Chalabigate

A Pentagon official acted to award a contract to a group that included his friends.

by T. Christian Miller, Los Angeles Times
April 29th, 2004

WASHINGTON — A senior Defense Department official is under investigation by the Pentagon inspector general for allegations that he attempted to alter a contract proposal in Iraq to benefit a mobile phone consortium that includes friends and colleagues, according to documents obtained by The Times and sources with direct knowledge of the process.

John A. Shaw, 64, the deputy undersecretary for international technology security, sought to transform a relatively minor police and fire communications proposal into a contract allowing the creation of an Iraq-wide commercial cellular network that could generate hundreds of millions of dollars in revenue per year, the sources said.

Shaw brought pressure on officials at the U.S.-led Coalition Provisional Authority in Baghdad to change the contract language and grant the consortium a noncompetitive bid, according to the sources.

The consortium, under the guidance of a firm owned by Alaskan natives, consisted of an Irish telecommunications entrepreneur, former officials in the first Bush administration and such leading telecommunications companies as Lucent and Qualcomm, according to sources and consortium members.

Shaw's efforts resulted in a dispute at the Coalition Provisional Authority that has delayed the contract, depriving U.S. military officials and Iraqi police officers, firefighters, ambulance drivers and border guards of a joint communications system.

That has angered top U.S. officials and members of the U.S.-led authority governing Iraq, who say the deaths of many Americans and Iraqis might have been prevented with better communications.

In interviews, Shaw said he had a long-standing personal relationship with at least one member of the consortium, but had no financial ties or agreement with the consortium for future employment. One other member of the consortium's board of directors is under contract with his office as a researcher.

Shaw said he was trying to help the group because it could quickly install the police and fire communications system, and because the group was using a U.S.-based cellphone technology called CDMA that had lost out in what he called a "rigged" competition last year for commercial licenses in Iraq. Three companies using European-based technology won contracts.

Additionally, Shaw said that he had been contacted by Rep. Darrell E. Issa, a Republican whose San Diego County district was packed with Qualcomm employees, and the office of Republican Sen. Conrad R. Burns of Montana, the head of the Commerce Committee's communications subcommittee, urging him to ensure that U.S. technology was allowed to compete for cellular phone contracts in Iraq. Issa confirmed they he had contacted Shaw on the issue. Burns' office did not respond to inquiries.

CDMA, which was developed by Qualcomm, is used in the United States and some countries in Asia. Its rival, a standard developed by Europeans called GSM, is used in the U.S., Europe and the Middle East.

"Hey, we won the war," Shaw said in an interview. "Is it not in our interests to have the most advanced system that we possibly can that can then become the dominant standard in the region?"

The Pentagon's Defense Criminal Investigative Services, a unit of the inspector general, began its investigation after two senior officials with the U.S.-led coalition authority reported that Shaw had demanded that they make the changes to the contract. They refused. Daniel Sudnick, who was the senior advisor to Iraq's minister of communications, the highest-ranking American in the ministry, and Bonnie Carroll, a chief deputy, resigned this month.

A Pentagon spokeswoman said the inspector general was "unable to discuss this matter at this time."

Carroll declined comment Wednesday. Sudnick issued a statement denying Shaw's charges of corruption in the original cellular license award that he helped to oversee.

"Together with my team, we were singularly instrumental in putting modern communications in place that never existed in Iraq before," Sudnick said. "No one, doing it properly and carefully, and avoiding the misuse of taxpayers' dollars, could have done it any faster."

The inquiry into Shaw's actions is believed to be the first for a senior Pentagon official in connection with the massive $18.4-billion package funded by U.S. taxpayers to help rebuild Iraq.

According to contracting experts, Shaw's behavior raises several concerns.

First, contracting officials, not political appointees, are supposed to have full discretion when issuing government contracts. Second, promoting a private company led by friends could present conflict-of-interest issues.

