The Military from The Center for Public Integrity

Key findings:

2012-05-23T15:11:24-04:00

From 1998 through 2007, sources outside the federal government paid for more than 22,000 trips worth at least $26 million. While these trips are generally permitted under federal regulations, military watchdogs say the system is broken. Allowing the drug industry to send military pharmacists to Las Vegas or letting a Saudi prince pay a top official’s way to Riyadh, they warn, can create serious conflicts of interest. Defense officials say these trips are thoroughly vetted to guard against impropriety.

According to the analysis:

The medical industry paid for more travel than any other outside interest — more than $10 million for some 8,700 trips, or about 40 percent of all outside sponsored travel. Among the targets: military pharmacists, doctors, and others who administer the Pentagon’s $6 billion-plus annual budget for prescription drugs;
Foreign governments paid more than $2.6 million for 1,500 trips. The biggest sponsors: U.S. allies Australia, Singapore, and Japan, but the list also includes China, Russia, and the United Arab Emirates;
Manufacturers of retail goods paid for more than 500 trips, at a cost of about $470,000. Their targets included buyers at on-base retail outlets, which sold more than $12 billion of merchandise in 2007. Among the sponsors: Nike, Skechers, Mattel, and Sony;
Thousands of the trips were taken to popular vacation spots such as San Diego, Las Vegas, Honolulu, San Remo and Venice, Italy, and Jeju Island, South Korea. Among the guests were spouses, who participated in at least 240 of the trips.

The travel disclosure records, submitted in paper form to DOD’s Office of Government Ethics, were digitized and sorted in a joint project by the Center and Northwestern University’s Medill School of Journalism.

Thousands of free trips taken by Pentagon staff

2012-05-23T18:05:31-04:00

Two thousand camels scissor-kicked their way along a 12-mile race track, garnering thunderous applause from the Saudi crowd. It was the 2005 Janadriyah Festival, outside Riyadh, and in attendance was Prince Miteb bin Abdullah bin Abdulaziz and his special guests, a couple from northern Virginia. In addition to the festival, the prince treated Richard and Susan Millies to a musical production, banquets, and first-class flights to and from Washington, D.C. The eight-day trip ended up costing more than $24,000, with Miteb picking up the entire bill.

Why was Prince Miteb so generous to a couple from the Washington suburbs? Mr. Millies worked for the Pentagon as deputy director of the Defense Security Cooperation Agency (DSCA), which runs the program through which foreign governments purchase advanced weapons systems. And therein lies the problem, military watchdogs say, with close relationships and free travel posing potential conflicts of interest. At the time, Prince Miteb was an assistant deputy commander of the Saudi National Guard, and the kingdom utilized DSCA more than any other country except Israel and Egypt. Indeed, from 2003 through 2006, the Saudis bought $4.4 billion worth of training and equipment through the program, according to the Congressional Research Service. Some of those deals stirred controversy, including a 2008 agreement to buy $123 million worth of smart bombs.

Millies has plenty of company at the Department of Defense (DOD). Despite the Pentagon’s big budgets, DOD personnel routinely accept free flights, accommodations, and hospitality from outside interests, according to a Center for Public Integrity analysis of thousands of travel disclosure records. From 1998 through 2007, the analysis found, outside sources paid for more than 22,000 trips worth at least $26 million, sponsored by an array of foreign governments, private companies, and other groups which have business with the Pentagon. The records, submitted originally in paper form to the U.S. Office of Government Ethics, were digitized and sorted in a joint project by the Center and Northwestern University’s Medill School of Journalism.

This privately paid travel has become riddled with conflicts of interest and is in need of stronger oversight and stiffer regulations, say watchdog groups. “This is the kind of behavior that should be barred without a loop hole,” says Winslow Wheeler of the nonprofit Center for Defense Information. Even some of the travelers are cautious of outside sponsorship. “Some foreign sponsors of the travel may hope to acquire influence by sponsoring travel and holding meetings,” warns Judith Yaphe, a Middle East expert at DOD’s Institute for National Strategic Studies who has taken dozens of the trips to Great Britain, Italy, Kuwait, and Qatar.

Regulations governing the travel are subject to interpretation. Both military and civilian DOD personnel are allowed to accept free trips from outside the government to attend meetings, conferences, and similar functions, according to federal rules. But the travel must be related to one’s official duties and in the interest of the government, and it cannot involve direct marketing efforts or pose a potential conflict of interest. Whether travelers always meet these criteria is not always obvious.

Behind the trips is a diverse set of foreign and commercial interests, the Center found. Among the key findings:

The medical industry paid for more travel than any other single interest – over $10 million for some 8,700 trips, or about 40 percent of all outside sponsored travel. Among the targets: military pharmacists, doctors, and others who administer the Pentagon’s $6 billion-plus annual budget for prescription drugs;
Foreign governments paid more than $2.6 million for 1,500 trips. The biggest sponsors: U.S. allies Australia, Singapore, and Japan, but the list also includes China, Russia, and the United Arab Emirates;
Manufacturers of retail goods paid for more than 500 trips, at a cost of about $470,000. Their targets included buyers at on-base retail outlets, which sold more than $12 billion of merchandise in 2007. Among the sponsors: Nike, Skechers, Mattel, and Sony;
Thousands of the trips were taken to popular vacation spots such as San Diego, Las Vegas, Honolulu, San Remo, Italy, and Jeju Island, South Korea. Among the guests were spouses, who participated in at least 240 of the trips;
Many of the trips were low-cost affairs; about 25 percent cost less than $500. But a significant number had hefty price tags, with more than 10 percent of them costing above $2,000.

Unusual Deployments

The beaches of Brazil’s Rio de Janeiro and the canals of Venice, Italy, are not exactly typical military deployment destinations. But these were among 1,500 trips taken by DOD employees and paid for by foreign governments from 1998 through 2007. Those traveling ranged from top military brass to the greenest privates.

