Pentagon Strips Air Force of
21 Major Weapons Programs
Las Vegas Review-Journal
WASHINGTON (AP) – In a highly unusual move, the Pentagon’s top weapons buyer
on Monday took away the Air Force’s authority to oversee 21 major programs with
a combine value of $200 billion.
The move, called temporary, was made because of a civilian leadership vacuum at
the Air Force after the departure last week of Peter Teets, who was under
secretary of the Air Force as well as acting secretary. Teets had been fillin in
since James Roche resigned as secretary in January.
It also comes amid continuing controversy over the Air Force’s handling of a
multibillion-dollar Boeing aircraft lease deal that fell through last year and led to
the conviction of former Air Force executive Darleen Druyun on charges of
conspiring to violate conflict-of-interest rules.
Druyun admitted in court that she favored Boeing on deals worth billion of dollarsbecause the company gave jobs to her daughter and son-in-law. Her admission
led to a detailed Pentagon review of her nearly 10-year tenure as a key weapons
buyer for the Air Force and prompted rival defense companies to file protests
over Boeing contracts awarded during that period.
The episode has taken a tool on the Air Force. Since Roche departed, the White
House has not nominated anyone to replace him as the Air Force secretary, a post
that requires Senate confirmation. Some believe the current Navy secretary,
Gordon England, will get the nomination.
In addition, no one has been nominated to replace Teets as the under secretary.
What’s more, the post of Air Force acquisition chief has been vacant since Marvin
Sambur left in January.
With Teets gone, the most senior civilian in the Air Force is Michael I.
Dominquez, who has served since August 2001 as assistant secretary of the Air
Force for manpower and reserve affairs….
In Monday’s announcement, the Pentagon said it was giving the decision-making
authority for the 21 major Air Force weapons programs to Michael Wynne, the No.
2 Pentagon civilian in charge of weapons procurement.
The No. 1 slot has not had a Senate-confirmed holder since May 2003. Wynne was
nominate for the top spot but his nomination – and others in the Air Force – have
been blocked by Sen. John McCain, R-Ariz, as part of a long-running dispute over
the Boeing lease deal….
The 21 programs include a $59.2 billionBoeing contract for C-17A Globemaster II
advanced cargo aircraft, and a $31.7 billionBoeing and Lockheed Martin contract
for the Evolved Expendable Launch Vehicle….
Among other programs affected are air-to-air missiles, B-2 bomber radar
modernization, C-5 cargo plane improvements, propulsion replacement for the
Minuteman III intercontinental ballistic missile and a $18 billion communications
$ $ $
March 8, 2005
Boeing Forces Out CEO Over
Ethics Scandal Involving Affair
By Dave Carpenter, Associated Press
CHICAGO – Boeing Co., CEO Harry Stonecipher, brought back from retirement
15 months ago to boost the aerospace manufacturers’ tainted image, has been
forced out because of a new ethics scandal involving an affair he had this year with
a female executive.
In a stunning announcement that left the exact circumstances behind the ouster
unclear, Boeing said Monday the 68-year-old- president and chief executive
officer had resigned at the board’s request a day earlier for improper behavior
while carrying out the consensual relationship.
Chairman Lew Plattsaid the affair by itself did not violate the code of
business conduct at the company, where a string of defense scandals has raised
questions about the way Boeing obtains its lucrative contracts. But an internal
investigation that started because of an employee’s complaint discovered “some
issues of poor judgment” involving Stonecipher, who is married.
Platt refused repeated requests to be more specific and did not identify the
female executive, who he said remains with Boeing….
< < < FLASHBACKS < < <
Program Manager Interviews
ASSISTANT SECRETARY OF DEFENSE FOR ECONOMIC SECURITY
~ ~ ~
Which Defense Firms Will Survive – Meet the
Man Who Helps the Pentagon Decide
A large white banner is first thing you notice upon entering the reception
area of Joshua Gotbaum’s third-floor Pentagon office. In foot-high red
letters, it reads: “Please Mr. Gotbaum, Save Natick [Mass.] Labs”
(referring to the Base Realignment and Closure [BRAC] recommendation to
Secretary Gotbaum, a former Wall Street investment banker, achieved
the status of Washington insider in 1 short year. He is respected both
by the Pentagon brass and defense industry officials. He influences key
decisions ranging from BRAC to which defense industries will survive.
Secretary Gotbaum is the right man for the job at the right time. A 44-year-old lawyer, Secretary Gotbaum is at home in the world of mergers,
acquisitions, and restructurings. He heads the new 260-person Pentagon
Office of Economic Security and has won the confidence of many defense
industry and military officials for helping educate the Pentagon brass on
their decisions which impact the nation’s troubled defense industry. And so
far, both sides appear pleased with his efforts or their behalf….
Kamal Adham was one of the true inside power players of the Middle East, a
shrewd, jovial man who had for decades straddled the worlds of Middle Eastern
business and politics.. He was the half brother of Iffat, the favorite wife of King
Faisal, who ruled Saudi Arabia from 1964 until his death in 1975….
Like so many other enterprising Arabs in the 1960s and 1970s, when oil revenues
were booming and foreign companies were lining up to sell their products, Adham
had used his connection to commercial advantage. The way most commoners in the
Middle East got rich off the oil boom was through a simple system know as
In order to sell a product or service in Saudi Arabia, you had to know someone in
the royal family, which authorized all expenditures. If you did not know a
princeling or a royal cousin, then you hired an “agent” who provided you access for
Though this commission often looks very much like a“bribe” … it was nonetheless
the way business was done, and few were better at it than Kamal Adham.
The list of his agency deals was long and illustrious….
By the mid-1960s Adham’s influence was such that he simultaneously came to
represent three defense firms and was being ardently courted by a fourth. Said
Northrop representative Kermit Roosevelt, “Adham already has a piece of the
Lighting deal, the Mirage deal, and the Lockheed deal and is trying to complete
the square by an arrangement with Northrup.”
He also came to be the principal broker for weapons purchased by
Saudi Arabia on behalf of Egypt.
But perhaps his richest contract was withBoeing Company, which
paid himmillions of dollarsin commissions to help it sell passenger
jetliners to the fledgling Saudi airlines….
That and other similar transactions had led to a three-year investigation of
Boeing’s commission payments by the U.S. Securities and Exchange
Commission, whose goal in part was to figure out exactly who Boeing was using to
accomplish these sleights of hand.
