In Memory of John R.



Journal’s Wilke Dies of Cancer at 54
WASHINGTON—John R. Wilke, a 20-year veteran of The Wall Street Journal known for incisive reporting on the intersection of business and politics, died of cancer Friday afternoon at his Bethesda, Md., home. Mr. Wilke, 54 years old, was a member of the Journal’s Washington bureau. In recent years, he specialized in articles about deals cut by members of Congress to win special appropriations, known as earmarks, for friends, supporters and business associates back home. One of his investigations helped lead to last year’s indictment of then-Rep. Rick Renzi (R., Ariz.), who is accused of receiving favors from developers and copper-mining executives in return for congressional help. Another revealed the broad range of earmarks a powerful Democrat, Rep. John Murtha, used to bring federal contracts to his Pennsylvania district. After receiving a master’s degree from the Columbia University Graduate School of Journalism, Mr. Wilke worked for BusinessWeek as a Washington correspondent in 1984 and became a staff writer for the Boston Globe in 1986. He joined the Journal’s Boston bureau in 1989, where he covered technology. His reporting there disclosed an internal revolt against Kenneth H. Olsen, president of computer pioneer Digital Equipment Corp., who soon resigned. After moving to Washington for the newspaper in 1995, he covered the long Justice Department antitrust case against Microsoft Corp. He also uncovered that Microsoft Chairman Bill Gates wasn’t able to wrangle an invitation to join the exclusive Augusta National Golf Club, despite his considerable wealth and fame. (Mr. Gates eventually did get in to the club.) Mr. Wilke reveled in the camaraderie of the newsroom. Late on Fridays, he was known to send emails to colleagues asking, “Shall we gather a posse?” before leading them to a local restaurant or watering hole. Between drinks, he would duck out to make calls on his cellphone before announcing the need to head out to “assure domestic tranquility.” He loved spicy food, such as that found at Washington landmark Ben’s Chili Bowl; baseball, specifically the Boston Red Sox; and newspapers in general. He was often seen leaving the newsroom at the end of a day with four papers tucked under his arm, along with an accordion folder filled with documents. Even with sources and the subjects of his articles, Mr. Wilke usually was an easygoing presence. He mentored many younger reporters. At his desk, he often juggled two calls at once, and he furtively guarded his stories—until he believed them ready for publication—from the prying eyes of editors. He wrote and rewrote the leads of his articles, sometimes dozens of times, until he was happy with the tone and content, and he nursed story ideas for weeks or months, cultivating a slight air of mystery, while gathering threads. For his Microsoft coverage, Mr. Wilke and his San Francisco-based colleague David Bank won a Computer Press Association award. Mr. Wilke’s coverage of earmarks won him the 2007 Everett McKinley Dirksen prize for distinguished coverage of Congress. A native of New York, Mr. Wilke received a bachelor’s degree in psychology and biology from the New College in Sarasota, Fla., before going on to Columbia. He is survived by his wife, Nancy, a son and a daughter.



On the SpOt

At Digital Equipment, Ken Olsen Is Under Pressure to Produce
Board Asks That He Bring In High-Level Outsiders, Speed Up Restructuring
Unfruitful Talks With Apple
By John R. Wilke
Two of the computer industry’s most powerful figures, Apple Computer Inc. chairman John Sculley and Digital Equipment Corp. president Kenneth H. Olsen, met in secret last spring in Washington, D.C., at Mr. Sculley’s request. His question: Would an alliance make sense? Apple needed a partner for a new generation of chip designs. And Digital, which makes large office computers, needed a bigger presence in the surging business of personal computers. But the talks, which were never disclosed, went nowhere. Instead, Apple stunned the industry with a sweeping technology-sharing agreement with its arch-foe, International Business Machines. Thus was another opportunity apparently lost to Digital and Mr. Olsen, whose longstanding skepticism about the PC—he used to call it a “toy”—hobbled the nation’s second largest computer maker as PCs reshaped the market. Mr. Olsen also long resisted two other major industry trends of the last decade: the moves to so-called “open” systems that use standard operating software, and to a new generation of simpler, more potent chips. This legacy now haunts Digital and its 66-year-old founder as they face the danger of being left behind by the industry they did so much to create. The $14 billion company that has been Mr. Olsen’s singular passion for 35 years is mired in huge losses on declining sales. Despite vast resources spent on research and engineering, its latest products have largely failed to ignite growth. Repeated restructurings have sapped morale. Key employees and executives have departed following run-ins with Mr. Olsen. The company’s shares now trade at one-fourth their 1987 peak, closing at $45.25 on the Big Board yesterday. And it isn’t clear Mr. Olsen knows what to do next. Even though DEC has made some deft moves recently, such as an alliance with software powerhouse Microsoft Corp., there is no quick relief in sight. The depth of the latest loss ($294.1 million in the quarter ended March 28) “caught us by surprise,” Mr. Olsen says. “When we laid out our restructuring last summer, we thought we’d have more time.” One of Mr. Olsen’s first moves after the loss was to disband much of the organizational structure he had created only weeks earlier, sidelining a key executive and leaving an impression of management in disarray. The troubles inevitably raise anew the difficult question of succession at Digital, which has been dominated by Mr. Olsen’s towering presence for so long that few leaders have emerged and remained. “He’s at a defining moment in his extraordinary career, where he can be remembered as a titan who built this great company, or the founder who couldn’t let go,” says Jeffrey Sonnenfeld, author of “The Hero’s Farewell,” a study of corporate succession. But as Digital’s difficulties have deepened, so too has Mr. Olsen’s determination to solve them. “No way am I going to leave now,” he says. “I only want the job as long as I’m the best. But there’s a clear mission to accomplish now. I’m not a quitter.” For now, Digital’s directors are behind him; no one expects a General Motors-style board revolt. But in a secret, seven-hour meeting recently, the long-compliant board pressed Mr. Olsen as never before. Directors insisted that restructuring efforts be stepped up and that strong outsiders be brought into senior executive ranks, beginning with the chief financial officer’s post, which has been empty since James M. Osterhoff resigned last year. The board’s new aggressiveness is being led by former Ford Motor Co. president Philip Caldwell, insiders say. He has the support of Thomas L. Phillips, retired chairman of Raytheon Co., who has long been viewed as an Olsen ally, someone who’d attended a local monthly prayer breakfast with Mr. Olsen for more than a decade. Also supporting Mr. Caldwell were Robert Everett, former president of Mitre Corp., and Colby Chandler, Eastman Kodak Co.’s former chairman, say Digital insiders. None of the directors would comment for this article. Mr. Olsen, the only Digital executive on the nine-member board, won’t discuss the reaction of directors either. But he says the unexpectedly steep loss “certainly got their attention,” and the board “wants a clear plan” for faster restructuring. Mr. Olsen says he supports reaching outside for new talent: “Over the years, we haven’t brought enough new blood and new ideas into the company.” A new urgency was apparent the day after the board meeting. On April 24 senior vice president John F. Smith said Digital will record a charge that may reach $1 billion and will cut more jobs—perhaps 10,000 to 15,000—in the year beginning July 1. That’s on top of $1.65 billion in charges already taken and 10,000 previous dismissals (employees currently number about 116,000). And Mr. Smith did nothing to dispel expectations of at least three more losing quarters, nor did he predict when revenue would pick up. In the latest quarter, sales fell 7.6% to $3.25 billion. Some former managers say Mr. Olsen must take the blame. Digital “has everything it needs to turn around—good people, good products and great service—but it won’t happen while he’s still in charge,” argues John Rose, who resigned last month as manager of the company’s PC unit. Mr. Olsen rejects criticism of his leadership. “The real question is whether I have allowed too much freedom,” he says. And he has, indeed, rescued Digital from hard times in the past and managed each time to ignite new growth. In the early 1980s, in particular, Digital was written off and Mr. Olsen sharply criticized—old and in the way, analysts said— only to roar back with the strongest growth of any major computer maker of the time. Moreover, the Maynard, Mass.-based concern still has a strong balance sheet, with no debt. And, though long overdue, it has a powerful new computer design that could fuel a comeback in 1993. Based on RISC chip technology (reduced-instruction-set computing), its new Alpha computers aren’t limited to Digital’s proprietary operating software but can also use Unix and Microsoft’s Windows NT. “They’re doing a lot of the right things, playing off their technological strengths with foresight about the way the industry is headed,” says John Levinson, a Goldman, Sachs & Co. analyst. “The problem is, they still have a ridiculous amount of baggage left over from the successes of the past.” Most people can’t imagine Digital without Mr. Olsen. “No matter what changes, there’s one constant, and that’s Ken,” says David Smith, a former Digital software analyst. “He’s a living legend.” But many Digital executives contend that Mr. Olsen, who shows no signs of retiring, has become increasingly isolated and irascible. His convoluted, rambling speeches, long a staple of company lore, have become even more difficult to follow, and the pearls of wisdom that once rewarded the careful listener seem more scarce. At a managers’ meeting April 16, Mr. Olsen’s presentation left many in the audi-


