positions from the hedge funds to the brokers. In such circumstances,
many brokers would fail, and the cascade of failure would ripple through the financial
system and render the clearinghouses insolvent. The entire hierarchy of exchanges,
clearinghouses, brokers, and customers could be pushed to the brink of collapse.
Sleeper hedge funds can serve another insidious purpose, acting as intelligence-gathering
operations years in advance of an attack. Intelligence analysts today need more than
state secrets. Economic intelligence—including plans for natural resource projects,
energy discoveries, pipeline routes, and other initiatives—is just as valuable. This
information canimpact commodity markets, financial stability, economic growth, and the allocation
of resources by both the private and the government sectors. Such intelligence is
not always known to government officials, but is known to CEOs, engineers, and developers
throughout the private sector.
Once a covert hedge fund acquires a material position in a target company, it can
arrange to meet that company’s management. Access to management is especially easy
at small to medium-size companies that receive less attention from brokerage research
departments. Companies like this are often on the cutting edge of new designs in satellites,
3-D applications, and digital imaging. Access is the key. Savvy investors pick up
winks and nods and interpret hints to infer the timing and nature of the latest developments.
This can continue for years as the covert hedge fund patiently builds trust, churns
the account, gathers information, and spots vulnerabilities. Then, like a scorpion,
the fund stings, on orders from its sovereign masters.
Skeptics claim that an intelligence or military covert operation in hedge fund form
would be easy to detect because of detailed anti-money-laundering and know-your-customer
rules, strictly enforced by the brokers. This objection does not withstand scrutiny.
The necessary techniques for operating with cover include front companies, so-called
cutouts, secret agents, cover stories, and entities layered on top of each other so
that the unwitting points of contact cannot see the controlling parties. A covert
hedge fund structure involves layers of legal entities in tax-haven countries offering
the enemy sponsor a deep cover. Professional assistance is needed from corrupt lawyers
or bankers who retain innocent professionals to handle detailed work such as fund
administration. Directors are recruited from the advisory companies in offshore jurisdictions
that offer administration services to investors. Having innocent parties in the food
chain throws counterintelligence agents off the scent.
The covert fund manager would operate in well-appointed quarters in a cosmopolitan
center such as Zurich or London. The enemy managers would be highly educated professionals
groomed years before by foreign intelligence agencies to perform such tasks, with
business degrees from Harvard or Stanford. They would receive experience in large
bank training programs at places like Goldman Sachs and HSBC, forming a cadre of sleeper
finance professionals who are then given a covert assignment to manage the enemy funds.
Counterintelligence agents might happen upon such sleepers; the interception of targeted
communications may reveal something of their doings. But if their operation is structured
wisely by the enemy, such hedge fund plotters are almost undetectable by outsiders
unless insiders betray them. Then there’s the bigger issue: Is the U.S. national security
community on the lookout at all?
■ The World in Financial War
If all this sounds far-fetched, consider that the Chinese—and others—are already perpetrating
even subtler forms of financial attack.
In January 2011
The New York Times
reported thatChina had been a net seller of U.S. Treasury securities in 2010 after years of