Finally, criminal charges could result if there were any financial ties between Shaw and members of the consortium.



Pieced together from e-mails, documents and interviews with sources in the coalition, telecom industry and Department of Defense, the story of the battle over Iraq's new cellphone network began soon after the U.S. attack on Iraq on March 19, 2003.

For the coalition, creating a workable communication network was crucial to getting the war-ravaged country on its feet. Less than 2% of the population of Iraq had a phone.

For private industry, Iraq was one of the world's last wide-open markets. By some estimates, a nationwide cellular network for the country's 26 million people could generate as much as $500 million in annual revenue.

For Qualcomm, the creation of a CDMA network would establish a foothold in the Middle East and ease the company's entry into nearby countries.

Early on, Qualcomm found a champion for its technology in Liberty Mobile, a consortium headed by Declan Ganley, a 35-year-old Irish entrepreneur.

The consortium first approached the coalition in the spring of 2003 for permission to build a cellphone network using CDMA technology, and was turned down. The consortium tried a second time when it entered a cellular phone license competition in the fall. Again it lost.

By then the consortium had found a friend at the Pentagon in Shaw.



Shaw, who had worked in the White House for Republican presidents from Nixon to Reagan, was appointed to his current post in 2001. His task was to reform U.S. controls on the export of sensitive American technology and to investigate illegal arms dealing.

Although his office does not normally do government contracting and Shaw had no experience with cellular phone technology, he threw himself into the effort to rebuild Iraq's telecommunications and transportation sectors. He came to focus on the effort to establish a CDMA-based network in Iraq after conversations with an old friend, Don DeMarino.

DeMarino used to work under Shaw at the Department of Commerce, and the two had been friends for decades. DeMarino had also befriended Ganley in the 1990s, working with him in several business projects, and was a member of Liberty Mobile's board of directors.

DeMarino introduced Ganley to Shaw last spring during a visit to Shaw's office.

After Liberty Mobile lost out in the competition for a cellphone contract in Iraq, Shaw said he became convinced by DeMarino, Ganley and others that the bidding had been rigged.

Shaw pointed to the involvement of Nadhmi Auchi, a wealthy, Iraqi-born British citizen who had been convicted in France in a massive kickback scheme. Auchi's lawyer did not return calls for comment, but Auchi has publicly acknowledged holding a small interest in one of the winning companies.

Shaw took his concerns to the Pentagon's inspector general, triggering an investigation into allegations that coalition officials had taken bribes.

"We have huge circumstantial evidence that we're dealing with the most sophisticated money-laundering operation and ruthless group, as ruthless and sophisticated as you'll find in the world," Shaw said.

The investigation ended in December, clearing U.S. officials of any crime. Shaw criticized the inquiry as being incomplete.



Meanwhile, Shaw said he hit on a new way to get CDMA into the Iraqi market.

The Coalition Provisional Authority was trying to create a communications system that would link Iraqi police, fire and security agencies, called the first-responder network.

Although Shaw had no direct authority over Sudnick, Shaw suggested in an e-mail to Sudnick in November that Sudnick could "graft" a CDMA system onto the first-responder contract that could then "morph into a commercial service with our having total control over it."

"Believe we could concoct a new configuration of Liberty CDMA bid with emergency system grafted on top of it," Shaw wrote Sudnick in November, according to an e-mail obtained by The Times.

By coincidence, Shaw had been approached earlier in the fall by a lobbyist on behalf of a company called Nana Pacific, a small business owned by Alaskan natives that was interested in doing business in Iraq. Alaska native-owned small businesses, as part of a special Small Business Administration program, can be awarded large government contracts without having to go through the usual competitive bidding process.

Shaw said he seized on that as a way to avoid the lengthy bidding process and to get work done quickly on the first-responder contract. Shaw's office arranged for Nana Pacific's president, Janet Reiser, to meet Ganley. They agreed to work together on a telecommunications project in Iraq, Reiser and Ganley said.

