Mutual Interests

The Texas story of Veridian Inc. provides a snapshot of the military-industrial-government complex

Mutual Interests
Illustration By Jason Stout

If you live in Texas, no matter where you live or what sort of work you do, you're profiting from the various wars, armed interventions, covert actions, and miscellaneous military conflicts now being pursued worldwide by American armed forces and the U.S. intelligence community.

Here's how:

On an upper floor of an office tower in downtown Austin, about a mile from the Capitol, is the suite belonging to an investment company called the Texas Growth Fund. The growth fund represents a relatively recent effort by the state of Texas to become a more active force in profiting, directly and indirectly, from the state's investments.

The money that TGF invests is yours and mine -- specifically, it comes from money allocated by the Teacher Retirement System of Texas and the Employees Retirement System of Texas, the University of Texas and Texas A&M, as well as the less-rich San Antonio Fire and Police Pension Fund. In the bear market of the last few years, TGF has generally not done well. But there has been at least one very notable exception: an investment in what was until recently an obscure company named Veridian Inc. Veridian, which a few months ago became a division of General Dynamics, is in the "information warfare" business -- a classified contractor to the U.S. Department of Defense and other arms of the federal government.

In 1995, the state of Texas, through the TGF and during the administration of then-Gov. George W. Bush, helped create a very formidable defense contractor by investing millions of dollars of state money in Veridian. The company has gone from $100 million in revenues (prior to the state's investment) to $1.2 billion now, benefiting directly from a slew of federal defense-related contracts, as President George W. Bush's "War on Terror" has taken shape. Recently, the state has capitalized on its foresight and investment talent by receiving a big pot of money.

This investment is unlike most state investments, in which pension funds or university endowment managers have simply bought stock in various companies. In the case of the TGF and its infusion of cash to Veridian, the state assumed an equity interest in the company. Texas has held a place directly on Veridian's corporate board, in the person of Jim Kozlowski, the president of TGF, who has shared a seat at the Veridian corporate table with other tech heavyweights, including America's first female astronaut, Sally Ride, and at least one Hewlett-Packard vice president.

For the state of Texas, the Veridian connection has turned out to be a particularly profitable association.

Rewarding Relationships

Precisely what Veridian does to earn all that money is secret. It is known that among other functions, the company produces drone aircraft (in principle useful in both intelligence and weapons applications), and has research operations at an airfield at Niagara Falls, N.Y. The company has by its own admission recruited among Air Force and CIA senior staff.

Veridian describes itself as "a leading provider of information-based systems, integrated solutions and services specializing in mission-critical national security programs for the intelligence community, the Department of Defense, law enforcement and other U.S. government agencies." Those services include "network security and enterprise protection; intelligence, surveillance and reconnaissance; knowledge discovery and decision support; chemical, biological and nuclear detection; network and enterprise management; and systems engineering services," and it claims to employ more than 5,000 computer scientists. A Defense Department spokesman said Veridian now has locations in 31 states, including Texas. An unspecified operation in San Antonio gave the company the Texas presence that -- under the guidelines by which the Texas Growth Fund was created by means of a state constitutional amendment -- permitted the Veridian investment.

Recently the company has been very successful attracting defense contracts: July 2002, $7.6 million, Air Force; July 2002, $154.4 million, Navy; July 2002, $24.2 million, Navy; October 2002, $20.8 million, Coast Guard; October 2002, $18.9 million, Air Force; October 2002, $11.18 million, Army; November 2002, $39.8 million, U.S. Patent and Trademark Office; November 2002, $10.8 million, Department of Homeland Security; November 2002, $166.9 million, Navy; January 2003, $123 million, Navy. (Contracts with the Central Intelligence Agency are not usually divulged.) Two complaints by Veridian's competitors, presumably for unfair trade practices, were overruled last year by the U.S. General Accounting Office.

The state of Texas' involvement with Veridian began in 1995, shortly after George W. Bush became governor, when the growth fund invested $3 million of the million-member Teacher Retirement System's money in the company. Bush himself apparently had little involvement with the TGF at that point -- at least according to its chairman, a Goldman Sachs partner from Houston named Hubbard Scott Caven Jr., who in 1996 wrote Bush to complain that the governor's office was failing in its responsibility to supervise the growth fund's operations.

"The Texas Growth Fund is not subject to legislative oversight," Caven wrote to Bush in a letter dated Aug. 2, 1996, "and although it is technically supervised by the Office of the Governor, no one from your administration has attended any of our public meetings." Caven then went on to describe TGF in glowing terms, telling Bush that the fund "relies entirely on outside, third-party private contractors for its day-to-day functions. It has been recognized at several national conferences of chief investment officers of state retirement and trust funds as a prime example of a successful privatization of this particular government initiative."

This chastisement by Caven may have had its desired effect. By 1999, when the TGF invested another $20 million in Veridian (from the teacher's pension fund and the Employees Retirement System of Texas, which represents 200,000 present and former state employees), the TGF's apparent contact in the governor's office was Bush's chief of staff Joe Allbaugh -- one of W.'s most trusted and important lieutenants, part of the "Iron Triangle" with Karen Hughes and Karl Rove. (Allbaugh later became Bush's 2000 campaign manager, then followed him to Washington as director of the Federal Emergency Management Agency, and recently left the government to form a security contracting business in Iraq.) The state's 1999 investment was used to assist Veridian in a spate of acquisitions of competitors.

Caven (whose other duties have included being treasurer of the River Oaks Country Club, where the Bushes like to play) left the growth fund in 2000 after more than 10 years as TGF's first chairman. His latest incarnation has been as Gov. Rick Perry's 2002 campaign finance chairman, after which he was rewarded with a seat on the UT Board of Regents, replacing Perry's defeated foe, Tony Sanchez.

A Robust Pipeline

In May of this year, Veridian President David Langstaff, speaking to investment analysts, made the rather startling and increasingly hard-to-believe declaration that his company was not profiting from the U.S. war in the Middle East. "The Iraq conflict did not materially impact our numbers," he said, although he added, "we saw a bump up in a few numbers as people were deployed [abroad] for longer periods."

He then speculated briefly about the future. "The work we do is national security in the broadest sense," Langstaff said. "We've talked about increased traction in homeland security. That continues to be strong for us."

Using the oil business metaphor that seems to resound very well in Washington these days, Langstaff said, "We see a very robust pipeline of opportunity."

Veridian may or may not be making money off the Iraq war, but it has become an attractive property in what is truly a growth market. Apparently, others coveted the pipeline as well. Later this summer, Veridian was sold to General Dynamics, the U.S.' fourth-largest defense contractor (armored vehicles and submarines), for $1.5 billion. The state of Texas' cut was $96 million, a tidy profit of about $73.5 million -- less fees of $3.3 million for the private management company led by Mr. Kozlowski -- split between the Employees Retirement System and the Teacher Retirement System.

Money has a life of its own, and it doesn't always go where fund managers would like. But what is scariest about state government's latest way of making money is that the Bush-defense-Iraq connection probably is not conspiracy, just serendipity. There is no conflict of interest -- rather, the interests are mutual if not identical. That's because many of the same people are doing business in Texas, D.C., and Iraq. No one needs to conspire: Money was flowing toward conflict before the first shot was even fired.

As we're all becoming aware, this conflict is less about ideology or security than it is about money. In fact, in some ways George W. Bush is best understood as a business himself, a corporation, a conglomerate, with offices in Dallas, Houston, Austin, Washington, suburban Virginia, and now, Baghdad.

In this light, the conquest of Iraq can be simply but accurately viewed as the ultimate hostile takeover. end story

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