In the case of Richard Millies, who oversaw DOD’s advanced weapons sales, his Saudi trip was approved by a DSCA ethics officer. Millies did nothing wrong, according to DSCA General Counsel Kay Cannon. “This certainly was unique in terms of its amount,” said Cannon of the $24,000 trip, “but it was thoroughly vetted and approved.”

Millies defends his foray to Saudi Arabia as both needed and beneficial to U.S. foreign policy. The Pentagon, he says, would have paid only for a short visit; his extended week with the Saudis allowed him to build personal relationships and convinced him that the Saudis actively oppose terrorism — something he says he never would have learned while sitting behind his desk. Millies also stresses that Saudi Arabia would hardly have been his pick for a junket. “To tell you the truth,” he suggests, “I would look with a more careful eye at people who were running off to Rome and Paris.”

Millies’ DOD colleagues, in fact, took 140 trips to Rome and Paris. Foreign governments, universities, drug manufacturers, and international political organizations like the North Atlantic Treaty Organization paid for the majority of these trips, the most expensive of which cost more than $12,000.

A number of travelers cited the importance of diplomacy in accepting the trips. “You couldn’t turn around and say we’ll come but we have to pay for it,” says Millies. “Hospitality is very important in Arab cultures.” Some of the trips are simply courtesy visits extended by allied governments, officials stress. In March of 2001, Admiral Dennis Blair, then commander-in-chief of the U.S. Pacific Command, and now director of national intelligence, took a $3,600 trip to China paid for by the People’s Republic of China. “It is customary for a diplomatic or military leader to accept meals and accommodations as a courtesy from the host country when invited for official business,” says Michael Birmingham, a spokesman for the Office of the Director of National Intelligence, speaking on behalf of Blair. “In many parts of the world and especially in the Pacific region, should the guest reject this hospitality, it is considered a personal affront.”

Other officials argue that, despite occasional travel to vacation spots, they are engaged in official business. In 2006, for example, the Italian navy paid for Admiral Michael Mullen and his wife to visit Venice, Italy, for a “Regional Seapower Symposium.” The admiral, now chairman of the Joint Chiefs of Staff, met on various security issues with allied governments, says DOD spokesman John Kirby, and “there was an official spouse program to which Mrs. Mullen was invited.”

Some military watchdogs say it’s impossible for DOD officials to make impartial decisions regarding national security while accepting thousands of dollars worth of travel from foreign governments, especially when the trip includes a spouse and a vacation. “The big deal isn’t the number of dollars, it’s the relationships these people are trying to create,” argues Wheeler of the Center for Defense Information. “Governments and people drool at the idea of getting in the head of people who make decisions.”

Wheeler says DOD money would be better spent paying for travel when necessary and to a certain degree Middle East expert Yaphe agrees. “Tight budgets make travel for foreign area experts difficult and acceptance of outside funding could create the impression of impropriety,” she says. It wouldn’t take much to eliminate even the appearance of impropriety, critics say, and they could be right. The approximately $210,000 spent by foreign governments on travel for DOD officials in 2007 represents .0025 percent of DOD’s $8.4 billion travel budget for that year.

Targeting Military Medicine

The fact that the health care industry paid for about 40 percent of all trips may seem surprising, but medical ethics experts say it makes sense. The billions of dollars spent by DOD on health care are a tempting target for drug companies, device manufacturers, and other medical companies.

The Government Accountability Office found that the Pentagon’s prescription drug spending more than tripled to $6.2 billion from fiscal year 2000 to fiscal year 2006. The money accounts for some two percent of all drug sales nationally, a market expected to reach $15 billion by 2015. As such, the $1.7 million spent by the pharmaceutical companies and medical device manufacturers on free travel for Pentagon personnel may seem a wise investment to health care companies. The industry doled out more than 1,400 trips to DOD doctors, medical researchers, pharmacists, and other health care employees from 1998 through 2007.

Among the top medical device manufacturers or pharmaceutical company sponsors of trips are:

Johnson & Johnson, 187 trips at a cost of more than $215,000;
GlaxoSmithKline, 95 trips at a cost of more than $120,000;
Hologic Company, 37 trips at a cost of more than $102,000;
Medtronic Inc, 86 trips at a cost of more than $93,000;
Smith & Nephew, 81 trips at a cost of nearly $90,000.

Representatives of these companies say they follow the law and government regulations closely, paying only for reasonable expenses tied to professional trips or third-party meetings. But industry-sponsored travel has become a hot topic in the medical community. After studies showed that doctors who receive drug company perks were more likely to prescribe that company’s product, the American Medical Association issued guidelines in 2003 stating that physicians should not accept travel and lodging from the industry. Such concerns prompted Admiral Thomas McGinnis, chief of the Pharmaceutical Operations Directorate for DOD’s military health care program, earlier this year to prohibit his direct staff from going on company-paid trips. Still he remains skeptical that pharmaceutical companies have much to gain. “I don’t really know what the hook is, what their advantage is,” McGinnis says. “I don’t see the reason why firms would do that.”

One outspoken critic is Dr. Adriane Fugh-Berman, an associate professor at Georgetown University School of Medicine who has researched industry influence on physicians. Fugh-Berman asserts that the free travel is part of careful planning by corporate marketing departments to subtly manipulate medical professionals into using their products. Medical professionals, she says, “don’t understand the influence that occurs, and I don’t think that they would continue to allow these trips if they knew more about the industries’ real motives.”

Targeting the Exchange

Another major target for industry is the military’s sprawling system of retail exchanges and other on-base stores, which sell billons of dollars worth of merchandise every year. The buyers and managers who decide what products get stocked at bases worldwide have taken hundreds of trips worth hundreds of thousands of dollars from companies jockeying for shelf space.

