February 2, 1998
Memos Said to Detail Reuters Effort to Get Data
By KURT EICHENWALD
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.
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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.
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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.
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By 1991, Capital Markets Decisions had developed and released a
system known as Decision 2000 and nicknamed the "Bloomberg Killer."
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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'
desks.
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.
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Related Article
Reuters Subsidiary Target of U.S. Inquiry Into Theft of Data From
Bloomberg
(January 30, 1998)
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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
Pope.
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
case.
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
Analytics.
Copyright 1998 The New York Times Company
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