Curiously, in the words of a 1976 Wall Street Journal article, Boeing’s efforts to
suppress those names, particularly Adham’s, “has been accomplished with
significant help from the State Department, which entered a court fight
between the SEC and Boeing to argue that disclosure of Boeing’s ‘highly placed’
consultants abroad could harm U.S. foreign policy interests.”
How could the mere disclosure of Adham’s name affect U.S. foreign policy? In two
First, Adham was the head of the Saudi internal security service – arguably the
most important agency of the government, since it protected the royal family – and
theGeneral Intelligence Directorate of Saudi Arabia.
In that role he was the principal liaison between the CIAandEuropean
intelligence agencies, and he even had an agency code name:Tumbleweed.
In geopolitical terms, Adham was the five-hundred-pound gorilla of
Saudi intelligence, an outfit known and feared for its merciless
hunts for dissidents and brutal methods of repression….
But the second and more important foreign policy concern was that Adham was the
kingdom’s key link to Egyptian PresidentAnwar Sadat in the years leading to
the Camp David accords in 1979 – the years following the 1973 war, when the
Saudi-Egypt axis acquired key strategic importance….
$ $ $
July 25, 2004
Former Boeing CFO to Plead Guilty
NEW YORK (Reuters) – Former Boeing Co. Chief Financial Officer Michael
Sears agreed to plead guilty to conspiring to deceive the U.S. government about
negotiations for a contract to provide the Air Force with refueling jets, according
to a report by Bloomberg News on Sunday.
Sears is cooperating with federal prosecutors who are probing negotiations that
Sears had with a former Pentagon official who had been offered a job by Boeing,
a report on Bloomberg’s Web site said, citing an unnamed source.
The former Pentagon official, Darleen Druyun, pleaded guilty to the same
charge in April, and confirmed that she received the job offer while negotiating
for the Air Force….
The investigation may delay the awarding of the $23 billion contract, which
includes providing the Air Force as many as 100 planes that refuel aircraft in mid-air.
The agreement to hire Boeing was suspended pending review in November, when
Druyun and Sears were fired from Boeing.
$ $ $
July 17, 2004
Boeing settles sex discrimination case
Boeing Co. has agreed to pay between $40.6 million and $72.5 million and
change some practices to settle charges that it discriminated against 29,000
women who have worked for Boeing in the Seattle area.
The settlement of the class-action suit filed in 2000 received preliminary approval
in U.S. District Court in Seattle yesterday. It calls on Boeing to change the way it
determines starting salaries, modify its performance-evaluations and monitor
salaries and overtime to reduce the risk of gender discrimination.
$ $ $
July 6, 2003
Air Force deal with Boeing draws heat
Cox News Service
The Air Force needed tanker planes to refuel its jets.
Boeing Co. needed orders.
So the two got together and crafted what they see as a stroke of bureaucratic
brilliance, said Business Week (July 7) – a $19.6 billion deal to lease 100 new
767s to replace the Air Forces’ rusting KC-135s tankers.
But the deal has drawn heat from all sides. Watchdog groups on the right and left
see it as a brazen Boeing bailout. Defense Department civilians say Boeing
asked too much, and others say a lease’s finance charges drive up the cost.
At least three congressional committees are looking into the deal.
$ $ $
June 26, 2003
Ex-Boeing Workers Charged Over
By Renae Merle, Washington Post
Two former Boeing Co. employees were charged last night with stealing
Lockheed Martin Corp. documents to help Boeing win an Air Force contract.
The U.S. attorney’s office in Los Angeles said William Erskine, 43, and
Kenneth Branch, 64, face criminal charges of conspiracy, theft of trade secrets
and violating the Procurement Integrity Act. A lawyer who represented Erskine
and Branch in a wrongful-termination lawsuit against Boeing did not return a
call for comment.
The charges mark the latest escalation in a four-year fight over a
multibillion-dollar contract to build the next-generation rocket launcher known as
the Evolved Expendable Launch Vehicle. Earlier this month, Lockheed
Martin sued Boeing as well as Erskine and Branch, accusing them of using corporate
espionage to steal the high-profile Air Force contract.
“By covertly using a competitor’s secret information, they caused harm not only to
Lockheed Martin, but also to the Air Force and taxpayers who finance government
operations,” U.S. Attorney Debra W. Yang said in a statement. “Their improper
conduct had huge ramifications because of the value of the contract.”
If convicted on all three counts, Erskine and Branch could be sentenced to a
maximum of 15 years in prison and a fine of $850,000.
Boeing acknowledges that some employees “behaved unethically” during the
competition. The company fired Erskine and Branch in 1999 and has turned over
more than 37,000 pages of Lockheed documents, including some that contained
sensitive cost and technical information and Air Force critiques of Lockheed’s
Lockheed declined to comment on the charges. “We are cooperating fully with the
Justice Department’s investigation and the Air Force’s inquiry,” said Boeing
spokesman Daniel Beck.
The repercussions from the various investigations could profoundly affect
Chicago-based Boeing, industry analysts said. If the Air Force punishes the firm by
reversing its decision on the rocket-launch competition, the multibillion-dollar hit
to the company’s already struggling space business would be severe, they said.
French defence company in bribery
scandal in Seoul
Dassault denies graft claims in Seoul
By Andrew Ward in Seoul and Victor Mallet in Paris, Financial Times
In March 2002, Dassault Aviation said it was the victim of a smear campaign
after the French aircraft manufacturer was accused in a corruption scandal
embroiling the race for a South Korean fighter jet contract.
The company denied bribing a South Korean air force colonel to improve its
chances of winning the deal to build 40 aircraft.
Newspapers in Seoul linked Dassault to a Won11m ($8,300, £5,900) sweetener
allegedly paid to the colonel in return for advice about the bidding process.
Dassault said it was being smeared by people that did not want its Rafale jet to
beat Boeing’s F-15 to the estimated $3.2bn contract. “There’s nothing between
Dassault and the colonel,” a Dassault spokesperson told the FT.
“Everybody knows the evaluation process has put the Rafale at the top. We fear
that there is manipulation by people who are annoyed to see the Rafale at the top.”
Any bidder proved to have paid bribes could be barred from the so-called FX
contract, which is among the biggest defence deals currently being contested.
