Jules Kroll’s corner office on the seventh floor of 900 Third Avenue in Manhattan comes as a surprise if you’re used to visiting investment bankers, attorneys and other corporate executives – most likely clients of his. At first, it’s as if you’re in some fancy parlour. There’s a tufted brown-leather sofa, and a couple of high-backed chairs around the obligatory coffee table in a room full of windows through which you can almost hear the heartbeat of New York City’s traffic.
What’s missing, of course, is the intrusive giant desk, the usual reminder that you’re in the chairman’s office. Then, out of the corner of your eye, you see it: a slice of opaque glass partitioning off a far corner, a small chamber of its own, with a long desk and a telephone facing the far wall. The scene doesn’t quite conjure up Sam Spade, that quintessential hard-boiled hero of American detective fiction. But it is very private – and unique.
So is licensed private investigator Jules Kroll and the corporate investigative business, Kroll Associates, that he has spent more than two decades building. After working as a state prosecutor, followed by a period running his father’s printing business, Kroll finally found his calling when he started Kroll Associates in 1972. Since then, he has brought on a slew of former federal prosecutors, police officers, intelligence officers, and DEA (Drug Enforcement Agency) and FBI agents to run operations worldwide – 22 offices in almost as many countries at the last count. And with over 300 employees, Kroll has brand-name recognition unrivalled by the handful of competitors he is up against, many of whom are ex-Kroll employees.
After almost single-handedly catapulting the industry into the limelight, Kroll continues to be a trailblazer. He is now selling Kroll Associates to the insurance information services group of Equifax – a US public company best known for its credit-reporting service. The deal signals the institutionalization of the industry and its transformation into what Kroll executives prefer to call a risk-management consultancy. Kroll and Equifax did not release details when the deal was announced at the end of March. But those close to the firm estimate the value at a $70 million stock swap. This figure equals Kroll’s gross revenues for 1996, its most profitable year. Kroll’s revenues grew 35% during the year after a miserable 1995, when the firm was in the red.
A vision for the next decade
Timing was part of the impetus for a sale, acknowledges Kroll. But he insists the deal also came out of “our vision of what’s going to be needed over the next 10 years” to hold on to Kroll’s lead in the market. Other investigative firms are a competitive threat, but the intrusive big-six accounting firms are perceived by Kroll to be a far greater one. “It’s going to require quite a bit of financial resources and technical abilities that Equifax has and we don’t,” he says. The Equifax insurance group had $587 million in revenue in 1996 and owns CDB Infotek, one of the largest private data banks in the US.
Given the sleuthing industry of which it is part, Kroll’s deal and the future of the merged company promise to be a thriller. Will public ownership diminish Kroll’s ability to engage in the type of romantic pursuits for which it is best known? Alternatively, could the new company, with its vast resources, investigative tricks and technological sophistication, turn into a corporate big brother with greater access to information than many governments?
Kroll’s operations are somewhat mysterious and almost as secretive as the firm’s client list. For example, Kroll Associates helped corporate titan ICI fend off takeovers during the 1980s and uncovered Saddam Hussein’s assets for the government of Kuwait in the early 1990s. Kroll says information the firm provided led investigators to an arrest last month of a mafioso for the murder of Italian banker Roberto Calvi, found hanged under London’s Blackfriars Bridge in 1982.
The globalization of finance has been particularly fruitful for Kroll recently. Its far-flung contacts in many exotic places and the lack of reliable public information often lead to work on potential joint ventures and investments for clients. Recently Kroll is believed to have been involved in exposing the huge fraud at Bre-X Minerals, working for one-time Bre-X suitor Barrick Gold.
Last autumn, Kroll exposed an $11 million embezzlement for MD Sass Investor Services, the biggest ever uncovered at a securities firm. Regulators have just hired it to look into ways of keeping the mafia out of Wall Street’s over-the-counter financial market, a growing concern in New York City. As the bidding war for investment bankers heats up in London and New York, firms are turning to Kroll for employee surveillance following suspicions that confidential data are being relayed to the competitors who hire them. And the merger boom has revived an old mainstay business.
