Spies: The Rise and Fall of the KGB in America (64 page)

When I said that I had expected him to be holding `John Bull,' and that
this was the only sign I had to go by, "Dan" replied that he had already gone to
the meeting place three times with `John Bull' but had practically lost hope of
contacting us, become upset, and forgotten it today. He wanted to know why it
had taken us so long to show up for the meeting. With regard to the sign, he
was sure that we ought to have a photo of him, because he had provided two
of his cards expressly for that purpose before leaving. During the conversation,
"Dan" remarked that, in essence, he had agreed to come here in order to help
us here. `If I hadn't met up with you, there wouldn't have been any point in
coming here at all,' he said .1114

Korneev held five meetings with Stanley Graze during his tenure at
the OSS's London office. Graze provided the KGB with copies of the interrogation of former Soviet prisoners-of-war who had been serving with
the German Army (Moscow Center had a high interest in this material)
and related what he had learned about OSS operations in Vienna, a city
under joint Allied occupation, from an OSS officer who had recently returned from there. He also described material on the USSR that the OSS
had received from British intelligence, but the London station decided it
was too risky for Graze to attempt to steal copies. Graze also noted that
while British intelligence had provided the OSS with information on the
USSR during the war, it was declining to continue to do so with the war
over. With the OSS in the process of dissolution and its London office
closing down, Graze returned to the United States in October 1945. He
immediately reestablished contact with the KGB via Victor Perlo, but it
coincided with Bentley's defection, and the entire network, including
Graze, was deactivated. 15

Attempting to revive the crippled American station, in 1948 the KGB
decided to renew connections with old agents, including Graze, who had
successfully transferred from the OSS to the State Department. It assigned Joseph Katz to the task, but for unknown reasons he never reached
Graze. The KGB did not return its attention to Stanley Graze until 1951,
at which time he was working at the United Nations. A Russian UN employee (and KGB co-optee) arranged to meet him for dinner at the White
Horse Restaurant. After introducing Graze to "Jour," a KGB officer, the
co-worker left, while "Jour" used the old 1945 London passwords to establish his bona fides. He met with Graze again and learned he had come
under investigation in the State Department in the fall of 1947 for suspected Communist ties. Although Secretary of State George Marshall rejected the security office's recommendation to discharge him, Graze
thought it prudent to leave. He resigned in May 1948 and invested his
savings in a small advertising business. After it failed, he taught part time and took a job at the United Nations. He told "Jour" he regretted that he
had not been in contact with anyone from Soviet intelligence in late 1950
because he had had the opportunity to join Radio Free Europe and might
have been useful as a source there. "Jour" continued to meet with Graze
over the next several months. Moscow cabled New York in June 1951,
however, that Graze's current position (executive secretary of the railways
operations study unit of the UN Technical Assistance Administration)
was of limited interest and urged the station to "determine the most practical way to utilize his potential," "`bearing in mind that D. ["Dan"/Graze]
is loyal to us and is the only American agent who even now has opportunities at his disposal for our work."' That remark was more of a comment
on the depleted resources of the KGB's American stations in 1951 than
an indication of Graze's access to information of significant intelligence
value. He did, however, hand over a 1947 intelligence report he had saved
from his State Department days exposing a Soviet engineer working in
the USSR who was furnishing information to American intelligence.16

The KGB and Graze discussed various possibilities about using him,
but nothing came to fruition before the Congress called him to testify in
October 1952. After he invoked the Fifth Amendment, UN secretary
general Tiygve Lie discharged him. The KGB immediately provided
$2,000 to assist him to establish a business but concluded: "`On 23 Oct.
1952, D. ["Dan"/Graze] was fired from the UN Secretariat in connection
with the loyalty checks of Americans working there. D. was subsequently
called before the U.S. Senate by the Internal Security Commission, and
there followed the publication of materials against him in the American
press, where it was reported that D. is suspected of espionage activities
and that the FBI has an extensive file on him. In connection with this, the
station was issued a directive to terminate its connection with D. until
further notice. At present, D. is out of commission.", 17

