A company staffed with former operatives ofIsrael’s top intelligence agencies and founded with the help of the former head of the Mossad is being used by hedge funds looking for an edge in the financial markets.
Kela Israeli Intelligence has increasingly become a popular service on Wall Street. The firm employs about 40 former intelligence operatives and analysts, most of them ex-members of the Israeli army’s secretive 8200 unit, which is often described as Israel’s equivalent to the NationalSecurity Agency and believed to be behind the Stuxnet computer worm that attacked Iran’s nuclear facilities. Kela also employs former agents of Israel’s Mossad spy agency and the company was founded with the help of Shabtai Shavit, the director general of the Mossad from 1989 to 1996, who sits on Kela’s advisory board.
Founded in 2009 with an eye toward harnessing the intelligence talent in Israel for use in the corporate sector, Kela does work for insurance companies, pension funds and sovereign wealth funds, but it has found its services are greatly in demand by hedge funds. Some 80% of its business is currently coming from hedge fund managers inNew York, London and Hong Kong, according to Yigal Naveh, Kela’s chief executive officer and co-founder.
“We are focused on hedge funds, mostly activist hedge funds, and long/short hedge funds,” Naveh said in an interview. “They are trying to find fraud, not only on Chinese companies but companies around the world, Europe, where the business situation makes more companies cut corners and do less legitimate things.” Added Naveh: “We get a scope, we get a series of questions and we try to help.”
The world of corporate intelligence is not new, producing large companies like Kroll, a private investigations firm for big corporations that has been called a “private CIA.” Hedge fund managers, always hungry for information and looking for a leg up in the markets, have for years dabbled with these kinds of services. For example, Business Intelligence Advisors, based in Boston, has been staffed with former, and sometimes active, CIA officers and has reportedly worked for the likes of Goldman Sachs and SAC Capital Advisors, the big hedge fund run by billionaire Steve Cohen. Among its services, Business Intelligence Advisors reportedly teaches money managers so-called “deception detection” techniques to identify when corporate executives might be lying on conference calls.
Daniel Loeb, the billionaire founder of New York hedge fund Third Point, also reportedly got former CIA operatives to teach his staff deception detection techniques and uses private investigators when the hedge fund is shorting a stock. Last year, Loeb seemed to use the kind of information that may have been uncovered in a rigorous background check to undercut then Yahoo CEO Scott Thompson, exposing that Thompson’s resume falsely claimed he possessed a computer science degree on his resume.
For his part, Naveh, who served as an intelligence officer in the Israeli army, co-founded Kela with Nir Barak, who was a member of the 8200 unit and now heads Kela’s researchers. Like many adult Israelis, Naveh still performs reservist duties in the Israeli army. Naveh says a lot of the work the company does is so-called open source intelligence, with trained experts using computing and other technological tools to connect the dots of information that are already in the public domain, particularly on the Internet and social networks. “If someone has powerful crawlers that can identify and connect different dots, you can reach interesting conclusions, red flags,” says Naveh. “But the computers can’t reach the conclusions themselves.”
Still, Naveh says his firm does physically send people out to gather information all over the world if the situation calls for it. As an example, he claims his firm has flown its people to China to count how many trucks were being driven into a production facility. “We start with the computers, but when it’s needed you have to have boots on the ground,” says Naveh. “Sometimes you need to take pictures of a factory, or a house, or car.”
Naveh claims Kela only uses legal tactics and works with lawyers and compliance experts to protect both Kela and its clients. He also says the firm avoids anything that could be classified as inside information, a particularly sensitive topic these days for hedge fund managers. Federal prosecutors and securities regulators have brought dozens of insider-trading cases involving hedge funds in recent years, often focusing on third-party service providers engaged in expert-networking services. These expert-network services connect money managers with people working in various fields, sometimes facilitating the exchange of insider-information that hedge funds have used to profit.
“We don’t give brown envelopes and tell you ‘don’t ask how I got that information,’ we sign a lot of NDAs and compliance sheets, it’s not about inside information,” says Naveh. “We don’t get near it, we don’t speak to people who were working at the company and do not touch information that only people on the inside would know.”
Nathan Vardi, Forbes