[IWAR] ESPIONAGE Reuters/Bloomberg

From: 7Pillars Partners (partnersat_private)
Date: Mon Feb 02 1998 - 08:43:57 PST

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    February 2, 1998
    Memos Said to Detail Reuters Effort to Get Data
         F ederal prosecutors have obtained more than 100 written
         communications between a U.S. subsidiary of Reuters Holdings PLC and
         a consulting company that investigators believe was hired to steal
         information from the computers of a competitor, Bloomberg LP, people
         in touch with the investigation said Sunday.
         The communications from the subsidiary, Reuters Analytics Inc.,
         include memos and other records requesting detailed information about
         technical programs for analyzing investments, these people said.
         The consultant was then said to have electronically broken into
         Bloomberg's corporate computers and obtained the information.
         Afterward, it was passed to Reuters, at times directly to the parent
         company's London headquarters, they said. Prosecutors were said to
         have also obtained the consultant's responses.
         The computer consulting company, whose name could not be immediately
         determined, was said by people briefed on the case to have been
         founded by a former employee of Bloomberg. They said that the company
         is based near the Stamford, Conn., headquarters of Reuters Analytics.
         Reuters Holdings, the largest and oldest competitor in the financial
         information-services business, had more than a century's head start
         when Michael Bloomberg founded Bloomberg LP in 1981.
         Prosecutors obtained the documents during an undercover investigation
         of Reuters Analytics that has lasted about a year. In the
         investigation, at least one confidential informant helped the
         government obtain an array of evidence, including tapes.
         Robert Crooke, a spokesman for Reuters America, declined to comment.
         The written communications are the first documentary evidence known
         to have been obtained by prosecutors in the case. Such written
         communications, including messages sent by e-mail, would be
         potentially critical evidence, because they could be used to
         establish which executives were connected to the purported scheme.
         Already, Reuters has placed three executives in the subsidiary on
         paid leave in the wake of the scandal. According to people with ties
         to Reuters, they include Hubert Holmes, the unit's head, as well as
         Jeff Walker and James Feingold, two executives in the unit.
         In telephone calls, Holmes and Feingold declined to comment. A home
         telephone number for Walker could not be obtained.
         More than $6.5 billion is spent annually to keep computer terminals
         on the desks of Wall Street spewing out up-to-the-second bond and
         equity prices and currency values and offering complex analytical
         tools that combine years of historical and contemporary data to
         predict current trends.
         Reuters Holdings, the largest and oldest competitor in the financial
         information-services business, had more than a century's head start
         when Michael Bloomberg founded Bloomberg LP in 1981. But Reuters'
         brash competitor developed new analytic tools that Wall Street
         professionals regarded as well suited to their needs in an era of
         derivatives and other increasingly complex securities transactions.
         According to people briefed on the investigation, prosecutors have
         obtained evidence that Reuters was stealing information from
         Bloomberg's operating code, the underlying software that governs the
         functioning of Bloomberg's data terminals.
         As the head of Reuters Analytics, Holmes reported directly to senior
         executives at the parent company in London. For several years, he
         reported to David Ure, an executive director responsible for
         marketing and technical policy. Since late 1996, he has reported to
         John Parcell, who is executive director responsible for the
         financial-information product line.
         Executives in London maintained direct contact with the analytics
         division, occasionally traveling to Stamford to meet with Holmes and
         other executives. In recent months, investigators have been examining
         the travel of London executives to the subsidiary and their contacts
         with its American executives as part of an effort to determine if
         they knew of the purported scheme, people briefed on the case said.
         Since announcing the grand-jury investigation on Thursday, Reuters
         has declined comment on the extent of the inquiry. Reached by e-mail
         in Davos, Switzerland, where he was attending the annual World
         Economic Forum, Bloomberg, who is the chairman and chief executive of
         Bloomberg LP, also declined comment. "Sorry, have nothing to add to
         obvious story," he wrote.
         From its earliest days, Reuters Analytics has been faced with
         accusations that it used unsavory business practices to obtain other
         companies' technologies.
         The subsidiary was originally an independent company with a mission
         to develop technology to compete with Bloomberg. It was acquired by
         Reuters after the settlement of a bitter 1993 lawsuit, in which the
         founders of the predecessor company, Capital Markets Decisions Inc.,
         accused Reuters of secretly hiring its programmers and using their
         proprietary knowledge to build a clone of Capital Markets' software.
         Holmes, Walker and Ure, the London executive, all played roles in
         that earlier dispute.
         Crooke, the Reuters spokesman, said that the court records had to
         speak for themselves. Many of Reuters' documents are missing from the
         public record. However, in the records that do exist and in
         interviews at the time of the suit, Reuters executives denied all of
         the allegations made by Capital Markets Decisions, saying that no
         effort had been made to obtain any confidential information from the
         small company.
         In 1989, Reuters, in its efforts to move further into the business of
         analytics, turned to Stephen Levkoff, a senior vice president at
         Smith Barney who had previously developed analytics systems.
         By 1991, Capital Markets Decisions had developed and released a
         system known as Decision 2000 and nicknamed the "Bloomberg Killer."
         Reuters asked Levkoff to develop a product equivalent to the
