Broker, Trader, Lawyer, Spy (12 page)

“I think the fish in the bay got pretty high that night,” Peloquin says with a chuckle.

Intertel’s men spent the following months searching everywhere for Hughes’s will. But it was never found—if one had ever existed at all. Eventually, Hughes’s cousins in Texas, whom he had barely known, inherited his money.

A
S ALL-CONSUMING AS
he could be, Hughes wasn’t Intertel’s only client. Among others, there was the telecommunications giant ITT, and in 1972 the Intertel team played a tangential role in a Washington scandal known as the “Dita Beard affair.”

That year, the muckraking newspaper columnist Jack Anderson revealed a memo written by ITT’s Washington lobbyist Dita Beard. It appeared to link the company’s pledge of $400,000 to sponsor the upcoming Republican national convention and a favorable resolution of an important antitrust case against ITT by the Department of Justice. Washington exploded—had the White House sold out for campaign cash? Everyone involved went into damage-control mode.
⁹
ITT decided to argue that the memo was a forgery and turned to Intertel’s document experts to analyze it. The experts concluded that the memo probably had been written on a typewriter from Beard’s office—and if so, it was probably genuine. But they also concluded that it would be almost impossible to prove that the document had been typed by Beard. This constituted enough deniability for ITT to go ahead with the claim
of forgery. If the memo couldn’t be proved to be genuine, the accusation that it was a forgery couldn’t be disproved, either.

Jack Anderson reported later that Intertel had also tried to dig up dirt on him, with an eye toward throwing him off the scent. But, as Anderson wrote in his memoir, Intertel couldn’t find any damaging gossip to use against him.
¹⁰
Perhaps that’s because Anderson was a Mormon who didn’t smoke, drink, curse, or even drink coffee. (Peloquin denies that Intertel ever went after Anderson, saying, “I wasn’t that wacky that I wanted to get written up by Jack Anderson.”)

The existence of an intelligence firm for hire, connected to the Kennedys, terrified the Nixon administration. A confidential memo within the Nixon White House noted: “We should be particularly concerned about the new and rapidly growing Intertel organization…. Should this Kennedy-mafia dominated intelligence ‘gun for hire’ be turned against us in ’72, we would, indeed, have a dangerous and formidable foe.”
¹¹

Indeed, some journalists have long suspected that the Watergate burglars broke into Democratic Party headquarters on June 17, 1972, because of Intertel. The theory is that the burglars worried that Intertel had given the Democrats details of illicit payments from Howard Hughes to Nixon’s associates. Thus, the break-in was designed to find out what the Democratic National Committee (DNC) knew about the Hughes connection.

For his part, Peloquin says that Intertel was never a spy agency for the Kennedys, although he acknowledges that Republicans feared it might be. He says that Intertel’s Washington offices were broken into at one point, and the burglars attempted to drill holes in the safes that contained the firm’s secret documents. The safes proved too strong for the drills, and the burglars left with nothing. Peloquin is convinced that the burglars had been sent by the White House. “They were supposedly fearful that we had info that Hughes had put Nixon on his payroll,” Peloquin recalls. Ironically, Intertel didn’t have the proof the burglars might have been after. Peloquin
says that he had his suspicions, but never proved that Nixon took bribes from Howard Hughes. “There probably was some payment made to Nixon or Nixon’s brother. But I had no evidence of that.”

Intertel maintained a much lower profile through the 1980s and early 1990s, but it maintained a roster of high-paying corporate clients. One former vice president of the firm recalls working on cases in the 1980s for McDonald’s, Kraft Foods, Mars, and the Clorox Company.

Intertel worked on the famous Tylenol tampering case of 1982, serving as the central point of contact for all law enforcement officials who wanted access to Johnson and Johnson, the company that made Tylenol. But Intertel didn’t do any investigating on that case, which was never solved. To this day, no one knows who killed seven people in the Chicago area by lacing Tylenol capsules with cyanide.