Through all of this the Kroll name has had great expectations placed upon it. “It’s scary,” says executive managing director Ernest Brod, involved in some of the higher-profile international cases at Kroll. Brod has also been involved in what historically was its most profitable line of business – investigations for targets of hostile takeovers. “People come at us as though there’s a piece of magic out there. By invoking the Kroll name, they think anything is possible,” he says.
However, during the early 1990s Kroll’s reputation suffered a setback. It became embroiled in controversy surrounding the illegal or unsavoury aspects of some of the tactics employed by its subcontractors. The firm then suffered several years grappling with a shifting business climate, international expansion, increased competition and management turmoil.
Former employees and competitors say it’s a tough business, and it has made Kroll weary. But even those who’ve left the firm, or fallen out with their former colleague, respect him. “He deserves tremendous credit for raising the profile of the industry,” says former Kroll investigator Paul Bromberg, now working for a competitor in Hong Kong.
Kroll became a millionaire by selling 25% of the firm to insurance giant American International Group in 1992, say former employees. Until the upcoming sale goes through, he will still own an estimated 70%, with the other 5% spread out among senior executives. Though Kroll insists the firm had not been on the block, months of press speculation of a pending deal preceded the announcement that the firm was being sold to the Equifax unit, due to be spun off this summer to create a new company called Choicepoint. In the merged company, still awaiting anti-trust approval, Kroll will keep its name. Management has been writing reassuring letters to clients, insisting nothing will change.
Kroll says he had been talking to Equifax executives about a merger since last autumn, and had worked with the firm’s insurance investigative unit on a number of projects since 1993. “This wasn’t something that came out of the woodwork,” he says. Kroll’s first encounter with Equifax was in 1992, when it was searching for investors and decided on AIG instead. But Equifax wasn’t the only company interested in buying into the Kroll mystique. By the time of Kroll’s annual managing directors’ meeting in Coral Gables, Florida, last December, accounting firm Coopers & Lybrand had also made an offer. “I indicated to all the managing directors that we had two offers on the table, and I felt the time to do something was here,” recalls Kroll.
But as was only to be expected, rumours surrounding the deal circulated, becoming a source of embarrassing publicity for Kroll, and providing a window into the secret world of investigators. Reports of dissension in the ranks began to circulate in the British press, with reports that British managing director Arlish Turle – a former SAS soldier hired in 1995 – was plotting a management buyout of the European operations. “Complete rubbish” is Kroll’s response to the reports.
Chief operating officer Michael Cherkasky who, with Turle, is a member of the newly created five-person executive operating committee formed in the wake of Kroll’s financial troubles, blames the rumours on disgruntled ex-Kroll employees. These are “people who practise what they do, providing disinformation”, he says, vaguely alluding to some of the former intelligence professionals working for Kroll in Europe. “That’s not what they were hired to do, but it’s in their background and that’s what they do,” asserts Cherkasky, a former federal attorney who prosecuted New York mafia boss John Gotti and was involved in the Bank of Credit and Commerce International (BCCI) case.
Hiring former spooks has caused problems for Kroll, according to former Kroll investigators. Because of their predilection for dirty tricks, ex-intelligence officers tend to create paranoia. For example, former Kroll executives say that using former intelligence officers to run the Paris office led the firm to believe the French government had placed them under constant surveillance. The top executives in Paris have now left and the office has since been cut back.
However, Europe continues to be a boom market, a trend that began with the fall of communism in eastern Europe. Kroll has recently opened an office in Brussels and Frankfurt, and added to its London office. The firm has 315 employees and expects that to grow to 350 by the end of the year. That far outdistances some of its closest competitors, which have less than 200 employees each.
A piece of the equity action
Kroll and Cherkasky confirm that there is an element of truth in the rumours. The firm has been trying to work out a way to increase the share ownership of key executives in an attempt to keep “the assets from walking out of the door”. Former Kroll executives agree this was a sore point in the past, particularly among the firm’s rising stars.
None of Kroll’s partners will be getting rich from the deal, and one US executive, president Robert McGuire, has announced he will leave the firm in June.
But others, such as executive managing director Brod, see the Choicepoint deal as a way finally to get a piece of the action. Brod says: “The stock option and ownership is a particularly exciting one. I have a sliver of equity, but now I will have an opportunity to increase it, which I didn’t have before.”
