The late 1990s were heady times for technology companies in Virginia. The future looked bright, and arguably nowhere more so than in Northern Virginia's new technology corridor, where boxy, smoked-glass structures filled with well-capitalized startups sprouted by the dozens along the highway leading from Washington, D.C., to Washington Dulles International Airport. While California had Silicon Valley and New York had Silicon Alley, Virginia's Fairfax County featured this stretch of buildings surrounded by dogwood trees and neatly clipped lawns -- a place where, at the time, it did not seem far-fetched that people might one day want to buy Borg-like wearable computers with a little screen they could flip down in front of one eye that would allow them to work hands-free.

As Virginia's governor until early 1998, George Allen did his best to help promote the state's burgeoning technology sector, which was why his office sponsored a 15-day business-promotion trip in June 1997 through Germany, Denmark, the Netherlands, and Great Britain. Officials from the company that planned to one day sell those wearable, flip-screen computers -- the futuristically named Xybernaut Corp. -- came along in hopes of finding new business opportunities. Xybernaut had completed a successful initial public offering just a year earlier, and, by the end of the government-sponsored junket, Allen was able to announce that Xybernaut had licensed its technology to sbs Software Center in Germany to develop a hands-free unit in Europe.

“The support given to Xybernaut by the Commonwealth, and especially Governor Allen, has greatly aided the rapid consummation of both manufacturing and software capabilities that we believe will allow Xybernaut and its ‘see-and-speak' technology to dominate the computer marketplace,” Steven Newman, the company's executive vice president, declared in one of many optimistic press releases.

Even before leaving the governor's mansion, Allen made his ambitions to run for the United States Senate in 2000 plain. By spring of 1998, he was waxing enthusiastic about the prospect of seeking a Senate seat: The Senate, he told The Washington Post, is “the best board of directors in the world.”

And on August 11, 1998, he joined a real board of directors -- Xybernaut's -- where he would serve until December 2000. Upon his nomination, he extolled the firm's potential, crowing: “This is not science fiction -- the future is here now!”

But today, as Allen runs for re-election to “the best board of directors in the world” and mulls a candidacy for the Republican presidential nomination in 2008 with the encouragement of conservative insiders, who see him as the affable heir to George W. Bush, troubling questions have emerged about his tenure on the Xybernaut board -- which didn't turn out to be one of the best.

Little remains of the company except a pile of legal cases, federal investigations, and the faint imprints of furniture and footprints on the worn expanse of dark blue carpet at its longtime Fairfax offices, which have sat empty since early this year. (The remnants of the company, which employed more than 140 people at its peak but just 15 as of its last SEC filing, have moved to Chantilly, Virginia.)

Xybernaut filed for bankruptcy reorganization in July 2005, three months after an announcement by an audit committee of its board that an internal investigation -- established that February at the urging of a whistle-blowing company insider -- found that the firm's chief executive officer and board chairman, former CIA agent Edward Newman, and his brother, president and chief operating officer Steven Newman, had “improperly used substantial company funds for personal expenses,” engaged in major unreported transactions, and hired family members whose roles with the company were not properly disclosed, in violation of its bylaws. Edward Newman's attorney declined comment for this story, but Steven Newman predicted vindication in 2005 press reports. Unable to stand by its books in the wake of the audit committee's revelations, Xybernaut in 2005 had to warn shareholders that its financial statements and disclosures dating to 2002 were unreliable.

By February 2005, the Securities and Exchange Commission had already launched an investigation into sales of Xybernaut stock by company insiders, including some officers, though no complaint has yet been filed. (An SEC spokesman declined to comment on the matter.) The U.S. Attorney's Office for the Eastern District of Virginia also reportedly opened an investigation into Xybernaut's business activities in 2005, and shareholders filed multiple class-action lawsuits against the company and some of its officers and directors (those cases are now being consolidated in Virginia but are largely on hold until the resolution of the company's bankruptcy case).