ence confused, participants say. The speech meandered from topic to topic and went on for an hour and a half. Some managers stared down at their cold chicken lunches and others rolled their eyes or shook their heads. At one point, Mr. Olsen made an attempt at black humor. “You know, someone just came up to me in the hall and said, ‘Ken, I’d been considering taking early retirement but decided to stay because working here is so much fun,’” he told the group. “There was an embarrassed silence,” one manager says. The atmosphere in the crowded room, he says, “was like a wake.” “He’s the Fidel Castro of the computer industry,” contends Gordon Bell, a onetime star computer designer at Digital, who resigned in 1983 after a run-in with Mr. Olsen. Mr. Bell charges that “he’s out of touch, and anyone who disagrees with him is sent into exile.” A recurring criticism of Mr. Olsen’s stewardship is that his dominance of decision making tends to drive out good people. The most recent casualty is William Strecker, Digital’s chief engineer, whose product-development group was abruptly disbanded by Mr. Olsen three weeks ago. The group had been created only weeks earlier, and Mr. Strecker had been promoted to oversee all development. Mr. Strecker remains at Digital, which said he wasn’t available for comment. Colleagues of Mr. Strecker say he had repeatedly crossed Mr. Olsen, including opposing a mainframe project that had Mr. Olsen’s personal backing but has so far proved a costly failure. Mr. Strecker’s demotion dismayed some longtime Olsen loyalists. “It’s a criminal shame, because Bill Strecker was really the only one capable of charting a coherent product strategy in the inner circle” of senior executives, says Don McInnis, a former Digital manager now a vice president at Prime Computer Inc. Another key talent was lost when Mr. Olsen pulled the plug in 1989 on Prism, a RISC computer design headed by David Cutler, a highly regarded software engineer. Instead, Digital bought a stake in MIPS Computer Systems Inc. and designed a line of workstations around its RISC chips. Mr. Cutler resigned and went to Microsoft. Mr. Strecker also opposed the Prism cancellation and the alliance with MIPS.

When it began to appear that Digital’s MIPS-based machines weren’t going to be a big hit, Digital recharged its internal RISC project. Ironically, Mr. Cutler became the designer of Microsoft’s Windows NT software, which Digital now hopes will boost future Alpha sales. And just when Digital most needs an experienced hand overseeing finances, the chief financial officer’s job remains unfilled, nearly a year after Mr. Osterhoff quit following a disagreement with Mr. Olsen. “He went to the mat” against Mr. Olsen, opposing acquisition of two European companies without more research, an associate says. Mr. Osterhoff’s concern was well placed: Digital last year paid a total of $390 million for the computer units of Philips Electronics N.V. and Mannesmann AG, but so far their weak performance hasn’t helped results, while adding 10,000 people to the payroll. Mr. Osterhoff won’t discuss his departure. There are signs, too, of stress within Mr. Olsen’s core management group. Mr. Smith, his second-in-command, appears to have lost some authority in the latest reorganization. Colleagues say Mr. Smith, fiercely loyal to Digital, seems increasingly exasperated. Mr. Smith says he continues to have a close working relationship with Mr. Olsen, adding: “It shouldn’t come as a surprise that the level of frustration inside the company right now is sky high.” The management problems are worrisome, critics say, because Mr. Olsen’s vision of the computer industry has proved to be lacking of late. From PCs to standard software, the choices he has made have left the company at a disadvantage in a fast-changing market. As a result, his critics say, he didn’t grasp the significance of a possible alliance with Apple, in which Apple might have used Digital’s Alpha RISC chip. That could have established Alpha instantly in a market segment where Digital was weak. The apparent lost opportunity still leaves some current and former Digital executives bitter. Within the small circle of Digital’s senior staff aware of the Olsen-Sculley meeting a year ago, Mr. Olsen gets the blame for its going nowhere. Digital executives and Apple’s Roger Heinen, senior vice president, confirm that the meeting took place. Mr. Heinen asserts that Mr. Olsen’s “lack of interest and

understanding of the role of the personal computer industry” was indeed an obstacle. Mr. Heinen, himself a former Digital executive, says the companies “continue to have a close relationship.” Mr. Olsen dismisses the talks with Apple. “It just never came to fruition. It wasn’t that important to me.” He notes that Apple talked to other companies, too, before settling on an alliance with IBM, and that such alliances are decided on a whole range of factors. But at Mr. Olsen’s direction, Digital has tried to make up for lost time in PCs. In the past six months, it has brought out a line of aggressively priced IBM-compatible PCs sold by mail order, which are going strong. Though the late start makes it unlikely Digital will be a major player anytime soon, PC hardware sales should hit $500 million this year. One of Mr. Olsen’s most costly decisions has been backing the ill-fated VAX 9000 mainframe computer, which cost $1 billion to bring to market but attracted few buyers. “It wasn’t a mistake, because we needed a high-end machine,” says Dorothy Terrell, a former Digital manager now at Sun Microsystems Inc. “But it was late, too complicated and costly to build, and the sales force wasn’t selling it effectively.” Mr. Olsen repeatedly resurrected its funding after others tried to kill it, she adds. Mr. Olsen concedes that the project “took longer and cost us more than it should have.” But, he says, “we belong in that business.” Before long, Digital is expected to introduce a redesigned mainframe based on simpler technology. While such hugely expensive projects have gone forward, management’s efforts to cut other costs often have focused on items such as water coolers and magazine subscriptions. In January, a memo circulated at a Digital office in Acton, Mass., identifying the building as a test site for lower-cost toilet tissue, “a project being driven by Win Hindle, corporate staff senior vice president.” Mr. Hindle, who has been acting chief financial officer since Mr. Osterhoff’s departure, says, “I can see how that might look silly. But if a new national paper-supply contract can save something like $300,000 a year, well, every little bit helps.”


THE WALL STREET JOURNAL, September 18, 1998

At Augusta National, Microsoft’s Bill Gates Hits an Iron (Curtain)
Billionaire Duffer Would Love To Belong to Storied Club, But He Lacks an Invitation
By John R. Wilke
They don’t let just anybody into Augusta National Golf Club. Ask Bill Gates. You’d think Microsoft Corp.’s chairman, the world’s wealthiest duffer, would fit right in at the exclusive club, home to the famed Masters golf tournament. Its 300 members are a who’s who of corporate America, including John Reed of Citicorp, Jack Welch of General Electric Co., Hugh McColl of NationsBank and the current or former chief executives of AT&T Corp., International Business Machines Corp. and Ford Motor Co. So far, though, Augusta’s elite membership doesn’t include Mr. Gates. He hasn’t actually asked to be admitted. That would be bad form; membership at Augusta is by invitation only. But over the past two years, he has made it known, in the discreet way people do such things, that he’d love to be a member. Within the past year, the software mogul has golfed and played cards with Augusta members, and enlisted the aid of his friend and fellow golfer, investor Warren Buffett, who has long been on Augusta’s membership roster. He has also tried to raise his profile in the golfing world, including an endorsement of Big Bertha golf clubs in a TV ad campaign. In the simple, 30-second spot for Callaway Golf Co. of Carlsbad, Calif., Mr. Gates talks about his love of the game. “I started playing golf about five years ago,” he says. “It was humbling. I really like it, but it’s so frustrating. I think I’m getting better.” He also has donated cash and stock options to a foundation started by golfing star Tiger Woods, and was a sponsor of this year’s PGA Championship, played at Sahalee Country Club not far from the company’s headquarters in Redmond, Wash. A big new building under construction at Microsoft is code-named “Augusta.” It isn’t clear why Mr. Gates hasn’t been able to sink this putt. The club’s membership rules are shrouded in secrecy, and a spokesman refused to discuss them or Mr. Gates. People close to the club speculate that Mr. Gates, who is 42 years old, may be too young—or his golf swing might not measure up to Augusta’s standards. The club prefers members who play the game reasonably well and have a deep appreciation of its nuance and lore. If age and skill are the barriers, Mr. Gates may yet, with a few more years behind him, gain entrance; he has a mediocre 26 handicap at the Broadmoor Country Club near Seattle, where he sometimes plays. But he is competitive on the course and works diligently at improving his game. Indeed, a person close to Augusta with knowledge of Mr. Gates’s interests thinks time is on his side. “I’ll bet my last nickel that he’ll eventually get in.” Or it may be that Mr. Gates is guilty of the one thing that is known to often disqualify Augusta aspirants: He wants it too badly. “The old saying goes that if you want to play the club, don’t ask the members,” says Curt Sampson, author of the recent book, “Augusta: Golf, Money, and Power in Augusta, Georgia.” Though Mr. Sampson has no personal knowledge of Mr. Gates’s situation, he says asking can backfire, adding, “It’s odd—something you want so dearly and you can’t have it because you want it.” A spokesman for Mr. Gates says it’s unfair to suggest that he is actively trying to get into Augusta: “Bill loves golf and plays when he can with friends, family and business partners around the world. In some cases, he’s been asked to endorse or support certain golf activities. And, in all of these cases, he has done so out of his love for the game and respect for friends who have asked.” Golf has become ingrained in Microsoft’s corporate culture, and country-club memberships are a status symbol for many of the more than 2,000 millionaires at the company. A mutation of the game has also cropped up in Microsoft’s offices called “swing around the wing,” or hallway golf. “It’s a great de-stresser,” says David Hufford, a spokesman for Microsoft’s interactive-media group. “If you hit a ball onto someone’s desk, you have to play it where it lies.” Mr. Gates has observed the game, but never played, Mr. Hufford says. Whatever eventually happens, it has to be humbling for now for Mr. Gates who, as one of the most driven and successful businessmen in history, is used to getting what he wants. Yet his interest in the genteel Georgia club is hardly out of character with generations of business barons who have made fortunes while making golf their leisure-time obsession. If the game is religion, Augusta’s azaleanecklaced course is its cathedral. Stroll down its long front lane, shaded by century-old magnolia trees, and you follow in the footsteps of golf’s legends—from the late Ben Hogan to Jack Nicklaus and that new guy, Mr. Woods, who all have worn the green polyester-and-wool jacket worn by members and bestowed on Masters winners. How Augusta, which opened in 1933, ultimately decides on membership remains mysterious. Unlike most golf clubs, it shuts down each summer (shortly after completion of the Masters). New members discover they have been admitted only when they receive a bill for dues sometime after the club reopens in October. By tradition, final membership decisions rest solely with the chairman, now William “Hootie” Johnson, a retired banker in Greenwood, S.C. The all-male club (though women are allowed to play the course) has become a cloistered refuge for the rich that jealously guards its privacy. In its annual report, members are told to “actively discourage any form of publicity.” Members know they can be booted without recourse for any offense to sportsmanship or violation of the club’s many unwritten rules—especially that greatest of sins, speaking publicly about the club or its membership. That helps explain the reaction of one Augusta member when asked recently about the Gates matter. This person, one of the most powerful executives in America, lowered his voice and replied that he simply couldn’t discuss it.