By January, Ganley had formed a new consortium called Guardian Net. According to documents obtained by The Times, Guardian Net and Liberty Mobile have nearly identical boards of directors.

On Jan. 12, Shaw called a meeting at his office at the Pentagon. Sudnick attended, along with Pentagon officials and contractors, including Lucent and Qualcomm. Shaw introduced what he called a fast-track solution to getting the first-responder network up and running, unveiling the pairing of Nana and Guardian Net.

Sudnick and Carroll told Pentagon investigators that they did not realize Ganley headed Liberty Mobile.

They also did not recognize other Guardian Net board members who had been Liberty Mobile board members, including DeMarino and Julian Walker, a British citizen, former ambassador and Iraqi expert who had met Shaw in England through an acquaintance. Walker is currently under contract with Shaw's office to do small-arms research, Shaw said.

In documents handed out to those in attendance, Ganley made clear that his long-term vision for the first-responder network was a commercial cellular license using CDMA technology.

"Nana Pacific and Guardian Net will have the right to provide nationwide commercial cellular coverage in a manner that will enhance the overall security of Iraq," according to the document.

But neither Sudnick nor anyone in the Iraqi communications ministry was interested in making that happen. Sudnick's job as advisor to the ministry was to help design the new first-responder network, not reopen the commercial market. Sudnick made that point clear in an attachment to an e-mail to Shaw just days after the January meeting.

"The intended market and use of the [first-responder] network will be strictly non-commercial," he wrote. The network "will not compete with commercial mobile cellular operators."



Just days after the Jan. 12 meeting, Nana Pacific sent a letter to the coalition stating its interest in winning a no-bid contract to create a first-responder network.

Sudnick and coalition officials decided they could use Nana to build a small-scale first-responder network in Baghdad — essentially a pilot version of a nationwide first-responder system that could cost as much as $70 million. They sent Nana a description of the work on Feb. 15, emphasizing that the job was "not the build-out of the national network."

On March 8, Nana returned its proposal. Instead of a small pilot project, Nana and Guardian Net insisted that they be allowed to build a first-responder network that "shall be designed so that the operators of the network shall be able to offer nationwide commercial cellular service on a nationwide basis throughout Iraq."

Carroll and Sudnick rejected the proposal.

At 2 a.m. in Baghdad on March 9, Carroll got a call from Shaw. He demanded that Carroll insert the more expansive language in the contract. When she refused, said sources with knowledge of the exchange, Shaw told her there would be "hell to pay."

Two days later, Shaw e-mailed Sudnick that the first-responder network "is the last opportunity to install a viable cellular network that is responsive to our needs and requirements. Your continuing unresponsiveness and calculated delays in its implementation have nearly killed the projected plan, which may have been what you had in mind. But if you can't lead or follow, get the hell out of the way."

In an interview, Shaw conceded that it was "altogether possible" that he demanded that Carroll insert the language.

Shaw said he was upset because Sudnick had verbally agreed to include an option to build a commercial CDMA national network. Sudnick does not mention such a project in e-mails reviewed by The Times, and Shaw was unable to produce any documentation to back up his assertion.

Within days of the blow-up, a senior coalition official told Sudnick that he was no longer allowed to work on the first-responder network, sources said. Sudnick submitted his resignation and was followed by Carroll a few days later.

Both have since returned to the United States.



In the six weeks since, little progress has been made on creating the first-responder network. Coalition authorities have told Nana it will not work on building the network. Nana may appeal the decision.

Coalition contracting officials said they were currently negotiating with Lucent to design the system, but that actually building it could take as long as a year. They said they were "surprised" by the changes Nana had made to the contract language.

"It was not asked for and it was not a requirement," said Gen. Stephen Seay, head of contracting for the coalition. "It was not a nationwide cellular effort."

Shaw said he was continuing to hold out for the contract to be awarded to Nana and Guardian.

"I'm as positive now as I was then," Shaw said.

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