The corruption scandal emerged when a colonel, identified by his surname, Cho,
was arrested on bribery charges. He is believed to be the same man that appeared
on South Korean television with his identity concealed, to allege that the selection
process was rigged in favour of Boeing.
Mr Cho was part of the air force’s evaluation team that assessed the four bids –
Eurofighter’s Typhoon and Russia’s Sukhoi, the other two candidates, are
Dassault’s more modern Rafale outstripped Boeing’s ageing F-15 in
flight tests, according to information leaked to the South Korean press.
However, defence chiefs were reported to favour the US product
because of Seoul’s close military alliance with Washington.
Last week, opposition lawmakers accused the government of
succumbing to political pressure from Washington to select the F-15.
Dassault said it was “totally confident in the transparency of the process”.
Boeing denied involvement in the alleged bribery….
# # #
January 19, 2002
China Finds Bugging Devices on Jet
BEIJING – China has discovered 27 bugging devices in a U.S.-made Boeing
767 it bought for the personal use of President Jiang Zemin, published
reports said Saturday. The tiny, highly sophisticated devices were hidden in the
jetliner’s upholstery, including in the president’s bathroom and the headboard of
his bed, the London-based Financial Times said, citing unnamed Chinese sources. It
said Jiang was outraged at the discovery.
The bugs were discovered when they emitted static during a test flight after the
plane’s delivery in August, the newspaper said. In a separate report, The
Washington Post said Chinese army communications experts found the bugs in
October, days before the plane’s first official voyage. It said the jet is now
sitting with its insides torn out on an air base north of Beijing.
The Washington Post report said Chinese officials blamed U.S. intelligence
agencies for the bugs. It said the incident would be raised during President
Bush’s Feb. 21 summit with Jiang in Beijing.
The reports described the devices as satellite-controlled and more complex than
those available commercially. Chinese officials were puzzled as to how and when
the bugs were planted, the reports said. They had carefully monitored the plane’s
construction at the Boeing plant in Seattle, Wash., and the fitting of its interior by
several aircraft maintenance companies in San Antonio, Texas.
Two of the companies, Gore Design Completions and Dee Howard Aircraft
Maintenance, issued a statement Friday saying they had received no complaints
about their work on the plane, the San Antonio Express-News reported.
”I know that we had no culpability whatsoever in this. All we did was put an
interior in it,” Jerry Gore, president of Gore Design, told the paper. The plane was
parked in a Dee Howard hangar and work began shortly after a contract was signed
in October 2000, the Express-News reported, continuing through a contentious
period the following spring when Beijing and Washington had a standoff over the
forced landing of a U.S. Navy spy plane and China’s detention of its 24-member crew. Chinese officials were concerned Washington would seize the plane,
so security was tight, Gore told the Express-News.
The hangar was guarded by Dee Howard security staff and Chinese troops. The
reports said 20 Chinese Air Force officers and two employees of the China
Aviation Supply Export & Import Corp., which bought the plane, were
being questioned. Officials at the State Department in Washington and the U.S.
Embassy in Beijing had no comment. China’s Foreign Ministry did not answer calls.
Employees at the Chinese aviation company refused to comment.
Randy Harrison, a Boeing spokesman in Seattle said he had no knowledge of the
* * *
For a closer look at some of the Boeotian birds
and their nests,
JUST BOOK YOUR FLIGHTS AND FOLLOW YOUR FANCY
Akin, Gump, Strauss, Hauer & Feld– One of the largest nests of
Lobbyists in the world.
In 1998, this firm declared total lobbying income of $11,800,000. Among their
clients are the likes of Alliance of American Insurers; America Online; American
Express; American Financial Group; Apollo Advisers; AT&T; Biotechnology
Industry Organization; Boeing Co.; Capital Gaming International; CBS Corp;
Citigroup; Korean International Trade Assn; Miller & Chevalier; National
Hockey League; Pfizer; PG&E Corp; Pharmaceutical Rsrch & Mfrs of America;
Philip Morris; Pohang Iron & Steel; Samsung Electronics; Sri Lanka Apparel
Exporters Assn; AOLTime Warner; and Warner-Lambert, just to mention a few.
* * *
December 11, 2001
The White House connection: Saudi
‘agents’ close Bush friends
by Maggie Mulvihill, Jonathan Wells and Jack Meyers, Boston Globe
A powerful Washington, D.C., law firm with unusually close ties to the White House
has earned hefty fees representing controversial Saudi billionaires as well as a
Texas-based Islamic charity fingered last week as a terrorist front.
The influential law firm of Akin, Gump, Strauss, Hauer & Feld has
represented three wealthy Saudi businessmen – Khalid bin Mahfouz,
Mohammed Hussein Al-Amoudi andSalah Idris– who have been
scrutinized by U.S. authorities for possible involvement in financing Osama bin
Laden and his terrorist network.
In addition, Akin, Gump currently represents the largest Islamic charity in the
United States,Holy Land Foundation for Relief and Development in
Holy Land’s assets were frozen by the Treasury Department last week as
government investigators probe its ties toHamas, the militant Palestinian group
blamed for suicide attacks against Israelis.
Partners at Akin, Gump include one of President Bush’s closest Texas
friends, James C. Langdon, and George R. Salem, a Bush fund-raiser who chaired
his 2000 campaign’s outreach to Arab-Americans.
Another longtime partner is Barnett A. “Sandy” Kress, the former Dallas
School Board president who Bush appointed in January to work for the White
House as an “unpaid consultant” on education reform. . . .
Miller & Chevalier – A Washington, DC-based nest of Lawyers and Lobbyists.
From their web-site, 8/1/00: . . .
In 1920, Robert Miller and Stuart Chevalier founded Miller & Chevalier
as the nation’s first law firm specializing in tax matters. Mr. Miller had served as
Solicitor and Mr. Chevalier as Asst Solicitor of the Internal Revenue Service
shortly after the first federal income tax laws were enacted….
Like our firm’s founders, many of our tax lawyers have worked in federal
Our firm’s tax practice is diverse, responding to the increasing complexity of the
international tax system and the need for Washington representation to deal
effectively with important tax policy issues. We serve clients in numerous
industries: … aerospace, automobile, banking and finance, natural resources and
energy, chemicals, electronics, pharmaceutical, retail, and health care insurance….
