DO DONATIONS BUY POLITICAL FAVORS?


INSIGHT, Nov. 17, 1997, by Charles R. Smith and Douglas Burton

Vice President Al Gore said he did not violate the law by making phone calls for donations from the White House; President Clinton confidently told the Washington Press corps in March: "I don't believe that I have changed government policy solely because of a contribution." Whether the Clinton administration's actions - or deliberate inaction - benefited any large contributor "chiefly" or "primarily" rather than "solely" because of a donation probably is an issue only God can answer. But whether California investment banker Sanford Robertson's investment firm reaped rich rewards soon after Robertson made a large donation to the Democratic National Committee, or DNC, in 1996 there can be little doubt.

According to Gore's call records of November 1995, the Vice President intended to call Robertson, a longtime Clinton backer, to seek a $100,000 donation. Robertson denies that Gore called him, nonetheless gave $100,000 to the Democrats in January 1996, with $80,000 of soft money going to the DNC and $20,000 of hard money directly into the Clinton-Gore campaign.

Three months later Robertson's investment banking firm, Robertson Stephens & Co. raked in a financial advisors fee of $2 million for its role in aiding the merger of two large computer security firms, RSA Data Security Inc., or RSA - the largest US encryption software company - and Security Dynamics Technologies Inc. or SDTI, shortly after RSA had obtained an exclusive deal to pursue encryption research with the People's Republic of China. The merger of the two companies took place three months after an agreement was signed between James Bidzos, head of RSA, and the Chinese government for the purpose of performing joint research on encryption.

RSA is a leading-edge company in developing "public-key encryption" a type of strong encryption that allows the sender and the receiver to exchange messages without the need to meet beforehand and exchange keys. RSA's product is used by banking and financial institutions to send and verify transfers of funds and is considered the industry's standard means of funds verification.

Bidzos said in an electronic interview that the deal was a "memorandum of understanding," or MOU, with China's Laboratory of Information Security, or LOIS, and the Ministry of Foreign Trade and Economic Cooperation, or MOFTEC. Bidzos said the deal only applies to products that legally may be exported to China.

How important was this deal? According to an official of an RSA competitor, the MOU was a highly significant accomplishment for a US company. "The RSA MOU with China is an historic moment, akin to Linbergh crossing the Atlantic for the first time," said Rich Ankey, Vice President of Certco, a banking and finance information security firm based in New York City. No other company, including Sun Microsystems, has this kind of agreement with the Chinese, according to Ankey, who added. "There is no doubt that RSA has positioned itself on the inside track with the People's Republic of China, and the MOU certainly made RSA much more valuable to Security Dynamics."

Securities and Exchange Commission records show that before the merger RSA was worth at most $226 million, and that SDTI paid $285 million for RSA's stock. According to Bidzos, RSA is currently worth about $296 million - a good profit by any standard. For Robertson Stephen's role as broker of the merger, the firm was paid $2 million SEC records show. The merger was routinely approved by the Justice Department, according to Thomas Eddy, the Robertson, Stephens partner who advised SDTI on the merger.

True, Bidzos, who stood to gain a great deal from the China deal, donated nothing to the DNC. However, the following sequence of events is worth noting: According to SEC documents filed at the time of the merger, SDTI President Charles Stuckey discussed with Bidzos the possibility of merging their two companies in November 1995, just a month after Bidzos had made a preliminary visit to the People's Republic of China. Within days of that meeting, Robertson's name was on Al Gore's call list. In late January of 1996, Robertson's $100,000 was received by the Democrats in Washington. A few days later, Bidzos signed the MOU with China; three months later SDTI merges with RSA to the mutual benefit of all parties.

Some lawmakers concerned about RSA's "joint-research" project wonder whether the Clinton administration is preaching strong control of encryption and practicing the opposite. Rep. Curt Weldon, Pennsylvania Republican and Chairman of the House National Security subcommittee on Military Research and Development, is one. "We have been working with the administration to slow the availability of selling encryption technology to developing countries like China," Weldon told Insight, adding: "If this [joint research] is the case, it is treason." Weldon said he was "dismayed that the administration was leading the effort to sell this kind of technology to an adversary." He also complained that if the "administration had sold out its own tough policy against encryption exports in exchange for campaign donations this could be grounds for impeachment."

RSA evidently received special attention at the highest levels in the Clinton administration. When Insight asked whether the Commerce Department had any active oversight of the RSA deal with LOIS, the query was denied by a department spokesman, who cited rules of protecting the proprietary interests of private businesses. However, among the classified files removed by Commerce Official Ira Sockowitz and hidden in a personal safe at the Small Business Administration (see "Commerce-ial Espionage?" Sept. 1 Insight) were files marked "RSA" and "encryption exports."

There isn't any evidence that Bidzos broke any rules simply by talking to the Chinese about future services. "The RSA export does not appear to require a license," says Cindy Cohn, a California based lawyer with McGashan & Sarrail who handles cases involving export rules. However, she noted, "This simply is one of those gray areas in law that drives judges made and frustrates honest businesses. These exports depend on bureaucrats who interpret broadly written regulations on an adhoc basis. There are no clear guidelines that can be applied equally to everyone. The bureaucracy can deny one export while allowing identical exports to go ahead. It is clearly a 'who-you-know' rather than a 'what-you-know' situation.

Robertson's warm relationship with the President undoubtedly was and is an asset. A self described lifelong Republican until switching parties in 1992, Robertson is one of the most generous contributors to Clinton and the DNC. Although, Robertson denies he talked to Gore on the phone, he has backed Clinton since the 1992 campaign and has met the President and Vice President. In October 1992, Robertson held a fund-raising dinner party for Clinton, Gore and 70 Silicon Valley and high tech executives at his home in San Francisco. The dinner raised $400,000. Robertson also lent $100,000 to Clinton's 1993 inaugural, according to a White House report of November, 1996. Robertson told Insight that the latter figure was wrong and his gifts to the Inaugural totaled $8,400.

Was the RSA deal with China an important factor in SDTI's decision to merge with RSA? Not according to Robertson and Eddy. Eddy told Insight that "strategically, sure it looked very important, but it was not a factor in assessing the value of RSA at that time [of the merger]. It was less than not important, it was irrelevant." Robertson emphatically denies the thesis that donations to the DNC were made with a mind to pave the way for the merger of SDTI and RSA, telling Insight that such an interpretation is a "fairy tale."

By all accounts the business deals brokered by Robertson and Bidzos make perfect business sense. And the Bidzos arrangement with the People's Republic in particular may pave the way for international trade, which could be hugely lucrative for Silicon Valley firms, somewhat akin to "Marco Polo going to China," in the words of Certco's Ankey. The only problem, according to some skeptics, is that in this case Polo may be introducing spaghetti to the Chinese.


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