Intertel never grew large. At its peak it had something on the order of fifty employees scattered around the world. But those people had special skills. Jim Healy, who had served a long time at the FBI and who worked for Intertel from 1984 to 1994, says his colleagues at Intertel were almost all veterans of the government, including CIA officers, IRS investigators, and customs agents.

Intertel developed a new system of high-resolution closed-circuit television cameras for its casino customers. Intertel installed them to help casino security forces monitor the action at gaming tables. Were employees pilfering cash? Were players cheating? The cameras could tell. “The quality of the pictures was excellent,” recalls Healy. “You could look at the customers and tell if they had real freckles or fake freckles.”

In 1994, Intertel was bought out—ironically—by the Pinkerton detective agency. By that time, Pinkerton had become a security firm, providing armed guards to patrol factories and warehouses. But the executives there saw the growing market for corporate investigative services and wanted to get back into the business their company had invented. They acquired Intertel, operating it for a
time as an independently branded firm, but ultimately subsuming it into their own larger company.

Aside from Intertel, Peloquin served as an executive vice president of Resorts International. And when Crosby died in 1986, the company was sold to the New York real estate magnate Donald Trump. Peloquin thus became perhaps the only man in the world who has done business in person with both Howard Hughes and Donald Trump. But his new situation didn’t go well. Peloquin and Trump butted heads. “Trump would say, ‘You guys are scumbags.’ And then he’d look up and say, ‘Hey, Bob, have you seen my new boat?’ We’d talk about that. And then we went back to being scumbags again.”

Reflecting on the differences between the two men, Peloquin says, “Hughes was weird—an addict. I don’t think Trump was on drugs. I think he was born on drugs. He’s such an egocentric person.”

I
NTERTEL BEGAN TO
run out of steam because of retirements among its core employees; but another firm, begun in the 1970s, would far surpass it, and ultimately emerge as the twentieth century’s heir to the Pinkerton legacy: Kroll.

In 1972, a former assistant district attorney in Manhattan, Jules Kroll, founded a small consulting firm—Kroll Associates—to work with corporate purchasing departments. It would grow to be much more than that: a nearly 4,000-person corporate investigative and intelligence juggernaut that would employ veterans of the FBI and CIA transitioning back into private-sector service. In the coming decades, Kroll would play a key role in the development of the modern intelligence firm—and Wall Street’s gradual embrace of intelligence techniques.

In many cases, up-and-coming firms such as Kroll would turn to a well-connected network of former FBI agents for help in the spadework of their day-to-day investigations. There is even a quiet
but effective guidebook to the network of the top private detectives in the country. Once a year, a small company in Dallas publishes a spiral-bound paperback directory, the
Trapline
. This publication lists every retired FBI agent in the country who works in the private investigations business, giving names, telephone numbers, and addresses. The veteran agents pay to be included in the book, and they are listed by region and by specialty—including such esoteric skills as “electronic countermeasures,” “hostage negotiations,” and “psychological profiling.”

The 326-page
Trapline
is distributed only to the several hundred FBI veterans it actually lists. It is not sold to outsiders by mail or in bookstores. The information in it is not available on the Internet. For security reasons, most FBI veterans won’t give or sell copies of the directory to outsiders.
*

The publication is put out every year by Trapline, Inc., which is led by Jim Abbott, a thirty-two-year veteran of the FBI, long retired. Abbott named his directory after an old FBI tool called a “trap line,” a telephone technology used to capture a caller’s phone number even if the caller is trying to conceal it. He is proud of being the central node in a vast network of FBI veterans.

On the phone, Abbott is polite and gracious, but he refuses to send a copy of the
Trapline
to a reporter. Later in the conversation, though, Abbott consults his own copy of the
Trapline
to rattle off the names and phone numbers of retired FBI agents who might be helpful in the research for this book. Connecting people who have problems with people who solve them is what Abbott does.