In January 1955 the KGB considered reactivating Graze. Moscow
told the New York station that it was considering him "as a possible candidate for work in illegal conditions" and ordered that he be contacted to
see if he was willing and able to consider changing his identity and moving to the West Coast or Europe. The New York station called upon
Michael Korneev, who had met with Stanley in London in 1945, to make
the contact. Wanting to intercept Graze on the street, Korneev made five
visits to his neighborhood. He discovered on his first trip that few people
walked or spent much time outdoors in Stanley's suburban neighborhood.
The next time no one was home. On the third visit he managed to speak
to his wife and learned Stanley was still at work. As the conversation went
on, Mrs. Graze began to get an inkling of her visitor's business. She agreed to tell Stanley he would return a few days later. On Korneev's
fourth visit, no one was home, leading him to suspect that Stanley was deliberately avoiding him. Finally, on zz June his persistence paid off. Stanley Graze, it turned out, was still loyal to the Communist cause, but he
was very cautious. The KGB report explained:

"'Dan' [Graze] did not recognize A. ["Alan"/Korneev], and, as he is very sensitive to provocation, he gave Alan the third degree. When he had stepped outside his house, he again insisted that he had never met A. and that he does not
know of any "Robert" from London. A. began to recount the circumstances of
their meeting in London; the meeting place, subsequent meeting places, the
number of meetings, the fact that D. had once brought him chewing gum and
cigarettes. Little by little, D. began to acknowledge A. and answer his questions to the point. For the duration of the meeting, he kept bringing up the
subject of working with A. in London. In particular, he asked A. to name the
person whose photograph A. had shown D. in London. At first, A. could not
remember, but after D. said that he greatly admired this person, A. remembered that it had been a personal photograph of Maurice Thorez. Later, A.
also remembered that D. had known him as "Michael" in London. D. also
asked A. to give him the password he had used to contact him in London. A.
remembered part of the password but was unable to recall the whole thing. It
was especially important for D. that A. name the restaurant that was included
in the password. A. remembered the material recognition signal.

After all this, when he was almost sure of A., D. apologized for all the
questioning, noting that the times weren't what they used to be, and he had to
be very careful. D. wanted to tell A. about the lapses that had been allowed on
our part during our work with him recently, but he put this matter aside until
the next meeting. It was apparent that he was hurt by the manner in which the
meeting with him [the connection with him] ... had been broken off."

Stanley, Korneev reported, was currently working at a stock trading company but indicated his willingness "`to continue working with us, because
in our work he sees the purpose of his life."'IS

Over a period of several months the KGB met with Graze and discussed various schemes for using him in France, England, or Mexico, but
in November 1955 Moscow Center concluded that "for now, D. ["Dan"/
Graze] cannot be used on N's line [illegal line], neither in the USA nor any
other capitalist country. Considering that he might be under FBI surveillance, we cannot attach him to any of the illegal stations. Dan should find
a lower profile cover in NY, consolidate his position, and refuse any incriminating contacts, so as to fall off the FBI's radar. Deactivate."19

In 1958 the KGB once more attempted to reestablish contact, but the operatives who went to Graze's house thought they saw surveillance
and abandoned the project. In 1959 Moscow Center considered bringing
in "foreign specialists" to assist the Soviet understanding of American society, and a draft proposal recommended

"relocating to the USSR Victor Perlo, Stanley Graze, and Lauchlin Currie,
who could be used, according to their knowledge and professional experience,
by the Ministry of Foreign Affairs, the State Security Committee under the
Council of Ministers of the USSR, and the Committee on Cultural Liaisons
with Foreign Countries as consultants in our work against the USA.

It would be expedient to provide the relocated American specialists and
their families with apartments in Moscow and furnish them with jobs at our institutes or magazine editorial offices, as well as to secure them a state subsidy."