Our firm represents over half of the Fortune 50 companies. We also work with
foreign-owned companies of similar size …
* * *
Taxation – Representative Engagements
Amoco Corp v. Commissioner (a.k.a. US Taxpayers) . . . The U.S. Court of
Appeals … held that Amoco was entitled to foreign tax credits for Egyptian income
taxes paid on its behalf by the Egyptian National Oil Co . . . The amount of the
asserted deficiency was over $450 million….
Atlantic Richfield Co v. Commissioner (a.k.a. US Taxpayers). . . This case
involves over 200 issues and a deficiency in excess of $700 million. Some of the
issues involve hedging, tax accounting, foreign source income, and capitalization
B.F. Goodrich v. United States (a.k.a. US Taxpayers) . . . This case involved
whether interest expenses incurred on corporate owned life insurance were
deductible. The taxpayer sought a refund of approximately $2.5 million. The case
was settled. . . .
The Boeing Co v.United States (a.k.a. US Taxpayers) . . . This case involves
the allocation and apportionment of research and development expenses for
purposes of computing combined taxable income for DISC/FSC purposes. The
taxpayer is seeking a refund of over $450 million. The District Court granted
Boeing’s motion for summary judgment; the govt’s appeal to the Ninth Circuit is
pending. . . .
Cheng v. Commissioner and Pen v. Commissioner . . . The issue in these
companion cases was whether commissions earned as compensation for the
performance of personal services in Taiwan were taxable as income effectively
connected to a U.S. trade or business. The total amount at issue exceeded$40
million in deficiencies, penalties, and interest. The government conceded. . . .
(Those must have been some personal services! I wonder what kind?)
Exxon Corp v. Commissioner (a.k.a. US Taxpayers) . . . The Tax Court held
that the Commissioner’s proposed allocation of over $6.5 billion in income was
precluded under Code sections 61 and 482 due to a foreign legal restriction. . . .
General Electric Co v. Commissioner (a.k.a. US Taxpayers) . . . This case
involved whether the taxpayer properly elected … to deduct currently
approximately$118 million in research and development expenses.
~ ~ ~
In addition to their legal services, Miller & Chevalier declared lobbying income
of $1.4 million in 1998, with total lobbying expenditures of $320,000 (all to the
lobbying firm of Akin, Gump).
Among Miller & Chevalier’s lobbying clients: Assn of Financial Service Holding
Cos; Atlantic Richfield;Blue Cross/Blue Shield; Boeing Co; Boston Edison;
Chevy Chase Bank; Gallo Winery; Monsanto Co;Nuclear Fuel Services; and the
Philip Condit – Chairman and Chief Executive Officer, BOEING CO.
From the Boeing website (www.boeing.com):
Phil Condit is chairman and chief executive officer of The Boeing Company, the
world’s largest aerospace company. As the largest manufacturer of satellites,
commercial jetliners, and military aircraft, the company employs close to 167,000
people and serves customers in 145 countries. It is also a global market leader in
missile defense, human space flight, and launch services. Boeing has headquarters
in Chicago, Ill., and is the largest exporter in the United States, with revenues of
more than $54 billion in 2002.
Under Condit’s leadership, several mergers and acquisitions have transformed the
company into a broad-based, global enterprise. The acquisition of Rockwell
Aerospace, the merger with McDonnell Douglas and the addition of Hughes Space
& Communications has established a company with great strength and breadth.
Today, Boeing is strongly positioned in commercial airplanes, defense, space,
information technology, financing, and communications.
Elected president and member of the board of directors of Boeing in 1992, Condit
added the title of chief executive officer in 1996. In 1997, he was elected
chairman. He is the seventh chairman since the company was founded in 1916….
Condit serves on the board of Hewlett-Packard Company, is co-chairman of
the Trans Atlantic Business Council, chairs the United States––China
Business Council, and is a member of the Business Roundtable.
Elected a member of the National Academy of Engineering in 1985, he is also an
honorary fellow of the Royal Aeronautical Society and an honorary fellow of the
American Institute of Aeronautics and Astronautics. He belongs to the Society of
Automotive Engineers and has chaired the NASA Advisory Council’s Aeronautics
A native of Berkeley, Calif., Condit was born on Aug. 2, 1941. He has been an
aviation enthusiast his entire life and earned a pilot’s license at the age of 18.
* * *
From AFL-CIO Executive PayWatch … (www.aflcio.org) …
In 2001, Philip Condit raked in $4,037,035 in total compensation including stock
option grants from BOEING CO.
And Philip Condit has another $3,897,304 in unexercised stock options from
Technology Strategies and Alliances – Another company that knows the
meaning of “quid pro quo”.
In Feb of 1995, the administration announced that for the first time it would
consider the financial state of U.S. defense contractors when negotiating overseas
arms sales. The administration has also pushed to relax export restrictions on
high-tech equipment used to manufacture sophisticated weapons systems.
Part of what has ingratiated the Clinton administration to weapons manufacturers
has been the presence of William J. Perry, first as Deputy Secretary and later as
Secretary of Defense.
Perry is a former defense consultant who headed Technology Strategies and
Alliances (TSA) between 1985 and 1993. TSA’s 1994 clients included Boeing,
Grumman, Lockheed, Martin Marietta, McDonnell Douglas,
Northrop, Textron, Texas Instruments, TRW, Westinghouse, and
20 other defense contractors.
While Perry severed his ties with the company, he had amassed more than a million
dollars in consulting fees from TSA’s clients. Not long after he joined the Defense
Department, Perry began going to bat for the industry.
One of Deputy Defense Secretary Perry’s extra base hits came when he and then-Defense Undersecretary for Acquisitions and Technology John Deutch quietly
agreed to provide U.S. defense contractors with taxpayer-finance subsidies for
mergers and acquisitions. That was a dramatic shift in Pentagon policy. Usually,
such issues are taken before Congress.
Instead, Deutch, in a July 21, 1993 memo, reversed the Pentagon’s ban on the
subsidies and underwrote $270 million worth of TSA clientMartin Marietta’s
acquisition of General Electric’s Aerospace Division.
Just seven weeks earlier, on June 3, 1993, industry CEOs, including Martin
Marietta’s Norman Augustine, had sent a letter to Perry and Deutch asking for
DOD funding of “restructuring costs” for mergers and acquisitions. Perry also
approved Northrop’s $2.1 billion acquisition of Grumman. Both were TSA clients.
