FOREIGN INVESTMENT ACT OF 1975

THURSDAY, MARCH 6, 1975

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, SUBCOMMITTEE ON SECURITIES, Washington, D.C.

The subcommittee was reconvened, pursuant to adjournment, at 10:15 a.m. in room 1318, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr., chairman of the subcommittee, presiding. Present: Senators Williams and Javits (by special invitation of Senator Williams).

Senator WILLIAMS. We are continuing our hearings this morning on S. 425, the Foreign Investment Act of 1975.

It was announced yesterday that a member of the staff has investigated a west coast company that received some attention from the press 3 or 4 weeks ago. Mr. Howard Menell of the staff investigated that for the subcommittee, as it was reported to be in the area of our concern. We talked about legislation dealing with foreign investments and for the record, Mr. Menell, we are asking you to report your findings from your investigative trip to the west coast.

STATEMENT OF HOWARD A. MENELL, ASSISTANT COUNSEL, SENATE SUBCOMMITTEE ON SECURITIES

Mr. MENELL. Thank you, Mr. Chairman.

As you said, this morning I am appearing to report to the subcommittee the results of an onsite investigation I conducted last week in its behalf into certain affairs of the Vinnell Corp., of Alhambra, Calif.

The Vinnell Corp. was awarded a $77 million, 3-year contract by the U.S. Army Materiel Command. Under the contract, Vinnell's Technical Services Division will train Saudi Arabian National Guard troops. Since the Department of Defense first announced the contract award early last month, considerable debate has centered on the use of an American company, with civilian employees, to train another nation's armed forces.

The subcommittee authorized the investigation of Vinnell in connection with the hearings on S. 425 after the disclosure that voting control of Vinnell, a privately held firm, would pass to a group of investors which included a foreign investor.

Unable to ascertain answers to questions concerning the ownership and activities of Vinnell from the Defense and State Departments, I was authorized and instructed by Senator Williams to determine the (283)

49-480 - 75 - 19

actual present and proposed future ownership of Vinnell Corp., and specifically to investigate reports that a substantial percentage of Vinnell stock would pass to a Lebanese banker under the terms of a proposed corporate refinancing.

The investigation was conducted in Los Angeles, Calif., on February 23, 24, and 25. I interviewed officials and reviewed public and nonpublic documents at the California Department of Corporations. I also interviewed Mr. John Hammill, president of Vinnell Corp., and Mr. E. R. Baldwin, an officer and director of, as well as counsel to, Vinnell.

In addition, I inspected corporate books and documents which were made available to me upon request.

First, I will give some background information about Vinnell, since little is known about its activities.

The company was incorporated in 1945 in California, and was and remains privately owned. It considers itself a heavy construction company, and has built dams, powerplants, airfields, highways, and pipelines abroad, as well as in the United States.

Through its Technical Services Division, Vinnell has built, operated, and maintained military stations, air bases, missile sites, and power generation and transmission systems. Its foreign operations are substantial and appear to center in Southeast Asia.

Of its eight operating divisions, only the Technical Services Division appears to be of interest to the subcommittee. It is this division. that will administer the military and tactical training and modernization of approximately 3,600 Saudi Arabian National Guard troops, both in the United States and in Saudi Arabia. This Saudi contract is one of the largest ever undertaken by Vinnell, whose former and present clients include various agencies of the U.S. Government, including the Army Corps of Engineers, the Army Materiel Command, the Army First Logistical Command, the Army Mobility Equipment Center, the Coast Guard, the Defense Supply Agency, the International Cooperation Administration, NASA, and the U.S. Navy. Vinnell's long history of Government contracts, and sometimes sensitive and classified projects in Southeast Asia, Saudi Arabia, and Iran, have fueled speculation that Vinnell has direct ties to the Central Intelligence Agency. By coincidence, this was specifically raised in a New York Times article which was published when I was at Vinnell's headquarters. In addition to suggesting a Vinnell-CIA link, this New York Times article further cited statements by spokesmen for the Indochina Research Center here in Washington that Vinnell employees had done interpreting work for the United States in interviews with Vietcong prisoners.

When raised with Mr. Hammill, he emphatically denied both of the allegations.

Turning next to the area which is of most concern to the subcommittee, the present and proposed future ownership and management of Vinnell, Vinnell is a company with serious financial problems. Financial statements I inspected indicate that the company has incurred net losses in all but one of the last 5 fiscal years, and further, that it has a negative net worth and serious cash flow difficulties.

To improve its financial condition, the company has proposed a complicated refinancing plan.

Of far more importance to the subcommittee than the terms of the refinancing is the prospect that a foreign investor, Mr. Ghassan I. Shakir, may become a significant stockholder in Vinnell.