For its exclusive readership, the
Trapline
gives a one-man private investigative shop the national—and global—reach of Kroll or any of the other large investigative firms. Thomas Bara, an investigator with the Bara Hutton Group in Lavallette, New Jersey, retired from the FBI in 2000, at age fifty, after putting in twenty-eight
years at the bureau. His career included hunting fugitives, surveillance, organized crime enforcement, SWAT teamwork, and counterintelligence. “I joined counterintelligence because I figured out that spies eat at better restaurants than mobsters do,” he says with a laugh. “My picture’s on the wall at The Palm.”

When he formed his private investigative firm, Bara was careful to make sure it was listed in
Trapline
, but nowhere else. His listing includes the alphabet-soup codes for an array of skills: GIM (General Investigative Matters), MVA (Motor Vehicle Accident Investigations), OC (Organized Crime), PH (Photography), PP (Personal Protection) PSS (Physical Security Surveys), SC (Security Consultant), and SU (Surveillances). “If I get a call from somebody from
Trapline
, I know I’m going to get paid,” Bara says. “And I know it’s not a bullshit case. If I advertised out there, I’d be getting calls from people who line their walls with aluminum foil.”

As a result, he says, a steady stream of reliable business rolls in. Bara won’t reveal details, but says he worked on a surveillance project for a pharmaceutical company recently. The company’s head of security is a retired FBI agent, and got Bara’s name from
Trapline
. For years, Bara says, he worked as a subcontractor for General Electric, where the head of security was another retired FBI man. The
Trapline
is a bit like an institutionalized old-boy network for retired G-men. Each member is able to trust it because Abbott promises to remove the listings of any private investigator who is not in good standing with the rest of the group. In the preface to the
Trapline
, Abbott notes:

In other words,
Trapline
polices itself.

When the cold war ended with the collapse of the Soviet Union in 1991, thousands of government-trained veterans of the nation’s intelligence services flooded into the private sector, beginning a profound change in the way companies related to the world around them. In contrast to the operatives of the Pinkerton era, though, the new generation of corporate spies would be deployed by one company—or financial firm—against another, beginning with the corporate takeover wars of the 1980s. The new intelligence operatives didn’t track down train robbers; they chased down hard-to-find witnesses for corporate lawsuits. They didn’t spy on counterfeiters; they spied on corporate directors. But the tactics were still intelligence and investigation, and the goal was still the same: profit.

By the first years of the twenty-first century, a globalizing economy and the rise of large pools of private capital called hedge funds would create a market for corporate spying. The tactics, techniques, and technologies that had been developed by government intelligence services would now be for sale in the private market. The price would be high. So would the risk—and the drama.

Like Robert Peloquin, Jules Kroll spent part of the 1960s socializing at Robert F. Kennedy’s Virginia estate, Hickory Hill. Kroll was working his way through Georgetown law school as a staff aide to Kennedy in the Senate, where Kennedy served after his term as attorney general ended in 1964. Kroll was just twenty-three and a recent graduate of Cornell when he went to work for the newly elected senator from New York. He remembers that even the legislative assistants—generally twentysomethings near the bottom of the Senate’s food chain—didn’t have much time for him.

Kroll—along with dozens of other volunteers—had the job of grinding through a pile of more than 150,000 letters to Kennedy that had remained unanswered since his campaign for the Senate in 1964. Kroll and the other staffers organized the letters by topic, and cranked out responses to each one. When he was not writing letters, Kroll served as a general office gofer.

The work was not exciting, but it came with one unusual perk: on weekends, Kennedy would open his Hickory Hill estate for the staff, even though the senator and his wife, Ethel, were typically away at the family compound in Hyannis Port, Massachusetts. The people hanging out at Hickory Hill were ruled by staff aides in their early thirties—they were the only “grown-ups” around—and
for Kroll and the other junior aides, Hickory Hill offered the perfect social swirl: a time to relax, pursue romances, and make contacts that would last a lifetime.