The Pentagon called the policy shift a “clarification” that did not require
The policy shift required both Perry and Deutch to seek ethics waivers from rules
that call for a one-year “cooling off” period before Pentagon officials can deal with
former clients. They got them from then-Defense Secretary Les Aspin, whom
Perry replaced in February 1994.
Paul Kaminski got an ethics waiver in November of 1994, when he was named to
head the Pentagon’s Acquisitions and Technology Department, replacing Deutch.
Deutch remained in the Pentagon loop a while longer and became Deputy Secretary
of Defense before moving to the CIA.
Kaminski, who worked at TSA, is responsible for awarding$43 BILLIONin
defense programs to Pentagon contractors.
The Kaminski appointment marked the first time former defense industry
consultants filled the Pentagon’s top three policy posts….
Thayer Capital Partners – A private equity investment fund where some
very big birds privately nest.
June 29, 1998
Thayer Capital Partners Makes Its Mark as a New Player
Among Old-Time Investment Firms
By Jerry Knight, Washington Post
In an office 31 floors above Park Avenue in New York, a congregation of
executives, lawyers and investment bankers is scheduled tomorrow to perform a
ritual symbolic of contemporary business trends: the marriage of two companies.
If all goes as planned, three hours of voting and affirming, signing and witnessing
will join together the two telemarketing firms to createAegis Communications
Inc., a $230 million-a-year business that will have 8,500 employees, offices in 30
cities and shares traded on the Nasdaq Stock Market.
Playing matchmaker, as well as mother of the bride and dowry donor, is Thayer
Capital Partners, Washington’s newest player in the big-money private
Two-year-old Thayer is the newest of the financial powerhouses that have
emerged in Washington in the past five years as the mid-Atlantic region has grown
into a world-class player in finance and technology.
Washington’s “old money” institutions, symbolized by Fannie Mae and Freddie
Mac, has been joined by a clique of newcomers, including Friedman, Billings,
Ramsey Group Inc. of Arlington, one of the nation’s largest underwriters of new
stock offerings; J.E. Robert Co. of McLean, a real estate investment empire soon
to expand into Asia; and Carlyle Group, the merchant banking firm that Thayer
resembles on a smaller scale.
Thayer, bankrolled by two dozen banks, pension funds and financial
institutions that put up $364 million in capital, has invested in
businesses as varied as mail-order meat sales, multinational bicycle manufacturing,
travel wholesalers and telemarketing.
Almost $40 million has gone into the Aegis telemarketing group, one of
several Thayer investments that are turning the crucial corner from private
ownership to publicly financed companies, allowing Thayer to convert its equity in
the private companies into stocks that can be sold.
One of Thayer’s eight portfolio firms, meat marketer Colorado Prime Foods,
has produced no gains after a year, a disappointment in a business in which
investors demand a quick payback. Two other deals have been done in the past few
weeks, but its earlier investments are on the fast track:
Aegis, an unusual “reverse IPO” in which a large privately held Los Angeles-based
company backed by Thayer will go public by merging with a smaller, Dallas company
listed on Nasdaq. Thayer will end up owning about 38 percent of the stock of the
companies that handle phone inquiries for client companies and make telephone
Global Vacation Group Inc., a Washington-based travel wholesaler that is
planning a conventional IPOlater this summer to raise $63 million.
Derby Cycle Corp., with headquarters in Nottingham, England, raised $160
million last month by selling bonds in the United States and Germany.
Software AG Systems Inc.of Reston — which has given Thayer the kind of
home run that big investors often long for but rarely hit. The $29.7 million
investment was worth more than $460 million after Software AG stock soared to
a record $32.25 Friday.
Based on its track record with those companies, Thayer is talking to institutional
investors that put money into its first fund about raising a second pool of capital.
With this funding, the firm would have as much as $1 billion to make more
Though Thayer has been in business in its existing form for only a little more than
two years, Thayer’s players are three longtime starters in the big leagues of
Company founder Fred Malek, 62, who first made a name in Washington as a top
aide to President Richard M.Nixon.
Malek went on to become president of Marriott Corp.of Bethesda and then
was president of Northwest Airlines after leading a buyout of that company
with fellow Marriott alumni Al Cecchi and Gary Wilson.
Malek led a management buyout of CB Commercial Real Estate Group, then
returned to the hotel business, forming a pair of hotel investment partnerships
and arranging a buyout of the Ritz-Carlton hotels in partnership with Marriott.
Paul G. Stern, 59, was a top corporate manager before he got into the buyout
business as a partner in Forstmann Little & Co. in 1993. By then his resume listed
stints as chairman ofBraun AG in Germany, vice president for strategic planning
and acquisitions ofRockwell International Corp. and president of Burroughs
Corp. He spent four years as chairman of Canada’s Northern Telecom Ltd.
before joining Forstmann.
Rick Rickertsen, 38, hooked up with Malek in 1994 after working at Hancock
Park Associates, a Los Angeles venture capital and buyout firm and Brentwood
Associates, the biggest venture capital investor in Southern California. He worked
on Thayer’s two hotel funds and the Ritz-Carlton transaction. He also has
coordinated fund-raising for Thayer Equity Investors III, the partnership behind
the company’s current deals.
The principals are backed by a coterie of apprentice dealmakers — half a dozen
Harvard MBAs — a small support staff and a heavyweight advisory board that
includes Washington power lawyer Vernon Jordan; former vice presidential
nominee Jack Kemp; Frank Zarb, chairman of the National Association of
Securities Dealers; Jim Robinson, former chairman of American Express Co.; and
Drew Lewis, former transportation secretary and current chairman of Union
“Fred Malek is the driving force. He has built a very fine and very focused
organization,” said Ed Mathias, a principal at Carlyle Group, Washington’s bigger
and better-known buyout firm. Malek and Stern have the management experience
and worldwide contacts essential for success in the relationship-based business, he
said, while Rickertsen “is the right age and the right kind of guy” to complement
the two veterans.
“With the people they have now and the results they have shown, they should be
able to raise a sizable amount of money,” Mathias said.
Target Return: 30 Percent
Though they are in the same business, Thayer and Carlyle do not compete directly
for deals or financing. Much of Carlyle’s funding comes from overseas and is
focused on bigger deals and venture capital, which are not part of Thayer’s
In the taxonomy of finance, Thayer Capital Partners is classified as a private
equity investment firm, which means it generally invests in privately owned
companies rather than publicly traded companies. It also is considered a
leveraged buyout firm because, in addition to its own capital, it uses borrowed
money to finance transactions.
