Providence Financial Giant Staggers Under Snowden Suits Fallout
Friday, January 24, 2014
The Snowden case, the biggest U.S. security leak since the Pentagon Papers, may seem like a remote affair, involving a lone security analyst based in Hawaii who leaked National Security Agency files in Hong Kong, now lives in limbo in Moscow, and has President Obama and the Washington policy establishment grappling with the fallout.
But among its many other consequences, it has dealt a huge blow to Providence Equity Partners, the local investment giant quietly run by Jonathan M. Nelson, a Providence native whose low-key demeanor and insistence on remaining in Providence earned him the nickname, the “stealth mogul.”
Nelson is Rhode Island’s richest man, with a net worth of $1.6 billion, according to Forbes.
From discreet offices on Kennedy Plaza, Nelson and a small shop of financiers run a global empire of assets worth more then $37 billion, owning everything from cable giants in Europe and India, to pay TV in Turkey, to a piece of the Yankees Entertainment and Sports Network, known as YES!, that broadcasts the Bronx Bombers.
But it also owns the parent company of US Investigations Services, LLC, which specializes in background screening of hundreds of thousands of government employees, many of whom are granted high security clearance based on USIS’s review.
The Justice Department’s lawsuit, unveiled yesterday, alleges USIS defrauding the country of millions of dollars by methodically filing 660,000 investigations that were incomplete in that they didn’t undergo a final review. The complaint includes damning evidence, including embarrassing emails between employees joking about the practice of dumping.
"Shelves are as clean as they could get. Flushed everything like a dead goldfish," the complaint quoted one USIS official as writing to two of the company's top quality control officials in 2010.
The suit is the latest is a series of bad news for USIS and comes at an awkward time for Providence Equity and its founder.
In a sense, it’s ironic that the quiet firm would find itself in media glare since it has plenty of experience investing in the area. Indeed, Nelson started it by concentrating in media and telecommunications, where the bulk of its holdings remain today.
Nelson comes by his moniker, “stealth mogul,” very deliberately. The East Sider, who is now 57, is a member of Brown’s elite Board of Fellows and is active in local philanthropy, but doesn’t seek out the limelight, granting perhaps an interview or so a year, according to a person familiar with his company.
"My own mother doesn't know what I do," Nelson once joked.
Nelson grew up in Providence and attended Brown in the 1970s where he hosted an early-morning radio show on WBRU that played John Coltrane, Thelonious Monk and Charlie "Bird" Parker, “ according to a 2007 Providence Journal story that covered a “Parents Day” speech he gave at the university.
“Find your passion,” he said at the time.
Launching his own firm
After graduating in 1977, he lived in China, moved to Sweden, got married, returned to attend Harvard Business School, then took a job with an early private equity firm, Narragansett Capital Corp., founded by Royal Little, the founder of Textron, which did leveraged buyouts. After Narragansett Capital liquidated in 1986, Nelson started Providence Equity in 1989 with fellow Brown graduates, and decided to concentrate solely in media and telecomm. The unusual decision made it difficult at first to raise money – most private equity firms cast their nets for investments far and wide – but would pay off with huge winners later in the 1990s, including an obscure company called Western Wireless, which later produced VoiceStream Wireless, which in turn was bought by Deutsche Telekom and is today T-Mobile.
Another key early decision was to stay in Providence -- the office is at 50 Kennedy Plaza -- a decision that separated the firm from most of the rest of the New York-centered industry, and attracted the curiously of The New York Times in 2003.
“I don't feel removed,'' he told the paper. ''I feel perspective. We need common sense. It's easier to do that from this vantage point. It's easier not to get caught up in the bubble or the burst. And you know, not every C.E.O. is in love with New York.
The firm over the years has enjoyed some stunning successes. Just this month, Providence Equity sold a stake in AutoTrader Group Inc. that it bought from Cox Enterprises four years ago back to Cox for $1.8 billion, resulting in a return of about three times the $640 million Providence has invested in the company.
But it would be a non-media/communications company that would bring Providence Equity trouble and into the media’s glare. In 2007, Nelson’s firm bought Altegrity, USIS’s parent firm, from two others investment firms for $1.5 billion, including $780 million in equity.
The company, a contractor since 1996, handles about 45% of federal background checks, according to according to The Wall Street Journal, including for the Defense Department, Department of Homeland Security and more than 100 other federal agencies. About 90% of the company's work comes from the U.S. government. Over the past decade, USIS has been awarded more than $4 billion in federal contracts, the Journal says.
Snowden is screened
One of the candidates screened by the company in 2011 was Snowden, who was eventually cleared to work for another outside contractor, the consulting firm Booz Allen Hamilton, owned by Carlyle Group, which was performing sensitive work for the NSA. While working for Booz Allen, Snowden last year secretly flew from his home in Hawaii to meet journalists Glenn Greenwald and Laura Poitris to hand over documents showing that surveillance activities of U.S. civilians were far from extensive than previously believed. They were published inThe Guardian and The Washington Post over the summer, setting off a global furor. The finger-pointing of Snowden’s access to sensitive information began shortly thereafter, with some of the most damaging allegations directed at the vetting unit owned by Nelson’s private-equity giant.
In the wake of the Snowden furor, the Justice Department announced it would join a previously filed lawsuit filed by an ex-employee-turned-whistleblower, who charged USIS routinely passed along job candidates without fully vetting them , a practice known as “dumping” and “flushing.”
The suit doesn’t mention Snowden.
After the Justice Department’s move, Providence Equity shook up the unit, effectively eliminating the parent company of USIS, pushing its chief executive officer in November, eliminating the job, and flattening the hierarchy.
The Justice Department complaint filed this week ups the ante further, alleging fraud, and adding new details to record. DOJ lawyers said that top USIS officials used what it called the firm's “fraudulent scheme” to secure nearly $12 million in bonuses from the federal government, which thought the company was completing thorough background checks.
A spokesperson for USIS, which has 6,000 employees, said in a statement:
“The alleged conduct referenced in the civil complaint is contrary to our values and commitment to exceptional service. These allegations relate to a small group of individuals over a specific time period and are inconsistent with the strong service record we have earned since our inception in 1996. Since first learning of these allegations nearly two years ago, we have acted decisively to reinforce our processes and management to ensure the quality of our work and adherence to OPM requirements. We appointed a new leadership team, enhanced oversight procedures, and improved control protocols. From the outset, we have fully cooperated with the government’s investigation and remain focused on delivering the highest quality service under our OPM contracts.”
Now, however, Nelson’s firm has difficult waters to navigate.
The company has been hurt like other contractors by cuts in federal spending. What’s more, Altegrity is carrying about $1.8 billion in debt, including a large piece that must meet certain conditions of its terms, including profit-to-debt ratios, by March 31 or could be found in default.
In a statement, Altegrity says: “The company believes it has ample liquidity and a number of options to address its upcoming debt maturities.”
A person familiar with the company, which has hired Evercore Partners to help handle the debt situation, says the situation could be cured by adding equity, among other options.
The impact of the USIS mess on Providence Equity’s overall financial performance is not known, but that deal is only one of many the company is involved in.
The larger question is what effect Providence Equity’s entanglement in a security scandal of historic proportions will affect the reputation of one of the industry’s most successful and respected investors.
Through a spokesman, Nelson and Providence Equity decline to comment.
Dean Starkman is a Pulitzer Prize winning journalist, and also currently serves an editor at the Columbia Journalism Review, running its business-media section, called The Audit, which offers review and comment on business news. He recently published a Book, The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism , released January 2014.
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