THE WALL STREET JOURNAL, February 18, 1999


As Microsoft Struggles With Antitrust Case, Tactical Errors Emerge
Inflexible on Monopoly Point, And Poor on PR, Firm Finds Defense in Disarray
Judge Offers Equine Allegory
By John R. Wilke
WASHINGTON—Bill Gates’s lawyers went to federal court last fall with a good hand. But it isn’t the hand they played. They could have conceded that Microsoft Corp. is a tough competitor, but more forcefully argued that consumers are helped, not harmed, by its hardball tactics. They could have acknowledged Microsoft’s monopoly—like dominance in personal-computer operating systems, but argued that restrictions enforced by government bureaucrats would do more harm than good in such a fastmoving industry. Instead, Microsoft refused to give an inch. Rather than emphasizing the strongest elements of its case, the company’s lawyers have become mired in defense of the weakest parts. They have argued fervently that the company doesn’t have a monopoly, despite Windows’ 90% share of the market in PC operating systems. They have maintained that the company doesn’t bully its competitors, despite internal electronic mail and documents suggesting otherwise. The result: Although a decision by Judge Thomas Penfield Jackson is still at least three months away, Microsoft’s defense is in disarray and its executives and economist have been battered so badly on the witness stand that the judge has questioned key elements of the Redmond, Wash., software giant’s case. Microsoft’s supporters—and, privately, even some members of its defense team—harbor doubts about its course. “They’re letting the government define the case, instead of going with their strongest cards,” says Thomas Hazlett, a visiting scholar at the American Enterprise Institute, a conservative Washington think tank, who has been a vocal opponent of the antitrust case brought by the Justice Department and 19 states. “Microsoft should stand up and say, `Yes, we tried to eliminate our competitors.’ Instead, they argue over threats, e-mails and exclusive contracts that are common in any industry—playing right into the government’s hands.” Others who have strongly opposed the government’s case express frustration with Microsoft’s defense. “They’re bungling it,” says Stephen Margolis, a North Carolina State University economist who, like others quoted in this article, was on a list of pro-Microsoft economists that the company recently distributed to reporters. Mr. Margolis notes that Microsoft’s lawyers failed to pursue the strong arguments they could have made on “the lack of consumer harm and the idea that competitors aren’t foreclosed from the market. Instead, they are defending themselves by saying they are not a monopoly. If people find that unreasonable—and many people probably do—it undermines everything else they say.” Microsoft’s lawyers also refused to accept that this case is as much a public-relations battle as a legal one. And on the publicity front, as even they now concede, they have been clobbered. The government’s lead trial counsel, David Boies, has proved to be a master showman, serving up juicy documents and courtroom pyrotechnics that play well in the press. The Microsoft lawyers, with their dry and legalistic arguments, frequently wind up sounding defensive. Given the high stakes in this case for Microsoft’s reputation, the public-relations fight may prove almost as important as the legal arguments. Microsoft’s field general is William Neukom, the company’s courtly, silverhaired general counsel, who takes copious notes during the trial and passes scribbled instructions to his team of lawyers from New York’s Sullivan & Cromwell seated around the defense table. As his client’s troubles have worsened, he has been stepping more often before the news cameras outside the courthouse to remind the media that courtroom theatrics aren’t going to prevail in this case; rather, Mr. Neukom says, “the facts and the law are going to win it, and they are on our side.” Mr. Neukom says there has been no second-guessing on the defense team, “not a minute’s worth.” The core of the government’s case is “fatally flawed,” he says, and its evidence of illegal conduct is weak. As for engaging each and every one of the government’s specific charges, he says, Microsoft had no choice. “You have to meet those allegations with the facts,” he says. “We feel very good about where this case stands right now.” It’s unclear what role Mr. Gates, Microsoft’s chairman, has played in shaping the legal strategy, but it certainly mirrors his combative style. Mr. Gates was personally involved in the company’s response last year to the Justice Department’s charge that Microsoft wasn’t living up to terms of a 1995 consent decree, which settled an earlier antitrust case. It isn’t known whether he has continued the hands-on involvement; a company spokesman wouldn’t say. While there is no sign that Mr. Gates has lost faith in his legal team, Tod Nielsen, a young executive who has the chairman’s ear, was sent to attend the trial. Mr. Nielsen sits in the front row each day, like a thirdbase coach, focused intently on every play. You can tell how he thinks witnesses are doing by watching him—grimacing, grinning, shaking his head. During breaks, he reports to Redmond from the corridor, chattering into a cellular phone; Mr. Nielsen says he simply is providing technology advice to the legal team. Much of the defense rests on the claim that Microsoft isn’t a monopoly. But some involved in the company’s defense now are asking why they are trying to defend turf that can’t be held, thus losing credibility with the public and the judge? Retreat to the high ground, these insiders argue, by shifting emphasis. Defend Microsoft’s right to innovate. Show that consumers haven’t been hurt. And play the trump card: If there is a problem, can government lawyers and economists really be trusted to fix it? These insiders say the defense has been hemmed in by the hard line taken by Mr. Gates, and by fear of what one of them called “collateral damage” from private lawsuits. If Microsoft is declared a monopoly by the court—even if no other limits are placed on the company—its ability to acquire companies and make other deals could be reined in, while the number of private antitrust suits against the company would be likely to grow. It is legal for a company to have a monopoly if it has been fairly won. But it is a violation of the antitrust laws to try to use that monopoly to keep out rivals or hurt competitors in other markets. Microsoft hasn’t been accused of gaining a monopoly illegally, but rather of trying to use its monopoly in PC operating systems to thwart challengers and win dominance of other markets, such as that for Internet browsers. If Judge Jackson formally tags Microsoft as a monopoly, every private antitrust suit against it would start at the 50-yard line. Plaintiffs no longer would bear the burden of proving that Microsoft has a monopoly. That’s likely to set off a race to the courthouse by lawyers itching to file class-action suits against the company. And Microsoft could face even more serious legal threats from Netscape Communications Corp., which


is being acquired by America Online Inc., and others that have been targeted by Microsoft’s business tactics, legal experts say. Already, cases filed by Caldera Inc. and Bristol Technologies Inc. are headed for trial, and another, by Blue Mountain Arts, is pending. One of Microsoft’s arguments has been that it doesn’t dominate the PC operatingsystem market because of competitive threats from Silicon Valley start-up Be Inc. and tiny Red Hat Software Inc., in Research Triangle Park, N.C. But it isn’t too convincing. “Once you get to the point where people are laughing, you have to do something,” says Stanley Liebowitz, a University of Texas economist who has been a strong Microsoft supporter. But the company’s defense team, he says, “doesn’t seem to have any fallback position.” Waning courtroom credibility has been another problem for the company, and it can be traced directly to Mr. Gates. Even before the trial began last year, the Microsoft chairman’s unyielding approach set a confrontational tone with Judge Jackson that persists today. Mr. Gates insisted that Microsoft couldn’t unbundle its Internet software from Windows, despite the judge’s order to do so. Mr. Gates also appeared defiant and uncooperative in his videotaped deposition, so that any executive testifying later who wanted to be more candid risked countering his boss’s testimony. In the Gates videotape, which continues to haunt Microsoft’s defense, the famously hands-on chairman appeared forgetful and repeatedly insisted he wasn’t involved in key decisions and company strategy. That deposition gave Mr. Boies, the government’s lead trial counsel, an opening to attack Microsoft’s credibility, an approach he has pressed with each witness since. If Judge Jackson finds that Microsoft’s witnesses aren’t credible, much of the rest of the company’s defense is threatened as well. And such a finding would make the judge’s ruling harder to overturn by the appeals panel that almost certainly will review the case. Microsoft’s lawyers have complained bitterly that Mr. Boies is waging little more than a public-relations campaign that has scant bearing on the substance of the case. The press has fallen under Mr. Boies’s spell, they say, reporting only the trial’s drama and ignoring more pertinent facts. One Microsoft lawyer says, “We have not done as good a job

