FROM THE PRINT ISSUE: JUST A GIGOLO. Everyone's talking about George Allen today. No doubt the man has some ethnic sensitivity issues. And as our own Garance Franke-Ruta details in the Prospect's September issue, the Virginia senator has got some business issues too: In the 1990s, he served on the board of a Virginia tech firm called Xybernaut Corp. Xybernaut manufactured and marketed a product as sci-fi-like -- and dubious -- as the company�s name: a wearable hands-free computer headset, with a little screen that flips down in front of one eye. The product barely ever sold, and the company's rise in the go-go '90s was fueled by seedy financial backers and offshore front groups -- all while Allen served on the board. Xybernaut is currently embroiled in an array of class-action lawsuits and an SEC investigation.
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.
Read the whole thing here.