Federal travel rules prohibit DOD employees from taking trips to marketing events, but more than 450 trips were to product presentation events and paid for by the manufacturer of the merchandise. Nike paid more than $80,000 for U.S. Navy apparel buyers and merchandise managers to take nearly 100 trips, almost all to product line displays. Toy-maker Mattel paid nearly $30,000 for Navy merchandise buyers to take 26 trips, most to view new product lines at the company headquarters in El Segundo, California. Skechers, the shoe company, paid about $17,000 for about 25 trips, and Sony paid about $15,000 for just under 20 trips.

Some buyers took multiple trips year after year, paid for by the same retail manufacturer. William Marx, athletic footwear buyer for the Navy Exchange Service Command (NEXCOM), decides which athletic shoes are sold at navy exchanges worldwide, a $40 million business in fiscal year 2008. Skechers spent more than $4,500 to pay for seven trips by Marx to Manhattan Beach, New York, and Los Angeles, between 2001 and 2005. Marx described these trips as “all work,” meeting with managers and sales reps, and says that Skechers treats NEXCOM like any similarly sized business account.”

Under current rules, buyers like Marx are allowed to accept free travel even to marketing events because it’s their job to receive sales pitches, according to Eric Rishel, senior attorney at the DOD’s Office of the General Counsel Standards of Conduct Office. This relationship does not represent a direct conflict of interest as buyers do not regulate the companies paying for their travel, they only purchase millions of dollars worth of merchandise from them, Rishel said.

“That makes absolutely no sense,” counters Craig Holman, a government affairs lobbyist for Public Citizen, a nonprofit consumer group. Holman sees the industry-paid trips as an extension of lobbying. “The buyers are the ones who are making major purchases,” he says. “This is exactly the conflict of interest that these ethics restrictions are designed to stop.”

Medical staff and retail managers are not the only ones targeted by industry. Credit card company VISA paid nearly $35,000 for the travel of a financial officer and directors of DOD’s human resource data agency. Exxon Mobil Corporation spent more than $33,000 to cover the travel of a chemist, a physicist, airfield pavement evaluators, and several students. General Electric paid more than $27,000 for about 30 trips, including travel to a consumers show case for audio and video electronics buyers.

A Need for Reform?

Industry-sponsored travel became a major issue in Congress in 2006, after the Jack Abramoff and Duke Cunningham lobbying scandals. At the same time the Center for Public Integrity revealed $55 million in lobbyist-paid travel by members and their staff. The Center’s Power Trips investigation documented how those working for Congress often took trips to golf resorts, beaches, and other vacation spots, paid for by business and private interest groups. In response, legislators strengthened the rules regulating Congressional travel paid for by outside sources. The House and Senate passed legislation in 2007 prohibiting members of Congress from accepting travel funded by lobbyists or any entity that retains or hires lobbyists. They also cannot accept paid travel from foreign agents.

But while Congress cracked down, the executive branch, including DOD, did not and remains susceptible to some of the same problems that dogged Capitol Hill years ago, Holman says. Executive branch travel rules allow multi-day trips without review of an ethics committee and let employees [to] take first-class flights with a simple waiver. The decision to approve or deny a trip often falls to individual officers within the traveler’s department and not an independent agency. “As a result we have everyone just doing what they want,” Holman says. “The ethics officers interpret ethics laws the way that suits their boss. How would you like to walk into your bosses’ office and tell them they can’t take a trip to Hawaii?”

Rishel, of the DOD’s Office of the General Counsel, says the current system in fact strikes a fair balance between public oversight and ease of use for DOD personnel. “There is a whole approval process for travel, and in most instances an ethics officer” who reviews the case, he says. “Remember that the main thing that’s happening here is that instead of spending X amount of dollars out of the federal travel budget, you are traveling to something where there has been some identified government need without expending government money.”

But should those free trips exert undue influence, critics warn, the wasteful spending or misguided policies that result could far outweigh any benefit. “You don’t want to start a relationship based on favors from people who want something from the government,” says the Center for Defense Information’s Wheeler. “Even a meal is the first step down that slippery slope, and a trip worth thousands of dollars is much further down that slope.”

Researcher Laura Cheek and Staff Writer Jillian Olsen contributed to this report. Pentagon Travel is a joint project by the Center for Public Integrity and the Medill School of Journalism at Northwestern University.l

Medical industry showers DOD with free travel

2012-05-23T18:12:14-04:00

A trip to Paris in September 2006 cost Dr. D. Gray Heppner nothing. GlaxoSmithKline, one of the world’s largest drug manufacturers, paid $7,800 for the lieutenant colonel and chief of the Walter Reed Army Institute of Research’s Department of Immunology to attend the company’s symposium on malaria.

It was Boston in May for John W. Szabo. Medical device manufacturer Cardinal Health paid $5,000 for Szabo, then chief of the Pharmacy Service at the U.S. Army Health Clinic at Schofield Barracks in Hawaii, to attend a leadership conference in 2002. The year before, Szabo went to a diabetes conference in Austin, Texas, and GlaxoSmithKline paid the bill through an unrestricted grant, totaling more than $1,000.

Trips to Tampa Bay and Austin in 2000 for Peter Bulatao were paid for by drug-makers Novartis and GlaxoSmithKline. Bulatao, then chief of the Department of Pharmacy at Lyster Army Community Hospital, in Fort Rucker, Ala., sat on the committee responsible for selecting drugs for the hospital.

These were among 8,700 trips by Department of Defense personnel paid for by the health care industry — at a cost of more than $10 million — from 1998 through 2007, according to an analysis by the Center for Public Integrity. In a joint project with Northwestern University’s Medill School of Journalism, the Center examined 22,000 travel disclosure forms filed by DOD personnel, and found that the medical industry was by far the biggest sponsor of free travel, accounting for about 40 percent of all trips. The sponsors included not only drug and device makers but also health foundations and trade groups often funded by those companies.

A $6 Billion Drug Market

Of special interest to the industry were DOD employees who prescribe, purchase, or recommend the use of drugs or medical equipment. Drug companies and device manufacturers spent about $1.7 million for more than 1,400 trips taken by DOD doctors, medical researchers, pharmacists, and other health care employees over the decade, creating relationships that pose serious conflict of interest issues, according to medical ethics experts. From 2000 to 2006, the DOD prescription drug budget ballooned from $1.6 billion to more than $6 billion a year.