as we should have to explain our message and the law,” which he says strongly favors Microsoft. Mr. Boies, he says, “has been focusing on largely peripheral and tangential issues, doing a good job turning to his advantage the theater of the courtroom.” Case in point: On his first full day crossexamining Microsoft’s lead-off witness, economist Richard Schmalensee, Mr. Boies barely touched on the witness’s 328-page statement. He hammered away at other points, such as whether Dr. Schmalensee’s testimony squared with his past writings—it didn’t—and avoided the line-by-line dissection of witness statements that Microsoft’s lawyers had conducted earlier in the trial. At the end of the day, just as reporters and television crews were deciding what to report about the trial that day, Mr. Boies produced a memo written by Mr. Gates last year that asked his staff to survey software developers that would support Microsoft’s Windows strategy. Then Mr. Boies produced another memo showing that the survey—which had been cited by Mr. Schmalensee—was rigged in Microsoft’s favor. A third memo, displayed on oversize video screens, noted that most of the companies polled thought Microsoft should be sued—a finding the company hadn’t made public. Gotcha. On the courthouse steps, Mr. Neukom denounced the ambush as a cheap stunt, irrelevant to the substance of the trial. But it got prominent play on television news programs and in major newspapers. Then came the famous videotape fiasco. When Microsoft senior vice president James Allchin took the stand, Mr. Boies gleefully dismantled a video demonstration Mr. Allchin had brought. The tape was supposed to show that Windows doesn’t work well when its Internet software is removed, countering a key government argument. But Mr. Boies’s dissection of the video prompted the judge to say that the tape was so deeply flawed that it “casts doubt on the . . . entire reliability” of that evidence. Mr. Allchin was given a chance to redo the tape, and after a grueling all-night effort, he played it the next day with fewer problems. The affair was later dismissed by Mr. Neukom as “a sideshow” and a “melodrama about four minutes of tape” that will have little bearing on the facts of the trial. But Mr. Boies also has scored substantive points that strike at the core of Microsoft’s case. When he rattled Dr. Schmalensee with questions on the survey, it was after

the economics professor had been forced to concede a more important point: that there was no viable alternative to Windows for most PC makers today. Similarly, the most damaging day for Mr. Allchin wasn’t the day that landed him on the front pages of newspapers. It was the day before, when Mr. Boies pressed Mr. Allchin to admit—not once, but 19 times— that the benefits of adding Internet software to Windows could be achieved using the products separately as well. That undercut one of the company’s key arguments: that Microsoft bundled the two products to benefit consumers, not to crush rival Netscape, as the government alleges. Some of Microsoft’s supporters wonder why the company’s lawyers bothered arguing the unbundling point. In a separate but related case, a federal appeals court ruling last year gave Microsoft wide latitude to add new features to Windows, even if it targeted a product already being sold by another company. (After that ruling, exultant Microsoft lawyers said the decision would let the company add “a ham sandwich” to Windows if it chose to.) Some members of the Microsoft team are preparing for an appeal, as if this part of the case already is lost. And as Microsoft’s fortunes flag in court, the prospect of courtimposed restrictions on its business practices becomes increasingly likely. Justice Department officials insist that, since it is impossible to know whether or how broadly the judge will rule against Microsoft, such talk is premature. They also say that none of the possible remedies under discussion in recent months—ranging from a breakup of the company to forced licensing of Windows or a more narrowly tailored set of conduct restrictions—has been decided on. Judge Jackson clearly would like to wrap things up. Before Tuesday’s afternoon session, he offered an allegory that he insisted was irrelevant to the Microsoft case, but is relevant to “our work” as lawyers. “When you discover you are riding a dead horse, the best strategy is to dismount,” he said. But lawyers have other strategies, including “buying a stronger whip, changing riders . . . declaring that the horse is better, faster and cheaper dead, and, finally, harnessing several dead horses together for increased speed.” “That said,” he concluded, turning to Mr. Boies, “the witness is yours.”


THE WALL STREET JOURNAL, September 1, 2006


Wine Lover’s Nose For Fakery Leads To Famed Bottles
Collector of 1780s Bordeaux Says He Was ‘Swindled’; German Dealer Denies It
A Probe Using Gamma Rays
By John R. Wilke
PALM BEACH, Fla.—When Boston’s Museum of Fine Art displayed William Koch’s private collection last year, the treasures included paintings by Monet, Degas and Dali, a trove of Greco-Roman and American West artifacts, and his renowned racing yacht, winner of the 1992 America’s Cup. But the museum wanted proof of the provenance of some of the energy tycoon’s most prized possessions: hand-blown bottles of Bordeaux from the 17,000-bottle cellar beneath his estate here. The wines bear the vintages 1784 and 1787 and the initials of the then-ambassador to France, Thomas Jefferson. The museum’s questions prompted Mr. Koch to bankroll a year-long quest to discover whether he, along with many experts in the wine world, had been duped by the mysterious bottles. Mr. Koch assembled a team of former Federal Bureau of Investigation and British intelligence agents, wine and glass experts, Sotheby’s former head of wine sales, even a nuclear physicist. Led by a former federal judge, the effort has already cost more than twice the $500,000 Mr. Koch paid for the four bottles in 1987. Now the 66-year-old chemical engineer and yachtsman believes he has found proof the bottles were fakes—as well as evidence of other fraud in the wine-auction business, especially for vintages older than 1945. And he wants to settle the score. “I bought them for the mystique, to own something that belonged to the third president, the author of the Declaration of Independence,” Mr. Koch says over a silken 1971 Petrus in his ornate dining room here. “If someone robs you of those bragging rights, you get p----- off.” In the rarefied world of historical wine collecting, the Jefferson bottles, said to have been discovered in a bricked-up cellar in Paris in 1985, have long inspired awe and controversy. In December 1985, the late Malcolm Forbes paid $156,000 for a Jefferson Lafite at a Christie’s auction, still a record bid for a bottle of wine. While doubts about the authenticity of the bottles have been voiced over the years, many wine experts vouched for them, including Christie’s board member and wine author Michael Broadbent. The Jefferson bottles are believed to have been sold to wealthy buyers around the world by auction and private sales. Yesterday Mr. Koch filed suit in federal court in New York against a German collector and dealer, Hardy Rodenstock, who supplied the Jefferson bottles and other rare vintages to auction houses and merchants. Mr. Koch alleges that the former pop-music promoter defrauded him and engaged in a scheme to deceive wine buyers and reviewers around the world. Even his name is a creation, the suit says: He was born Meinhard Goerke, and later changed his name. A second wealthy collector, Russell Frye, says he also bought wine provided by Mr. Rodenstock, including some of the world’s rarest Bordeaux vintages. In federal court in San Francisco yesterday, the Massachusetts software entrepreneur filed suit against a California distributor that sold him Mr. Rodenstock’s wines. Christopher Forbes, vice chairman of Forbes Inc., publisher of Forbes magazine, has also challenged the authenticity of the Jefferson bottle purchased by his father. “Mr. Rodenstock is a clever, intelligent and refined con artist,” Mr. Koch says. “He has swindled a lot of wealthy people.” More troubling for the auction houses and great French chateaus whose brands could be tarnished by counterfeiting: Mr. Rodenstock and others “completely polluted the market with fake and mislabeled wines,” he says. Often called the Indiana Jones of fine wine for his uncanny ability to unearth rare vintages, Mr. Rodenstock is known for his tastings, which are widely cited in wine reference books. He denies Mr. Koch’s claims. In a series of faxed messages to The Wall Street Journal, he repeated that the Jefferson wines were found in Paris, but said that he bought them from a man who he said may no longer be living—and whom he wouldn’t identify. He added that even if it turned out after all these years that the bottles weren’t genuine, any legal action “would be barred by the statute of limitations.” Mr. Rodenstock sent pages from a French winery’s records that he said support the authenticity of the bottles by showing orders made by Jefferson. He also rejected the claim that he has supplied other mislabeled wines, such as a 1961 Petrus that was withdrawn from a Christie’s auction in Los Angeles in June. “Are there any pieces of evidence, or is this again only a stupid rumor?” he asked. Mr. Rodenstock maintained that “the subject [of] fakes is totally over-rated” and that “it is nearly impossible to fake an old wine” because it would be easily exposed. Still, he said in a July 18 fax, “fakes have always existed and will certainly always exist, but that does not mean the end of the wine world. Jesus Christ was already a faker, as he changed water into wine.” Mr. Koch owns and operates Oxbow Group, a global energy company that mines lowsulfur coal and produces coke and natural gas. He is perhaps best known as skipper of the America3 racing yacht, which brought the America’s Cup back to the U.S. in 1992. With wire-rim glasses, a thick shock of white hair and a perpetual tan, Mr. Koch has long had an independent streak. His billionaire brothers control Koch Industries, a $25 billion business empire. He carried on a long legal battle with his brothers over the division of family assets. The suits have been settled and he is reconciled with his brothers. His twin, David, was best man at his wedding last year. Mr. Koch says he took on the wine investigation because he didn’t expect police or federal prosecutors to be able to do much. “No one’s going to have much sympathy for rich guys who got cheated—it’s not as if the public at large is hurt,” says Mr. Koch. Besides, “I get a kick out of being able to play Wyatt Earp.” Early in the investigation, his posse obtained a copy of a previously unpublished 1985 report by the Thomas Jefferson Memorial Foundation, a nonprofit educational group that runs Jefferson’s Monticello estate in Virginia and supports scholarly research. The study, conducted after Mr. Rodenstock approached the foundation about a tasting, examined the former president’s extensive personal records of his contacts in Bordeaux. It raised serious questions about Mr. Rodenstock’s claims based on those records. At that point, “we knew the game was afoot,” says Mr. Koch, sitting in his Palm Beach mansion under an oil portrait of the daring American naval Capt. James Lawrence, an ancestor of Mr. Koch on his mother’s side, who famously commanded: “Don’t give up the ship.” The Jefferson foundation’s report found no documentary link to the bottles Mr. Rodenstock discovered. The former president was indeed an admirer of French wine and toured Bordeaux in 1787 as ambassador to France, riding on horseback through the vineyards and buying cases of Haut-Brion, d’Yquiem and Margaux for himself and for George Washington. He ordered more from Bordeaux on his return to the U.S. in 1790, always keeping precise ledgers and receipts. “Jefferson’s


