries. The policy gives agents a chance to earn more
    while still staying on the government payroll.

    A government official familiar with the policy insists it doesn't
    impede the CIA's work on critical national security investigations.

    This official said CIA officers who want to participate in it must
    first submit a detailed explanation of the type of work involved and
    get permission from higher-ups within the agency.

    "If any officer requests permission for outside employment, those
    requests are reviewed not just for legality, but for propriety,"
    CIA spokesman George Little told POLITICO.

    There is much about the policy that is unclear, including how many
    officers have availed themselves of it, how long it has been in
    place and what types of outside employment have been allowed. The
    CIA declined to provide additional details.

    Generally, federal employees across the vast government work force are
    allowed to moonlight in the private sector, but under tight guidelines,
    that can vary from agency to agency, according to the federal Office
    of Government Ethics.

    "In general, for most nonpolitical employees, they may engage in
    outside employment, but there are some restrictions," said Elaine
    Newton, an attorney at the Office of Government Ethics. She explained
    that agencies throughout the federal government set their own policies
    on outside employment, and that they all typically require that the
    employment not represent a conflict of interest with the employee's
    federal job and that the employee have written approval before taking
    on the work.

    But the close ties between active-duty and retired CIA officers at
    one consulting company show the degree to which CIA-style intelligence
    gathering techniques have been employed by hedge funds and financial
    institutions in the global economy.

    The firm is called Business Intelligence Advisors, and it is based
    in Boston. BIA was founded and is staffed by a number of retired
    CIA officers, and it specializes in the arcane field of "deception
    detection." BIA's clients have included Goldman Sachs and the enormous
    hedge fund SAC Capital Advisors, according to spokesmen for both firms.

    BIA has employed active-duty CIA officers in the past, although BIA
    president Cheryl Cook said that has "not been the case with BIA for
    some time."

    But the ties between BIA and the intelligence world run deep. The
    name itself was chosen as a play off CIA. And the presence of so many
    former CIA personnel on the payroll at BIA causes confusion as to
    whether the intelligence firm is actually an extension of the agency
    itself. As a result, BIA places a disclaimer in some of its corporate
    materials to clarify that it is not, in fact, controlled by Langley.

    BIA's clients can put the company on a retainer for as much as $400,000
    to $800,000 a year. And in return, they receive access to a variety
    of services, from deception detection to other programs that feature
    the CIA intelligence techniques.

    In one presentation in 2006, BIA personnel promised to teach managers
    at a leading hedge fund some of the CIA's own foolproof techniques.

    The presenters that day at SAC Capital Advisors in Stamford, Conn.,
    included two women with backgrounds in intelligence. One spent 20
    years with the CIA, specializing in polygraph, interviewing, and
    deception detection. The other had more than 25 years of interrogation
    experience.

    In their intensity, they reminded one person in the room of Clarice
    Starling, the no-nonsense FBI agent played by Jodie Foster in the
    movie "The Silence of the Lambs": "You could tell they knew exactly
    what they were doing."

    The tactics that BIA officials such as these teach hedge fund clients
    are based in a program it calls "Tactical Behavior Assessment.".

    Unlike polygraph machines, the TBA technique allows examiners to work
    without hooking up their subject to a series of wires. The subject
    never knows he's being scrutinized.

    Polygraph machines work by measuring a person's physical responses,
    such as heart rate, that indicate stress. Analysts using the machine
    need to sit with their subject for a long time. They have to establish
    a person's physiological baseline, so they begin with a "control"
    conversation about neutral topics, before they can begin grilling
    the subject. Conducting an interview and doing a thorough analysis
    of polygraph results can take hours.

    TBA focuses on the verbal and nonverbal cues that people convey when
    they aren't telling the truth. Psychologists familiar with the method
    say it works because human beings just aren't hard-wired to lie well.

    Holding two opposing ideas in your brain at the same time - as you have
    to do in order to tell a lie - causes a phenomenon they term "cognitive
    dissonance," which creates actual physical discomfort. And when
    people are uncomfortable, they squirm. They fidget ever so slightly,
    they pick lint off their clothes, they shift their bodily positions.

    Agents look for the physical indicators of lying. They watch for a
    person shifting anchor points. If the person is leaning forward on
    one elbow, does he switch to the other one? Interrogators watch for
    grooming gestures such as adjusting clothes, hair or eyeglasses. They
    look to see if the person picks at his fingernails or scratches
    himself. They watch for the person to clean his surroundings - does
    he straighten the paper clips on the table or line up the pens? If
    he does, he could be lying.

    To obtain verbal clues, agents listen for several kinds of statements.

    They'll listen for qualifying answers, phrases that begin with words
    like "honestly," "frankly" or "basically." The agents will be listening
    for detour phrases like "as I said before ..." They'll want to hear
    if the person invokes religion - "I swear to God" - or attacks the
    questioner: "How dare you ask me something like that?"

    Other red flags: Complaints -"How long is this going to take?"

    Selective memory -"To the best of my knowledge." Overly courteous
    responses -"Yes, sir."

    BIA doesn't just offer training, though. For a fee, its officers do
    the analysis themselves.

    Often, BIA deploys its CIA-trained operatives to analyze quarterly
    corporate-earnings calls. Those conference calls are an important
    Wall Street ritual that serves as a direct line from the corporate
    boardroom to the trading floor.

    Companies use the calls to put the best spin on the events of the
    quarter and give investors a sense of the way ahead. Analysts for
    top-of-the-line investment houses use them to ask probing questions
    of senior management.