For those lucky enough to be invited to the official parties with the Kennedys themselves, almost anything seemed possible. Dogs, ponies, rabbits, and other animals belonging to the Kennedys’ eleven children roamed the grounds. Guests might include the Beatle John Lennon, the actress Judy Garland, and the dancer Rudolf Nureyev, along with other celebrities, politicians, and military officers. Washington’s grandees engaged in raucous drinking and dramatic escapades on the rolling lawn, on the tennis court, and in the pool area. The historian Arthur Schlesinger, Jr., wrote that at one party, Ethel Kennedy’s chair slipped off the edge of a poolside platform and she tumbled into the water along with it. As he was standing on the edge of the pool deciding whether or not to dive in after the senator’s wife, Schlesinger recalled, Lee Udall, the wife of the secretary of the interior, pushed him—fully clothed—into the pool, for the rescue.
¹
Dunking high-powered political people in the pool became a regular cocktail-hour prank.

It was as a junior observer of this milieu that Jules Kroll got an education in politics and business. An idealistic liberal inspired by Kennedy, he determined that he’d go into public service himself. And he also decided that he did not want to go into business, the way his father, Herman Kroll, did, opening up a small company called Book Printers, Inc. Kroll thought printing was a miserable business, and he wanted nothing to do with it.

After doing a short stint in the Coast Guard and joining the Coast Guard reserves, Kroll passed the New York bar exam in 1967 and went to work as an assistant district attorney in Manhattan. But soon Kroll’s father became ill with a grueling staphylococcus infection that caused large carbuncles to erupt all over his body. Herman Kroll was out of commission while he battled the infection, which doctors later found had been contracted during a visit to the dentist. So Jules returned to the family printing business. In
the 1960s, the printing business was awash in corruption and under the heavy hand of the Mafia. Kroll found printers scratching for ways to chisel a little more cash for themselves. Kickbacks, sweetheart deals, and intimidation tactics were everywhere.

“For an idealistic kid, it was a pretty demoralizing experience,” Kroll says. He was desperate to get out, and began plotting a way to get back into politics. His father recovered from his long-drawn-out illness, and the family wound down the company in 1971. That same year, Jules Kroll made a move to escape from business. He became a candidate for the New York City Council in Queens, where he ran up against the local Democratic political machine. These pols didn’t have much use for a thirty-year-old outsider, and they crushed Kroll’s campaign. He lost the election. Now unemployed, he went broke, and his car was repossessed.

For Kroll, politics was over, and so was his chance to become another Robert Kennedy. He went back into business, starting up J. Kroll Associates in 1972. In the new company he would build on lessons he had learned in the printing business and in the DA’s office. Corruption was strangling the printing industry, inflating costs, and creating massive waste. Kroll would develop a business helping companies to do an end run around their own purchasing departments, which often chose the highest bidder—not the lowest bidder or the best supplier—after accepting food, clothes, trips, and even cash from eager vendors. Kroll knew he could knock prices down by running an honest purchasing effort for the companies. He signed up his first client, Cadence Industries, which owned Marvel Comics, published several catalogs, and ran a direct mail business. Cadence would be Kroll’s only client for his first year, but it was a global company, and the fee it paid was enough to feed his family. Most important, Cadence gave him space to work—inside the company’s own headquarters on Lexington Avenue in Manhattan.

After lowering costs for Cadence, Kroll began to develop new clients, focusing in each case on increasing transparency, creating
a competitive bidding process, and sending a message to employees that fraud wouldn’t be tolerated. There was so much corruption in the industry that the methods were bound to work. Kroll couldn’t miss.

