Cashing In on CatastropheBy Wayne Barrett & Dan Collins
Sep. 11, 2006
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Even before he left office as New York City's mayor at the end of 2001, Rudolph Giuliani was telling reporters about Giuliani Partners, the management consulting firm he intended to open up with his old City Hall team. The partners were more of a Giuliani posse than a group of peers. Michael Hess, the former city corporation counsel, was named managing partner. Fire Commissioner Tom Von Essen became a senior partner, as did Police Commissioner Bernard Kerik, whose later nomination as head of Homeland Security would go down in flames after revelations that his concern for following the rules and avoiding ethical conflicts appeared close to nonexistent. The only partner who came from outside the City Hall crowd was Roy Bailey, former finance chair of the Republican Party of Texas, who'd gotten to know Giuliani when he helped raise money for Giuliani's abortive 2000 Senate campaign against Hillary Clinton. Bailey helped finance the new company, whose reported start-up payroll was $10 million a year.
The most valuable commodity the new company had to sell was not management expertise but the aura of America's Mayor--the man whose cool-headed 9/11 leadership had taken on mythic proportions. While Giuliani's first term as mayor brought him renown as a crime fighter who made New York livable again, his second term was a slowly escalating disaster before 9/11. The city, which admired his feisty stubbornness when the enemies were drug dealers and cop killers, had grown tired of a seemingly endless series of political catfights with school chancellors, black neighborhoods, museums, rival politicians and even hot-dog vendors. And, as would become clear later, Giuliani had allowed the city to meet the disaster unprepared in myriad ways, ignoring the well-noted lessons of the first attack on the towers, which occurred less than a year before he became mayor.
Now, with Giuliani traveling the country as a 2008 Republican presidential hopeful, his record both as mayor and afterward is coming under increasing scrutiny. In no area is there more to examine than in the story of Giuliani Partners.
Giuliani Partners' initial press releases religiously avoided any mention of the attacks--Rudy is described as the man who "returned accountability to city government and improved the quality of life for all New Yorkers." But when their clients, who were very frequently companies in trouble, told the world they had just hired a renowned team of "crisis managers," no one pretended their critical expertise came from handling snowstorms or subway fires.
Before long, Giuliani Partners was all over the map, consulting on security for nuclear power plants one day, on efficient bulk purchasing for New York-area hospitals another. It signed on to help the troubled, scandal-plagued WorldCom establish a "model form of corporate governance" and to help Delta Airlines with its bankruptcy. It agreed to review the National Thoroughbred Racing Association's electronic betting systems after a race-fixing scandal. It formed a series of investment alliances that purchased interests in everything from a Tokyo wind-power company to a California firm, CamelBak, which made backpacks with sipping tubes for people like long-distance bikers and soldiers in desert postings. (Kerik was enthusiastic; it was "a perfect mechanism to stay hydrated," he told the Daily News, envisioning every New York City firefighter equipped with a CamelBak as a matter of course. "If I was a fireman I'd want one.")
The Partners also rekindled relationships with some old friends who played central roles in some of the biggest city failures on 9/11. Among them was a "strategic partnership" with CB Richard Ellis, the successor of the firm that had found the city the perfect location for a command center--high above lower Manhattan in one of the World Trade Center towers. The announcement of the deal, in which Giuliani Partners would be advising Ellis on "location and site assessment" as well as on emergency preparedness and fire safety, was made without any discernible sense of irony.
Cashing in on 9/11 took many forms. In 2004 Giuliani Partners signed up Pharmaceutical Research and Manufacturers of America, which was concerned about the popularity of drug re-importation. American pharmaceutical companies sold their product at much lower prices in Canada and Europe, where national price controls were in effect. The big profits came in the United States, where Congress had vigilantly guarded the drug manufacturers' right to charge what the market would bear. But American senior citizens had begun taking bus trips to Canada to buy their medication, and, in a far more ominous development for the drug companies, members of Congress were talking about making it legal to import cheaper prescription drugs from across the border. PhRMA wanted Giuliani Partners to prepare a report on the safety of these practices.
The report found re-importation to be a bad and dangerous thing. "As the nation tightens its borders against possible future terrorist attacks, it risks undermining security and safety by opening them to non-FDA approved prescription drugs," the Giuliani study concluded. Giuliani himself testified before two Senate committees. When the public was invited to take its turn to testify before a federal task force studying drug importation, one of the first speakers was Kerik, who raised the possibility that terrorists could send weapons of biological warfare across the border disguised as prescription drugs.
