http://www.nytimes.com/2004/10/02/business/02ties.html

October 2, 2004

Inquiry Stymied on Company With Air Force Ties

By DIANA B. HENRIQUES

If you're a military officer, you can't miss First Command Financial Planning of Fort Worth.

It sells life insurance and investments to young officers serving around the world. Many of its executives and most of its agents were officers once themselves, and they let you know it. A parade of retired generals and admirals serve on its advisory boards. With more than 300,000 customers, virtually all of them current or former officers, the company depends on the military for its very existence.

And in a smaller way the military relies on First Command. The company, like others in this market, has long sponsored popular events like the Marine Corps Marathon and the Air Force talent show, Tops in Blue.

So First Command was not happy a year ago when it discovered that a legal office at Air Force headquarters had put out a notice asking military lawyers in the field for feedback on "reports of possible unethical or overly aggressive" sales practices by the company's agents. The notice also raised questions about the suitability of the company's core product, an archaic and expensive type of mutual fund with sales fees that eat up half of an investor's first-year contributions.

First Command fought back: it complained to the second-most-powerful general in the Air Force. And it was heard.

The New York Times has found that within three weeks of the legal office's posting, the Air Force issued a retraction, which it had allowed the company to edit. It gave the company a letter of exoneration, signed by the Air Force's top legal officer, after letting the company edit that, too. The Air Force legal staff stopped cooperating with a securities industry investigation into the company's practices and products. And the Air Force effectively abandoned a broad inquiry of its own, letting local base authorities handle complaints.

One complaint was about a First Command agent who had made veiled threats against a young officer in Charleston, S.C., suggesting he could be court-martialed or sued for criticizing the company in an e-mail message.

First Command's success in its face-off with Air Force lawyers was a stark illustration of how a company with strong military connections can influence the very people who are supposed to monitor its sales activities on bases.

One of those who felt that influence was Thomas L. Farmer, who, from his Pentagon office, worked on the First Command inquiry for the Judge Advocate General's Corps, which oversees the administration of justice and ethics for the Air Force. Mr. Farmer, who was a major at the time but has since left the service, said that neither the Air Force nor the company has acknowledged the chilling impact that the episode, especially the company-edited retraction, has had in the ranks.

"Most JAG officers would take it as an endorsement of First Command," Mr. Farmer said of the retraction. "Our being rebuked sends a message out to the field that 'well, they're not going to be able to help us' when it comes to this company." He added, "When we tried to tackle it, First Command could contact a four-star general and stop us, to the point where First Command is helping to write official Air Force material."

Mercer Bullard, president of Fund Democracy, an advocacy group for mutual fund shareholders' interests, said the episode underscored the danger of relying on the military to police the sale of financial products on bases.

"The JAG Corps is the most independent, most likely agency in the military to stand up to these companies," said Professor Bullard, who teaches law at the University of Mississippi. "If the JAG Corps can't do it, no one else in the military will be able to."

First Command maintains that in appealing to the top ranks of the Air Force, it was seeking fair treatment, not special treatment.

"What was put in that posting was inaccurate and unfair and harmed our company," said Lanny J. Davis, a Washington lawyer and former special counsel to the Clinton administration who represents the company. "Because we were concerned with getting a correction quickly, we couldn't afford the luxury of going up the chain of command to get a remedy. So we went as high as we could, to get it immediately."

The company went as high as Gen. T. Michael Moseley, the Air Force vice chief of staff. An Air Force spokesman, Col. Gary Halbert, said the general's role was "fairly routine," intended only to ensure that the company got a prompt and appropriate response. General Moseley, the colonel said, did not intend to discourage the Judge Advocate General's Corps from enforcing the rules that govern the sale of insurance and investments on military bases.

General Moseley himself said in a written statement: "Fighting and winning the global war on terrorism and providing support for our airmen are my top priorities. We have made and will continue to make every effort to protect our airmen from unscrupulous salespeople and fraudulent products."

Straight to the Generals

Three events prompted Mr. Farmer's office, the legal assistance and preventive law division, to send out the notice inquiring about First Command. The first was an e-mail message in early July 2003 from Vandenberg Air Force Base in California complaining that some First Command agents were using a senior officer's name without permission to get clerks to give them the telephone numbers of officer trainees.

A few weeks later, a brigadier general in the Air National Guard sent Mr. Farmer's unit a copy of an article from Kiplinger's Personal Finance magazine that criticized the expensive kind of mutual fund sold by First Command. Then the office received a request for information from NASD, the securities industry regulatory group, which had opened an inquiry into First Command.

The newsletter item, which also told field offices how to forward complaints to NASD, ran on Aug. 20, 2003, in the Judge Advocate General's Corps internal electronic newsletter, The On-Line News. And it caught the attention of the Air Force unit in San Antonio that oversees Tops in Blue, the touring Air Force talent show. Two days later, the program office asked First Command about the item. This was apparently the first the company had heard of it.