It was a heady time. Society was changing—shedding old ways of doing things—and Kroll found himself at the intersection of powerful trends in America. “The chances of a business like ours being successful at any other time are probably de minimis,” Kroll says. “But Watergate changed things.” In the aftermath of the scandals surrounding President Richard Nixon, people at all levels of society were reevaluating corruption. After Woodward and Bernstein, crusading young reformers were in vogue. On top of that, the late 1970s brought malaise, oil shocks, and economic slowdown. The fat profit margins of an earlier era—margins that could more than account for waste and abuse in the system—were gone. And the industry reform that Kroll was selling was seen not as the naive concept of an outsider, but as a sensible business strategy for a new era of belt-tightening.

By 1978, Kroll had about thirty employees, new offices, and new opportunities for his growing company. He signed a joint venture agreement with a publishing house to put together a text for corporate readers:
Crimes against Business: A Practical Guide to the Prevention and Detection of Business Crime.
Kroll hired experts to write think pieces on each aspect of the problem that he’d seen: commercial bribery, theft of intellectual property, antitrust violations, and so on. The project put Kroll in touch with the leading thinkers in his field, and gave him time to organize his own thoughts on fighting corporate crime. The work led to an intellectual framework for the company he would build. Kroll concluded that the nation was about to enter a prolonged period of self-examination, and issues such as transparency and accountability would be more important in America’s future than they had been in its past. He wanted to put himself at the center of the emerging trend.

Kroll’s big break came in the form of a European playboy and
millionaire, Sir James Goldsmith, known as “Jimmy.” Goldsmith was a corporate raider with a taste for yachts and high living, and the heir to a family fortune that traced its roots back to sixteenth-century Germany. Goldsmith had already acquired a slew of companies around the world, including the British foods company Bovril, the corporate parent of the French weekly newsmagazine
L’Express
, and the American supermarket chain Grand Union. He was eyeing other American targets for takeover. He settled on Diamond International, a paper company whose executives vowed to fight any such attempt. It promised to be a bruising battle, especially since Goldsmith liked to brag about his tough tactics. “When I fight, I fight with a knife,” he once said.
²

Diamond International decided to fight back against this swash-buckling global raider, and its law firm hired Kroll to take a look at Goldsmith’s corporate holdings. Goldsmith was proposing a stock acquisition, and Diamond’s lawyers wanted to know what his worldwide holdings were. They sent Kroll on a mission to find and evaluate the companies Goldsmith controlled. Kroll looked at everything Goldsmith owned, questioning the way he accounted for his profits, the character of his business partners, and the accuracy of his official documents. “We were looking for chinks in their armor,” Kroll recalls.

The goal was to identify some weakness in Goldsmith’s corporate holdings, to demonstrate that the stock he was offering was not worth what he said. In the end, though, all Kroll could do was delay the inevitable. Goldsmith succeeded in buying out Diamond International, but Kroll was pleased with his own work. He felt the efforts of his investigators had succeeded in buying time for Diamond, turning what might have been a two-month process into a two-year pitched battle. Kroll believed that the long fight had generated a higher sales price for his client.

Kroll learned that there was money to be made in corporate takeovers, win or lose. But he still wanted his first victory. He was brought into another takeover fight: the chairman of Sharon Steel
Corporation, Victor Posner, raided Foremost-McKesson, a conglomerate that ran food, liquor, dairy, and pharmaceutical businesses. These were regulated industries, overseen by government bureaucrats. Foremost-McKesson’s executives reasoned that Posner, who had already developed a reputation as a brash corporate raider, wouldn’t fit the government’s idea of the type of executive who should run a drug company. The battle, which had been brewing since 1976, turned ugly: Foremost and Posner threw allegations of mismanagement and improper conduct back and forth. To gain an edge, Foremost hired Kroll, giving his firm a mandate to find out what it could about Posner’s dealings. Any dirt the investigation uncovered could be used to push back against the takeover bid.

Kroll and his team went to work. They scoured Posner’s acquisition of Sharon Steel, and searched for sources who could describe how Posner ran his businesses. Kroll’s men knew what Woodward and Bernstein had discovered a few years earlier: investigators must follow the money. And the best way to follow that trail is often disgruntled former employees. They often know where the trail leads, and they have a motive to reveal secrets.