Entergy Nuclear Northeast hired Giuliani Partners to evaluate emergency planning and security systems around its five nuclear plants in the Northeast, including Indian Point, north of New York City, which were always under the sharp and hostile glare of the communities in which they were located. Then, when Hurricane Katrina struck, Entergy was happy to announce that Giuliani Partners was going "to counsel the company in coping with the aftermath," which included trying to get its New Orleans electric utility back in operation. In making the announcement, J. Wayne Leonard, the chief executive officer, said, "Rudy Giuliani is a proven leader and his team of experts are probably the most acclaimed crisis managers in the world." Not only was New Orleans getting the attention of Rudy himself, the press release noted, but also that of a team of experts in this sort of catastrophe. All this consulting firepower was not enough, however, to keep Entergy New Orleans from declaring bankruptcy right after the hurricane, or to get power back to large swaths of the city, which were still without electricity months after the hurricane struck.
While such deals may have raised a few eyebrows, they don't compare with Nextel. Indeed, if there was any doubt that Giuliani Partners was all about 9/11, it was erased by the Nextel deal. Nextel was one of the firm's first and most lucrative customers, forming what the Partners called a "strategic alliance to significantly improve public safety communications across the United States."
The theme was consistent and clear: "On September 11th, we learned the true importance of interoperable communications. It was a chaotic scene at Ground Zero, but if it weren't for Nextel providing us with interoperable communications tools, it might have been worse." This pitch was so much the core of the Giuliani Partners message that partner Richie Sheirer was quoted as repeating it word for word at Nextel-sponsored public safety conferences in Washington, DC, and St. Louis in the spring of 2003. Tom Von Essen made the identical statement at yet another Nextel-sponsored event, at the Hilton hotel in New York City. Nextel echoed the point, describing how it had distributed thousands of cell phones at both Ground Zero and the Pentagon (along with mobile cellphone masts to get them working) and how "with local phones jamming and telephone and power main stations down, Nextel's Direct Connect service and two-way messaging remained working throughout the entire crisis, recovery and clean-up."
But Nextel's role in emergency service communications in New York was far from universally positive. It was, in fact, so problematic you'd have thought Giuliani would have left office with a bad taste in his mouth for the entire product line. The city was a big Nextel client when Rudy was mayor, leasing its phones for agencies from the Police Department to the Board of Education to the Office of Emergency Management. But as Nextel phones and equipment became omnipresent, the system developed a stunning, even life-threatening, glitch. The engineering tricks that allowed co-founder Morgan O'Brien to brag that Nextel had managed to stuff 8 million subscribers on a spectrum that was supposed to have a ceiling of 1 million also had a troubling side effect: The infrastructure created interference. In communities across the country, including New York City, Nextel signals were causing those in adjacent frequencies to drop or become garbled to the point of incomprehensibility.
While no one can establish that Nextel caused interference on 9/11, there is good reason to wonder. Five days after the attack, a lawyer representing the city e-mailed the FCC about the deployment of all the Nextel equipment at Ground Zero--particularly mobile cell masts--and observed that if Nextel and the city didn't coordinate closely, "it is highly probable that Nextel will disrupt these other critical communications." Another city attorney testified at a subsequent Senate hearing that the city and others in a communications coalition held teleconferences twice a day right after 9/11 to "monitor and, if necessary, remedy any interference," focusing especially on Nextel. Even the company acknowledges that interference with public safety communications increased with the kind of explosion of cellular use that occurred on 9/11. There are also indications that the World Trade Center might have been a particular source of Nextel interference. John Paleski, president of Subcarrier Communications, which managed sites atop the WTC, said Nextel had several pieces of interference-generating equipment there, including digital and analog antennas. While those antennas were probably knocked out from the moment the planes hit, Nextel apparently had a lot of similar equipment nearby.
In fact, the company had so much disruptive equipment in the area that a year after 9/11 it was still a public safety headache. Giuliani led the commemorative services at Ground Zero on September 11, 2002, even while his largest client, Nextel, made the city's interagency communications at the site so "inoperable" during the ceremony that the Bloomberg administration filed a complaint against the company that used precisely that word.
Giuliani Partners was not hired to defend Nextel's performance, however. It was retained instead to stress how important it was to protect the public from Nextel interference, and to promote the company's own self-serving solution. Only a few weeks after the attack, Nextel filed a proposal with the FCC, beating its own chest about the need to end its interfering ways. It offered to surrender some of its 800-megahertz frequencies to public safety, cutting the interference. In exchange, it wanted new, continuous spectrum from the FCC estimated to be worth a minimum of $4.9 billion. On May 2, 2002, when Giuliani announced his company's partnership with Nextel, the former mayor talked about the interference problem: "Giuliani Partners is committed to helping resolve these concerns and improving the ability of public safety authorities to speak with one another during both day-to-day operations and crisis situations." He also told the New York Daily News that he had reviewed the varied plans for fixing the problem and had decided that Nextel's was the best--"without any doubt."