Other investigators, having grown up in Kroll’s shadow, quickly praised the proposed changes. “The story here is that our industry has changed so dramatically that companies are realizing the value of joint ventures or acquisitions with companies at the cutting edge of information. This is a natural progression,” says Michael Hershman, whose Washington DC-based Fairfax Group is one of Kroll’s chief competitors in the US. But, like other competitors, he also looked for a weak point in the deal. “It’s Jules’ exit strategy,” he speculated. “It’s his swan song.”
Kroll, a consummate marketer who works closely with clients, bristles at such comments: “Their wish,” he says bluntly. “I will be working here for many years to come. I am locked in here financially, legally and morally.” Cherkasky offers another perspective. He says: “Is this deal frightening for our competitors? Damned straight.”
The competitors may be best advised not to underestimate Kroll. They are the first to admit that Jules Kroll dragged a seedy business out of the gutter and made it respectable, though not without a little sweat. “In the early 1990s we were still viewed as people who hid in closets and spied on people,” says Cherkasky. “We hope in the latter part of the 1990s to be viewed as high-level problem solvers and analyzers who know how to get information and find out what it means.” Part of that is a desire to get beyond what Cherkasky calls the “response” business, which now comprises only 65% of Kroll’s work. As Brod explains: “Every time the phone rings, we have an opportunity to make some money. But it’s phone call to phone call.” Kroll says there is another reason for the shift: “It’s what the client wants,” he insists.
To make the transition, Kroll has already broadened the company’s services. Kroll is now split into three segments. The first is Kroll’s traditional stonghold – termed business intelligence. Now accounting for about 40% of revenue, that business covers the M&A work that turned Kroll into a powerhouse in the 1980s, which brought in $5 million in revenue last year, with what Kroll calls “market and competitor intelligence” and the regular due-diligence work that is increasingly international in scope.
The international market is important to Kroll, says Brod, because in many markets “more of the information gathering has to come from live sources”, which is Kroll’s speciality. In such countries as the US, on the other hand, not only is there more public information, but such information is accessible to more people because of the Internet or other search technology.
Says Cherkasky: “International is a booming business now, and we’re aggressively pursuing it. Others will catch up, but we’re the only ones that can do it now.” Indeed, it was largely Kroll’s international presence that enticed Equifax. It wanted to expand its business internationally, and into the corporate world. Last year half of Kroll’s earnings came from outside the US, with all but two of the offices profitable. Kroll also opened new offices in Beijing, Frankfurt, New Delhi, Sao Paulo and Sydney in 1996, along with four new US offices – in Baltimore, Chicago, Pittsburgh and Santa Clara.
Another 40% of Kroll’s business is based in corporate investigations, including litigation work, asset searching and fraud. Much of that work now requires individuals who are highly skilled in analyzing public records and understanding how to use computer technology in obscure areas such as forensic accounting. This type of business is set to become critical for future operations, and so Kroll’s London office is hiring British Telecommunications’ computer security chief. He is due to come on board as a senior manager in May.
The last 20% is in risk management, and includes businesses in corporate security, security planning, computer security and crisis management, as well as risk-assessment audits. Some of the latter grew out of Kroll’s partnership with AIG. For example, a new kidnap and ransom response team led AIG to offer corporations a new line of kidnap and ransom insurance. The AIG link also helped expand Kroll’s presence globally.
But it is the core “business intelligence” that has given Kroll its reputation. Former employees say it is the most lucrative part of its work. In the 1980s, Kroll gained national prominence working for companies defending themselves against hostile takeovers. “Those were heady days,” recalls a former Kroll executive. The Kroll name hit the headlines when US cosmetics company Mary Kay filed an action against it in 1991, accusing Kroll investigators of going through its garbage after Mary Kay launched a hostile takeover of Avon Products, a Kroll client. The garbage was on public property, Kroll argued, making its search legal. “We only obtain what’s in public view, but we might put ourselves in a unique position to see it,” says Cherkasky.
Now that hostile takeovers are making something of a comeback, Kroll is at it again. Recalling one of its recent victories, Brod, who is working on investigations involving three hostile takeovers, says: “From the very first conversation we had about the possibility of getting into this case, Jules was on the phone saying to the client that, ‘if you want to win, you’ve got to make that decision yourself and show your impact into the marketplace from day one. You’ve got to send every signal with every weapon at your command’.”
