Broker, Trader, Lawyer, Spy Page 3

  At the end of the Reagan administration, Burt became the chief U.S. negotiator in the Strategic Arms Reduction Talks (START) with the former Soviet Union, and then decamped for the private sector and a partnership at the consulting firm McKinsey and Company.

  Barbour Griffith and Rogers invested in Diligence. Suddenly, the little shop became an intercontinental firm. Burt stepped in as Diligence’s chairman, although he kept his office at Barbour Griffith and Rogers. Burt’s connections provided an entrée to the top of Washington society, but that access came at a cost. His abrasive style was legendary in Washington, and his verbal blunders caused some heartache for the growing company, which needed all the goodwill it could get. On occasion, for example, Burt would burst into rages at the lobbying firm. One person familiar with him says, “Rick Burt could be a very nasty piece of work.”

  Still, Diligence leveraged Burt’s connections to its own benefit, becoming wired into the uppermost echelon of British and American business, politics, and intelligence. Eventually, Diligence’s advisory board would include an astonishing array of heavy hitters:

  Judge William Webster, a former director of both the CIA and the FBI

  Michael Howard, a former leader of the Conservative Party in Britain

  Lord Charles Powell, former foreign affairs and defense adviser to the British prime minister Margaret Thatcher

  Ed Mathias, managing director of the enormous American private equity firm Carlyle Group, which specialized in buying and selling defense companies

  Thomas “Mack” McLarty, former chief of staff to President Bill Clinton

  Ed Rogers, chairman of Barbour Griffith and Rogers, a protégé of Republican political consultant Lee Atwater, and a veteran of the Reagan and the first Bush administrations.

  The weave of interconnections between these men can be complicated. For example: Diligence’s chairman Rick Burt has also served as a senior adviser to Ed Mathias’s Carlyle Group; as a senior adviser to Mack McLarty’s firm, Kissinger McLarty Associates; and as a senior advisory board member to Barbour Griffith and Rogers’ client Alfa Bank, in Moscow.2

  The overlapping relationships created a constant stream of business referrals and mutual assistance to a group of executives whose business affiliations and loyalties extend across national borders and around the world. The group was poised to take advantage of the new opportunities available in the global economy. In the coming years, Barbour Griffith and Rogers would represent clients from all over the world, including the governments of Equatorial Guinea, Eritrea, Honduras, Serbia, and Qatar. The business would prove lucrative: Eritrea, a desperately poor country bordering Sudan in eastern Africa, for example, would sign a contract to pay the lobbying firm $65,000 per month for “strategic counsel and tactical planning” in Washington.3

  FOR DILIGENCE, THE global network of connections paid off, and business started to accelerate. Through a contact who had formerly worked at the CIA, the Diligence team landed a high-paying assignment working for Enron, the Houston-based energy trading firm. Enron had spent years lobbying in state capitals and in Washington for energy deregulation, which would allow anyone to buy and sell electrical power just like other commodities. The huge company was politically well connected with the newly elected administration—President George W. Bush famously nicknamed his fellow Texan, Enron’s CEO Kenneth Lay, “Kenny Boy”—and it was posting huge numbers. In July 2001, it reported earnings of $50.1 billion, more than triple the year before. But before long, those numbers, like much of the firm’s operations, would prove nothing more than a mirage.

  What no one knew at the time was that Enron was hiding more secrets than just its bogus accounting. Buried deep inside Enron was a corps of intelligence veterans, spies who reached out to Diligence for help vetting the companies that the energy giant wanted to acquire. But soon the Enron intelligence team had a much bigger idea. The company’s traders could make more money if they could determine in advance when power plants would be turned off for maintenance.

  Power plants can’t run ceaselessly. Periodically, they have to be taken off-line for inspections and repairs. This maintenance is done at regular intervals, but not always with public notice. And when the plants go down, sometimes for days at a time, the price of electricity in an entire region can go up, following the time-tested laws of supply and demand. The less electricity in the market from the power plant, the more expensive the remaining electricity will be.