There's no evidence that Allen did anything illegal, and he has not been named in any of the shareholder suits, which post-date his tenure on the board. Yet Xybernaut clearly engaged in questionable activities -- and did plenty of business with questionable characters -- while Allen was a director with a responsibility to protect shareholders' interests. Xybernaut's rise, indeed, was driven by some of the financial industry's seediest bottom-feeders -- questionable stock touters, offshore front groups involved in money laundering, and foreign financiers linked to short-selling, securities fraud, and, in 2005, the collapse of a major Wall Street brokerage firm. Driving Xybernaut upward as well were the determined efforts of its officers to promote and sell the company's stock to unwitting small investors, even as the company's fundamentals spiraled ever more out of control. It became clear that no market for its products would emerge. And Allen's affiliation with the company should now raise questions about whether he deserves to retain his other seat -- the one on the best board of directors in the world.

* * *

Warning Signs

Xybernaut's problems date as far back as its debut as a publicly traded company. Founded as Consumer Products & Services in 1990, the company changed its name to Xybernaut less than a month before its July 18, 1996, initial public offering (IPO) after merging with a Delaware-based company of that name.

Signs of trouble were soon apparent. The brokerage company that underwrote Xybernaut's IPO, Kensington Wells Inc., was targeted in a regulatory crackdown in 1997 and closed that year. That firm's top executives were eventually sent to prison, following a series of felony convictions surrounding three unrelated IPOs involving schemes to inflate the value of the firms' stock and launder profits back to themselves through front groups based in the Caribbean. In 2001, prosecutors in the Eastern District of New York extended their investigation to include Kensington's role in the Xybernaut IPO. Former Kensington Wells president Elias Tacher is serving a nearly five-year term in a minimum-security prison in South Florida.

The underwriting partner of Kensington Wells in the Xybernaut IPO, Long Island– based Royce Investment Group, encountered similar difficulties. Royce's former chief executive and chairman, John Marciano, remains free on $1.5 million bond and was in plea negotiations earlier this year with prosecutors from the U.S. Attorney's Office for the Eastern District of New York on 15 counts of money laundering in a scheme involving Xybernaut stock. Royce has ceased operations. Marciano, who was working earlier this year at a Bentley car dealership on Long Island, has called the charges “baseless.” A trial is set for 2007.

No Xybernaut officers or past or present board members have been named in the IPO securities manipulation and money-laundering cases, but those company officers, directors, friends, and family members awarded stock in the IPO deal benefited from the manipulations of Royce and Kensington Wells. By creating an artificial demand for the stock, the market makers drove up the price. And the company gained substantial financing that the market otherwise might not have provided. The IPO raised more than $13 million for the company.

Xybernaut officers should have been aware of Royce's reputation in financial circles when they chose it for their IPO in the mid-1990s, say industry insiders. “They're the bottom-of-the-barrel kind of firm,” says Jacob Zamansky, a prominent securities fraud lawyer in New York. “When you're dealing with a Royce, you've got a very close personal relationship with a third-tier underwriter.”

Xybernaut also saw some of its biggest boosters in the investment community nabbed by the long arm of legal and regulatory authorities years after their relationships with Xybernaut ended, in a kind of echo-boom of charges and cases that's blossomed from the boom-era activity. Two former touters of Xybernaut stock have since been accused by the SEC of fraudulent activities relating to publicly- traded securities, though not Xybernaut. Christina S. Kohlhaas of CSK Securities gave Xybernaut a “strong buy” recommendation and was granted stock by Xybernaut in 1996 (before Allen joined the board). In 2002, she, as Christina Skousen and CSK Securities Research, were enjoined from further securities violations without admitting guilt as settlement of an SEC complaint charging her with writing several “fraudulent research reports” between 1999 and 2002. Meanwhile, Mark Bergman, a director of investor relations at Xybernaut during Allen's board tenure, and a founder of financial public relations firm Access 1 Financial, was named in a 2002 SEC complaint as part of “a massive stock fraud in the NASDAQ Over-The-Counter securities market” for his work touting Environmental Solutions Inc., in what the SEC characterized as a stock “pump-and-dump” scam.

