Wikileaks' Stratfor E-Mails Reveal an Investment Plot Worthy of a Spy Novel

Imagine an intelligence agency that uses the information it collects – some if which was gathered through coercive tactics – to trade on the markets in order to expand its operations. It reads like a scenario out of a James Bond novel. Yet, according to internal e-mails from Strategy Forecasting released publically by Wikileaks on Monday, it turns out that the private global intelligence agency more commonly referred to as Stratfor actually planned to do just that. Stratfor, founded in 1996 by CEO George Friedman, publishes intelligence briefings for subscribers and performs a variety of other intelligence services for clients. The company, with a small staff that still numbered as few as 70 by 2004, gained legitimacy from the high-quality intelligence it produced during the Kosovo War and in the aftermath of 9/11. Over time, as demand for Stratfor's work increased – with blue-chip companies like Coca-Cola KO and The Dow Chemical Company DOW seeking out the company's services, along with the US government – Friedman worried that competitors might try to move in on the corporate market and government hunger for intelligence his company had so successfully tapped. “We have no choice but to grow. If we stay this size someone larger, with deep pockets will notice the market we have created and come in after us,” he wrote in an e-mail on September 5, 2011. “We won't be able to compete. The only protection is market share, to be so dominant a force in the market that no one challenges us and our own deep pockets.” It is potentially for that reason Friedman, with the help of former Goldman Sachs employee Shea Morenz, decided to create a private global investment firm and hedge fund that would use both the “broad ideas” and “obscure nuggets picked up by [Stratfor's] intelligence” to make investments, particularly in currencies and bonds in emerging markets. Morenz was to invest several million in Stratfor as per the arrangement – which would be used to fund Stratfor's immediate plans for expansion – and was made CEO of the new investment firm, named StratCap. “Do not think of StratCap as an outside organization,” Friedman wrote. “It will be integral to Stratfor, in the sense that much of the intelligence we are developing is useful to Stratcap as well as Stratfor. The organizational and legal distinctions are real and important, but StratCap is linked to Stratfor intellectually and contractually.” The implications of StratCap were wide-ranging. A private intelligence company, with a CEO that once suggested to a female employee to use “financial, sexual or psychological control” to get information out of a source, would now possibly be using intelligence obtained by such means to direct trades and other investments. “Where we had previously advised other hedge funds. We would now have our own, itself fully funded by Shea,” Friedman wrote in that same September 5 e-mail. Friedman was already working with Morenz and others on mock portfolios by September, and hoped that StratCap would be making actual investments by some point in 2012. Though it is difficult to estimate exactly how much StratCap stood to benefit from Stratfor's insights, in an oft-cited study from late 2004, a portfolio that mimicked the purchases of US senators outperformed the market by 85 basis points a month on average. There are obvious advantages to having access to insider information. While current fate of StratCap is somewhat unclear, that the negative publicity generated by the leaked e-mails could very well capsize whatever hopes Friedman and Morenz currently had for it. Even with Friedman's e-mailed promise to Stratfor employees that “compliance officers” were going to ensure that StratCap was a legal venture, given recent events the scrutiny StratCap would now face from the US Securities and Exchange Commission could be unbelievably intense. Somehow, it is hard to feel sorry Friedman and his associates. The plot is just another example of powerful people attempting to collude to game the system. In the meantime, the prospects of many American's retirement funds and the fortunes of average day traders hang in the balance, clinging to the belief that the markets are largely just and fair. For its part, Stratfor claims that some of the e-mails “may be forged or altered to include inaccuracies; some may be authentic.” However, to date, the company has not denied any of the content in the e-mails relating StratCap.