         Bloomberg terminal, and he agreed to join Reuters as a consultant
         through his own independent company, Capital Markets Decisions,
         according to the court documents.
         Bloomberg had made rapid inroads into Reuters' business by offering
         fund managers and other institutions a data terminal that allowed
         traders to aggressively analyze purchases and sales of investments.
         Reuters had no such product, known as an analytics system, and did
         not have the programming expertise to develop one.
         After his discussions with Reuters, Levkoff left Smith Barney to run
         Capital Markets Decisions, which would create a new analytics system
         for Reuters to sell.
         According to the contract, Capital Markets Decisions would receive
         royalty payments on each terminal installed, and Reuters would supply
         its data for the system.
         By 1991, Capital Markets Decisions had developed and released its
         system, known as Decision 2000 and nicknamed the "Bloomberg Killer."
         That year, Reuters began installing the new units on customers'
         Relations between the two sides began to break down in early 1993.
         According to court records, after repeated disputes about the
         contract between Reuters and Capital Markets Decisions, Levkoff and
         Ure renegotiated it, with handwritten revisions. But when pressed for
         a final draft of that agreement, Holmes refused to provide it,
         according to an affidavit by Levkoff.
         In 1993, Reuters declared Capital Markets Decisions in breach of
         contract for what it said were a variety of failures. But Levkoff
         believed the declaration was made in bad faith, as "an effort to
         break the contract or wear us down into selling the business to
         Reuters," according to court records he filed in the case. That would
         give Reuters ownership of the system, eliminating the need for
         royalty payments.
         Employees of Capital Markets Decisions began hearing from Reuters
         employees that their company faced imminent demise. According to the
         court papers, employees began leaving Capital Markets Decisions
         without telling their colleagues where they would be working.
         According to Levkoff's affidavit, a showdown occurred during a dinner
         with Holmes on Sept. 18, 1993, at the Homestead Inn in Greenwich,
         Conn. Holmes produced a draft letter, declaring Reuters' intent to
         terminate the contract immediately, despite a negotiated term that
         required six months' notice.
         Holmes informed Levkoff that Reuters had been working on Capital
         Markets Decisions' termination for a year, and had already paid a law
         firm $500,000 as part of the effort, the affidavit says.
         During the meeting, according to Levkoff's affidavit, Holmes told him
         that several Capital Markets Decisions employees who had disappeared
         were working for Reuters. A number of employees with Capital Markets
         Decisions signed affidavits saying that Walker was personally
         involved in the effort to hire them.
         One Capital Markets Decisions programmer, Tom Kokoska, had secretly
         joined Reuters after leaving Capital Markets Decisions for Bloomberg.
         To conceal Kokoska's work, he had taken the job under a pseudonym,
         Joe Pope.
         Related Article
         Reuters Subsidiary Target of U.S. Inquiry Into Theft of Data From
         (January 30, 1998)
         Memorandums written by Reuters executives at the time show the name
         Joe Pope was even used on internal communications. And an affidavit
         by another Capital Markets Decisions executive describes how a friend
         of Kokoska could reach him at Reuters only by knowing to ask for Joe
         Why the subterfuge? According to Levkoff's affidavit, Holmes told him
         it was because Kokoska was working for almost a year on a secret
         project to make a clone of Decision 2000. Once it had used the
         knowledge of former Capital Markets Decisions programmers to make its
         own system, Reuters could take over the business, Levkoff said.
         Kokoska did not return a telephone call to his home seeking comment.
         But, as described in Capital Markets Decisions records filed in U.S.
         District Court in New York, Reuters, whose needs had spurred the
         creation of Capital Markets Decisions and its flagship product, was
         secretly hiring away some employees who understood its software. In
         turn, according to an affidavit by Levkoff, they were using that
         knowledge to develop a similar product.
         Levkoff said in his affidavit that he was told of the effort by a
         Reuters executive. As a result, Levkoff said, the value of Capital
         Markets Decisions would be reduced, allowing Reuters to buy the
         company at a low price. That would give Reuters use of the Decision
         2000 product without paying royalties.
         Before the Homestead dinner was over, Holmes presented a copy of an
         agreement for Reuters to purchase Capital Markets Decisions. Levkoff
         said in court papers that Holmes told him that with the clone project
         under way, Decision 2000 was no longer considered a valuable asset.
         "Every day that goes by, Decision 2000 is worth less to Reuters,"
         Levkoff quoted him as saying.
         Levkoff said in his affidavit that he refused the deal because
         Reuters was offering a lowball bid; Holmes stated in an affidavit
         that a deal was agreed upon.
         On Oct. 19, three weeks after the Homestead Inn dinner, and after
         Levkoff rebuffed a second offer to buy his company, Reuters severed
         all communications links, including real-time data feeds, that
         Capital Markets Decisions needed to get access to the operational
         Decision 2000 product to update the data used by customers. It also
         changed the number for the Decision 2000 help desk, which had been at
         Capital Markets Decisions.
         Levkoff brought suit, seeking $30 million in damages. After much
         battling, he won the right to depose many of the principals in the
         But Reuters reversed course. It reached a confidential settlement, in
         which it purchased Capital Markets Decisions for an undisclosed sum
         that was acceptable to Levkoff. He then left the company.
         Under the supervision of Ure, Holmes, along with Walker, began
         working with Reuters' latest subsidiary, the newly named Reuters
    Copyright 1998 The New York Times Company

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