It was Spy vs. Spy. Jerry I. Treppel had begun to suspect that someone was going through the garbage that he placed on the curb twice a week outside his central New Jersey home. Engaged in a bitter feud with Canadian drugmaker Biovail Corp. (BVF ), Treppel, a former pharmaceutical analyst for Bank of America Corp. (BAC ), even had an idea who might be doing it. To be certain, he hired a private investigator.
Sure enough, in the wee hours of the morning during several weeks in the fall of 2005, the PI, positioned behind a fence, filmed two men as they drove up in a gray minivan, grabbed Treppel's trash, and even put some replacement garbage back in the cans to try to cover their tracks. "I live in Edison. The garbage [they put in] was from Perth Amboy," Treppel says. (It included, among other things, pieces of discarded mail.)
Trailing the men back to their homes, Treppel's gumshoe quickly identified the pair as Michael Specht and Edward Wong, investigators who live in neighboring towns on Long Island, N.Y. Figuring out who had hired the two men would prove astonishingly easy. After Treppel subpoenaed Specht and Wong to appear for depositions in a lawsuit he is pursuing against Biovail, an attorney for the two responded in a letter, stating that they "were retained by counsel for Eugene Melnyk," Biovail's chairman. In an e-mail comment to BusinessWeek, a Biovail spokesman said the company wanted to determine if Treppel was destroying evidence that might be relevant to the litigation. Treppel and Melnyk have asserted claims against each other for defamation, growing out of Treppel's coverage of Biovail.
Compared with the techniques employed by Hewlett-Packard Co. (HPQ ) in trying to discover the source of its boardroom leaks, rifling through someone's trash is pretty tame. "Dumpster diving," as it is commonly known, is generally legal. Obtaining phone records through impersonation, the way HP investigators did, may be a crime. But both the HP and Biovail situations stand out as rarities: The victims actually found out they were being spied upon. Most people whose private letters, bills, telephone records, and e-mails are scrutinized by unscrupulous snoops never find out.
But as the HP surveillance scandal unfolds, and new details emerge about how the tech titan pried into the lives of board members and journalists, it is becoming clear that even the bluest of blue-chip companies are sometimes willing to hire corporate spies. HP is hardly an isolated example. Several prominent Hollywood bigwigs and attorneys used the services of Anthony Pellicano, the private investigator whom federal prosecutors indicted in Los Angeles in February for illegal wiretapping. And Oracle Corp. (ORCL )acknowledged in 2000 that it hired detectives who had attempted to obtain the trash of a think tank that defended the aggressive business practices of its archrival, Microsoft Corp. (MSFT )
Then there are the cases we never hear about. Even when a company catches a rival spying, the matter is generally resolved quietly, says John A. Nolan III, chief executive of the Phoenix Consulting Group Inc., a business-intelligence firm in Huntsville, Ala. "The guys who are having their clocks cleaned don't want their shareholders knowing," he says.
Executives who hire private investigators share some common characteristics. For starters, they are often desperate to get their hands on sensitive information: Who is leaking my company's secrets? Why is this person attacking my reputation? When is my competitor releasing its new product? Where are my goods being counterfeited?
Second, those who retain investigators are unable to get the answers to their questions through ordinary means. That's where the corporate spies come in. They do things that most managers either can't or won't: tail people, adopt false identities, trespass on private property, and dig through arcane electronic databases. "Our industry is useful and is needed," says Michael J. Hershman, head of the Fairfax Group, an investigative firm in McLean, Va., that he founded in 1983. "Corporations are under attack from many criminal elements, both internal and external."
Finally, the managers who hire PIs often feel their foes are fighting dirty. Defendants in asbestos suits, after years of paying off people with weak cases, have increased their use of detectives to scrutinize suspicious claimants. Targets of aggressive interest groups have also been big consumers of corporate espionage services. The owners of Ringling Brothers & Barnum & Bailey Circus, for instance, paid agents through much of the 1990s to infiltrate groups such as People for the Ethical Treatment of Animals, according to court filings and testimony of former employees.
Corporate demand for PI services has grown steadily since the 1980s. One reason is globalization. There is heightened need for information about people or companies in far-flung locations. Then there's the fact that the most valuable asset of corporations these days is information -- a company's ideas and innovations. That's a lot easier to steal than, say, a machine press. Foreign companies in particular, Hershman says, "are extremely aggressive in seeking out proprietary information to get an advantage." Employees, meanwhile, may be more ready to give that information up, since many feel less loyalty to their employers than workers used to. Finally, a wave of statutes, from the Foreign Corrupt Practices Act to Sarbanes-Oxley, create potentially severe penalties for companies that aren't aggressive about rooting out fraud.
The vast majority of work PIs undertake for business clients is routine and aboveboard. A whole industry has arisen that specializes in routine background checks for rank and file employees. But when big companies want to bring on a top officer or a director, they'll often get a PI firm to do a deep dive on a candidate's past. That may involve old-fashioned shoe-leather techniques, including visits to neighbors and former colleagues.