surviving records for the period are virtually intact,” the report said. And Ch. Lafite 1787, the vintage sold to Mr. Forbes in 1985, “does not appear in a single one,” it said. “Nor do any of the other vintages [found by Mr. Rodenstock] appear in the records, except the Ch. d’Yquem 1784, which we know Jefferson ordered and received in 1788,” the report found. It also challenged Mr. Rodenstock’s interpretation of winery records that he cites in his support. “He seems to have made the connection between the bottles and Jefferson by a study of the records,” the foundation report said. “But it is precisely those records which make such a connection less and less likely.” The report has since been described in a book published early this year by Bacchus Press, “An Evening with Benjamin Franklin and Thomas Jefferson,” by James Gabler. Mr. Gabler, a writer and lecturer on Jefferson’s passion for wines, said that based on his research, the Rodenstock bottles “were not, in my opinion, ever owned or possessed by Thomas Jefferson.” In response, Mr. Rodenstock said Mr. Gabler “never talked to me in detail about the Jefferson bottles.” He added, “he must be careful with such untrue statements as he or his publishers can get into a lot of legal trouble.” Mr. Koch sent his investigators across Europe, interviewing wine makers in France and collectors in Germany and searching their cellars for fakes. At one point, an agent of the fraud-control office of the French Ministry of Finance accompanied Mr. Koch’s team. A French government official declined to comment on whether the ministry is investigating the matter. Mr. Koch also went to extraordinary lengths to conduct physical tests of his Jefferson bottles. A nuclear scientist in a top French government laboratory in Bordeaux, Philippe Hubert, agreed to test for levels of radioactive cesium in the bottle. His method is based on the fact that any wine made after 1945 contains traces of fallout from atmospheric nuclear tests. Mr. Koch’s 1787 Lafite was brought to a special laboratory deep under a mountain on the Italian border, says Dr. Hubert, director of the Centre d’Etudes Nucleaires de Bordeaux. The lab’s depth minimizes the level of naturally occurring gamma radiation; additionally, the detector was shielded by “archeological lead,” prized by scientists for its low radiation, retrieved from a Roman cargo ship that sank on its way to Brittany nearly 2,000 years ago. After a month of testing the wine inside a nitrogen supercooled gamma-ray spectrometer, results were inconclusive. They showed the wine was made before 1945, but couldn’t answer the question of authenticity. With that setback, the Koch team focused on the bottles themselves. They purchased hand-blown antique bottles and worked to

re-create etchings similar to the initials “Th. J.” and other script that appeared on Mr. Koch’s bottles, using copper engraving wheels spun by foot pedals as in Jefferson’s time. And they worked with a Corning Glass Museum expert and a former FBI glass-forensics specialist to study the bottle engravings under a microscope. Their conclusion: The chateau, vintage and “Th. J.” initials on the bottles were engraved using a high-speed diamond drill with a movable head—an instrument that obviously didn’t exist in the 1700s. “At that point,” says Mr. Koch, “we knew we had him.” Mr. Koch’s investigators also reached out to some of the top wine makers in Bordeaux, including Count Alexandre de Lur-Saluces, whose family owned Ch. d’Yquem for four centuries before its sale to LVMH Moet Hennessy-Louis Vuitton in 1996. Jefferson corresponded with a Count Lur-Saluces in 1788, seeking the chateau’s sought-after Sauternes, a sweet white wine whose older vintages sell for $1,000 or more per bottle. In an interview, Mr. de Lur-Saluces, who is still affiliated with the chateau, said “there is almost no way to prove whether these bottles are genuine or not, but I am very skeptical.” He said that several years ago, Mr. Rodenstock brought a Jefferson bottle to the chateau for a tasting. He was not convinced. Others who drank the Jefferson d’Yquems at tastings held by Mr. Rodenstock raved about them. A 1998 Los Angeles Times profile of Mr. Rodenstock said the 1787 d’Yquem evoked “autumnal aromas of burnt sugar and undergrowth,” while the oldest, the 1784, stood out, “strange as it seemed, for youthfulness.” Mr. Rodenstock has long been a colorful and mysterious figure in the wine-auction world, a self-described expert in “pre-phylloxera” wines, referring to wines made before vine lice devastated Europe’s wine industry by 1945. For years, he has staged annual blind tastings in a Munich hotel of the world’s rarest wines, inviting luminaries such as Christie’s Mr. Broadbent, Robert Parker and the publisher of Wine Spectator. Mr. Koch discovered that Mr. Rodenstock had been sued once before for alleged counterfeiting. A German collector, Hans-Peter Frericks, accused Mr. Rodenstock in a Munich state court, which found in favor of Mr. Frericks on Dec. 14, 1992, saying “the defendant adulterated the wine or knowingly offered adulterated wine.” Mr. Rodenstock appealed, and the men also filed criminal complaints against each other for defamation. The charges were dropped and the cases eventually were settled in 1995. The details of the settlement are confidential. The German court files, which had been under seal and were obtained by Mr. Koch, reveal correspondence between Sotheby’s and Mr. Frericks in which the auction house declined to sell his Jefferson wine and other bottles, including Petrus and Mouton Roth-

schild, given concern about authenticity. “My worst fears were confirmed following the recent sensational annual tasting by Hardy Rodenstock,” a 1989 letter from Sotheby’s to Mr. Frericks said. “None tasted like Petrus of those years,” Sotheby’s said, and many bottles supplied by Mr. Rodenstock “had been obviously re-corked.” David Molyneux-Berry, who wrote the Sotheby’s letters and is now an independent cellar consultant, has been retained by Mr. Koch to identify other fakes in his collection. Mr. Molyneux-Berry says he is also working to get the major chateaus in Bordeaux to take a unified stand against Mr. Rodenstock and other alleged counterfeiters, “since the chateaus are the real victims of this fraud, with their enormous cellars.” The German court file also contains correspondence between the Thomas Jefferson Memorial Foundation and Mr. Rodenstock, in which the wine merchant is firmly told, only months after the Christie’s sale to Mr. Forbes, that there is likely “no connection” between Jefferson and his wine. Christie’s did not share Sotheby’s reservations, and earned a commission on its sale of the Jefferson wine to Mr. Forbes. “Looking back, more questions could have been asked,” says Richard Brierley, who is head of Christie’s U.S. wine sales but wasn’t involved in the 1985 auction. At the time, Mr. Broadbent, the renowned wine author and Christie’s board member, had vouched for the bottles and backed Mr. Rodenstock. “When more Jefferson bottles surfaced later, that cast a cloud on them,” Mr. Brierley says. Mr. Broadbent, who is 79 years old and still consults for Christie’s, wasn’t available for comment, a spokesman said. Christie’s is extremely vigilant about the wine it sells today, Mr. Brierley says, “to protect not just our clients but the marketplace itself.” Despite his many business interests, Mr. Koch’s greatest passions have long been his vast collections of art, wine and maritime memorabilia. The lush, heavily guarded grounds of his Palm Beach estate—which is a few doors down from Donald Trump— feature the monumental bronzes of sculptor Fernando Botero. Inside, every room offers a new theme, from Monet and Picasso to Remington, Rodin and a soaring Western room, featuring Gen. George Custer’s rifle, among other artifacts. In the cavernous wine cellar below, the Jefferson bottles are displayed behind a wrought-iron gate in a brick alcove. Walking among the thousands of bottles, Mr. Koch says he has a century of Latour vintages and 150 years of Lafite. He estimates that out of his 35,000-bottle collection, including a cellar at his summer estate on Cape Cod, perhaps 200 are fake. After Mr. Koch has found the evening’s wine, he scans bar codes into a computer that tracks each bottle. With a doctorate in chem-