Shahram Ahari says he is familiar with this game. While working as a sales representative for the drug company Eli Lilly & Company in 1999 and 2000, Ahari describes how he used free meals, trips, and unrestricted grants to subtly seduce civilian physicians into prescribing the firm’s drugs. The strategy, Ahari explains, is to make friends with doctors and pharmacists, get them talking about a company’s drugs or devices, and then reward them with additional perks for prescribing their drugs. Often physicians do not even realize the company is manipulating them.

“The return on dividends is phenomenal,” Ahari says. “If it costs them a thousand dollars for a dinner, that’s a [patient’s drug] payment for one month. If they fly you on the Concord to Paris for five grand, even if they get one patient out of it, it’s a lifetime of cash.”

Among the top medical device manufacturers or pharmaceutical company sponsors of trips for DOD personnel are:

Johnson & Johnson, 187 trips at a cost of more than $215,000;
GlaxoSmithKline, 95 trips at a cost of more than $120,000;
Hologic Company, 37 trips at a cost of more than $102,000;
Medtronic Inc, 86 trips at a cost of more than $93,000;
Smith & Nephew, 81 trips at a cost of nearly $90,000.

Medtronic made the front page of the New York Times in May after an Army investigation found that military surgeon Dr. Timothy R. Kuklo overstated the benefits of Infuse, a drug sold by Medtronic and used to treat combat-related bone injuries. The Army investigation revealed that Kuklo, a paid Medtronic consultant, falsified information and forged the signatures of colleagues as co-authors in a British medical journal article. According to the Center’s analysis, between 2001 and 2006, Medtronic paid for at least 15 trips taken by Dr. Kuklo, worth more than $13,000. Among the destinations were Coral Gables, Florida, and Scottsdale, Arizona.

Medical professionals and industry often partner to improve medical treatment, according to Dr. Heppner, now deputy commander of the Walter Reed Army Institute of Research. He says the institute could not create the vaccines and diagnostic services needed to protect the health of American military personnel without partnering with drug companies, as the institute lacks the necessary funding and technological capabilities to act alone. His trip to Paris, paid for by GlaxoSmithKline, represented a critical element of this partnership by allowing the U.S. government to receive credit for working on a malaria vaccine. “It is important to me that people understand the important things we bring and I felt that I had to represent our contributions to the world,” Heppner says.

Among the most prolific travelers in the Department of Defense is Dr. Norman Rich, a surgeon and professor at the Uniformed Services University of the Health Sciences. The doctor, a pioneer in vascular surgery during and after the Vietnam War, took about 80 trips valued at more than $250,000, including about $20,000 from Johnson & Johnson. Allowing Rich to take industry-funded travel, officials say, allows him to share his knowledge with surgeons across the globe.

“Is it normal for the faculty here? The answer is no,” says Bill Bester, the school’s acting vice president for external affairs, said of the trips taken by Rich. “But Dr. Rich has 40 years of surgical experience. He is known nationally and internationally. There’s probably no one living who’s contributed more to military surgery than Dr. Rich.”

Targeting the Pharmacy

DOD’s pharmacy system employees, who can influence which drugs are selected at base pharmacies, took more than 400 trips at a cost of more than $400,000 from medical industry sources, according to the Center’s analysis. Drug companies paid more than $115,000 for travel to popular destinations, including Las Vegas, Orlando, San Diego, New York City, New Orleans, Rome, and Paris.

Not all pharmacy employees can influence drug purchases directly and some lack even indirect authority, but chief pharmacists of on-base pharmacies have the option of serving on the board responsible for selecting drugs the facility will sell. Moreover, the pharmaceutical industry’s presence is felt more broadly, says Dr. Adriane Fugh-Berman of Georgetown University School of Medicine. Fugh-Berman, an authority on industry influence on medicine, notes that pharmacists often seek advice from one another and that drug companies can create a “net of influence” around the drug selection process.

These companies are not trying to curry favor, according to Szabo, the former chief of Pharmacy Service at the U.S. Army Health Clinic at Schofield Barracks. Szabo, while sitting on the base’s drug-selection committee, took trips paid for by Cardinal Health and GlaxoSmithKline, but he insists the only motivation behind the paid travel is altruism. “They feel it’s goodwill,” Szabo says. “I’ve never favored Glaxo products, and Cardinal Health deals in durable things, not drugs, so they would have no benefit by selecting me.”

Conflicts of Interest

Studies in the Journal of the American Medical Association and CHEST, a medical specialty journal, have found a link between perks bestowed on doctors and an increased likelihood that physicians, usually unknowingly, would prescribe a company’s drugs. Academic studies like these spurred a recent movement to regulate industry gifts to medical professionals. Since 2003, the American Medical Association’s guidelines have prohibited physicians from accepting subsidies from industry “directly or indirectly to pay for the costs of travel, lodging, or other personal expenses of physicians attending conferences or meetings.” Senators Chuck Grassley, Republican of Iowa, and Herb Kohl, Democrat of Wisconsin, proposed legislation this year that would require drug companies and medical device manufacturers to publicly disclose all gifts given to doctors valued at more than $100.

Such concerns have prompted Admiral Thomas McGinnis, chief of the Pharmaceutical Operations Directorate for DOD’s military health care program, to prohibit his direct staff from going on company-paid trips. Still, McGinnis is puzzled at why the medical industry would spend so much doling out free trips to military pharmacists. “I don’t really know what the hook is, what their advantage is,” McGinnis says. “I don’t see the reason why firms would do that.”

Ethics experts say the reason is obvious — gifts from drug companies affect the decisions of pharmacists. “They pay for them because it works,” asserts Thomas Murray, president of the Hastings Center, a nonpartisan bioethics research institute. “Trust me, their marketing departments are paying very close attention to cost benefit analysis for these kinds of gifts.”

