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Diligence LLC, a Washington-based investigative firm, is headed by a British ex-intelligence agent, counts former CIA Director William Webster as the chairman of its board of advisers, and once enjoyed connections to high-powered lobby shop Barbour Griffith & Rogers. But its pedigree hasn’t kept the firm out of trouble. Allegations of fraud and misrepresentation stemming from an undercover job in Bermuda, in which two employees allegedly posed as American and British intelligence operatives, have stained Diligence’s image and led to two lawsuits exposing the company’s operations. Complicating matters, a top official at Diligence who was fired in 2005 for allegedly stealing confidential company documents may now be helping a competing intel firm — run by Terry Lenzner, well-known for his spy work for President Bill Clinton — in one of the cases against Diligence. The litigation has engaged lawyers from Winston & Strawn; the Aegis Law Group, made up of Williams & Connolly alums; Kellogg, Huber, Hansen, Todd, Evans & Figel; and Bailey & Ehrenberg, a benefits and employment boutique. As is typical with spy stories, few involved in the cases are willing to talk. Much of the information about Diligence’s troubles has been culled from court documents and interviews with former employees and competitors. INSIDE JOB Diligence’s problems began in earnest in September 2005. Court documents show that the company accused its then-chief financial officer, Igor Alexeev, of stealing internal documents, directing employees to erase data from Diligence computers, and encouraging workers to leave the company. Nick Day, Diligence’s CEO, fired Alexeev on Sept. 28. Weeks later, a sheaf of Diligence e-mails appeared at the offices of accounting firm KPMG in Montvale, N.J. The messages detailed an operation straight out of a John le Carr� novel. (The document drop and details of the operation were first reported by BusinessWeek in February.) Posing as British and American intelligence agents, Diligence operatives infiltrated a KPMG office in Bermuda, according to court papers. The goal: to get their hands on a draft audit KPMG had conducted on IPOC International Growth Fund. The audit contained potentially damaging financial information that could be used against IPOC in a high-stakes fight over control of Megafon, a $1.5 billion Russian telecom. Diligence had been hired by Barbour Griffith, which, in turn, had been hired by Alfa Group Consortium, a Russian conglomerate, to turn up dirt on IPOC. Alfa was also battling for Megafon and would later use the information from the audit against IPOC in an arbitration over Megafon’s ownership. The e-mail trail sparked a round of suits. First, KPMG sued Diligence for fraud, misappropriation, and unjust enrichment. (Diligence settled in June 2006 for an undisclosed amount.) Then, IPOC sued Diligence — and Barbour Griffith — for computer fraud, tortious interference, unfair competition, and procuring information by improper means. Court papers do not say who leaked the internal communications. But a former Diligence employee from the company’s D.C. office says Day was convinced that Alexeev, the former CFO, had tipped off KPMG. Few at Diligence had access to the files, unless they had participated in the Bermuda operation or were part of the company’s top management, according to the former employee. “It was pretty clear that those who were in charge, Nick in particular, figured the source of his betrayal was Igor,” the former employee says. “After the [KPMG lawsuit], nobody else I know of was accused or fired.” Alexeev, through his lawyers — James Bailey, Jason Ehrenberg, and Kathleen Behan of Bailey & Ehrenberg — declined to comment. Alexeev filed his own suit against Diligence in D.C. Superior Court in October 2005, claiming breach of contract. Diligence filed a counterclaim accusing him of stealing internal data. The employment suit was dismissed by consent of both parties in July 2006. Alexeev and Diligence then began a private arbitration case. ENTER LENZNER The arbitration has helped uncover another spy game, this one involving Terry Lenzner and his company, Investigative Group International. Lenzner is a well-known D.C. investigator who was hired during the late 1990s to investigate Kenneth Starr’s staff and Clinton accuser Paula Jones. Last month, Diligence’s lawyers, Paul Rauser and Michael Ross from the Aegis Law Group, asked D.C.-based U.S. District Judge Emmet Sullivan to enforce subpoenas seeking records of any communications between IGI operatives and Alexeev, as well as any records that might mention Alexeev. IGI’s lawyers, Mark Hansen and Wan Kim of Kellogg, Huber, on Nov. 6 filed a three-page privilege log describing several documents containing either interviews with or references to Alexeev, beginning in October 2006. The log suggests that Winston & Strawn hired Lenzner’s investigations company to help with IPOC’s lawsuit against Diligence. Of particular interest to Diligence were a pair of memos, dated Dec. 15, 2006, and Jan. 5, 2007, “conveying information learned in interviews in connection with ongoing litigation.” Lenzner and others listed on the log did not return calls for comment, and Hansen declined to comment on IGI’s work for Winston & Strawn. Tim Broas, a partner at Winston & Strawn working on the IPOC case, and Rauser, of Aegis, also declined to comment. On Nov. 7, Sullivan ordered IGI to turn the documents over to the arbitrator in Alexeev’s case. Not long after, the arbitration concluded. The result remains confidential. COLLATERAL DAMAGE Former Diligence officials say the company still does a brisk business, despite the legal entanglements. The 7-year-old firm boasts more than 70 professionals scattered in eight offices around the world, including in Moscow and Hong Kong, according to the Diligence Web site. But the firm has seen plenty of talent leave since 2005, including its co-founder, Mike Baker, and Whitley Bruner, its former director of corporate relations in the Middle East. Both are former CIA officers. And Diligence has abandoned its Connecticut Avenue Northwest headquarters for more modest digs on I Street. “They’ve kind of disappeared in this market,” says Ken Cummins, president of the investigative firm Capitol Inquiry. “They went from a very nice, sweet office on Connecticut Avenue down to a back office somewhere in some executive suite.” Still, Diligence has cause for cheer. IPOC suspended its case against Diligence and Barbour Griffith in August, amid an escalating investigation by British Virgin Islands authorities into the hedge fund’s role in high-level corruption in the Russian telecommunications industry. (In a letter filed in U.S. District Court in Wilmington, Del., in October, BVI authorities formally requested assistance from the U.S. Department of Justice in the investigation.) IPOC is also trying to intervene in KPMG’s case against Diligence. U.S. District Judge Paul Friedman refused the motion in June 2006, and IPOC’s appeal is pending in the U.S. Court of Appeals for the D.C. Circuit.
Joe Palazzolo can be contacted at [email protected].

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