He Fought the Law and the Law Won - the Story of Matthew Maly

Matthew Maly thought he was doing the right thing when reporting what he believed to be corruption and incompetence.  He had little idea how doing the right thing would forever change his life

I am a US citizen and a former employee of Defense Enterprise Fund ("DEF"). DEF was established and funded by the U.S. Congress with a mission to create profitable joint ventures with the former Soviet producers of weapons of mass destruction (WMDs). DEF's stated goal was to convert these producers in order to prevent rogue states and terrorist organizations from getting their hands on the advanced Russian military technology.

DEF was funded with $67M of U.S. government funds and did not have any private money. But DEF was also supposed to prove that venture capital investment in Russia can be a profitable business and to raise a private investment fund, thereby contributing to Russia's economic restructuring.

I started to work for DEF in June 1996 In July 1999, after my repeated attempts to convince DEF's top management to improve the way the Fund was being run were all rebuffed, I wrote a confidential letter of concern to Ambassador Taylor, Coordinator of U.S. Assistance to the N.I.S.
  

In this letter, I alleged that during a period of two years about $20M of DEF's money were grossly mismanaged or lost. In particular, I alleged that $3M of U.S. conversion funds went to open a restaurant and $5M was transferred to a French company known to be bankrupt. I also alleged that DEF was paying up to $50K in cash, every month, to a former Russian Vice Prime Minister to lobby for a project DEF had invested in. Here is a figure that puts it all in perspective: prime Russian military scientists require only $2K of salary per year, less than $200 per month - and you get these knowledgeable and skilful engineers working for peaceful ends.

Ambassador Taylor ordered an investigation of my allegations to be conducted by a partner of a lawyer that represented DEF Board. I was concerned about a possible conflict of interest, but Taylor assured me that the investigation would be "thorough and impartial" and urged me to cooperate with it. I came to Washington, DC, and gave a five-hour testimony. The investigator did not make an official record of my testimony, but did collect all the relevant documents I had in support of my allegations. The investigation lasted four months and its Report was submitted to Amb. Taylor in December, 1999. I have not been able to see the Report, even though it had been promised to me: I was simply told that the Report did not find any evidence that would support my allegations. In February, I was told that DOS and DOD have "concerns" about DEF and "about the Report itself". My subsequent attempts to get the Report failed as it was termed "confidential".

DEF's lawyer, Robert Odle of Weil Gotshal & Manges, was a prominent Nixon staffer during Watergate. He was mentioned in the Congressional Record (Committee on International Relations, June 26, 1997, page 41) in connection with his $270K bill that the Romanian-American Enterprise Fund complained to President Clinton about.

On August 15, 2000, DoD IG published its Audit of DEF. In it, DEF's management and oversight were seen as "poor" and several million dollars of very questionable losses were described. However, this Audit failed to investigate or even mention my allegations.

On April 4, 2001, the Moscow Times, an English language newspaper of record in Russia, published a 10,000 page Special Report about DEF, "Investing, Pentagon-Style". This Report went through my allegations and essentially confirmed them.

On August 20, 2001, Defense Week published an article on DEF where it repeated the findingsofthe Moscow Times Report. Defense Week also reported that Defense Criminal Investigative Service was conducting its own investigation of DEF. This investigation was still unfinished as of June 2003. According to the Defense Week correspondent, this article prompted DoD IG to start redoing its Audit of DEF.

On December 31, 2001, the second DoD IG Audit of DEF was published. Again, it made no mention of my allegations, but its conclusions were shocking nonetheless. DEF invested about $30M, and the present value of this investment portfolio was estimated at $11M. DEF had just $4M in cash remaining in the $67M program. DEF spent $35M on itself, or 53% of its money, whereas, as the Audit noted, usually venture capital firms spend just "one to two percent" on administration. The Audit also found $2.2M of "unallowable" expenses, such as golf club memberships.

Diplomatically, DEF has been a "resounding success" as well. As I mentioned, DEF paid hundreds of thousands of dollars as a bribe to the Russian Deputy Prime Minister, but the project failed anyway. The project created such a scandal that Secretary Albright had to get involved.

After my letter of concern, the company that managed DEF at the time was fired by DEF Board and another company, Siguler-Guff / Russia Partners, was found to manage DEF. DEF former President, John Nowell, resigned. The new DEF President, Richard J. Nordin, Jr. was named in my letter of concern as someone who bears the brunt of responsibility for DEF's demise. Also, hundreds of thousands of dollars of "unallowable" expenses listed in the December 31, 2001 DoD IG Audit of DEF are directly attributable to Nordin.