DOD drug spending may merit that kind of attention. From fiscal year 2000 to fiscal year 2006 the Pentagon’s prescription drug spending more than tripled from $1.6 billion to $6.2 billion, according to a Government Accountability Office report issued in April 2008. Spending hit $6.8 billion on drugs in 2008, says Admiral McGinnis, and the GAO expects DOD pharmaceutical spending to reach $15 billion by 2015. McGinnis estimates that DOD spending on drugs purchased at on-base pharmacies alone accounts for about two percent of all drug sales nationwide.

Despite banning his staff from accepting drug-company sponsored travel, McGinnis nonetheless allows DOD pharmacists to attend continuing education programs and other events paid for by drug companies, a practice common for pharmacists in civilian practice. These trips save DOD money and are appropriate, McGinnis says, as long as the company is not promoting a drug at the event and as long as participants reveal their ties with industry.

But Dr. Fugh-Berman, the principal investigator of PharmedOut, a project to educate physicians about the influence of pharmaceutical companies on prescribing patterns, argues that allowing medical professionals to take industry-paid trips may actually cost more in the long run. The costs of purchasing more expensive or unnecessary drugs, a phenomenon studies have associated with gifts to doctors, dwarf bills for the occasional continuing education conference, she says.

Expenses aside, Fugh-Berman says the ultimate problem is with allowing even the appearance of doctors and others owing a debt to medical drug and device companies. “Industry and medicine are not on the same side,” Fugh-Berman insists. “Doctors and other health care professionals are supposed to represent the best interests of their patients, and industry is supposed to represent the best interests of its shareholders. These are not the same.”

The sincerest form of flattery

2011-11-17T16:49:11-05:00

Following the extraordinary success of the Washington-based Carlyle Group, which has built a private equity empire that's earned billions for its investors, a number of firms have lined up rosters of former government officials and high ranking military officers as they pursue companies that are in the national security business.

Carlyle, which ranked as the ninth largest Pentagon contractor from 1998 to 2003, has made billions of dollars by investing in the defense sector. A team of high-powered former Washington insiders, including Frank Carlucci, who served as secretary of defense in the Reagan administration, and James Baker, who served as George H. W. Bush's secretary of state, led its pursuit of defense deals. (See related report, "Investing in War.")

More than a half dozen companies are now following in the footsteps of Carlyle by signing up former high-ranking government and military officials as they try to make inroads into the Pentagon and the newly-created Homeland Security contracting business.

The blue-chip political talent these private equity firms have lured include five of the past nine defense secretaries, two secretaries of state, two national security chiefs, two CIA directors and dozens of distinguished retired military officials.

Veritas Capital Management is the 41st largest defense contractor and second only to the Carlyle Group among private equity firms. Though Veritas doesn't have any marquee former politicians in its ranks, its roster includes Adm. Joseph W. Prueher, ex-commander-in-chief of the U.S. Pacific Command and former U.S. ambassador to China; Gulf War I veteran and former U.S. Southern Command chief Gen. Barry R. McCaffrey; former commander-in-chief of Allied Forces in Southern Europe Admiral Leighton W. ("Snuffy") Smith; former commander-in-chief of the U.S. Central Command Gen. Anthony C. Zinni; and Gen. Richard E. Hawley, former commander of Air Combat Command at Langley Air Force Base, Va.

The companies it has invested in have been very successful in bagging defense contracts, with nine of them winning Pentagon deals since 1998. More than 70 percent of the firm's contracts were brought in by Vertex Aerospace (formerly Raytheon Aerospace, part of the Raytheon Corp.), which provides aviation and aerospace technical services to the Pentagon and other branches of the U.S. government. Veritas sold Vertex in December 2003.

Unlike the Carlyle Group, which has reduced its investments in the defense sector, Veritas is still investing heavily. Last July it bought a majority stake in Springfield, Va.-based McNeil Technologies, which provides translation services to the Defense Department and intelligence agencies, among others. Primarily catering to the national security market, the bulk of McNeil's more than 1,000 employees have security clearances.

New entrants

In the past three months alone, two new venture partnerships have been formed, with hundreds of millions in funds, to invest in the national security market. Former Pentagon leaders, both civilian and uniformed, are at the center of both efforts.

Last August, former Defense Secretary William Cohen disclosed his plan to form a merchant banking firm, TCG Financial Partners, to invest in defense companies. Cohen, who heads The Cohen Group, a consultancy in Washington, D.C., hired a top investment banker from Bank of America to head the new private equity firm, which aims to raise $300 million. According to news reports, the ex-Pentagon chief will also employ Gen. Joseph Ralston, Supreme Allied Commander in Europe until last year, and former NATO Secretary General George Robertson.

In September, Bear Stearns Merchant Banking, the private equity arm of investment banking and securities trader Bear Stearns, entered into an alliance with GlobeSecNine, a little-known private equity group headquartered just a few miles from the Pentagon in Arlington, Va.

Bear Stearns Merchant Banking, which manages $1.5 billion, has earmarked $300 million to invest in national security-related companies, while GlobeSecNine has connections to the country's defense and national security establishment. David C. Miller Jr., one of GlobeSecNine's founders, was a special assistant to President George H.W. Bush for counter-terrorism and counter-narcotics. Gregory S. Newbold, another founding member of the firm, served as director of operations for the Joint Chiefs of Staff before he retired in 2002.

GlobeSecNine's board of directors includes John Lawn, Drug Enforcement Administration chief under Presidents Reagan and the first Bush, and Gen. Al Gray, a former commandant of the Marine Corps and former member of the Joint Chiefs of Staff. And Brent Scowcroft, who served as national security advisor for Presidents Gerald Ford and George H.W. Bush, is the chairman of GlobeSecNine's advisory board.

In announcing their deal, GlobeSecNine and Bear Stearns Merchant Banking drew attention to another partnership the latter had formed for investing in the defense sector. In July 2003, Bear Stearns Merchant Banking teamed up with Giuliani Partners LLC, a consulting firm founded by former New York City Mayor Rudy Giuliani, along with his ex-police, fire and emergency management commissioners.