    And BIA uses them to figure out if the company may not be disclosing
    the truth - all with the help of the CIA-trained analysts.

    In one particular instance in August 2005, Hong Liang Lu, the chairman
    and CEO of a company called UTStarcom, walked through the numbers
    with a telephone audience of Wall Street investment bankers. With
    his slicked-back hair, rimless glasses and wide smile, Lu projected
    an image of intelligence and competence.

    And as he began the call, Lu couldn't know that it also was being
    patched into a room thousands of miles away where interrogators
    trained in CIA-style techniques would analyze each inflection in Lu's
    voice. The analysts were human lie detectors, working for BIA. They
    were trying to find out whether Lu was telling the whole truth about
    UTStarcom's financial health.

    When they came to their conclusion, they'd report it to BIA's client,
    an enormous hedge fund. The secret intelligence they produced would
    help the hedge fund decide whether to buy or sell UTStarcom stock. If
    the intelligence analysts did their jobs, the hedge fund would be
    far ahead of the rest of the market.

    The information they gleaned from this phone call could be worth
    millions of dollars.

    The company Hong Liang Lu ran sells broadband, wireless and hand-held
    Internet equipment and technology around the world. It had generated
    more than $700 million in revenue that quarter, and although it
    was still losing money, that performance was good enough to bring it
    close to profitability. The company thought the results were positive,
    and the CEO seemed optimistic.

    Investment analysts from Bank of America, Smith Barney, Deutsche Bank
    and other Wall Street powerhouses were the official participants in
    UTStarcom's call. The analysts prepared their best questions to help
    them figure out the answer to one big question: Would UTStarcom emerge
    as a hot stock in the third quarter?

    After some opening remarks, Lu threw open the session to questions from
    the Wall Streeters. One of them, Mike Ounjian, a keen-eyed analyst
    with Credit Suisse First Boston, asked about potential problems he'd
    spotted with how the company's income was being counted in the books,
    a process known as revenue recognition.

    There seemed to be a backlog in the recording, and Ounjian wanted
    to know why. If the problems were serious, they could affect the
    company's financial results in the next quarter and might cause the
    stock price to dip.

    "Are there any issues related to recognizing revenues on
    these?" Ounjian asked.

    The voice of Michael Sophie, then the company's interim chief financial
    officer, came over the phone line: "Yes, with the backlog, the vast
    majority of the wireless backlog is clearly PAS [an acronym for one
    of the company's products, Personal Access System]. I think you saw
    the announcement at the end of June where we announced on the PAS
    infrastructure orders in China. And again, it's just the timing of
    deployment and achieving final acceptance, we've also got some CDMA
    [an acronym for a type of mobile phone standard] to a lesser extent
    in the backlog. ... But Q3 is clearly a little more handset-oriented
    than we would typically run."

    After analyzing the call, BIA's employees supplied a 27-page
    confidential report to their client, and they singled out Sophie's
    response to the question about revenue recognition for particular
    attention. They noted that Sophie qualified his response and referred
    back to another announcement from the end of June.

    BIA called that kind of conversational reference a "detour statement,"
    and its analysts were convinced that Sophie was trying to minimize
    the delays. "Mr. Sophie avoids commenting on any issues related to
    revenue recognition, and his overall behavior indicates that revenue
    recognition problems cannot be ruled out."

    Overall, BIA's team rated the second-quarter conference call as
    a "medium high level of concern"- the same rating they'd given
    UTStarcom's call the quarter before. This time, though, the BIA
    team found more problems, which they listed in a box on the first
    page of their report: "Lacks Confidence," "Underlying Concern,"
    "Avoids Providing Information."

    In their conclusion, the BIA team said they'd found that the executives
    were worried about the timing of the company's profitability date
    and the issue of revenue recognition. The report says: "Management's
    behavior indicates that they will post poor third-quarter results,
    and it is also highly unlikely they will achieve profitability in
    the fourth quarter."

    It might not seem like much, one take on whether the company will
    do well in the next six months. But to hedge-fund investors - who
    are looking for ways to make money off of falling stocks by selling
    short - that is valuable information indeed.

    BIA's client had no way of telling whether the deception analysis
    report was accurate or not. It was the client's job to take the
    report, combine it with other information known about UTStarcom and
    make a bet for or against the company. And there's no evidence that
    UTStarcom officials weren't being truthful during the call.

    With the benefit of hindsight, though, it's possible to go back and
    check the record to find out what did happen to UTStarcom stock in
    the weeks after the call.

    It turns out that any investor who shorted UTStarcom at the time
    BIA submitted its report would have been in a position to reap
    substantial gains.

    Over the next month or so after the call of Aug. 2, UTStarcom's stock
    price lost about $1 per share, a nice win for any short seller. But
    on Oct. 6, 2005, the company released its third-quarter results,
    shocking Nasdaq traders with numbers that were below the guidance
    executives had offered during the conference call. In October,
    UTStarcom said it expected total revenues of between $620 million
    and $640 million, compared with its previous target of $660 million
    to $680 million. The next morning, investors frantically sold their
    shares: more than 23 million transactions took place on Oct. 7, 2005.

    A day after the third-quarter results were released, the stock was
    down roughly an additional $2, closing at $5.64. It had been at $8.54
    when the BIA team listened in on the conference call in August and
    flagged the potential problems with revenue recognition.

    And what reason did UTStarcom give for its poor third-quarter
    performance? It disclosed difficulties with revenue recognition.
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