  For an energy trader, advance notice of a power plant shutdown could be a powerful way to make money. Armed with a schedule, Enron traders could make bets in the energy markets based on nearly certain knowledge that electricity prices would rise, by how much they would increase, and when it would happen. These bets—a sure thing, in some cases—could be worth millions of dollars.

  Enron approached Diligence with a proposition. It wanted to know when the power plants would be going on and off. Enron’s intelligence officers had already developed a checklist of things a plant would do just before a shutdown. For one thing, plants tended to let the supply of coal on their property run low just before shutdown—no sense investing in expensive inventory that the plant wouldn’t be using anytime soon. Also, even routine plant maintenance requires specialized employees to visit the facility. To accommodate them, plant owners frequently brought in portable toilets to set up around the grounds. And all those new workers require a place to stay. In the rural areas of Europe where power plants are frequently situated, the one or two local hotels were bound to be booked to capacity during the maintenance project.

  For a spy, all these preparations are easy to detect. In late 2000 and 2001, Diligence set about gathering intelligence on as many as a dozen of continental Europe’s biggest power plants. Baker won’t say exactly where the plants were, but another person familiar with the operation recalls missions in France, the Netherlands, and Germany.

  Baker decided that the best way to gather most of the information was from the air. So he hired small commercial aircraft typically used for mapping and surveying, and outfitted them with video cameras. Then he and his pilot flew over the plant, training their equipment on the telltale areas. How high were the coal stacks? How did that height compare with last week? How many cars were in the workers’ parking lot? More than usual? Painstakingly, Baker overflew each location in a four-seat airplane, compiling the same kind of secret data that spies once recorded for contending governments—only now he was doing so for one of the world’s wealthiest companies.

  Baker flew on many of the missions and dispatched lower-level Diligence employees on others. To avoid detection, he hired local planes and pilots in each country. Other pilots at the small airports he used might notice any foreigners hanging around. The last thing Baker wanted was pilots asking questions about the operation. As long as the locals saw the flights as a source of business, though, Baker figured that no one would worry too much about what or who they were for. After all, the operation was perfectly legal. Real estate developers, surveyors, and other specialists use aerial surveillance all the time. Baker and his pilots dutifully made sure that each day’s flight plan was filed with government authorities.

  Back in London, meanwhile, Diligence’s team members manned the phones to gather the rest of the information they needed. Posing as potential customers, they called to book reservations in the hotels nearest the power plants they were targeting. Asking for room rates and availability weeks in advance, they could pinpoint when each hotel was at maximum capacity—or sold out. By trolling for “no vacancy” dates, they developed more data on when the maintenance was likely to happen.

  Putting it all together, Diligence sent the raw data and video along to Enron’s intelligence operatives, who worked out when the plants were going off-line and passed the information along to the traders doing battle in the energy markets. At first, Diligence passed along the details from every flight, but soon it settled on a system of weekly reports. Enron gained a crucial edge over the rest of the
traders in the market. The work was done for a monthly retainer that represented a key, regular stream of income for Diligence. Baker declines to say how much Enron paid per month, and he says he has no idea how much money Enron made from the overflight information.

  The nifty little scheme crashed to a halt in late 2001, as Enron itself collapsed into bankruptcy. Even with the moneymaking European spy flights, Enron’s top executives had badly mismanaged the company, steering revenues into numerous secret shell companies. As the firm began to unravel, Baker says he got a sudden call from his contact at Enron: “If you’ve got any bills outstanding with us,” he said, “get them to me today, and I’ll make sure you get paid.”

  THE LOSS OF Enron was a learning experience for the young spy firm. Baker says the message was clear: “There’s a lot of information available out there.” The key, he concluded, was to match a client who understands the value of information and an intelligence firm that has the wherewithal to go out and get it. And he took away one more thought: Diligence could have charged twenty times more for the information than it did. As he learned the value of information, Baker resolved not to undercut his own pricing again.

