| http://english.pravda.ru/main/2001/08/21/12998.html
Pravda.RU:Main:More in detail 16:38 2001-08-21 JOHN M.DONNELY: U.S. DEFENSE FUND IN RUSSIA IS TARGET OF CRIMINAL PROBE A Pentagon program to convert former Soviet doomsday-weapons organizations into commercial projects is under criminal investigation, Defense Week has learned. Since 1994, the United States has spent $67 million in grants for a not-for-profit corporation that the Pentagon oversees called the Defense Enterprise Fund. The fund has invested in jobs such as transforming a former military satellite-tracking organization in Kazakhstan into a telecommunications firm. After receiving seed money, the projects (also in Russia, Belarus and Ukraine) were supposed to attract private capital and sustain themselves. The fund's story illustrates the perils of investing in the former Soviet states, even in the good name of stemming the spread of weapons of mass destruction. Of the $67 million, the fund spent $24 million on its own operations and invested $43 million in 13 projects, the Pentagon says. Today, however, only six of those projects survive and the $43 million investment is worth less than half that amount, just $19 million. An August 2000 Defense Department Inspector General audit criticized the Pentagon's Defense Threat Reduction Agency, which is supposed to oversee the fund, for inadequately doing so. Shortly thereafter, the Inspector General's Defense Criminal Investigative Service began its criminal probe, according to three people familiar with it. They declined to discuss specifics, except to say that the investigation is examining misuse of government money alleged by a former program employee. The Bush administration has taken a hard look at how the United States spends some $5 billion on programs meant to turn Soviet swords into post-Cold War plowshares. Some of the programs have been criticized by lawmakers for mismanagement, despite the destruction of thousands of nuclear weapons. The defense fund's story may also highlight the risks run by whistle-blowers like the former fund employee. After he took his concerns to his bosses, he was re-assigned, then fired, along with others, in 1999. Since then, he says, he has had trouble feeding his family. "Today, me and my family (wife and two daughters, aged 7 and 2) are penniless, and we have lost the apartment we were living in," said the whistle-blower, a Russian-born U.S. citizen named Matthew Maly, in an email to Defense Week. "I am sure that I have been blacklisted. ... Aged 42 and holding degrees from Columbia and Yale, I am unlikely to find a position at McDonald's." Meanwhile, the man who allegedly mismanaged the program's assets, Richard Nordin, has been promoted. Formerly senior vice president at Global Partners Venture (GPV), the fund's first portfolio manager, Nordin is now president of the Defense Enterprise Fund. A restaurant, an apartment, envelopes "The serious allegations Mr. Maly has raised ultimately led to the matter being brought to the attention of the Office of the DoD Inspector General, where it remains under review," the Pentagon said in a statement to Defense Week. Maly's allegations include: � $3 million of the $6 million the fund invested to convert RAMEC, a Russian military-electronics company, into a maker of personal-computer products was instead used by a Russian partner to open a restaurant in St. Petersburg; � $5 million that was meant to go to a project to recover precious metals from electronic scrap was loaned to Valme Industries, a French partner, even though fund officials knew Valme was bankrupt and should have known the project was technically questionable; fund employees delivered manila envelopes containing up to $500,000 in U.S. dollars to a former Russian vice premier, Valery Serov, who was lobbying the Russian government on behalf of MPS-Telekom, a telecommunications project the fund had invested in; Nordin spent $1 million of fund money on his own Moscow apartment. Nordin, in an interview, said he didn't punish Maly because of his allegations. And Nordin dismissed the substance of Maly's claims. "The stuff that I was personally involved in that he accused [me of] just simply did not happen," Nordin said. "And the stuff he accused other people of doing, I don't believe any of this has any merit ... in terms of criminal behavior, malfeasance and so forth." Nordin says in retrospect, though, that he might have managed the fund differently. Robert Odle, an attorney representing the fund's board, said in an interview that the board thinks Nordin has performed well. Odle's firm investigated Maly's charges