As part of his Nextel duties, Giuliani appeared at conventions of public safety officials to talk about 9/11 and the need for antiterrorism preparedness. In his keynote speech at the convention of the Association of Public-Safety Communications Officials International in Nashville in 2002, for instance, he delivered his standard talk on 9/11 and his five principles for leadership, one of which was communication. Communication reminded Giuliani of the importance of being able to get through on the telephone in a time of crisis. "I am in favor of your support for the consensus proposal before the FCC that would allow public safety to have more frequencies and better communications," he said. "Thanks to you and Nextel who agreed on that. It can be positive for the future." A trade journal covering the convention called Giuliani "engaging, funny, seemingly honest and informative," but noted that "he never mentioned his consulting company's link to Nextel."
After forcing some changes in the Nextel plan, APCO and other public safety organizations rallied behind it, and it was artfully redubbed the Consensus Plan. But Giuliani and the Partners were also making friends at the FCC, doing volunteer jobs that had been brokered by Nextel's counsel. The Partners spent more than a year helping the FCC prepare a report about how local government can best communicate with the public. Sheirer, Von Essen and another Giuliani partner, Tony Carbonetti, attended a meeting of the FCC's Media Security and Reliability Council just as Nextel hired their firm in May 2002, and another partner, Tom Fitzpatrick, who spearheaded the New York Fire Department's disastrous radio contracting process, moderated an FCC panel. Finally, Giuliani himself was named to a prestigious FCC advisory council two months before the Nextel deal was approved.
"Everybody knows what we're doing, so there's nothing hidden," Giuliani told the New York Times, in explaining why he had not registered as a lobbyist for Nextel or anyone else. Actually, few did know what he was doing. Giuliani, for example, pushed his bandwidth crusade before the 9/11 Commission and in television interviews without ever acknowledging his interest. Two months before the FCC vote on the spectrum deal in July 2004, Giuliani called for "a dedicated bandwidth for emergency services" on Larry King Live and CBS as the solution to the 9/11 communications breakdown. He didn't specifically refer to the Nextel deal, saying only that the bandwidth was "doable but the FCC has to approve it."
By the time Giuliani made these appearances, his consulting deal with Nextel had come to an end, but the Partners still may have had the stock options, then valued at $15 million, that they received as part of their compensation. Shortly after the company got its new spectrum without the public auction usually required for such FCC largesse, Sprint merged with it in a $36 billion deal. Between 2002 and 2004, Nextel's stock rose nearly tenfold, according to the Wall Street Journal.
Giuliani Partners is a private company, and one that keeps its dealings very close to the vest. Conventional wisdom, encouraged by Giuliani Partners insiders, holds that the firm made around $100 million a year, or more than $2 million per employee. Giuliani had never seemed particularly concerned about money--he wouldn't have been scheming so desperately for a third $195,000-a-year term as mayor if wealth had been his top priority. But his sudden riches came in handy. His settlement with his former wife, Donna Hanover, in the summer of 2002 called for him to pay her $6.8 million over three years as well as child support. Hanover's lawyers estimated that Giuliani's income in 2002 was $20 million, a little more than half from speaking fees and book advances. And he quickly adapted to his new lifestyle, demanding first-class flights and accommodations for himself and his posse when he traveled and purchasing a $4 million summer house in the Hamptons for himself and Judy Nathan, whom he married in 2003. The couple also have an apartment on Manhattan's East Side worth more than $5 million, complete with Rudy's Yankee diamond rings displayed in wooden boxes, a lithograph of Winston Churchill above the fireplace, two white Churchill porcelain figures and a Joe DiMaggio shirt encased in glass.
Giuliani Partners attempts to present itself as just another vehicle for Rudy Giuliani's fight for justice. "We take these things on if there's good to be done," said Michael Hess. But most of the deals it has made were like the Nextel one--patently about a client's hope to cash in on Giuliani's fame, to borrow a little of his crime-fighting aura or to make use of the Partners' many connections in the increasingly profitable business of homeland security. Rick Perkal, a senior managing director at Bear Stearns Merchant Banking, told Newsday that his company had been impressed by Bernard Kerik's membership on a federal panel that was supposed to give the Department of Homeland Security advice on, among other things, what it ought to be purchasing. Bear Stearns had agreed to invest up to $300 million in new security-related ventures identified by Giuliani Partners, and Perkal said, "Being an adviser in Homeland Security, what has been helpful to us is that he understands the needs of the country. When we look at opportunities, companies that come up for sale, he can say: 'This is a good company. I think it has good growth prospects.'"
But the American public seems indifferent to such conflicts of interest. A June Quinnipiac University poll showed that Giuliani had the highest rating among nineteen national leaders and potential 2008 presidential candidates, ahead of John McCain, Hillary Clinton and Barack Obama.