The money that Thayer invests comes from two dozen investors, most of them
Backers include the pension funds of AT&T Corp., Boeing Co., Textron Inc.
and Aluminum Co. of America; Howard Hughes Medical Institute; Hawaii’s
Bishop Estate; Travelers Insurance Co.(now owned by Citigroup);
CreditSuisse First Boston; Bank of Nova Scotia; and Dresdner Bank.
There also is one individual investor —Roger Penske, the race car driver turned
truck and transportation magnate.
Pension funds put most of their money into conservative investments intended
to produce a return with little risk, but they usually allocate a small part of their
cash to venture capital and buyout funds with more ambitious profit goals.
Thayer’s target is a return on investment of30 percent a year, a goal the company
told investors two years ago when it set out to raise its pool of capital. The original
plan was to raise $250 million — enough to finance a dozen or so of what are
considered medium-sized deals these days — but eager investors pledged $364
million. The fund is officially namedThayer Equity Investors III LP.
Thayer I and Thayer II are a pair of hotel real estate partnerships set up
previously by Malek and named for one of his favorite figures,Col. Sylvannus
Thayer, the father of West Point, Malek’s alma mater.
Thayer’s three partners also put their own money into the company’s deals so they
can share directly in the profit. But the primary source of the company’s earnings
is based on what is considered the standard formula for the industry: Thayer gets
20 percent of the profit it generates, after expenses.
“The key to our business is to make a good rate of return for our partners,”
Rickertsen said. Investors measure performance as internal rate of return — how
much they make on their original investment every year. The longer a transaction
takes to produce a profit, the more money the partners expect, he said. “The IRR
clock is vicious. Time is very, very critical.”
To boost the return Thayer borrows money — using “leverage,” in
“Our style is to use debt and equity in every deal,” Malek said. If you spend $100
million to buy a business and sell it a year later for $150 million, you earn a 50
percent profit on your investment, he said. But if you put up $25 million of your
own cash and borrow the rest, you double your money — for a 100 percent return.
“Our objective is to put a fairly sizable amount, but a prudent amount, of leverage
into the transactions,” Malek said, stressing “prudent.” In the 1980s, buyout firms
like Thayer often had only 8 percent to 10 percent equity in their investments, he
said. Today Thayer’s capital structure typically includes one-third equity, two-thirds debt.
But in practice, the structure of Thayer’s investments is much more complicated
than simply buying stock and borrowing money. The prospectuses of Thayer
companies selling stock to the public are replete with multiple classes of shares,
convertible preferred stocks and other exotic securities, often engineered by
For example, Thayer made its investment in one company half in common stock and
half in convertible preferred stock, paying a deferred dividend of 20 percent a
year. If the value of the company’s stock increases as hoped, Thayer will pass up
the dividends, convert the preferred to common and sell it for a big gain. If that
doesn’t happen, the dividend provides downside protection.
While the kind of investing Thayer does can be risky, Rickertsen acknowledged,
it’s not as risky as venture capital. Investors expect to lose the venture capital
they put into some start-up companies — and routinely do. Thayer, instead, invests
in companies with assets that can be sold and cash flow that can be tapped to
repay investors. The worst that can usually happen is that Thayer will get all or
most of its money back. It won’t make a profit, but it won’t be wiped out.
Malek said he likes technology companies but avoids ventures in which success
depends on a technological breakthrough and ailing companies seeking financing for
But Malek is willing to start his own companies from scratch, launching three
ventures in the travel business, which he knows well from his days at Marriott and
For those ventures, Malek recruited Roger Ballou, who has served as president
of Alamo Rent-a-Car Inc. and American Express’s travel services group.
Thayer is backing Ballou in Global Vacation Group Inc., a Washington company
that is buying travel tour wholesalers andAssociated Travel Network.
Associated is a collection of what are known in the industry as “marketing service
organizations,” which buy airline tickets and hotel rooms in bulk for independent
Malek and Ballou reportedly have a third travel industry business in the works, but
won’t identify it.
Because Global Vacation Group has filed an IPO with the Securities and
Exchange Commission, neither Malek nor Ballou would discuss details of that
But in an interview last week, Ballou said he and Malek, old friends, began
discussing business ideas after Alamo was sold a few months ago.
“I took my basic business idea to them and literally in the space of a week they had
agreed to back it with capital,” he said. “We took another week to hammer out
“I felt like the dog that had finally caught a car,” Ballou said.
With $50 million of Thayer’s capital, Ballou began buying tour wholesalers, which
create tours by making deals with airlines, hotels, car rental firms and other
By May — just nine months after going into business with Thayer — Ballou had
spent $108 million acquiring five tour companies, creating Global Vacation
Group, which now isone of the biggest operators of tours toHawaii,
the Caribbean and the United States with annual revenue of $114 million last year.
Thayer put $50 million into Global Vacations and will own 60 percent of the
company’s stock, worth about $155 million if the IPO is completed on schedule this
Thayer’s money was not the most important part in the equation. “The largest part
of my coming together with them and a big part of what makes the thing tick is
personal relationships,” Ballou said. “They have the contacts . . . and in Fred’s case,
a guy who’s well-known in the travel industry, and that’s helpful.”
Lunch Leads to a Deal
The crucial mix of contacts, cash and quick decision-making also is behind Thayer’s
most successful investment, the buyout of Software AG Systems of Reston
from its parent company in Germany.
Software AG President Daniel F. Gillis set out to buy his division because he
knew the German parent company had financial problems and needed cash.
Gillis met Thayer through classic networking. Developing contacts in the Virginia
technology community, Rickertsen went on the board ofMLC Holdings Inc., a
Reston computer leasing firm. MLC’s chief financial officer was a friend of the
Software AG chief financial officer.
The three men got together for lunch in the fall of 1996 at the Hyatt Reston Town
Centre, Rickertsen recalled. That led a few weeks later to a sit-down between
Software AG and Thayer executives and then a trip to Germany by Gillis and
Rickertsen in January 1997.
“We were looking for a firm with a certain philosophy,” Gillis said. “We had to
select a partner that understood the strategy, liked the management team and
wanted to fund it.” Some of the firms Gillis talked to had their own ideas about
how Software AG should be run. “We told them, if you don’t like the story, don’t
Thayer liked the story and the executives in Germany liked Thayer. Though
Rickertsen spearheaded the deal and became chairman of Software AG’s board, it
didn’t hurt that Stern once ran Braun AG in Germany and is fluent in both the
language and business practices of the country.