and, he said: "We found no documents, no evidence, no witnesses, nothing that supports [Maly's] allegations, not one piece of paper or human being and not any other kind of evidence." However, because Odle represents the organization under scrutiny, Maly thinks Odle's review was a whitewash performed, in effect, by the defendant's lawyer. Exile in Ukraine Maly's allegations were reported in April by The Moscow Times, an English-language paper, but have not been published in the United States. The Defense Enterprise Fund has received no U.S. government money since fiscal 1995. It will exist until 2004, whereupon it will either become self-sufficient or be dissolved. The Pentagon itself managed the fund's investments from 1994 to 1998. Then , in 1998, the Defense Department turned to GPV, the portfolio manager, to steer the investments. Maly says that he began warning Nordin about shortcomings of the fund's management as early as 1997. For example, Maly says, he urged Nordin to hire a staff lawyer and to conduct due diligence before investing, neither of which Nordin did, he says. "After six months of these conversations, Mr. Nordin had enough of me and sent me to Ukraine, where I spent the next two years," Maly said in an email. He added that he never got any communications from Nordin, nor any raises, nor even one of the six-month performance reviews that his fellow employees got. Nordin counters that he wasn't Maly's supervisor and says he sent him to Ukraine because he was needed there. In 1999, Maly took his case to the State Department. In a letter to Amb. William Taylor, head of U.S. aid programs for the newly independent states, Maly said the defense fund was misspending federal money and was guilty of "serious wrongdoing." He laid out the case. A month after Maly wrote the State Department, he and the other employees of GPV were dismissed, and the fund's board hired a new portfolio manager, Russia Partners, a unit of New York City-based Siguler Guff. Maly says that, until he recently found work advising a Russian gubernatorial candidate, he hadn't held a steady job since that day in August 1999 when he was let go. Ruble and fund collapse In his letter to the State Deparment, Maly said the fund's misdeeds were "primarily" the work of Nordin, an Army Ranger and Harvard grad who Maly says had no experience running investment funds. The Inspector General's August 2000 report did not address any criminal activity but did confirm the losses. Those included the mere $1 million now left over from $6 million spent to convert RAMEC, the military-electronics company. The Inspector General said the losses were partly due to the poor investment climate in Russia after the ruble's collapse in August 1998. But Maly contends that at least $20 million of the setbacks were due to mismanagement, not the Russian economy's state. The State Department's Taylor responded to the complaint, Maly says, by saying that the matter would be reviewed in a "thorough and impartial" manner. However, Maly says, the investigation was conducted by Odle's firm, Weil, Gotshal & Manges, which represented the fund's board. Maly considers that a conflict of interest. Odle says he wasn't representing the portfolio manager or its employees, just the board. Today, he represents not only the fund's board but also the new portfolio manager, Russia Partners. "We were satisfied that, while there could have been some bad judgement, maybe some hotels that were more expensive than they needed to be and maybe some first-class travel that shouldn't have been used ... there were no bad acts," Odle said of his inquiry. He would not provide a copy of it, arguing that it is protected by attorney-client privilege. Odle said the fund has lost so much of its value not because of mismanagement or criminal activity, but because the Russian economy collapsed in August 1998 just as congressional funding for the project also dried up. Nordin said that he originally expected to get $440 million from Congress, not $67 million. Had he known funding would have been so much less, he would have invested more gradually and put his own managers in place on large projects, he said. Finally, Odle and Nordin said that the decision to fire GPV and hire Russia Partners in 1999 only weeks after Maly sent his letter had nothing to do with mismanagement. Russia Partners simply cost less than GPV, they said. It is unclear how much longer the now year-old Defense Department criminal investigation of the Defense Enterprise Fund will run. The Pentagon does not discuss ongoing criminal probes. John M.Donnely Spesially for PRAVDA.Ru |