Growth industry

The homeland security industry is currently the fastest growing sector of the U.S. economy, predicted to grow from a $5 billion industry in 2000 to $130 billion in 2010, according to the Homeland Security Research Corporation, a private California think tank.

"[T]he war on terrorism and possible confrontation with Iraq have focused investors' attention on defense and homeland defense," Bob Grady and Jay Koh, members of Carlyle Venture Partners, wrote in a February 2003 article in the Venture Capital Journal. "The events of Sept. 11 have drawn many new investors into the sector, spawned a host of new companies and redefined some old companies."

Among the private equities that have focused their efforts on the emerging homeland security contracting, trying to replicate Carlyle's success with defense contracting, are Paladin Capital Partners, Arlington Capital Partners, and Behrman Capital.

Like Carlyle, Paladin and Arlington Capital Partners have enlisted several former political and military leaders.

"The advantage of having former politicians is that they give you perspective, they give you potential access to getting additional business," Bob Knibb, a partner of Arlington Capital, told the Center.

Paladin's roster of ex-officials includes former CIA Director James Woolsey and former National Security Agency director Kenneth A. Minihan, both principals of the Washington-based firm. Last December, Paladin entered into an alliance with homeland security consultancy Civitas Group LLC, also in Washington, D.C. President Clinton's National Security Advisor Samuel R. Berger and Republican strategist Charles R. Black, Jr. work for Civitas.

Paladin created a "Homeland Security Fund" immediately after 9/11 to invest in homeland security firms. Boeing Co., the second largest Pentagon contractor, was an early investor in the firm.

Paladin has made at least three investments in companies that do business with the Department of Homeland Security. It invested more than $10 million in AgION Technologies Inc., a Wakefield, Mass.-based company that makes anti-bioterrorism products. Paladin also bought stakes in ClearCube Technology Inc., which developed a computer-security system, and SafeView Inc., a Santa Clara, Calif.-based firm that provides personnel screening technology.

Arlington Capital Partners, a $450 million private equity, acquired two top federal contractors, ITS Services in April 2003 and Science & Engineering Associates Inc. in January 2004. The firm combined the two, and named the new company Apogen Technologies, which provides "technology solutions" to the departments of Defense and the Homeland Security, as well as other branches of the government. Apogen ranks among the top 10 Department of Homeland Security contractors.

The chairman of Apogen's board of directors is Phil Odeen, who served as an aide to Henry Kissinger when the latter was national security advisor. Odeen also served as chairman of the National Defense Panel and vice president of the Defense Science Board. Vice Admiral Daniel T. Oliver, a former chief of naval personnel and deputy chief of naval operations for manpower and personnel, heads the national security sector division.

Another major investor in the national security market is Behrman Capital, which acquired two defense and homeland security contractors in the past two years. The New York and San Francisco-based firm bought Hunter Defense Technologies, Inc., last January. It acquired majority stakes in ILC Industries, Inc., a defense, aerospace and industrial products provider, last year. The firm owned Condor Systems, Inc., a defense electronic firm, in the late 1990s.

Behrman, however, does not presently feature any prominent former civilian or military officials.

That's an exception among those private equity firms vying for companies in the national security market—where having political and military insiders for their boardrooms and executive suites is the norm.

Career opportunities

Five of the past nine defense secretaries, excluding those who are in the current administration, have ties to private equities. Of the remaining four, two are serving in the current administration (Donald Rumsfeld was the defense secretary in the Ford administration; Dick Cheney served George H.W. Bush's administration), one (Les Aspin) is deceased, and the other, Caspar W. Weinberger, is the chairman of the company that owns Forbes magazine. Every other defense secretary since Elliot Richardson held the post in 1973 has ties to a private equity firm:

Bill Cohen, the last defense secretary, entered the private equity market with his own firm, TCG Financial Partners.
Cohen's immediate predecessor at the Pentagon, William Perry, founded Global Technology Partners to help equity firms invest in defense, aerospace and technology companies, after he left office. The group advises Donaldson, Lufkin and Jenrette's Merchant Banking Partners.
James R. Schlesinger, defense secretary in the Nixon and Ford administrations, is an advisor to the Lehman Brothers investment banking firm.
Harold Brown, defense secretary in the Carter administration, is a partner at Warburg Pincus, an investment firm with holdings in approximately 490 companies worldwide.
Frank Carlucci, defense secretary during Ronald Reagan's second term, was the first Pentagon chief to make his mark as an investment banker.

A number of senior Pentagon officials who served these secretaries also work for private equities. Perry has three of his former deputies as his partners at Global Technology Partners. John White was a deputy secretary of defense under Perry, Paul Kaminski supervised Pentagon's acquisitions as an undersecretary at Defense, and Ashton Carter was an assistant secretary of Defense. Perry's founding partner was former CIA director John Deutch.

John F. Lehman, who served as Secretary of the Navy from 1981 to 1987 and was also a member of the 9/11 Commission, runs his own eponymous private equity firm, J.F. Lehman and Company. The firm's targeted markets include aerospace and defense. Gen. Paul X. Kelley, who served as a member of the Joint Chiefs of Staff, is a limited partner of the firm.

Also doing their parts in helping private equity firms to invest in the national security market are some members of the Defense Policy Board, an influential body that advises the defense secretary. Schlesinger and Woolsey are members of the board. Another member, Gerald Hillman, founded Trireme Partners along with Richard Perle, who once headed the board and was a member until he resigned in February.

Kissinger, another Defense Policy Board member who served as secretary of state and national security advisor to Presidents Nixon and Ford, is an advisor to the private equity firm Hicks, Muse, Tate & Furst. His firm, Kissinger McLarty Associates, also had a private equity unit, the Kissinger McLarty Capital Group. A spokesman from the company told the Center that the capital firm did not invest in any companies and has since folded.