The KGB leadership, however, rejected the idea. The KGB attempted yet
another contact with Graze late in 1961, but he ignored the prearranged
signals given over the telephone. In June 1962 a KGB officer showed up
at his house. He did not recognize Stanley: "`He had gotten older, gained
weight, and gone almost completely bald." After expressing some suspicion, Graze told the agent that the FBI checked on him only sporadically
and his life was less worrisome. While "`in principle he is ready to help
us as before, he does not see any realistic opportunities to do so."' They
agreed on another contact in August but again nothing developed.20

Stanley Graze then took a different direction in life. After decades of
devotion to an ideology that saw capitalists as criminals, he turned into a
criminal capitalist. He became vice-president of Love, Douglas and Company, a Wall Street brokerage firm, and then BWA, Inc., a West Coast
broker. There, in April 1968, he wrote a glowing report on International
Controls Corporation, a highly leveraged New Jersey firm that owned a
few dozen small manufacturing companies. His praise of its management
caught the eye of its chief executive officer (CEO), Robert Vesco, just
beginning a meteoric career based on fraud and deceit. Four years later,
after seizing control of troubled Investors Overseas Services (IOS), the
world's largest offshore mutual fund family, Vesco installed Graze as the
IOS fund manager.21

During the next year, with the assistance of a group of associates, including Stanley Graze, Vesco looted IOS accounts of more than $200 million, using a bewildering array of shell companies, money transfers, fake
arms-length sales, stock swaps with dummy corporations, and other swindles. As funds manager, Stanley Graze participated in these activities; in
one transaction in April 1972, he authorized the sale of $224 million in vested in U. S. blue chip securities and transferred the proceeds to a bank
in the Bahamas controlled by Vesco's aides. Another investment went into
a company chartered in the Bahamas that Graze ran from London and in
which he held a 4 percent ownership interest.22

In November 1972 the Securities and Exchange Commission (SEC)
filed a civil fraud complaint against Vesco and forty-one other individuals and corporations, including Stanley Graze. The largest fraud charge
in the SEC's history to that time, it triggered years of litigation, and Vesco
fled the United States, successfully fighting extradition for years in the
Bahamas and Costa Rica and, ultimately, seeking sanctuary in Castro's
Cuba. Graze refused to testify in an SEC hearing in 1973, citing the Fifth
Amendment (making him perhaps the only person ever to use the Fifth
Amendment in response to questions about both espionage and financial
swindles). He also settled in Costa Rica, where he received resident status and a passport. In 1976 the justice Department indicted him and five
other Vesco associates, charging them with misappropriating more than
$1oo million. He was also cited for contempt for refusing to appear before a grand jury. Because he never returned to the United States, the
case was never prosecuted. Likewise, in the civil case, a default judgment
amounting to $224 million and yet another contempt conviction ensured
that he would never come home.23

Fourteen years after his last contact with the KGB, in October 1976,
Stanley Graze reappeared on Moscow Center's radar screen. In San Jose,
Costa Rica, a KGB agent attending a wedding reported falling into intimate
conversation with another guest, Stanley Graze, and informed Moscow:

"According to him, he had helped us a great deal politically; however, during
the McCarthy period, he had been fired from his job and persecuted. He said
that because the people who worked with him `were not always competent,'
there had been a failure (in connection with the ... Gouzenko affair, Graze
fell into the sights of the FBI). For a long time, he did not have the means to
support himself, and as a result he had agreed to work for Vesco. Graze said
that while he was working with us (it appears that his wife cooperated as well),
he had been told that in our country he held the rank of Lieutenant Colonel.
`Maybe now I'm ranked as a General in your country, or there's a pension waiting for me over there,' said Graze. Graze feels burdened by his work for Vesco
and thinks he's scum.... In his opinion, our policies with regard to Israel and
the events in Czechoslovakia had a negative influence on his views.

Having started a conversation with me on this subject, Graze said: `I just
want you to know that I'm not trying to impose on you or entrap you, I'm not a
CIA agent.' When I approached Graze on my own initiative before leaving the
party and we continued our conversation, he said: `I have said all this because I have met a Russian after all these years, and I've had a bit too much to drink,
and my heart aches. But talking to you has made me feel better. -24