ical engineering from Massachusetts Institute of Technology, Mr. Koch treats his wines like rare elements. When he chooses an older vintage to drink, he filters it in his kitchen into a glass beaker kept under constant pressure supplied by vacuum pumps built into the pantry cabinet. This protects delicate wines while filtering out sediment. “Wine experts might consider this a heresy, but I just do it because it tastes better,” he says. Fears of counterfeiting are now buzzing through the wine world. On a Saturday morning in June in Beverly Hills, Christie’s sold a 1961 Petrus magnum, described in the catalog as “pure perfection . . . crammed with viscous, over-ripe black cherry, mocha-tinged fruit flavors,” for $13,000 to an undisclosed European bidder. But a second 1961 Petrus, from another seller that Christie’s didn’t identify, was withdrawn just before bidding. The auctioneer, Mr. Brierley, says his experts doubted the provenance of the wine and pulled it from the sale. “It’s a heavily counterfeited wine.” In the San Francisco lawsuit yesterday, Mr. Frye lists several alleged counterfeit wines more recent than the Jefferson bottles. The suit cites an 1811 Ch. d’Yquem, said to have been found in the cellars of Czar Nicholas II—another celebrated discovery by Mr. Rodenstock—and a 1961 Petrus, among many others. Mr. Frye, who started collecting wine after he sold his software company in 1995, said he was “shocked” when Sotheby’s experts told him some of the bottles he planned to auction were fake. Weeding them out “cost me millions of dollars” in lost sales, he said. The auction took place in May, bringing in $7.8 million for such rarities as a double magnum of Lafite Rothschild 1865, which fetched $111,625. “We want other collectors to come forward if they think they’ve been cheated,” Mr. Frye said in an interview yesterday. “This is an attempt to restore integrity to the wine industry.” Mr. Brierley of Christie’s said counterfeiting has risen sharply in recent years, given the soaring value of older vintages and the ease with which digital scanners can knock off labels. “In 10 years in the business, I have seen more suspicious bottles in the past year or two than ever before,” Mr. Brierley said. But he said these instances are rarely publicized. “Such things are usually settled privately” because most buyers don’t want to be identified. Some wealthy collectors contacted by Mr. Koch have already settled quietly with distributors or auctioneers after they questioned wines supplied by Mr. Rodenstock. Others would just like the whole thing to go away. The late Malcolm Forbes apparently was among those with misgivings about his 1787 Lafite, whose cork dried out in its display case and dropped into the bottle. His comment: “I wish Jefferson had bloody drunk the thing.”

deAl BReAkeR

Land-Swap Plan Causes Trouble For Congressman
Mr. Renzi Offers Field To Mining Companies; Grand Jury Is Active
By John R. Wilke
SUPERIOR, Ariz.—As they dig for nickel, copper and other commodities in the far corners of the earth, the world’s largest mining companies, Rio Tinto PLC and BHP Billiton Ltd., are used to solving geological problems. Here, though, the problems they encountered were political. North America’s largest copper lode is believed to be buried more than a mile beneath Apache Leap, the stark red cliffs that loom above this storied Old West town about an hour east of Phoenix. Resolution Copper Co., a joint venture between Rio Tinto and BHP Billiton, wants to mine it. But first it needs Congress to approve a federal land exchange, under which Resolution would swap 5,000 acres of private land for 3,000 acres of public land near its planned mine. In exchange for supporting the bill, the local congressman, Rick Renzi, a Republican, insisted on something in return: He wanted Resolution to buy, as part of the land swap, a 480-acre alfalfa field near his hometown of Sierra Vista, according to documents and people involved in the deal. Resolution executives refused. For starters, they thought the land was overpriced, people close to the deal say. More troubling, they discovered it was owned by Mr. Renzi’s former business partner, these people say. Resolution wasn’t the only party troubled by the congressman’s demands. His chief of staff resigned and began cooperating secretly with the Federal Bureau of Investigation, according to witnesses and others close to the case. The FBI began a preliminary inquiry that was first reported in October, just before Mr. Renzi was elected to a third term. That investigation has now become a formal public-corruption probe by a federal grand jury in Tucson. On Thursday, the grand jury authorized a search warrant of a Renzi family business. Investigators have uncovered evidence that Mr. Renzi received a cash payment from his former business partner, funneled through a family wine company, after a second investor group pursuing an unrelated land swap agreed to pay $4 million for the alfalfa field, according to people contacted in the course of the twoyear investigation. Mr. Renzi denies any wrongdoing and says that he intends to cooperate with the investigation. The search of the family business, he said in a statement Friday, is “the first step toward getting the truth out.” His lawyer says the cash payment he received was to settle an unrelated debt. The case could add fuel to the firestorm over the Bush administration’s firing of federal prosecutors late last year. Paul Charlton, the U.S. Attorney who had been overseeing the case, was among those dismissed at the behest of the White House. A spokesman for Mr. Renzi dismissed as “a political hatchet job” the suggestion that Mr. Charlton’s firing was connected to the probe of Mr. Renzi. On Thursday, Attorney General Alberto Gonzales told Congress that none of the dismissals were politically motivated, and said the Justice Department is committed to battling corruption. The Renzi case is the latest in a wave of public-corruption investigations of local and federal officials. At least five members of Congress—three Republicans and two Democrats—are now under federal criminal scrutiny. Two former members, both Republicans, have gone to prison in the past year. Voter polls have suggested that the investigations were one reason Republicans lost control of Congress last November. The Renzi case spotlights the potential for abuse in the murky world of legislated land swaps, which have become more common in recent years. Thousands of acres of public land worth hundreds of millions of dollars change hands each year through narrow special-interest bills. There is little public scrutiny, and often no vote is recorded in Congress. Some swaps serve public goals, such as protecting wild habitat. Others enrich private interests at taxpayers’ expense, sometimes sidestepping federal rules in the process. The proposed Arizona land exchange would sweep aside a 1954 order by President Eisenhower protecting national forest in the area, including Oak Flats, a campground located above the proposed mine. “Yet another piece of land that was being ‘permanently’ protected is being put on the block because a private interest has use for it,” Janine Blaeloch, director of the nonprofit Western Lands Project, complained to Congress last year.


Resolution, which declined to comment about its contacts with Mr. Renzi, has said it hopes to sink 7,000-foot shafts into the ground to reach the rich vein of copper ore. It has worked for years to win support for the mine, reaching out to local officials, environmentalists and rock-climbing groups. Arizona’s governor and most members of its congressional delegation are backers. The governor told a Senate hearing last year the project could bring 1,000 jobs and $1 billion or more to the state’s economy. Although Superior has long been a mining town, it has escaped some of the ravages of open-pit mining that have scarred nearby towns. It is rich in natural beauty, including otherworldly rock formations and steep cliffs that draw thousands of climbers each year. Mayor Michael Hing sees the new mine as a way to escape the boom-and-bust cycles that have whipsawed the town for more than a century, ever since silver was discovered in 1875 at the Silver Queen mine and hundreds flocked to town, including famed gunslingers Doc Holliday and Wyatt Earp. In order to secure the use of the government land for mining, Resolution has proposed buying a number of parcels elsewhere and transferring them to government entities for uses completely unrelated to mining. The town of Superior, for example, would get title to the town graveyard, now on federal land. Climbers would get another place to explore. Resolution says the vast Apache Leap rock escarpment—so named because Apache warriors on horseback are said to have jumped to their deaths to evade capture—would be protected. The San Carlos Apache tribe opposes the mine, citing concerns that culturally significant areas would be disturbed. Mr. Renzi told Resolution in 2005 that his support for the land swap would hinge in part on whether it helped fulfill a goal to cut water consumption along the San Pedro River, which slices through the desert far from the mining area, in southern Arizona, participants in the deal say. Fort Huachuca, a big U.S. Army base nearby, was under court order to cut water consumption, and it had been seeking help to retire farmland near the river. Mr. Renzi has longstanding ties to the base, the economic engine of the area. He grew up near it, and his father, retired U.S. Army Gen. Eugene Renzi, is its former commandant, now employed by one of its largest contractors, ManTech Corp. Resolution proposed buying and handing over to the government thousands of acres of bird and wildlife habitat along the banks

of the San Carlos, which would further the water-conservation goal. In early 2005, however, Resolution balked at buying the 480-acre alfalfa field owned by Mr. Renzi’s business partner, James Sandlin. Mr. Renzi then turned to another investment group, called the Petrified Forest group, that was looking to put together a unrelated land swap. That group, which included Bruce Babbitt, the former governor, agreed that April to buy the patch of farmland for nearly $4 million, says Philip Aries, a land-swap expert that was part of the group. “Congressman Renzi told me that the purchase of the Sandlin parcel was a matter of national security, and that it was key to ensuring the viability of Fort Huachuca,” Mr. Aries says. “He said that if we were to buy it before” upcoming hearings about the possible closure of the base, “he would give our swap priority—a ‘free pass,’ he said, would be sure to get through the Natural Resources Committee,” thereby ensuring its approval. Mr. Aries says that after his group’s purchase of the alfalfa field went through in 2005, Resolution complained that the Petrified Forest group had gotten priority treatment, and Mr. Renzi dropped his support for that group’s land swap. Mr. Aries, Resolution executives and others involved in the proposed transactions have been interviewed about the matter by the FBI, people close to the case say. Mr. Aries declines to discuss those conversations, or other details of his group’s dealings with Mr. Renzi. Mr. Sandlin, the former owner of the alfalfa field, declines to comment. Public records show that Mr. Sandlin and Mr. Renzi became business partners in 2001, when Mr. Sandlin bought shares of Fountain Realty &Development, one of Mr. Renzi’s companies. In 2002 and 2003, Mr. Sandlin paid his partner between $1 million and $5 million for Mr. Renzi’s stake in that business, according to House financial-disclosure records. In 2004, a Federal Election Commission audit found that Mr. Renzi had received a total of $369,000 in illegal corporate funds from Fountain in the 2002 election cycle. It found that Fountain had shifted $131,000 of this through Mr. Renzi’s personal accounts to the Renzi for Congress campaign account—and that at least $70,000 of it was put back into Mr. Renzi’s personal account. Mr. Sandlin bought the alfalfa field in 2003 for about $1 million, land records show. The farmland, more than a mile wide, with mountains rising on two sides, lies fallow today. One focus of the FBI’s current investigation