A spokesman for the judge advocate general, Lt. Col. Doug Murdock, said the item should never have gone beyond the JAG Corps. "Unfortunately," he said, "the article was interpreted as an indictment of First Command's business practices."

Lamar C. Smith, First Command's chairman and chief executive, was quick to respond. In an electronic memorandum titled "Thoughts," he acknowledged that the agent's threatening call to the young officer in Charleston "was an error and I will apologize for it." But he also expressed his anger, adding, "we have a real grievance" against the officer.

"Shall we pursue our own remedies?" Mr. Smith wrote. "If we do it will get harsh and expensive for the officer in a hurry."

The memo was sent to the Air Force by a senior vice president, Kurt B. Anderson, a retired Air Force general. A copy was obtained by The Times, as were copies of other documents for this article, including e-mail messages and handwritten notes of telephone conversations. Both the Air Force and First Command verified the authenticity of the documents.

Mr. Davis, the company's lawyer, said Mr. Smith's "Thoughts" had been written in the heat of the moment. But he acknowledged that Mr. Smith had been "upset and frustrated" with the Air Force and conveyed those feelings to senior officers.

One of them, the company said, was an old friend of Mr. Smith, Gen. Richard Brown 3rd, now retired, who was the acting assistant vice chief of staff. Mr. Smith then sent a letter of outrage to General Moseley, who had just become vice chief of staff. The letter, dated Aug. 28, cited the company's long support for Tops in Blue, condemned the Kiplinger's article and complained that the JAG item's author was "inviting others to join his war on First Command by filing complaints with regulators."

What the JAG staff should have done, Mr. Smith said, was report the Vandenberg complaint and any others to First Command.

The company would then have taken "instant and withering" action to discipline any agent involved, Mr. Smith wrote. He demanded that the JAG office run a "crystal clear retraction" and advise officers in the field that the item "should be disregarded."

The Order Is Retracted

A week later, the company said, another senior First Command executive, Rich Giles, a former Air Force captain, telephoned General Moseley, whom he had known for 30 years. And on Sept. 5, Mr. Smith followed up with a second letter to General Moseley warning that the company faced "the early stages of a 'wild fire.' ''

Mr. Smith's complaint moved down the chain of command from General Moseley to the judge advocate general, Thomas J. Fiscus. Two days later, General Fiscus called a staff member at home and loudly upbraided him for his staff's handling of the First Command inquiry, notes in the JAG files show. He cited the letters and calls to General Moseley and warned of possible litigation.

Colonel Murdock, the JAG spokesman, said the general was "reacting to his discovery that there were very limited complaints" behind the office's original inquiry.

The staff was now directed to draft a retraction for the newsletter. But its language did not satisfy General Anderson, the First Command executive, who was allowed to edit the item. His version, published almost verbatim on Sept. 10, 2003, said that "virtually no negative information about First Command has been received" as a result of the original item.

First Command was allowed to edit the retraction because the Air Force believed that was appropriate "to resolve the unfair impact" of the item, Colonel Murdock said.

On Sept. 18, First Command got the letter of exoneration it had demanded. The letter, too, was edited by the company, Colonel Murdock said. One change, though small, was significant. The Air Force's draft said the original item had been prompted by "complaints." First Command proposed changing that to "a single complaint." Lt. Col. Timothy Guiden, Mr. Farmer's boss, opposed the change, noting that four problems had been reported. He was overruled, the documents show.

The letter "tried to correct the record for their customers, undo any harm that had been done and level the playing field," Colonel Murdock said. But military documents confirm that complaints continued to arrive, both in writing and made orally to General Fiscus. (He temporarily stepped down last week pending the outcome of an unrelated Air Force investigation.) In each complaint, agents appeared to be trying to use "command influence," the power of senior leaders to sway junior officers, on First Command's behalf.

Only the incidents at Vandenberg and Charleston were ever reported to First Command, the company said. Its only disciplinary response was to counsel the agent in Charleston, said Mr. Davis, the company's lawyer. The Air Force said that none of the other complaints had revealed any systemic problem and that all had been resolved at the local base level. None were passed along to NASD, either.

"After we got slapped down in such a public manner, continued cooperation with the NASD was off the table," Mr. Farmer said.

NASD has nevertheless pursued its inquiry, which has been joined by the Securities and Exchange Commission and should be concluded soon, Congressional aides say.

Since The Times first examined First Command's practices in a two-part series in July, the company has come under scrutiny in Congress. Lawmakers are considering legislation to abolish the type of mutual funds the company sells and require the military to coordinate more closely with civilian regulators.

There was one small coda. In January, First Command notified the Air Force that it would no longer provide $150,000 a year to sponsor Tops in Blue. The company said the decision was based on "marketing considerations." But one Air Force executive attributed the loss directly to the JAG office's initial newsletter query about First Command. In an e-mail message to General Fiscus last Jan. 30, the executive wrote: "This is 'water under the bridge' but wanted you to know the consequences of the article."