In early 2000, Bergman's Access 1 Financial had also given Xybernaut a “strong buy” recommendation, Howard Kurtz recounts in The Fortune Tellers: Inside Wall Street's Game of Money, Media, and Manipulation, and predicted the firm's stock price “would double within six months.” Xybernaut boasted of the Access 1 “strong buy” recommendations in February, March, and April 2000. The stock zoomed more than 300 percent in value that year, peaking at $29.97 on March 2, 2000. The firm neglected to mention that Bergman wrote his reports for companies that paid him, and not as a credible financial analyst.

Another promoter of the company's stock, the Donner Corp., ran afoul of professional licensers earlier this year. Later renamed National Capital Securities Inc., the Donner Corp., its president, Jeffrey L. Baclet, and research analyst Vincent Michael Uberti were charged by the National Association of Securities Dealers (NASD) with issuing 25 reports between March 1999 and May 2002 that “contained fraudulent, exaggerated and unwarranted statements, and failed to include critical information about numerous companies' financial and business operations,” according to an NASD release, and also for failing to disclose that Donner had been paid by 51 companies it was touting, including Xybernaut, to prepare positive statements. According to a 2006 NASD decision, two of the reports written by the company included a “speculative buy,” issued October 12, 1999, and a “buy” recommendation, issued January 24, 2000, on Xybernaut (during Allen's tenure). The NASD ultimately expelled Donner from its ranks and barred Baclet and Uberti from participation in it.

Xybernaut also failed to pay employee withholding taxes in 2000, leading the Internal Revenue Service to file a lien against the company for $1.13 million in back taxes in January 2004. Company president Steve Newman called the IRS complaint “absolutely without merit” that year.

Much of this mischief took place while Allen was on Xybernaut's board. Allen refused repeated requests to discuss his relationship to Xybernaut, but some experts believe that, at best, the board was asleep at the wheel. “It's possible that those sorts of things could have gone on without a board of directors knowing about it, but it's unlikely that a properly functioning board of directors would miss all of that,” says David Skeel, a corporate law specialist at the University of Pennsylvania Law School and author of Icarus in the Board Room: The Fundamental Flaws in Coporate America and Where They Came From. “At some point there are enough red flags that a properly functioning board of directors should have a sense that something is going wrong.”

* * *

Selling Stock, Not Product

There were still further signs of trouble in the years after Xybernaut went public. The company wound up selling so much more stock than mobile computing devices that it ultimately became a joke in the business press, derided for its stock “printing press.” Its products never caught on, despite a marketing and advertising budget that grew to nearly $9 million by 2000. Between its founding in 1990 and 2005, the company sold only 10,000 mobile computers, according to The Washington Post, while racking up losses of $162 million, and issuing 200 million shares of stock. In September 1999 -- also during Allen's board tenure -- the company's accounting firm, PricewaterhouseCoopers, issued a dreaded “going concern” letter with a grim assessment of the company's financial health. (A going concern letter is how accountants officially express substantial doubt about a company's ability to continue in business.) But rather than heeding the warning, Xybernaut fired PricewaterhouseCoopers, replaced it with Grant Thornton LLP, and ramped up the pace of its stock sales.

“As far as I knew they had gone down the right avenues and had gotten some good funding,” says Christine Kallivokas, vice president of operations for the Northern Virginia Technology Council, which helped promote Xybernaut over the years. “We viewed them as a very strong growth company.”

Starting in 2000, however, Xybernaut increasingly turned to a newly popular financial instrument to keep growing -- and going: so-called PIPE deals, short for “private investments in public equity.” In such deals, private investors are granted warrants or convertible debentures for stock at below-market rates in exchange for financing. All the investor has to do to make money is sell the stock. But some sleazy PIPE financiers go a step further by shorting the stock of the companies they finance, driving down share prices, diluting the shares of other investors, and even -- in a particularly egregious form of illegal short selling known as the “death spiral finance scheme” -- driving the company into bankruptcy through aggressive rounds of financing and short selling. Between March and November 2000, Xybernaut went from 1 percent to more than 15 percent owned by institutional investors who acquired their stock in the company through private deals, according to media reports.

“It really rode the Internet bubble, and it was real hot stuff,” recalls Gregory Sichenzia, of Sichenzia Ross Friedman Ference LLP, a law firm that specializes in securities and PIPE transactions, which he described as an increasingly traditional financing mechanism. “It's not the fault of the financing that the company collapsed.”