  Over the next couple of years, Baker and Day traveled widely, rubbing elbows with some of the richest and most powerful people in the world. And they became close friends. Baker moved to Washington, D.C., to be near the lobbying firm Barbour Griffith and Rogers, which was still a major source of referrals for business.

  By 2005, Diligence was eager to grow still further, and he was scouting around for investors to finance expansion. Ultimately, Burt provided an introduction to an Argentine private equity firm, the Exxel Group, run by a flashy buyout specialist, Juan Navarro, who was based in Buenos Aires. This Uruguayan-born investor cut a glamorous figure: he lived in a penthouse, cultivated expensive tastes, and was known for his aggressiveness. In 1991, he quit a successful career at Citibank’s Argentine venture capital unit to launch his own firm, Exxel. He secured investments from GE Pension Trust, Rockefeller and Company, Liberty Mutual, and Columbia University, and began investing billions in nearly 100 companies, mostly concentrated in Latin America.

  During the course of negotiations with Exxel, Baker began to feel uncomfortable about the future of Diligence. The new cash would mean big-time expansion, and new management responsibilities for himself and Day. He says now that he was worried and felt it might be better to bring on a professional CEO who would have the experience to expand the company without wasting money. Baker disclosed to his colleagues and prospective investors such as Exxel Group that he wouldn’t stay on board much longer.

  Exxel Group invested in Diligence, reportedly taking a $15 million stake in it. Baker cashed out, selling his remaining 15 percent stake in Diligence to Exxel as part of the transaction. Barbour Griffith and Rogers cashed out, too. No one involved will reveal the exact numbers regarding who got what. But even if the deal valued Diligence at a relatively small amount of money, it’s likely that Baker walked away from the deal with more than $1 million in cash, a tidy profit from his five-year involvement with the company.

  Now it would be up to Day, running Diligence on his own, to deploy the remaining money and generate the kind of growth his new investors were expecting. Soon, his attention would turn to a new client that Baker had been working hard to sign just before leaving the firm, Russia’s largest commercial bank, Alfa Bank. Alfa was already a client of the lobbying firm Barbour Griffith and Rogers, which in 2005 received $680,000 in fees from Alfa.

  What’s more, the lobbyists disclosed in federal filings that they didn’t do any lobbying at all that year for Alfa. That’s a lot of money to pay a lobbying firm that’s not doing any lobbying. Often, lobbying firms are paid not to lobby—the technical definition of which is contacting public officials on behalf of a client—but to “consult,” which means simply to provide advice to the client about how to handle Washington.*

  Before he left Diligence, Baker says, he pushed the lobbyists to provide an introduction to Alfa. The huge Russian bank would make a great client for Diligence. Barbour Griffith and Rogers made the connection, and soon after that, Nick Day was in Bermuda fetching KPMG’s documents out from under rocks.

  The anonymous document drop at KPMG in October 2005 put a stop to that operation. On November 10, 2005, KPMG Financial Advisory Services filed suit against Diligence, alleging fraud.4 But the legal complaint filed by KPMG was heavily censored. Page after page of the publicly available version of the document was left blank, simply stamped “REDACTED” in bold letters.

  Perhaps the complaint was so heavily shielded from view because the company feared letting even more sensitive details of the case into the open. But perhaps, too, KPMG held back so much of its filing because the company was embarrassed at how easily an employee had been duped out of its most secret corporate work product. After all, KPMG is one of the world’s largest accounting and consulting firms. It routinely handles the deepest secrets of the biggest companies in the world. What would its clients think if they knew those documents could leak out to corporate spies?

  Indeed, the entire case was filed under seal, and it wasn’t until months later that any of the documents began to surface into public view. At Barbour Griffith and Rogers, the move to release the documents set off panic. The prestigious firm didn’t want the public or the press to know that it had been involved in the spy game.