Too clean an image?
It’s that kind of aggression that has earned Kroll such a tough reputation. Now former Kroll investigators question whether companies will feel comfortable hiring a public company that might be afraid to get its hands dirty. “The fact of the matter is that in this business, to really get the icing on the cake, you have to sail very close to the edge,” says one such former Kroll investigator. “We’re not going to break into somebody’s office and put a bug on the phone, but, are we going to pay someone to obtain an itemized telephone bill? The answer is yes. Technically it’s not legal, and that’s not information any of us would pay for. But if you’re using someone who does, that’s an interesting question. If you’re not prepared to go the distance, you won’t get the information.”
That’s not always the case, however. During Kroll’s search for Saddam’s assets, two former Kroll subcontractors, eager to obtain the information, got into trouble for bugging the offices of a Geneva bank. Kroll insisted they were not working on the job, but it was a tedious search through a tangle of public records that actually produced the goods on Saddam – his 14% shareholding in French publisher Hachette.
Nonetheless, the risk of engaging in such behaviour is bound to be greater for a public company. “To have regulators breathing down your back, having to face thousands of shareholders and pension managers asking about the questionable practices of Kroll subcontractors would be difficult. And unfortunately the type of work we do carries those risks,” claims the former Kroll investigator who now works for a competing investigative firm.
Bart Schwartz, another former Kroll executive who runs a competing New York-based firm, Decisions Strategies International, says his firm has considered public ownership as an option, But, he says: “We’ve had lawyers tell us we would not get their business if we were a publicly held company.” This, he says, is because “a publicly held company is more likely to be the subject of litigation, particularly class-action litigation that could bring the entire operation under review”.
In discussing their merger, Kroll and Equifax have both considered the problem, and decided it could be overcome. “We’ve thought about it, and communicated to every client that we will operate the same way,” says Cherkasky. “A public company can keep private confidential information. There’s no regulatory change that would require us to reveal information we obtain. Our clients need complete discretion. We will never break laws and do things that we wouldn’t do in a public company.” In fact, he points out, ABC News did a sting operation a few years ago, in which reporters asked a number of investigators to bug a room. “We were the only ones that said no,” boasts Cherkasky.
In the past, however, Kroll has become enmeshed in a couple of cases that attracted publicity because subcontractors engaged in questionable activity. “Kroll regrets it if it happened,” says Cherkasky, attempting to bring to a close old stories that don’t seem to go away. “That was six years ago,” he says, referring to a number of cases involving Kroll’s insurance clients who were in litigation with chemical companies. In a number of cases, Kroll subcontractors were censured by the courts for misrepresenting themselves to potential litigants (former and current chemical company employees) in their investigative work. “There are things we thought about doing in the early nineties that we would not do now. We’re the industry leader, we set the tone, and it has changed,” says Cherkasky, who joined the firm in 1994.
It’s all part of Kroll’s transformation. Although Kroll, like any investigator, still has to have “people on the street”, Cherkasky notes, the firm has reduced drastically the number of subcontractors it employs, preferring to do more of the work in-house. “We’re concerned about quality control,” he says. “Every time you hire people as subcontractors you’re legally responsible for them.” In the past, say former Kroll investigators, the firm threw resources at solving cases, including hiring large numbers of subcontractors. But that also bumped up costs, helping to shape the reputation that Kroll was the most expensive firm in the business. “We’re a company that has to get it right. It’s very expensive,” says Cherkasky. At the same time, by cutting back on subcontractors, the firm has also helped shrink its cost structure.
For Kroll, it will always be hard to get away from ethical, if not legal, grey areas, and maintain its aggressive work for clients. For example, one of the booming businesses in Kroll’s London and New York offices over the last six months has been surveillance of employees for investment banks.
“There’s enormous concern that employees will do something inappropriate when people sign non-solicitation agreements and confidential agreements,” says Cherkasky. Fed up with raids on their traders and bankers, the industry has recently become “willing to be more aggressive” in pursuing potential illegal employee behaviour, he says. After all, says the former prosecutor: “As an employee, you have a fiduciary responsibility to be working solely for that company on their time.”