Several firms that financed Xybernaut during Allen's tenure on its board, however, have since been linked to a complicated international network of troubled financers and brokers. For example, in April 1998, Balmore Funds SA and Liechtenstein-based Austost Anstalt Schaan signed a private placement deal with Xybernaut granting the firm up to $11 million. One of their registrations of stock for sale came April 4, 2000 -- shortly after the March price peak and a period of unusually high volume trading, which was followed by yet another “going concern letter,” in mid-March, and a decline in the stock price. The signatory for Austost Anstalt Schaan was Thomas Hackl, who was from 1991 to 2002 head of treasury at BAWAG, the fourth largest Austrian bank (itself somewhat controversial for losing millions in the financing of Yasir Arafat's casino outside Jericho). TheStreet.com has linked BAWAG to Austost and also to the hedge fund Alpha Capital Aktiengesellschaft, which invested in Xybernaut in 2001. Last year Hackl became a major figure in the collapse of Wall Street brokerage the Refco Corp., where he was executive vice president, in an accounting scandal that wiped out more than $1 billion in shareholder value. Last fall, Time magazine also linked Austrian investor Thomas Badian -- for whom an arrest warrant (ultimately dropped) was issued in the United States in 2003, and who has been accused of playing a role in the “death spirals” of a host of other companies -- to Refco, through which he had been making some of his trades. Badian has been charged in the Southern District of New York with ordering the illegal short selling of the stock of software company Sedona by unknown offshore entities through his brokerage, Rhino Investments, in 2000 and 2001; Badian and Rhino agreed to pay civil penalties without admitting or denying the allegations. Badian has no apparent connection to Xybernaut. But a host of reporters and regulatory authorities are investigating the linkages between these brokers and funds -- as well as sources of their capital -- in the wake of the Refco collapse.

* * *

Dubious Characters

Over the years, Balmore Funds and Austost Anstalt Schaan both invested in a surprisingly large number of the same companies, according to SEC records. In addition, former Xybernaut board member Phillip E. Pearce sat on the board of two of those other companies: Starbase, which drew financing from Balmore, and Imaging Diagnostic Systems Inc., of Plantation, Florida, which drew financing from both.

“What we know about finance is that's it about who your connections are,” says Donald C. Langevoort, the Thomas Aquinas Professor of Law at Georgetown University, and a former special counsel to the SEC. “Normally when somebody with financial connections is brought onto the board, they are brought on for those connections, so the fact that they bring a book of business with them, that's what you get.”

Other entities that financed Xybernaut during Allen's board tenure have since been charged with involvement in securities manipulation as well. David Sims signed Xybernaut's pipe deal with Forest Ave. LLC in the Cayman Islands; he was charged in 2003 with illegal short selling.

Despite the plethora of dubious characters surrounding Xybernaut, the true identity of many of the company's financiers remains obscure. In the company's heyday, its officers claimed to have the support of major Wall Street firms, but that was more hype. What SEC records show instead is that during the company's 16-year history, it relied heavily on offshore firms for financing. And during Allen's board tenure, it received the vast bulk of its money from outfits based in the most notorious havens for tax cheats and money launderers: the Turks and Caicos, the Cayman Islands, the British Virgin Islands, the Bahamas, Liechtenstein, and Israel.

“Several of those things aren't necessarily indications of misbehavior, but cumulatively it doesn't look good,” notes Skeel. Trial lawyer James W. “Wes” Christian has been fighting the network of offshore firms whose stock manipulations he alleges damaged Sedona and dozens of other firms. “In every company without exception that we represent, we found a rat,” he says. “We found that the lawyers that these companies used were actually lawyers for the bad guys.” And, he says, there was also usually an insider on the board of directors who helped make sure the manipulative deals went down. “These guys put someone on the board because it's a way to monitor things.”

Whether Xybernaut knew what it was getting into when it sought out the offshore financiers remains unclear. The company approached Christian's legal team in 2005 about joining its network of fraud cases, he says, but the talks quickly fell apart in a disagreement over fees. What is clear about Xybernaut, Christian says, is this: “Their stock was manipulated both up and down to allow offshore companies, including hedge funds and financial investment funds, to make millions of dollars at the expense of poor innocent investors who paid for their shares with their hard-earned money that ultimately, because of such manipulation, became worthless.”

