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Tainted Past? No Problem


How's this for an investment opportunity? For sale: one defense contractor, linked to congressional bribery scandal, owner possibly facing prison time.

That's Bob McKeon's kind of deal. McKeon is the founder of Veritas Capital, a New York private-equity firm that invests in intelligence and defense contractors. Among the fund's holdings: DynCorp International Inc. (DCP) in Irving, Tex., whose name was tarnished in the late 1990s when some of its employees in Bosnia became embroiled in a sex trafficking scandal.

In the summer of 2005, another scandal-plagued military contractor caught McKeon's eye. MZM Inc. was the focus of a federal investigation into whether its owner bribed California Representative Randy "Duke" Cunningham in exchange for hundreds of millions of dollars of government contracts providing technical and other support to intelligence agencies and the military. Sensing an opportunity, McKeon hired a former CIA general counsel to quiz Pentagon and intelligence officials about the viability of MZM's business, which before the invasion of Iraq included helping with controversial analysis of Saddam Hussein's nuclear capabilities. "We take on messy situations, and MZM was a mess," says McKeon, whose top secret security clearance still doesn't allow him to know all the details of what his companies do.

He closed the MZM deal in September for around $20 million and renamed the company Athena Innovative Solutions, after the Greek goddess of wisdom and war. Athena has projected revenues this year of more than $100 million. The company is "clean, it's got a different name, it's got new leadership, and it's doing very important work for the country," McKeon says.

Not everyone is cheering. Critics argue that Athena's apparent success rests on lucrative contracts landed under questionable circumstances. "Veritas is profiting from the spoils of congressional bribes," says Keith Ashdown, vice-president of Taxpayers for Common Sense, in Washington.

McKeon, 51, shrugs off that kind of criticism and continues to expand his firm, tapping into a market that since the September 11 attacks has seen a spike in private investment. According to Thomson Financial (TOC) and the National Venture Capital Assn., private-equity firms have invested in 628 defense and homeland security companies, many of them relatively small. Veritas is poised to become a major player, helping to fill a void left by the Carlyle Group, a much larger private-equity firm that has moved away from its military industry roots to take on a wider range of deals, says John Hagan, managing director at BB&T Capital Markets/Windsor Group, an investment banking arm that specializes in defense and aerospace.

Robert B. McKeon founded Veritas in 1992 with Thomas J. Campbell, 47, a fellow former investment banker from Wasserstein Perella Management Partners Inc., where McKeon was president, then chairman, from 1988 to 1992. Veritas has three funds, ranging from $175 million to more than $600 million.

NO REFUND

The Bronx-born McKeon, a Harvard B-school grad, has a reputation as a hard-nosed businessman. In 1999 a consultant for Veritas admitted he had paid kickbacks to the Connecticut treasurer, who had approved the state's $125 million investment in a Veritas fund. Connecticut officials demanded a refund, but McKeon refused, arguing that no employee of the firm knew about the contractor's actions or had done anything wrong. Connecticut kept its money in the fund and realized a return of nearly 24%, according to state documents. (The treasurer pleaded guilty in the kickback scheme; no one connected to Veritas, including the consultant, was criminally charged.)

Today, McKeon, a history and military buff, oversees a firm that owns all or part of seven companies, including Wornick Co., which sells food rations to the military, and McNeil Technologies Inc., a defense and intelligence contractor.

DynCorp is Veritas's best-known and potentially most lucrative holding. Veritas paid $850 million for the company in 2005, putting down $100 million of its own cash and borrowing the rest. Veritas took DynCorp public in May, and the company is now valued at about $1.4 billion. (Veritas retains a 56% stake in DynCorp but is prevented from selling its shares until this fall.)

DynCorp has more than 14,000 employees and generates nearly $2 billion in annual revenue from its work for the U.S. government. About half involves aircraft maintenance; the rest is more exotic: flying helicopter gunships on Colombian coca-eradication missions, training police in Iraq, and providing security in Afghanistan. McKeon remains chairman of DynCorp, a job unlike most boardroom posts. When he traveled to Afghanistan in June, DynCorp security men rode in vehicles on either side of the one transporting McKeon, protecting him from parked cars that could have hidden a bomb.

McKeon's most recent acquisition was tainted by controversy even before revelations about the congressional bribery scandal. Public records show that employees of Athena's predecessor, MZM, worked at the National Ground Intelligence Center in Charlottesville, Va., a U.S. Army office that analyzed foreign militaries. The center, although not MZM in particular, was heavily criticized by President George W. Bush's commission on weapons of mass destruction for mischaracterizing Saddam Hussein's nuclear capabilities during the runup to the Iraq war. MZM also worked with the National Security Agency, the FBI, and the CIA.

GAMBLING ON A TRANSFER

McKeon minimized his risk in purchasing MZM by insisting that he wouldn't pay then-owner and CEO Mitchell J. Wade full price if McKeon wasn't able to keep MZM's dozen or so contracts. Wade, who has pled guilty to bribing the disgraced Cunningham, is not the only one linked to the company who has been implicated in illegal activity. On June 30, federal prosecutors accused former MZM employee Richard A. Berglund, a retired military officer, of helping Wade funnel improper campaign contributions. McKeon says Berglund left the company earlier this year after it became aware of his potential legal trouble.

McKeon had no guarantees that Pentagon officials would approve the transfer of MZM's contracts to Athena, a decision that would be made only after the mandatory Defense Dept. review triggered when a contractor is sold. The former CIA general counsel he hired, Jeffrey H. Smith, now a partner at the Washington law firm Arnold & Porter, reported back that the half-dozen intelligence agencies he approached thought highly of MZM. McKeon's gamble paid off when the Pentagon approved Athena's takeover of all of MZM's contracts.

Asked what Athena's employees do today, McKeon says: "That's classified" and declines to elaborate.

By Eamon Javers and Dawn Kopecki


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