Letter of the law

Watchdogs have long criticized the "revolving-door" between government and the private sector, particularly when former officials join businesses that they regulated while in office.

Ex-officials are subject to federal regulations enacted in the 1970s that require a one-year "cooling off" period before they can lobby their old agency; these former officials can, however, register to lobby immediately, provided they refrain from contacting their old colleagues.

Carlyle spokesman Chris Ullman says all former government officials working with the firm meticulously follow the regulations. "If someone serves their government and then leaves, and then abides by all of the conflict of interests rules related to lobbying former colleagues for a year," he said, "they abide by all those rules, and then they join a private sector job and don't lobby those officials, but share the expertise that they have and it happens to be the same as within the sector, the area they worked in, defense for example, that's a conflict?"

Some are more troubled by the revolving door.

"I think that this is a much more important issue than what has been legislated," says Dan Briody, an outspoken critic of Carlyle's business practices. "I think it is very detrimental to public's confidence in both the political structure and the business structure in the country."

On the other hand, those in the private equity business, such as Arlington Capital Partners' Knibb, see nothing wrong in the collaboration of private investment firms and former public officials. "Private equity as an entity is not necessarily a wrong one," he said. "There's a lot of credibility a gentleman like Odeen [who chairs the board of Arlington-owned Apogen] would bring to businesses."

Some Washington observers say that there's nothing "inherently unethical" about retired Defense Department officials working for private equities. "I wouldn't assume because someone is coming out of a revolving door-type situation, therefore, it's unseemly," said Michael Levy, a professor of public policy and business ethics at Georgetown University's McDonough School of Business. "It is not necessarily in any way shape or form wrong. There are pretty strict rules about speaking to your former agencies… It may be troubling, but it is not in itself a form of corruption."

According to Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, there's something ominous about Carlyle's success. "What's dangerous about the success of Carlyle is that other companies are beginning to understand that this is the way to make a killing," he told the Center. "These former politicians are coming out of office and they are in heavy demand. How far this goes is what I fear. I already feel that it has gone too far."

Researcher Sheetal Doshi contributed to this report.

Investing in war

2011-09-16T14:53:37-04:00

A dozen companies in which Carlyle had a controlling interest netted more than $9.3 billion in contracts.

Overall, six private investment firms, including Carlyle, received nearly $14 billion in Pentagon deals between 1998 and 2003. (See related report, "The Sincerest Form of Flattery.")

From its founding in 1987, the Carlyle Group has pioneered investing in the defense and national security markets, and through its takeover of companies with billions of dollars in defense contracts became one of the U.S. military's top vendors, ranking among better known defense firms like Lockheed Martin, Boeing Co., Raytheon Co., Northrop Grumman and General Dynamics.

Unlike those firms, however, the Carlyle Group itself is not a manufacturer. It offers no services directly to the Pentagon, and has no defense contracts. Rather, it manages investments—some $18.4 billion from 600 individuals and entities in 55 countries, according to its Web site. The firm's business is making money for these investors, the vast majority of whose identities are not disclosed to the Securities and Exchange Commission or other government bodies.

Though Carlyle itself has won no contracts, the companies it has owned or controlled have done billions of dollars worth of business with the Pentagon. The Carlyle unit that brought in the largest share—$5.8 billion—was United Defense Inc., which manufactures combat vehicles, artillery, naval guns, missile launchers and precision munitions. United Defense also owns the country's largest non-nuclear ship repair, modernization, overhaul and conversion company, United States Marine Repair Inc. Its most famous product may well be the Bradley fighting vehicle. United Defense brought in more than 60 percent of Carlyle's defense business.

Carlyle took United Defense public in 2001; by April 2004 it had sold all its shares in the company.

Lear Siegler Services, a leading contractor in aircraft logistics support, maintenance, pilot training and ground support, received contracts worth more than $1 billion. Carlyle sold the company in August 2002.

Southwest Marine Inc. also received contracts worth more than $1 billion since 1998, and Norfolk Shipbuilding & Drydock received contracts worth $827 million. In 1998, Carlyle merged these two companies into United States Marine Repair.

Vought Aircraft Industries, a large subcontractor doing work for military cargo planes, bombers, and fighters, received contracts worth $85 million. Vought is among the few defense contractors that the Carlyle Group has not sold.

Among other private equity firms, New York-based Veritas Capital Management firm that employs many former high-ranking military officials received Pentagon contracts to the tune of more than $2.2 billion. Veritas is the 41st ranked defense contractor.

Companies under the ownership of Vectura Holding Co., another New York-based group, got deals to the tune of $1 billion, while companies controlled by Berkshire Hathaway, led by billionaire investor Warren Buffett, won contracts worth $688 million. Companies owned by Green Equity Investors II LP ($275 million) and Gores Technology Group ($153 million) also received substantial defense money.

New market

Private equity firms did not have any significant presence in the defense industry until the end of the Cold War. Traditionally, the Defense Department depended on mega contractors such as Boeing Corp., Lockheed Martin and Raytheon for weapons and services. But since the 1990s, the military has increasingly outsourced to private contractors a variety of jobs and services, ranging from planning of operations to the supply of linguistic services. A U.S. government decision in the 1990s to encourage small-business participation in contracts also contributed to the expansion of the market for smaller, privately-owned companies.

The Carlyle Group acquired controlling interests in several underperforming defense contractors, installed its own management teams and revitalized the companies, in part by landing big Pentagon contracts. Then, they sold the contractors to other investors for a large profit.

"There have always been [private equities] that went in with management and bankrolled management," said Stuart McCutchan, editor of Defense Mergers & Acquisitions. "What Carlyle has done differently is they have taken it to a new level both in terms of size and in terms of being committed to an entire sector."

"Carlyle is the biggest single success in Washington of a venture capital firm," Dr. Loren B. Thompson Jr., a national security expert at the libertarian Lexington Institute, said.