Software AG Germany agreed to sell the U.S. division for $85 million in cash
plus a 24 percent royalty on sales of its software. Thayer put $29 million of its
own cash into the company, borrowed the rest and completed the buyout in April
Hoping to take advantage of the hot IPO market and cash out quickly, Thayer
brought in BancAmerica Robertson Stephens and Donaldson, Lufkin &
Jenrette * to underwrite a stock offering.
The timing turned out to be terrible. Software AG began its roadshow for
investors last Oct. 27, the day the Dow Jones industrial average fell more than
500 points because of financial turmoil in Asia.
Instead of $14 a share, for which Software AG had hoped to sell stock, the
company had to settle for $10 a share. That was enough, though, for Thayer’s
investors to recoup their entire original investment — and retain a 59 percent
stake in the company.
After doubling its profit, Software AG went back to the market last month and
sold its stock for $24.25 a share. Thayer sold enough shares to pay $115 million to
its investors and still keep 10.8 million shares worth about $345 million at current
“It’s been a great deal for everyone,” said Software AG President Gillis —
everyone including Gillis.
Before the Thayer-backed buyout, he was an employee, albeit an employee earning
almost half a million dollars a year. He sold $4.8 million worth of stock in the May
offering and still owns or has options to buy more than 2 million shares. That’s a
$60 million nest egg that Thayer would be more than happy to help him invest.
* For more on William Donaldson, the new head of the Securities &
Exchange Commission, GO TO > > > Spotting the SEC
The Lobbyists – Highly paid pimps to the powerful.
The link between campaign donations and political policy was brought into sharp
focus by the campaign finance scandals that erupted during the 1996 campaign.
Even jade observers were started by the Clinton administration’s selling of the
Lincoln bedroom to the highest bidder, and its organizing of White House coffee
klatsches to reward donors and encourage them to make additional contributions.
But political contributions are only one way that big business wins favors in
Understanding how the capital works, and how business prospers here, requires a
trip through the world of beltway lobbying and a review of the vast army of hired
guns working at the behest of Corporate America.
Dollar for dollar, lobbying is a better investment than campaign
contributions— one reason business spends far more on the former
than on the latter.
In 1996, Philip Morris coughed up $19.6 million for lobbying programs vs. $4.2
million for campaign donations (making it the leader in both categories). The same
pattern holds true with other firms.
For 1996, Georgia Pacific spent $8.9 million for lobbying and handed out $527,000
in political money. Corresponding figures for AT&T are $8.4 million vs. $1.8 million;
for Phizer, $8.3 million vs. $775,000; for Boeing, $5.2 million vs. $770,000; for
ARCO, $4.3 million vs. $1.4 million; for Lockheed, $3.5 million vs. $1.26 million; for
FedEx, $3.1 million vs. $1.9 million; for Dow Chemical $1.5 million vs. $578,000.
In addition to in-house efforts, most big corporations spend lavishly for outside
lobbying firms. Lockheed, for example, retains at least two dozen beltway lobby
shops to supplement its own efforts, while FedEx has an additional 10 firms on
In 1996, Boeinghired seven outside lobby shops for the sole purpose
of pushing renewed Most Favored Nation trade status for China,
paying them a combined total of at least $160,000 for their efforts.
While corporate lobbying has long been a major force in American politics, it has
been greatly transformed during the past few decades. Today, many efforts
involve stealth lobbying— the chief tactic here is mobilizing fake “grassroots”
campaigns— or with indirect methods,such as buying research from
friendly “think tanks” in order to influence Congress and public
All of this makes calculating corporate lobbying expenditures nearly impossible,
though it’s safe to say that lobbying has now become a multi-billion dollar-per-year
When you consider the enormous benefits bestowed on Corporate America by the
White House and Congress, the big sums companies spend to win favors are
revealed as chump change….
After winning control of Congress in 1994, the GOP house leadership met weekly
with “The Thursday Group,” a pack of lobbyists and activists who helped plot
legislative and media strategy on the “Contract With America”.
Included in this elite troupe were hired guns representing the U.S. Chamber of
Commerce, theNational Federation of Independent Business, and Americans for
SEND LAWYERS, GUNS AND MONEY
In the Belly of the Beast
If the post-Cold War environment has left arms makers exposed, the industry still
has plenty of assets when it comes to getting its way in Washington. Chief among
them is that weapons makers, to an even greater extent than other industries,
have especially tight links to the government bureaucracy.
When the Pentagon in 1997 needed a team to prepare a report on “reshaping the
U.S. military for the 21st century,” it picked for the job a task force headed by
Philip Odeen, president of BDM, one of the country’s big defense companies,
including Robert Riscassi, a former Army general who now serves as a vice
president at Lockheed.
The task force, known as the Quadrennial Defense Review, predictably
concluded that force levels should be cut further, but the Pentagon’s
procurement budget should be increased, thereby ensuring future
profits for the arms industry.
The Pentagon’s Defense Policy Advisory Committee on Trade provides
confidential recommendations to the Secretary of Defense on the sale of weapons
abroad. Members have included CEOs from Lockheed, Boeing, Northrop
Grumman and McDonnell, as well as a number of former Pentagon officials who
now serve as consultants to the arms industry.
Needless to say, the Advisory Committee invariably favors elimination of any
barrier to foreign sales and the introduction of a host new public subsidies to arms
Then there’s the Pentagon’s Defense Science Board, where Defense
Department officials and industry executives join hands to lard out vast sums of
money to fund research on future boondoggles.
Past members at the science board have included former Defense Secretary
William Perry; former CIAchief John Deutsch, and Paul Kaminski, the
assistant secretary for defense.
Worthy of more detail is the Defense Trade Advisory Group (DTAG), the
panel set up by the State Department to offer counsel in regard to the Direct
Commercial Sales (DCS) program, by which defense contractors make private
sales to foreign military and police forces….
In theory, State allows the sale of weapons destined for a “defensive” role. It will
not vend arms to an “aggressor” nation.