The contract with Russia Partners calls for $2M yearly management fee and is to run for five years. As present value of DEF investment portfolio was estimated at $11M, a contract to manage this portfolio for a fee totalling $10M seems quite generous. The Audit noted that Russia Partners was "destroying documents".

After the second DoD IG Audit of DEF, there was a second article in Defense Week and another one in the Moscow Times. These articles reported that all the DEF's money had been spoken for, which means that DEF can no longer conduct its defense conversion and investment activities, and yet, Richard Nordin, the person responsible for DEF's demise, was serving as DEF's President.

In June 2002, an Agent of the Defense Criminal Investigative Service, Mr. Thaddeus Corley, interviewed me in Kiev, Ukraine. He asked me which former DEF employees could confirm my allegations as to the felonies being committed, and I gave him some names. Then he went to Moscow where he interviewed many DEF employees over the course of his extended stay, but he did not interviewed those that were on my list.

The second DoD IG Audit of DEF reveals an interesting feature of DEF: it was conducting its operations under virtually no supervision. Department of State thought that DEF was supposed to be supervised by DoD. DoD assigned supervisory functions to the Defense Threat Reduction Agency. According to the letter of General Bongiovi, DTRA's Deputy Director, DTRA had attempted to discover what were the guidelines and regulations under which DEF was supposed to operate and discovered that there were none.

General Bongiovi's letter, attached to the second DoD IG Audit of DEF, argues that since there were no guidelines under which DEF was supposed to operate, nothing in DEF's operations can be considered "unallowable". $100K spent on golf membership, overcharging the US government by more than $150K on housing expenses, losing about $20M on grotesquely misguided or self-serving investments - nothing arouses General Bongiovi's concern.

Why did DEF management invest all its funds in a great rush, essentially over a period of just eighteen months? Why did DEF spend so much on itself? U.S. Congress allowed DEF to raise a private investment fund, to be owned and managed by DEF's management team, and thus, instead of converting former Soviet producers of weapons of mass destruction, DEF's top management essentially used DEF's money as a marketing and advertising budget for the private investment fund they would own and manage. To invest in ten projects that look very good on paper and then raise $200M of private money on the "strength" of this performance - that was the plan. But the projects started failing a bit too soon, and despite DEF's attempt to mislead the potential investors, no money was raised.

DEF investigation also highlighted other unpleasant facts about DEF's top managers: neither Nowell nor Nordin had any prior venture capital experience; one of DEF directors, Sarah Carey, steered $700K of DEF's legal work towards her firm; the Romanian-American Fund complained to President Clinton about a $270K bill submitted by DEF Board's lawyer.

Why did the U.S. Congress give $67M of public funds to two inexperienced and unqualified businessmen to raise the investment fund they would own? This is one generous gift. DEF top managers were earning $150K per annum, had an $150K per annum of housing allowance, spent DEF money on themselves with no limit, flew Concorde, charged family vacations and theater tickets to DEF, paid $100K for golf memberships, etc. But that was not enough for them: they rushed to raise a $200M private fund where their salaries and perks could be limitless.

I hold degrees from Columbia and Yale and am an author of two published books on democratization of Russia. The Globe and Mail called my book Understanding Russia "perhaps the best guide to [Russia-s] psychology". I live in Russia and Ukraine and want to find a position having to do with U.S. assistance to the N.I.S. Since I wrote the letter of concern four years ago I have not been able to find such a US-financed position even though I have filed more than 200 applications. My wife is Ukrainian, and I cannot go back to the States because this would mean a long separation: we have two small children. Thus, being blacklisted caused grave hardship for me and my family.

The IRS may also have been used to apply pressure on me. It froze my only bank account without giving any reason and kept it frozen for seven months. When I got some publicity about that, the accounts was restored, without finding any fault with my tax returns and without an apology.

Defense Threat Reduction Agency is a DEF's program supervisor and it maintains a DEF-related webpage. This page used to state that the number of former Soviet WMD scientists converted by DEF to peaceful pursuits was 3370. Then I made DTRA reduce this figure to 1250, a 66% reduction. I estimate that the real figure is 200 scientists, not a good result for a $67M program.
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In April 2001, I got my only, to date, communication from DTRA. DTRA's then Representative in Moscow, Col. Bill Smith, opined that I "lacked integrity".

Gross mismanagement of US funds, bribing foreign officials, blatant cover up, submission of results known to be false, and a revenge against the whistleblower - is this how the WMD conversion should look like? If this is WMD conversion, how can a threat of WMDs be used as an excuse for going to war?

Matthew Maly

http://matthew-maly.ru