In 1997, for example, the group made a 650-percent profit when it sold BDM International Inc., a McLean, Va., defense contractor. And in December 2001, Carlyle sold off the majority of its holdings in United Defense Inc. Altogether, Carlyle earned $1 billion in profit from the United Defense investment.

A windfall of war

The group cashed out many of its investments when the stock of defense companies rose dramatically in the aftermath of September 11 and the buildups to the Afghanistan and Iraq wars.

"Defense properties are too expensive these days," explained Carlyle spokesman Chris Ullman.

In 1997, Carlyle liked the price of United Defense, and beat out General Dynamics and Alliant Techsystems, which also coveted the underperforming artillery firm. General Dynamics bid more than Carlyle offered for the company, but potentially faced a lengthy, drawn out antitrust battle if it acquired United Defense. Carlyle ended up winning the bid.

Carlyle finally sold its stakes in United after taking it public in the aftermath of the September 11 attacks. The Washington Post called the hugely successful public offering "one of the most successful single venture investments of recent years."

But United did not seem all that lucrative before September 11.

"They [Carlyle] were really kind of in a pickle with United Defense," McCutchan said. "They wanted to cash out on the equity. There wasn't much money to be made... When 9/11 happened and the defense budget took off, suddenly they had a winner on their hands."

Even Carlyle, which typically does not disclose its financial and operational details, crowed over the sale.

"It was one of Carlyle's best investments," Carlyle's Ullman told the Center. "We did make more than a billion dollars on that deal, and we are very pleased that we served our investors quite well."

The reason Carlyle's defense portfolio is lean at the moment is the high value of defense firms, thanks in part to the ongoing U.S. wars. "If there comes a time when defense properties are priced in a way that we think makes sense for private equity investors, then we will certainly consider investing more of our dollars in that sector," Ullman told the Center.

Investment expertise

Carlyle has a diversified portfolio, focusing its investments in sectors that have heavy government regulation and contracting—defense, telecommunications and banking. Carlyle has matched its investments with the expertise of high ranking government officials, whom the firm has courted almost from its inception.

It was under the leadership of former Defense Secretary Frank Carlucci—first as a managing director, from 1989 to 1993, and as chairman from 1993 to 2003—that Carlyle grew from a small private equity to a global investment giant, and became a major player among defense contractors.

Other former government officials who have recent or current ties to the firm include former British Prime Minister John Major and former Philippines President Fidel Ramos; former Office of Management and Budget director Richard Darman; former Clinton chief of staff Thomas F. "Mack" McLarty; former Securities and Exchange Commission chairman Arthur Levitt and former Federal Communications Commission chairman William E. Kennard. Former Secretary of State James Baker works for the firm, as did his former boss, President George H.W. Bush, who was an adviser for the firm's Asian investment funds until he left Carlyle in 2003.

Critics have long denounced Carlyle's practice of recruiting former high-ranking government officials at the same time as it invests in companies regulated by their former agencies, dubbing it "access capitalism." For example, Kennard, who served as Bill Clinton's FCC chairman, is now managing director for Carlyle's global telecommunications and media group, directing the firm's business investments in companies he regulated.

"Carlyle would never have gotten to the level that it is at today had it not been for this premeditated commingling of business and politics," said Dan Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, a book that takes a critical look at the rise of the firm.

One of Carlyle's most controversial hirings was of former president Bush to serve as a senior adviser for its "Asia advisory board."

"The fact that George H.W. Bush was working for them while his son was president, while his son, in fact, was dramatically increasing defense spending—that seems to me one of the most blatant conflicts of interests in history," Briody said.

Bush—who joined Carlyle in 1998, before his son, George W. Bush, became president—ended his relationship with the firm in October 2003, Ullman told the Center. But that hasn't stopped the former president from continuing to give speeches for Carlyle, which he did at a Shanghai event sponsored by the firm in April 2004.

Ullman refused to disclose the remuneration Bush received for his services. "That's not information that we disclose," he said. "That's his personal business. You are certainly welcome to ask him."

Bush's office did not respond to the Center's request for an interview. Written questions faxed to the former president's Houston office, at an aide's request, did not elicit any response.

Though none are placed as closely as the president's father, Carlyle's other Washington insiders have ties to current Bush administration officials. Current Defense Secretary Donald Rumsfeld and Carlucci went to college together, for example, and Secretary of State Colin Powell was Carlucci's deputy on the National Security Council in the mid-1980s.

The continued presence of Baker and Carlucci riles critics such as Briody. "If you look at the relationship that Frank Carlucci still maintains with Don Rumsfeld and Colin Powell and the reach that he has to those folks—and he has in fact used that reach in the past and tried to influence decisions those folks were making, decisions that could directly or indirectly affect Carlyle's fortune," Briody said.

Carlyle dismisses the notion that Carlucci or any other former government or military leader on its payroll has any conflicts of interest. "Are you aware of any solicitations from [Carlucci] to Secretary Rumsfeld to ask for any particular benefits to United Defense or any of our other portfolio companies?" Ullman said. "All they [Carlyle critics] do is, they say: 'Oh, Carlucci used to work in the government and he went to college with Donald Rumsfeld, and Carlyle has defense investments, and now Secretary Rumsfeld is secretary of defense. Therefore, there is a conflict of interest.'"

Despite Ullman's assertions, media accounts have noted occasions when former government officials working for Carlyle have approached the Pentagon brass. For example, Fortune magazine reported in March 2002 that Carlucci had contacted at least two senior Pentagon officials, though Carlyle claimed these contacts did not constitute lobbying.

Ullman added that all former government officials working for Carlyle abide by "all of the conflict of interests rules related to lobbying former colleagues for a year." He pointed out that the Pentagon had cancelled the Crusader artillery system, produced by United Defense, adding, "So if we are as powerful as everyone thinks, why did they cancel it?"

Rumsfeld announced in May 2002 the termination of the artillery system; until then, the Pentagon had paid United Defense some $2 billion to develop the Crusader.

Researcher Sheetal Doshi contributed to this report.