In practice, State authorizes sales to virtually any nation capable of paying for its
purchases. Of some 20,000 requests for licenses made by vendors in 1994, State
rejected just 209. During the Clinton years, State has sanctioned the sale of tank
engines to Israel, trainer aircraft to Taiwan, and Black Hawk helicopters to
Also approved were deals with Guatemala, El Salvador, Colombia and
None of this is surprising after examining the roster of DTAG, State’s advisor on
these deals. In 1995, 57 of the 60 panel members came from the arms industry.
The group was headed at the time by William Schneider, a veteran of the military-industrial complex who served as undersecretary of state for security assistance
during the Reagan/Bush years….
As late as 1991, the ten biggest defense companies had a total of 108 lobbyists
registered in Washington.
As of mid-1997, Lockheed Martin alone has 87 lobbyists registered with
Congress, 26 working out of the company’s own offices and 61 at outside firms
that the company had on retainer. Lockheed’s total lobbying expenditures for
1996 totaled $3.8 million, 10 times more than the combined lobbying expenditures
for the ten biggest defense contractors in 1985.
While Boeing has fewer lobbyists on its payroll – 70 – it spent more than
Lockheed, shelling out $5.2 million for lobbying in 1996. Other arms makers
have similarly huge efforts, with Northrop employing 58 lobbyists and
McDonnell Douglas 53….
The United States accounts for about half of all military spending on the planet …
Here’s an example of just how ridiculous things have become:
A few years ago, it appeared that Congress might kill off a relic of the Cold War,
the V-22 Osprey, a vertical lift-off plane whose prime contractors are Boeing
and Bell Helicopter.
From the perspective of Pentagon porkers and arms makers, the V-22 has special
appeal: since it is incapable of carrying any of the military’s current inventory of
fighting vehicles, it has opened the door to a subsidiary boondoggle, the armored
dune buggy. Said buggy, which is capable of attaining speeds of 80 miles per hour,
is being designed especially to fit on the V-22.
To help save the plane, lobbyists for the V-22 dreamed up Alyssa, Albert & the
Magic Plane, a cartoon book that was distributed to members of Congress. The
comic book opens with little Alyssa playing in her backyard with Albert, a stuffed
animal who springs to life. The pair dream of attending the 1996 Olympics in
Atlanta but grow despondent upon concluding they won’t be able to get to the
games by bicycle (too far), truck (no drivers license), boat (no water near atlanta),
the Space Shuttle (not practical), or a variety of other means.
Just as the cuddly duo have reached the point of despair a V-22 – the “Magic
Plane” – lands in the backyard to fly them to Atlanta….
The dramatic tale of Alyssa and other lobbying, combined with hefty campaign
donations from Boeing and Bell, led Congress to save the V-22.
Coming next: The arms makers sign up Barney the Dinosaur to lobby for Star
The Media– You know, the source of your knowledge.
FromDerailing Democracy: . . . It has been almost 40 years since President
Eisenhower, in his final address to the nation before leaving office in 1961, issued
a rather extraordinary warning to the American people that the country “must
guard against unwarranted influence, whether sought or unsought, by the
military-industrial complex. The potential for the disastrous rise of misplaced
power exists and will persist.”
Following the same course that virtually every other major industry has in the last
two decades, a relentless series of mergers and corporate takeovers has
consolidated control of the media into the hands of a few corporate behemoths.
The result has been that an increasingly agenda has been sold to the American
people by a massive, multi-tentacled media machine that has become, for all intents
and purposes, a propaganda organ of the state….
And it is certainly true that by all outward appearances the United States does
appear to have the very epitome of a free press. . . . Yet behind this picture of
plurality there are clear warning signs that an increasingly incestuous relationship
exists between the media titans and the corporate military powers that
Eisenhower so feared.
For example, the number-one purveyor of broadcast news in this country— NBC,
with both MSNBC and CNBC under its wing, as well as NBC news and a variety of
“news magazines”– is now owned and controlled byGeneral Electric, one of the
nation’s largest defense contractors.
Is it not significant that as GE’s various media subsidiaries
predictably lined up to cheerlead the use of U.S. military force in
Kosovo, it was at the same time posting substantial profits from
the sale of the high tech tools of modern warfare it so
The Money Men – The birds who invented the term “quid pro quo”.
From The Money Men, by Jeffrey H. Birnbaum: . . . If you assume that campaign
money is so distasteful that you don’t want to hear any more about it, you’re
closing your mind to one of the most fundamental and most fascinating stories in
American politics. It’s okay to be outraged— more than okay. But it’s wrong to be
so disgusted that you don’t want to read another word.
Take, for example, the real-life picture we should have of our elected officials.
It’s wrong to think of them sitting studiously through boring congressional
hearings or making speeches to Rotary Club luncheons.
Think of them, instead, in windowless offices grubbing for money almost every
spare moment they get. Fund-raising is so essential to their reelections yet takes
so much time that politicians have invented a virtual science of efficient
Here’s the typical scene: The lawmaker or would-be lawmaker sits at a desk
surrounded by telephones. Aides seated nearby (there are usually 2 or 3 aides,
but I’ve heard about instances involving as many as 8) dial up contributors and stay
on the line until the would-be fund giver comes on. Then they put that person on
hold until the lawmaker gets to their line.
The politician is thus able to move seamlessly from one begging session to another,
and groveling can go on nonstop.
So there’s a picture for the ages: democracy on hold, literally.
Here’s another one: Around a conference table in the suite of the Speaker of the
House … a dozen lobbyists and trade-association executives plot strategy with the
highest-ranking lawmakers in Congress. This isn’t an occasional meeting. It
happens every week. On Thursday. At 11 AM. It even has a title: the Thursday
The point is that money men are players. They aren’t dark figures lurking in the
background, plotting political intrigue. They are central to the drama. They make
a difference in the way laws are made and implemented. Without them, the
politicians wouldn’t be politicians. And they insist on, and invariably get, politicians’
That’s the way it works….
~ ~ ~
Money, money everywhere.
But not all of it carries the same weight. And not all of it goes to candidates. The
laws and rules that govern political fund-raising are many and peculiar. They also
are largely ignored….
At the federal level, the most that any person can donate to a candidate is $1,000
per election. Political-action committees (PACs), which are amalgams of individuals,
can give $5,000. But that’s just the start. Individuals, labor unions, and
corporations can give as much as they want to political parties.
That’s the so-called soft money or, more appropriately, sewer money.
This money, in effect, is used to make a mockery of the limits on direct giving to
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