Working their sources, Kroll’s team stumbled across an interesting transaction. In 1975, Posner had donated twenty-two acres of land to Miami Christian College as a charitable gift and had taken a $1.7 million tax deduction. But the land wasn’t worth anywhere near that amount. In fact, the school went on to sell it for just over $500,000 several years later. This transaction looked like tax fraud, and it was a juicy find. Kroll’s team turned the evidence they’d discovered over to the IRS. Later, they found evidence that Posner’s reported corporate earnings were suspect. They turned that information over to the SEC. Kroll’s team also questioned lavish expenses at Sharon Steel that seemed to have little to do with running the company. Each new disclosure was a blow to Posner. He caved in, and by May 1981 he had sold his entire stake of the company’s stock back to Foremost-McKesson for $42 per share. Posner didn’t leave the deal empty-handed: he reaped about
$65 million from the transaction, which more than doubled his investment from several years before. Still, Foremost-McKesson was free.

In 1983, Posner and a colleague were indicted in the Southern District of Florida for their roles in the tax scam. Posner fought the charges for years, but he pleaded no contest in 1987. He was forced to donate $3 million to homeless causes and was assigned 5,000 hours of community service, including serving meals in a Miami shelter.
³
Posner’s legal troubles would go from bad to worse. Soon he was entangled with the infamous Wall Street swindlers Ivan Boesky and Michael Milken. Jules Kroll had defeated one of the era’s greatest corporate raiders. He was building a reputation for success just as the corporate takeover boom of the 1980s was set to begin.

J
ULES
K
ROLL NOW
had a vision for the future. Almost on cue, opportunity presented itself. The investment house Drexel Burnham Lambert underwent a damaging episode. The firm had taken the lead in underwriting a $25 million debt offering for a charter airline company, Flight Transportation, in 1982. Just a few weeks later, the FBI announced that Flight Transportation was a sham company—an airline without airplanes. Law enforcement officers rounded up the top executives. That Drexel had missed this obvious scam was embarrassing to its chief executive officer, Fred Joseph. He vowed that Drexel would never again be taken by surprise by such criminality. “Fred Joseph was appalled,” Kroll remembers. “He said, ‘we’re going to check out everyone we underwrite in a way that has never been done before.’” Kroll got the contract to do the spadework. It was his firm’s entrée into high-level Wall Street wheeling and dealing, and it was an opening to a huge new market.

“That’s when ‘Kroll’ became a generic name on Wall Street,” he says. From then on, firms on the verge of a huge transaction
would hire Kroll to dig into the backgrounds of the people sitting on the other end of the conference table. Solomon Smith Barney hired Kroll. Other big names followed. Fred Joseph made Kroll, setting up a firm that began with one man to become a business earning hundreds of millions of dollars a year. And Joseph wasn’t shy about trumpeting his new investigative firm in the press, telling one reporter, “Kroll signals red flags, like the time we were told a company used underworld connections to solve some labor problems. We decided not to do the financing.”
⁴

But there was one problem: Fred Joseph’s firm, Drexel Burnham Lambert, was increasingly dependent on the junk bond trader Michael Milken, who was based in Los Angeles. And in all the time Kroll worked for Fred Joseph and Drexel, its veteran law enforcement sleuths never figured out that their big client was running what amounted to, in many respects, a criminal enterprise based on insider trading in the junk bond market. Milken turned out to be one of Wall Street’s worst crooks. Kroll didn’t catch him, or even have a clue that fraud on such a vast scale was going on inside the prized client’s office. It was all the more embarrassing because Drexel had hired Kroll to do internal investigations of people the firm’s top executives suspected of insider trading. Those were limited, narrowly defined investigations. Drexel didn’t hire Kroll for a systemic analysis of its own business. For the most part, Drexel hired Kroll’s detectives to look out, not to look in. Kroll would continue to work for Drexel until the day the firm went bankrupt in February 1990.