is whether Mr. Renzi profited from the sale of Mr. Sandlin’s land to the Petrified Forest group, people close to the case say. Federal investigators have been asking questions about a May 2005 payment of $200,000 from Mr. Sandlin to Mr. Renzi, which was sent the same day that Mr. Sandlin received the first payment from the Petrified Forest group, these people say. The payment went to a wine company owned by Mr. Renzi, which was sold to his father days later, public records show. Phoenix lawyer Grant Woods, one of Mr. Renzi’s attorneys, said Friday that Mr. Sandlin sent Mr. Renzi the $200,000 to settle a debt stemming from a previous business transaction involving land in northeast Arizona. “The note was due, and he had to pay it off,” Mr. Wood said. He said Mr. Renzi was not pushing the sale of the Sandlin property to help his former business partner. “He was working to solve the water problems of the San Pedro River and help save Fort Huachuca,” Mr. Woods said. When Mr. Renzi was pressing Resolution and then the Petrified Forest group to buy the land, “he did not know Mr. Sandlin had an interest in that land,” Mr. Wood said. Executives of Resolution and participants in the Petrified Forest group are cooperating with the FBI in its investigation, people close to the case said. The Petrified Forest group is not being investigated for any possible wrongdoing. The FBI is also looking into the congressman’s dealings with Fort Huachuca, these people say. Mr. Renzi said Friday he would take a leave of absence from the House intelligence committee “until the matter is resolved.” John Boehner, the House Republican leader, had warned colleagues in a letter earlier this year that “clear likelihood of serious transgressions will lead to suspension from important committee positions; guilt will lead to immediate and severe consequences,” according to Congressional Quarterly. Mr. Renzi continues to serve on the House Natural Resources Committee, which handles land-swap legislation. Resolution is pressing ahead with its effort to line up congressional support for a land swap. Bruno Hegner, who was Resolution’s president when Mr. Renzi proposed that the company buy the alfalfa field, was so troubled by the incident that he wrote a letter detailing what happened and mailed it to himself, people close to the case said. He wanted a postmarked record of what occurred, these people say. That letter is now in the hands of the FBI, they say.




How Lawmaker Rebuilt Hometown on Earmarks
Johnstown Gets Billions With Power Broker’s Aid; FBI Questions a Contract
By John R. Wilke
JOHNSTOWN, Pa.—If John Murtha were a businessman, he’d be the biggest employer in this town. The powerful U.S. congressman has used his clout on Capitol Hill to create thousands of jobs and steer billions of dollars in federal spending to help his hometown in western Pennsylvania recover from devastating floods and the flight of its steelmakers. More is on the way. In the massive 2008 military-spending bill now before Congress— which could go to a House-Senate conference as soon as Thursday—Mr. Murtha has steered more taxpayer funds to his congressional district than any other member. The Democratic lawmaker is chairman of the House Appropriations Subcommittee on Defense, which will oversee more than $459 billion in military spending this year. Johnstown’s good fortune has come at the expense of taxpayers everywhere else. Defense contractors have found that if they open an office here and hire the right lobbyist, they can get lucrative, no-bid contracts. Over the past decade, Concurrent Technologies Corp., a defense-research firm that employs 800 here, got hundreds of millions of dollars thanks to Rep. Murtha despite poor reviews by Pentagon auditors. The National Drug Intelligence Center, with 300 workers, got $509 million, though the White House has tried for years to shut it down as wasteful and unnecessary. Another beneficiary: MTS Technologies, run by a man who got his start some 40 years ago shining shoes at Mr. Murtha’s Johnstown Minute Car Wash. A review by The Wall Street Journal of dozens of such contracts funded by Mr. Murtha’s committee shows that many weren’t sought by the military or federal agencies they were intended to benefit. Some were inefficient or mismanaged, according to interviews, public records and previously unpublished Pentagon audits. One Murthabacked firm, ProLogic Inc., is under federal investigation for allegedly diverting public funds to develop commercial software, people close to the case say. The company denies wrongdoing and is in line to get millions of dollars more in the pending defense bill. Mr. Murtha, a gruff, combat-decorated former Marine, was thrust into the national spotlight last year by his opposition to the Iraq war. Yet he has long been known in Washington, where he wields power like an old-fashioned political boss and has become a lightning rod for Republican attacks. With years of strong support for the military, he’s also been an important voice for Democrats in battles over war funding and troop withdrawal. But for his 33 years in Congress, his overriding focus has been the revival of his hardluck hometown. In addition to using taxpayer money to build a local defense industry, Mr. Murtha has funded by legislative fiat miles of new roads, water projects, medical facilities and federal offices for his district. He even brought a Marine attack-helicopter squadron here; it’s next to the John Murtha JohnstownCambria County Airport. Mr. Murtha has steered at least $600 million in earmarks to his district in the past four years, according to Taxpayers for Common Sense, a nonpartisan Washington group. The nonprofit group estimates he’s sent $2 billion or more to the district since joining the appropriations committee in 1992. Since Democrats took control of Congress this year, they’ve reversed the huge growth under Republican rule of earmarks—narrow, special-interest items that are added to the budget with little public scrutiny, sidestepping the usual competitive-bidding process. In the House, the value of earmarks in all pending budget bills is an estimated $5.6 billion, down by about half from last year, according to Taxpayers for Common Sense. Horse-trading in the House-Senate conference later this week could change the earmark totals. Mr. Murtha, too, cut his overall earmarks in the House defense-spending bill, a spokesman says. His earmarks in the current bill are $166.5 million, more than any other House member, Taxpayers for Common Sense says. Mr. Murtha’s spokesman did not dispute this year’s total, but said without providing details that it is down by half from last year. Prior to this year, earmarks couldn’t precisely be counted because Congress didn’t release comprehensive figures. Mr. Murtha defends Congress’s right to award such funds. Despite lobbying and earmark scandals of recent years, he argues that local lawmakers are best suited to understand the needs of their district. He says he’s backed new research into treating diabetes and breast cancer, largely funded with defense earmarks and steered to Pennsylvania hospitals and institutions. He’s particularly proud of the military contractors that have flocked to his district. “They do their work on time and at a competitive price,” he said in an interview, saying earmarks have helped spur economic development. “I’m not going to apologize for that.” Mr. Murtha underscored this point at a breakfast fund-raiser held for him this summer. “This is about jobs,” he told hundreds of military contractors and lobbyists at the Johnstown Convention Center downtown. Sponsored this year by defense giant General Dynamics Corp., the event drew more than 800 people, who paid $25 a head for scrambled eggs and a chance to meet the powerful lawmaker. Working the crowd, he tells a visitor that bringing federal dollars here “is the whole goddamn reason I went to Washington.” Across the street, an Army tank and armored vehicles bristling with guns and satellite dishes were on display, part of a two-day trade show sponsored by the chamber of commerce. It’s held each year in War Memorial Arena, an old hockey rink that is home to the minor-league Johnstown Chiefs and the set for the 1977 Paul Newman film “Slap Shot.” Inside, military contractors, many of them recipients of Murtha-backed earmarks, show off wares ranging from fighter-jet ejector seats to military mapping software. In Washington, Mr. Murtha—Jack, as he’s widely known—is used to getting his way. At 6-feet-6 and 75 years old, he has been known to physically intimidate opponents and fly into a red-faced rage when crossed. (One recent tirade, against a Republican who had tried to cut funding for a Johnstown earmark, found its way onto YouTube.) He curses like the Parris Island drill sergeant he once was, punctuating conversations by punching a finger into the chest of foes and friends alike. Much of this money will dry up when Mr. Murtha leaves office, an event local officials fear as much as the next flood. Johnstown, a city of 27,000, sits at the confluence of the Stony Creek and Conemaugh rivers, 60 miles east of Pittsburgh. For a time, it was the world’s largest steel producer and made much of the barbed wire that fenced the West. The rivers that fueled its steel and coal industries also were a mortal danger. A dam burst in 1889, destroying the city, and floods again wreaked havoc in 1936 and 1977. Steel mills, most of them unused, still line the river’s banks. By 1983, Johnstown’s unemployment rate was more than 24%. Today it is around 5%. New campuslike brick office and research


buildings stand just outside of town, with assembly plants up the hill by the airport. Mr. Murtha isn’t likely to leave office soon. He was re-elected in 2006 with 69% of the vote; in 2002, he won with 74%. Local Republicans didn’t field a candidate to run against him in 2004. Part of his support, no doubt, is self-interest: Voters know that no freshman challenger can match Mr. Murtha’s ability to bring home bacon. A move into Mr. Murtha’s district has become a profitable business model for military contractors. Some are subcontractors for established defense firms; others are homegrown, closely held firms. Such companies work a well-worn backchannel into the U.S. Treasury. Their executives give generously to members of the congressional appropriations committees, and hire lobbyists who often are former staffers or friends of lawmakers. In turn, the companies seek earmarks inserted into the U.S. budget. The company’s name typically isn’t listed: Funds are sent instead to a federal agency, such as the Army or the Justice Department, which is then directed to award the contract to the company. (Nonprofit firms can be awarded earmarks directly; one of the largest defense companies in Mr. Murtha’s district, Concurrent Technologies, claims nonprofit status.) One beneficiary is New Jersey-based DRS Technologies Inc., a multibillion-dollar maker of military electronics. The company entered Mr. Murtha’s district a decade ago when it bought a small cable assembler. Since then, the congressman has helped fund nearly $400 million in contracts for the local DRS unit, building data-display terminals installed in Navy destroyers and submarines. The Pentagon didn’t ask for many of these contracts in its annual budget requests. Mr. Murtha assured the work would be done in his district by earmarking part of the program to DRS. Paired with prime contractor Lockheed Martin Corp., the DRS unit helped build more than 4,000 display terminals in the past decade, some costing as much as $240,000 each. A former Murtha staffer, Paul Magliocchetti, helped get the funding through Mr. Murtha’s committee. He was paid $3.2 million by DRS over the period for his lobbying efforts, federal records show. Since 1989, Mr. Magliocchetti and executives of Lockheed and DRS have given more than $377,000 to Murtha campaign committees. Mr. Magliocchetti, who has built a lobbying business winning Murtha earmarks for dozens of companies, won’t discuss his work. “No comment,” he says. “I’m just a former staffer.” A spokesman for DRS, Richard Goldberg, also wouldn’t comment on Mr. Murtha. “We have a world-class manufacturing facility in Johnstown, and a skilled, reliable work force,” he said. A Murtha spokesman