  On January 24, 2006, the firm’s lead lobbyist on the Alfa account, Keith Schuette, sent an e-mail to his boss, the legendary Washington fixer Ed Rogers. Under the subject heading “Legal,” Schuette wrote, “Ed: Judge has unsealed the complaint against Diligence from KPMG. It has attracted no attention thus far, but I cannot imagine that it will remain quiet forever. Neither we, nor the client are mentioned in the complaint. Current strategy if it comes alive in the press [is] for Diligence to stonewall. Will keep you posted.”

  “What does it say??” responded Rogers, twenty minutes later.

  “Basically that KPMG was harmed by Diligence stealing materials under false pretences etc…. and that they must cease and desist,” wrote Schuette. “Critical issue now is KPMG’s request for expedited discover[y] and judge ruling on the question of jurisdiction. If the judge accepts jurisdiction and agrees to expedited discovery, things will deteriorate in very short order. If he goes against both, then it should die a fairly quiet death.”

  The judge did accept jurisdiction, and permitted discovery. That is the process by which lawyers obtain testimony and documents from the other side in a legal battle. Lawyers can force documents, records, e-mails, and other material from the opponent’s files onto the record. That’s how Schuette’s e-mail later ended up as part of the court record.

  And the Diligence case did not die a quiet death.

  AFTER PROJECT YUCCA imploded, Nick Day closed the Connecticut Avenue offices of Diligence, LLC, in Washington in exchange for much more modest digs. He moved his own residence to the picturesque French Alpine town of Saint-Gervais, which is only an hour’s drive from Switzerland. He is still in business, although he says that fallout from the Bermuda incident—which included recriminations, resignations, and lawsuits—taught him a lesson. He and his firm have changed their ways in its aftermath. “We essentially help businesses deal with the risks of operating in challenging markets,” Day says. “It’s a role which government agencies don’t necessarily have the resources or understanding to be able to fulfill.”

  Mike Baker, who left the firm well before the Bermuda operation, bounced around at other corporate intelligence firms, for a time running Prescience LLC, his own private intelligence firm serving hedge fund clients. He took on work as a Hollywood script consultant on intelligence matters and writes commentaries for FoxNews.com. He says he is working on a book. In early 2009, though, he and Day went back into business together for the first time in years. Day’s firm, Diligence, purchased Baker’s firm, Prescience, and Mike Baker went to work in Diligence’s New York offices at 7
Times Square.

  These days, Guy Enright is working for Deloitte and Touche in London. He didn’t come away empty-handed from his encounters with Nick Day. As Project Yucca wound down in 2005, Day, still in the guise of Nick Hamilton, gave Enright a Rolex watch worth thousands of dollars. Enright was led to believe it was a thank-you gift from the British government.

  But that, too, was a lie.

  IT HAS NEVER been clear who, exactly, owns Diligence, especially since several investors and owners have come and gone over the years. Day refuses to reveal who owns the spy company today. But one possible source of financial backing is one of the oldest banking families in the world, the Rothschilds.

  In the spring of 2007, the British and American press reported that Diligence had received an infusion of an unknown amount of capital from a fund controlled by Nick Day’s longtime friend Nathaniel Rothschild, then thirty-six years old, the wealthy son of Lord Jacob Rothschild and heir to one of the world’s most famous and ancient banking fortunes. The New York Times once called Nathaniel “the man who may become the richest Rothschild.”

  By 2007, Day had become a close associate of Nathaniel Rothschild. The two men had a lot in common: they were roughly the same age, both British, and both high-living businessmen who thrived on global intrigue. The friendship was a sign of just how far Nick Day had risen, professionally and socially. Through Rothschild, Day gained entrée to a family that had long dominated European banking, and had figured out—hundreds of years earlier—the value of marrying business and intelligence.