SPOOKY SITUATION

By Christopher Byron
New York Post
May 2, 2005

Last week we told you about a mysterious CIA outfit on Wall Street that goes by the name of In-Q-Tel Inc. and claims to be operating as a not-for-profit investment firm that channels seed money into promising young companies in the homeland security field.

This week there's more to report on this fishy, six-year-old firm, which has been pouring a reported $35 million annually of taxpayer money into deals running the gamut from the shrewd to the idiotic. The one common feature of them all: if an investment proves profitable, much of the money flows into the pockets of In-Q-Tel's own employees; if a deal proves a loser, the nation's taxpayers get stuck with 100 percent of the loss.

Now, evidence is emerging that In-Q-Tel's brand of "Heads I win, tails you lose" deal-making may go even further than that. A source familiar with In-Q-Tel's inner workings claims that once an equity deal with a company is worked out, In-Q-Tel officials routinely begin talking the company up on Capitol Hill to help the new partner land lucrative government contracts. A Newsweek story in March of last year suggested much the same thing, reporting that In-Q-Tel helped one of its investment partners — a Nevada-based software firm called Systems Research and Development — obtain government business.

Since In-Q-Tel employees all hold personal stakes in the very companies they've been promoting in this fashion, their efforts amount to yet another way in which the firm is using public tax dollars for the private benefit of its employees.

It seems doubtful that former CIA director George Tenet intended anything of the sort when he authorized the creation of In-Q-Tel (known initially as In-Q-It) in March 1999 as a tool to help the agency stay on the cutting edge of technological development in the private sector.

In a June 2001 report that the CIA commissioned for Congress on the activities of In-Q-Tel, the new group was described as being authorized to engage "only in unclassified projects." Yet it wasn't long before the distractions of America's global war on terrorism began to envelop In-Q-Tel in a patriotic cloak of secrecy.

One disturbing result: none of the four congressional committees charged with oversight of In- Q-Tel have ever held an unclassified hearing on its activities or published any reports. When asked why not, a spokesman for the House Permanent Select Committee on Intelligence said last week that oversight of In-Q-Tel is classified — which, of course, it was never intended to be. Left to itself, In-Q-Tel has thus evolved into a kind of self-enrichment machine for its employees as well as a handy little pork barrel for Congress.

In the June 2001 report to the Congress, In-Q-Tel's employee compensation program is described in detail, including the purposes and structure of a so-called "Long Term Incentive Compensation Investment Fund" in which participation by all employees is "mandatory."

As explained in the report, the fund takes equity positions — paid for by In-Q-Tel on behalf of its employees — in each of the companies in which In-Q-Tel itself invests. The idea: to make a job at In-Q-Tel competitive with salaries in the private sector, where stock option programs are commonplace.

It is, of course, deceptive enough that by requiring all employees to participate, the fund becomes in effect a profit-making mirror image of In-Q-Tel itself, operating just off-stage and in the shadows, while the spotlight of public attention remains fixed on the fund's "non-profit" alter ego.

But it gets worse. According to the CIA's 2001 report to Congress, even if In-Q-Tel should decide to bail out of an investment, the employee fund is prohibited from doing the same thing. In this way, the employees are presumably prevented from turning In-Q-Tel into a vehicle for speculating in the stock market.

Yet as we reported in this space last week, when In-Q-Tel decided to bail out of its position in a shaky startup company called Ionatron in mid-March, upwards of 50 In-Q-Tel employees cherry-picked their imputed shares in Ionatron out of the employee fund and sold them as well.

Many questions remain unanswered about In-Q-Tel's Ionatron investment. Ionatron claims to have developed a new kind of "Directed Energy Weapon" that can, in effect, shoot laser-guided lightning bolts through the atmosphere, disabling cars, trucks and even boats without harming the occupants.

But the founder of the three-year old company, which as yet holds no patents to back up its claims, is a twice-fined Wall Street stock promoter named Robert Howard, who agreed to pay $2.9 million in penalties in 1997 in settlement of a Securities and Exchange Commission suit charging him with making false and misleading statements about another company he founded and controlled, called Presstek, Inc.

Howard's newest venture, Ionatron, is closely tied to the politically well-connected Philadelphia law firm of Blank Rome LLP, which may explain the company's greased ride into Washington. Blank Rome's chairman David Girard-diCarlo, is widely viewed as a Republican Party king-maker and is reported to have strongly pressed the White House to name Pennsylvania's Republican governor, Tom Ridge, to the post of homeland security chief following the attacks of 9/11.

Howard's ties to Girard-diCarlo's firm come by way of the head of Blank Rome's New York office, Robert Mittman, who appears as attorney of record on numerous Presstek and other Howard-linked SEC filings dating back to the mid-1990s.

He also appears, at around the same time, as attorney of record for a California-based penny stock company called U.S. Home and Garden Inc., which eventually wound up being merged with Ionatron in March 2004, thereby giving Howard a revived post-Presstek presence on Wall Street.

These connections may help explain how Ionatron, which did not even exist as a private company until it was incorporated by Howard in Delaware in June 2002, wound up hiring Blank Rome as a fully and properly registered Washington, D.C., lobbyist nine months later, in March of 2003. Shortly thereafter, Ionatron inked its deal with In-Q-Tel, while Howard began bolting together the merger with U.S. Home and Garden.

Next, this zero-to-hero penny stock headed for the corridors of Capitol Hill. There it received a hearty thumbs-up — along with a personally pencilled-in defense spending supplemental budget authorization of $18 million — from chairman of the Senate Appropriations Committee, Thad Cochran.

When and how did Cochran first learn about Ionatron? His committee spokesman professed not to know, and insisted the question didn't matter because the senator had recognized the importance of what Ionatron had to offer.

That, however, is not an opinion universally shared outside the committee room. A spokesman for the private watchdog group Citizens Against Government Waste says the organization has listed the budgeted amount (cut back from $18 million to $12.6 million in a conference committee meeting last June) as pure pork-barrel spending.

Even In-Q-Tel appears to have had second thoughts, and by last November it had pulled the plug on its deal with Ionatron, triggering the avalanche of insider selling by In-Q-Tel employees that followed.

As for the rest of us, well, what can one say but hey, we really didn't need those tax dollars anyway, right?

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