says the program has saved money for the Navy by using commercial, off-the-shelf components. Military officers and agency officials sometimes gripe about congressional orders to spend money on projects they didn’t ask for. But the Pentagon tends to go along with Congress to facilitate earmarks, keeping lawmakers happy and ensuring political support for other military programs. T. Michael Mosely, the Air Force chief of staff and a featured guest at this summer’s Murtha breakfast, shrugs off the issue. Congressional earmarks for local projects have been in the military budget “for at least 200 years,” he says. Concurrent Technologies has been a centerpiece of Mr. Murtha’s efforts to build a defense industry in Johnstown. It has gotten at least $228 million in new earmarks over the past four years, according to a database of defense earmarks created by Taxpayers for Common Sense. Most are in the military-research budget and often fund vaguely worded research, producing white papers or demonstration projects whose worth is hard to quantify. In budget bills now before Congress, Concurrent stands to gain funding under at least a half-dozen programs. In the House defense-spending bill, it would get $3 million for “Integrated Mission Critical ESOH Technology and Regional Sustainability,” $2 million for “Advanced Combatant Materials Research” and another $2 million for “Strategic Logistics Initiatives—Asset Viability.” Multiyear contracts already awarded to Concurrent yield millions more each year. In June 2003, Concurrent landed a five-year, $350 million contract from the National Defense Center for Environmental Excellence, which was created by Congress with Mr. Murtha’s backing. Its stated mission is to demonstrate and put into use antipollution technologies for military bases and contractors, such as new ways of stripping paint from warships. But the program wasn’t very effective, and there’s no way to measure its results, Pentagon auditors determined. A 2001 report found that out of 63 new antipollution technologies, 20 had been tried at a military site and one was successfully in use at more than one installation. Concurrent also received millions of dollars through another Murtha-funded military program, the Electronic Commerce Resource Centers. Created by Congress in 1991, the program became a conduit for contracts to politically connected companies, congressional records show. The nonprofit company was intended to help small and midsize contractors use emerging Internet and electronic-commerce technology to do business with the armed services, which were increasingly requiring contractors to communicate online. In its earliest review, in 1997, the

Pentagon called the program “not efficient or cost-effective,” saying it overlapped services, such as providing Internet connections, that were available elsewhere. With Mr. Murtha’s prodding, Congress continued funding and also shifted more control of the program from the armed services to the contractors themselves. Concurrent used this autonomy to set up centers around the country, employing hundreds of people in a half-dozen locations from Bremerton, Wash., to Largo, Fla. That first Pentagon audit “found none of these initiatives to be of significant value.” The Pentagon’s audit, which was previously unreported, describes surprising tension at the time between the Air Force and Concurrent. The Air Force at one point tried to rewrite a contract that it said was “broadly worded with few deliverables.” Assured of funding from Mr. Murtha, Concurrent told the Air Force that it “should not attempt to manage” the work, the Pentagon report said, and that the company said it had “no interest in being hired help.” In 2004, the Justice Department’s Inspector General found serious problems in Concurrent’s handling of a Murtha-backed contract to develop technology for use by police. The audit questioned the company’s handling of $1.8 million, and said that $647,000 had been improperly charged to general operating expenses. Since 2000, Concurrent employees have contributed at least $117,000 to Mr. Murtha’s campaigns. Daniel DeVos, Concurrent’s chief executive, said in an interview that the company ironed out its problems with the Justice Department and that its more recent grant programs have run smoothly. He acknowledged past problems in a handful of other programs, some of them reflecting the difficulty of dealing with government bureaucracy, he said. “All of our programs are audited, and in well over 90% of cases there are no problems at all. In the few cases where issues are identified, we work hard to resolve them,” Mr. DeVos said. He added the company was working to wean itself from earmarks, pursuing competitive contracts in environmental services and other areas. “We have gotten a great deal of leverage out of earmark funding, but it’s a decreasing percentage of our work.” Johnstown’s National Drug Intelligence Center has cost U.S. taxpayers almost as much as Concurrent’s contracts. Since the center opened 13 years ago, Mr. Murtha has steered $509 million its way. For Johnstown, it has brought 300 federal jobs and the restoration of an abandoned red-brick department store downtown, now its headquarters. The center, operated as an arm of the Justice Department to provide intelligence


and analysis to combat drug trafficking, has been a target for lawmakers opposed to pork-barrel spending. Even before the center opened, the General Accounting Office had called it a waste of money because it duplicated drug-intelligence gathering in Washington and at a center on the Texas-Mexico border. It spent millions on shoddy drug-intelligence reports, and on analytical software that didn’t work well, congressional investigators said last year. For 2008, the White House had proposed spending $16 million to shut the center down. Mr. Murtha fought back and added $23 million more to the intelligence bill to save the facility for another year. In a recent letter to the House Intelligence Committee, he called the center “an asset to our intelligence community [and] an effective fighter in the war against drugs.” Other firms have grown rapidly with Mr. Murtha’s help. ProLogic, a closely held software and technical-services firm based in Fairmont, W.Va., opened a facility in Mr. Murtha’s district two years ago, though its headquarters are less than a half-hour away. The ribbon-cutting by Mr. Murtha and other politicians promised more local jobs, and the congressman’s office put out a news release taking credit for recruiting the company; more earmarks were soon steered to ProLogic. Funding for the new facility also helped the chief executive. Local real-estate records show that the building is part-owned by the CEO’s family; ProLogic pays a monthly rent higher than prevailing local rates. A ProLogic official said the rent was justified because the building had to have the special wiring and shielding required for classified Pentagon contracts.

Ken Boehm, of the conservative nonprofit National Legal and Policy Center in Virginia, says that county records reveal that ProLogic had similar rental arrangements in other facilities where it carried out defense contracts. He noted that four of its six locations are in the districts of members of the House appropriations committee. ProLogic was subpoenaed last year as part of a broader Federal Bureau of Investigation probe of earmarks granted by Rep. Alan Mollohan, a West Virginia Democrat, whose district includes ProLogic’s headquarters. Both the congressman and company have denied wrongdoing. More recently, FBI and Defense Criminal Investigative Service agents have begun looking into the alleged illegal diversion of earmarked funds to a commercial ground-radar software project, people close to this inquiry say. One approach squeezes even more value from earmarks. James Ervin, a retired lieutenant colonel, lobbyist and longtime friend of the congressman, helped found a venture-capital fund, Four Seasons Ventures, that invests in companies that have gotten earmarks and federal contracts. In a confidential document for prospective investors reviewed by The Wall Street Journal, Four Seasons says its principals include people with “long and proven expertise in government acquisitions and appropriations.” The firm doesn’t disclose its investors. According to the Four Seasons Web site, portfolio companies include PharmaThene Inc., a biodefense research firm, and Raydiance, a laser maker. Both received Murthabacked earmarks and are lobbying clients of Mr. Ervin. Mr. Ervin declined to comment. There’s no evidence that Mr. Murtha personally profits from the hometown

spending he rams through Congress. He ranked No. 333 in net worth among the 435 members of the House in a 2005 analysis by the nonprofit Center for Responsive Politics. But his campaign coffers have risen since he became chairman of the defense-spending panel. In the first nine months of this year, Mr. Murtha’s campaign committees have reported contributions of more than $1.05 million. Mr. Murtha’s devotion to his district became clear 26 years ago, in an infamous encounter that would foreshadow the young congressman’s long career. He told an FBI agent—posing as a lawyer for a rich Arab sheik—that he was reluctant to take the $50,000 in cash the agent placed on a desk, supposedly in exchange for help getting the sheik a U.S. visa. “After we’ve done some business, I might change my mind,” Mr. Murtha said on the grainy black-and-white video shot as part of the FBI’s Abscam sting in 1980. The key, he told the undercover FBI agent, was investing in his district. “I think with a tie to the district, there’s no problem at all getting this taken care of,” he said, referring to helping the sheik enter the country. Mr. Murtha wasn’t charged in the case. He cooperated with the government, testifying against two congressmen who were eventually charged and convicted for accepting cash in different meetings. Seated with the FBI agent, Mr. Murtha also explained why he needed to be more careful than other lawmakers, including the two he later testified against. “I expect to be in the f-ing leadership of the House,” he told the agent. “I’m delighted to do business with you. S---, I do business like this all the time to get companies into the area.”