In the wake of the HP scandal, some of the more established private investigative firms are arguing that most legal and ethical abuses are committed by smaller outfits. HP assigned the leak probe to Security Outsourcing Solutions, a tiny Boston PI firm. Some of the work was then subcontracted out to other firms. The PI field is bedeviled by "cowboys," who "will do whatever needs to be done to make the client happy, whether it's illegal or not," says the Fairfax Group's Hershman. "We're constantly battling the folks who are on the edge, and frankly there are a lot of them."
The behemoth of the corporate intelligence world is New York-based Kroll Inc., a unit of Marsh & McLennan Cos. (MMC ) With nearly 4,000 employees in 25 countries, Kroll reported 2005 revenues of $946 million, though only a portion of that came from PI work, since the firm offers many other services. Hundreds of midsize and boutique firms such as Fairfax, some bristling with former prosecutors or federal agents, also cater to the market. They typically charge by the hour, with rates ranging from about $125 to $400 an hour.
All in all, about 60,000 private investigator licenses are active in the U.S., according to an estimate by PI Magazine. It is not uncommon for a license to be issued in the name of a firm, which means many individuals may operate under it. "There's also a huge, unlicensed market out there," says Bruce Hulme, legislative director for the National Council of Investigation & Security Services.
Big companies often turn to obscure players to do their digging. Consider Spyro Contogouris. He is "an operative for short-selling hedge funds that pay him to drive down the price of stocks [and] otherwise to secure material nonpublic information," according to a complaint filed in New Jersey's Morris County Superior Court by Fairfax Financial Holdings Ltd. (FFH ), a Toronto-based insurer. In addition to Contogouris, defendants include a host of hedge funds and individuals.
On May 31, according to Fairfax' complaint, Contogouris "lied his way past security" at a Fairfax subsidiary in London by stating that he was a reporter conducting a survey. The next day, Contogouris, who also hands out business cards stating that he is a "special situations research consultant" for "MI4 Reconnaissance," hand-delivered an unmarked package to Fairfax' former chief financial officer, Trevor J. Ambridge. It contained a letter that tried to induce Ambridge to divulge inside information, Fairfax' suit alleges. "I would like to lay out a series of maps, flow charts, and related exhibits which I have put together that I feel are missing some critical pieces," the letter stated, according to an excerpt in the complaint. Then came what Fairfax alleges was a "veiled threat that failure to cooperate would result in Ambridge's criminal prosecution." Ambridge alerted Fairfax. "The charges in the lawsuit are without merit," said a spokesman for Contogouris.
The alleged antics of Contogouris may seem sleazy, but hiring big, brand-name investigative firms is no guarantee of avoiding controversy. For the past three years, several Russian businesses have been battling for control of a 25% stake in Megafon, a large Russian mobile-phone company. Much of the wrangling has taken place in arbitration proceedings in Switzerland, but part of it recently landed in U.S. courts. Two prominent American investigative firms have been caught in the fray.
In a complaint in federal district court in Washington in June, IPOC International Growth Fund alleges that Diligence Inc., a Washington-based investigator, infiltrated a confidential examination of IPOC's affairs being conducted by KPMG Financial Advisory Services for the Bermuda Finance Ministry. IPOC alleges that Diligence did this through "impersonation of United States and/or British intel- ligence agents," and that it obtained confidential documents from KPMG's inquiry through "fraud and bribery."
Founded in 2000, Diligence is a relative newcomer to the corporate investigations business. But it is nothing if not well connected. Richard Burt, a former assistant Secretary of State and U.S. ambassador to Germany, is executive chairman, and the firm's advisory board includes William Webster, former head of both the CIA and FBI, and Thomas F. "Mack" McLarty, former chief of staff to President Bill Clinton. Diligence did not return a call seeking comment.
In Geneva, meanwhile, in May, 2004, Bernard F. Meyer-Hauser, the chairman of the arbitration panel hearing part of the Megafon dispute, announced to the parties, each represented by prominent U.S. law firms, that he had filed a criminal complaint with the Swiss police. The reason, he said, was that he had "been shadowed by several investigators" who had "watched my house" and "taken photographs of all my contacts within the last four weeks."
Meyer-Hauser said local PIs told him and the police that they had been retained by Kroll out of its London office. He said they appeared to be looking for evidence that he had been bribed. (He denied receiving any bribes.) Meyer-Hauser also said that an effort was made to get access to his personal bank account by someone who spoke English and said he was calling from London. The person knew Meyer-Hauser's Visa account number and wife's name but tripped up by giving the bank representative a partially incorrect address. In an e-mail, Meyer-Hauser, a Zurich attorney, declined to comment. A spokeswoman for Kroll said: "We don't break the law and don't ask others to do it for us."
Big firm or little firm, the bottom line is clear: Any client who hires a corporate detective is taking a chance. That's because the PI industry is full of people who are not aware of the many legal, ethical, and public relations traps that surround big companies. Detectives frequently come from law enforcement, where "few people would disagree that it's O.K...to lie to suspects who are rapists and murderers and child molesters to trick them into giving information," says Alex Kline, a solo investigator in San Francisco who has worked for a number of larger agencies. But when these people transfer to a private setting, "it can lead to disaster if they don't use good judgment."
By Michael Orey