* * *

Allen: A Financial Gigolo?

Xybernaut was always clear about why its management wanted Allen on the board. He represented legitimacy and access. “George Allen, the former governor of Virginia and candidate for Senate in 2000, is on Xybernaut's board of directors and is very helpful in dealings with government,” company CFO John Moynahan wrote to the Xybernaut Corp. Yahoo! Group, an investor forum, in 1999. Moynahan repeatedly touted Allen -- “former governor of Virginia and candidate for U.S. Senate” -- on the message board as one of the company's strengths. On November 8, 2000, the day after Allen won his Virginia Senate race, Moynahan informed the Yahoo! Group investors about his pending departure under Senate conflict-of-interest rules, saying, “While his contributions to the board will certainly be missed, I believe that our shareholders are better off with a staunch supporter of Xybernaut in the U.S. Senate.”

There's no proof that Allen did anything for the company as senator. In addition, he never profited significantly from his board service. During his tenure on the board, Allen was granted 110,000 options of company stock that, at their peak, were worth $1.5 million, but he never exercised those options, which expired 90 days after he left the board, and made almost no money from the stock, according to his communications director, John Reid.

But three things seem clear. First, he did benefit in indirect ways from his association with the company: Allen's law firm did work for Xybernaut while he was on the board, and its officers contributed to his campaigns. While Allen was serving on the Xybernaut board, he was also a partner at the prestigious Richmond-based law firm McGuire Woods LLP. In 1998 and 1999, the firm billed $315,925 to Xybernaut for legal work and was also granted 1,996 shares of stock in lieu of payment for services rendered. According to a disclosure form candidate Allen filed on May 12, 2000, he earned $450,000 from McGuire Woods from January 1999 through April 2000. During much of that time, the firm was doing work for Xybernaut.

In addition, Xybernaut officers -- four directors, an advisory board member, the comptroller, and an officer's wife -- donated a total of $10,750 to Friends of George Allen in 1999 and 2000. After Xybernaut retained McGuire Woods to handle its more current legal problems in May 2005, McGuire Woods staff donated $32,500 to Friends of George Allen that very month -- compared to $31,625 during Allen's entire two-year 1999-2000 Senate campaign.

Second, Allen helped Xybernaut stay politically well-connected and in the good graces of the Virginia technology community -- despite its increasingly questionable associations in the finance and investment world. On Election Day 2001, for example, losing Virginia Republican gubernatorial candidate Mark Earley chose to forgo the traditional Election Day rally or press conference in favor of a visit to Allen's former firm. Earley attended -- and was photographed at -- a demonstration of Xybernaut's technology at the company's Fairfax headquarters. Joining him were Allen, outgoing Virginia Governor James Gilmore III, Senator John Warner, and Congressman Frank Wolf, all Virginia Republicans.

That Election Day demo session must have made a particular impression on Gilmore, who went on to join the Xybernaut board. But by then the jig was up: “Xybernaut stays flat despite Gilmore aid,” Tim Lemke reported in The Washington Times. “Even a former governor couldn't inject life into the stock price of Xybernaut Corp. last week.”

But if he had, Gilmore would have filled the part that Allen played before him, which brings us to the third conclusion about Allen's relationship with Xybernaut. What sort of board was this -- and what sort of director was he -- to allow these shenanigans to go on while they were allegedly (as board directors are supposed to do) protecting the interests of the shareholders? Did Allen know that the company was selling far more stock than actual computer units? Was he aware of the reputations of the some of the firms that arranged financing? What did he know about the firing of PricewaterhouseCoopers after it had the audacity to tell the truth about the company's financial health? Did he privately express any concern about the company's actions? And how long did he continue to promote such an obviously shady operation?

During the Great Depression, the late Supreme Court Justice William Douglas coined the term “financial gigolo” to describe someone with a prominent name who serves on a board of directors in order to add a veneer of respectability to a questionable enterprise. It's a term of derision that could have found new meaning in dot-com boom era Virginia.

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