In one New York case, Kroll investigators discovered that an employee had taken clients to a competing firm when he joined. Kroll’s client contacted the firm, threatening to sue its competitor for taking the employee, and also claiming damages for taking clients. The competitor rescinded the employee’s offer. “They reached a backdoor settlement. No-one wants to be involved in this kind of litigation,” says Cherkasky.
On such cases, Kroll often uses forensic accounting techniques to gain access to information that has been downloaded and deleted from an individual’s computer. In London Kroll has admitted placing electronic surveillance devices in company offices, which is legal there. But that’s not the case in the US, where privacy laws are stronger than in the UK. In New York State at least one party has to agree to the surveillance in any place where there is an expectation of privacy. One exception might be phone lines on which trading business is conducted, since those lines are often tapped for business records.
The question is whether Kroll would place electronic surveillance devices on such phone lines in New York. “We will never do something that’s close to the line, it’s not worth it,” says Cherkasky. He argues such tactics might not pay off for the company because of the effect on employee morale. Regardless of his point of view, Kroll in London has made a name for itself engaging in such tactics. Such differences are likely to occur more in the future, as offices have more independence from New York, due in part to management changes in an effort to recognize national market differences.
Sensitized to privacy
Merging with any other larger firm, whether it is a public one or an accountancy with its huge client list, is bound to intensify the difficult issues a firm such as Kroll faces. For example, Cherkasky says Kroll would not have felt comfortable aligning itself directly with Equifax because of that company’s credit reporting service, the largest in the US. That service has access to the credit records of millions of Americans, but it is a violation of federal law to use that information for any other purpose than granting credit. It’s a privacy issue Kroll had been sensitized to during the 1980s, when one of its subcontractors used his position as a consultant to the gaming industry to obtain credit information from a casino credit information service, which is supposed to be used only for industry purposes. The subcontractor, who was fined by the courts, claimed he passed the information to Kroll for use in its corporate takeover investigations, among others. Kroll, which denied using it illegally, was not charged.
Even though Kroll has adroitly avoided problems with Equifax’s credit reporting service by merging only with Choicepoint, privacy issues are not likely to go away. Kroll already has access to a huge number of public databases, but will now have access to Choicepoint’s proprietary database. That will allow it to expand its work into the mass market, scrutinizing a far wider range of companies and individuals, instead of focusing on the elite world of mergers, international investments, and high-profile criminal cases.
Using Choicepoint’s technology, for example, Kroll will now be able to engage in pre-employment background checks for corporations. Previously, Kroll could only provide such services on potential top executives. It also plans to expand the background check service it already offers. The first client was K-Mart, which was unwittingly selling clothing made by companies using illegal sweatshop labour. Using Choicepoint’s extensive technology, Kroll plans to launch a “vendor integrity programme” that will enable it to offer to check out every vendor a company buys from to see if it has a criminal history, or financial problems – a service that is too broadly based for Kroll to offer today. Cherkasky says partner AIG, which will also own shares in the new company, plans to use the programme and thinks it will save on insurance fraud claims as a result.
Cherkasky says Kroll respects the privacy laws in every country it operates in, but notes that there has to be a balance. He says: “Do we want to know who’s delivering our pizza, who’s coaching the soccer team, and who’s checking our baggage at the airport, even if it’s at some loss of privacy?” Kroll has been known to dig up dirt on individuals for its clients, but Cherkasky says 90% of the information it uncovers is business-related. And he argues that Kroll’s growing professionalism, including the hiring of former prosecutors such as himself, should give some comfort. Certainly no-one is expecting a return of the violence against workers once associated with the Pinkerton investigative agency, whose open-eye logo is responsible for the “private eye” moniker in use today.
Kroll, however, has a vaster reach than either Pinkerton or the pulp-fiction authors who popularized the industry could ever imagine. To illustrate it, Kroll executives like to use the term “six degrees of separation”, derived from the title of a popular Broadway play. Each individual, so this notion goes, is only six people away from knowing every other person on the planet. “It’s amazing how few calls we are away from anybody,” says Brod. With the Choicepoint merger, one thing is certain: Kroll will be getting a few degrees closer to you.