In the original application on file with the California Department of Corporations, Mr. Ghassan I. Shakir is listed as residing in Beirut, Lebanon, and employed as president of Banque de Liban et d'Outre Mer. Furthermore, his participation in Vinnell under the terms of the refinancing is indicated to the maximum extent of $125,000, or enough to acquire 16.6 percent of Vinnell's common stock outstanding at the close of the refinancing plan. Confidential files which I reviewed yielded no further information about Mr. Shakir's background or his identity.

As illustrated by Senator Williams' opening statement and the discussions Tuesday and yesterday, there may be dangers associated with the foreign ownership of a defense contractor such as Vinnell. Accordingly, the actual ownership, both present and proposed, of Vinnell, and the extent of any involvement in its management by foreign persons or governments, is of special interest to the subcommittee.

According to current lists of Vinnell shareholders, the officers and directors, with the exception of a Canadian citizen who owns a fraction of the total outstanding common stock, no foreign investors now own or are involved in the management of the corporation. Aside from the Charter Oaks Foundation, Vinnell's principal stockholder, owning some 85 percent of the now outstanding common stock, the rest is held by directors and officers and former employees and widows of former employees.

Of course, this would not be the case if the proposed refinancing is completed in accordance with its original terms. Mr. Shakir's indicated participation would allow him to become a significant stockholder. Accordingly, I investigated Mr. Shakir's background and his possible relationship to Vinnell and its management.

From Mr. Hammill, president of Vinnell, I learned that Mr. Shakir is an international businessman who spends much of his time in London and Beirut. I was told further that Mr. Shakir first expressed interest in investing in Vinnell about a year ago when the company began formulating its refinancing plans. In addition, Mr. Shakir has completed and returned to Vinnell a questionnaire which contains information about his financial ability and investment experience to undertake a risky investment of this kind. Finally, I learned that Mr. Shakir had been sent an offering circular and a subscription agreement. It appears that Mr. Hammill, president of Vinnell, and Mr. Shakir have a longstanding personal relationship. However, upon questioning Mr. Hammill to ascertain further information about Mr. Shakir, I found him either unable or unwilling to yield further information.

It is interesting to note that the day I visited Vinnell, Mr. Hammill was in the process of responding to an inquiry from the Army Mobility Command. This is the program manager of the Saudi Arabian contract for the Defense Department. Because the subcommittee's inquiry is on the same point-that of the potential involvement of a foreign investor-I will quote directly from Vinnell's response to the Army:

As of this date, no subscription agreement has been received * and in the event he-Mr. Shakir-does submit a subscription agreement, Vinnell has yet to decide whether or not to sell him the stock. Except for the interest expressed

by the Lebanese businessman, no other foreigners have expressed an interest in the possibility of participating in the purchase of Vinnell Corporation Stock, nor is it contemplated that any other foreigners would be invited to participate.

Since returning from California, I have learned of two further developments that may be of interest to the subcommittee concerning Mr. Shakir.

First, Mr. Shakir has returned his subscription agreement unsigned, and, I am told by Vinnell's counsel, unopened. Thus, by his own choice, he will not participate in the refinancing, and therefore he will not become a Vinnell stockholder-a stockholder of this defense contractor.

Moreover, at separate meetings of Vinnell shareholders and directors last Friday, the corporation has decided to amend its original stock application with the California Department of Corporations to remove Mr. Shakir's name from the list of prospective purchasers. This amendment is to be filed sometime this week.

That is the extent of my prepared remarks, Senator Williams. I would be happy to answer any question which you may have.

Senator WILLIAMS. Now, that is a very clear and penetrating report of investigation.

The present stock of the company is privately owned now, you say? Mr. MENELL. Yes.

Senator WILLIAMS. That means that the shares are not listed on any exchange.

Mr. MENELL. Right.

Senator WILLIAMS. Does the refinancing plan anticipate a listing of the stock?

Mr. MENELL. No; the refinancing is in the form of a private offering to a limited number of relatively sophisticated investors. The investment group would be primarily composed, with the exception of Mr. Shakir and another outside investor who has also withdrawn from the financing of Vinnell officers and employees.

Senator WILLIAMS. What was the original capitalization?

Mr. MENELL. They intend to raise $12 million from the sale of equity stock.

Senator WILLIAMS. And

Mr. MENELL. Of this, the investors' group was to account for $500,000. That group consists, still, of mostly Vinnell officers and directors. As a matter of fact, with the withdrawal of Mr. Shakir and another outside investor, I believe the company will find it difficult to raise the $500,000 from the remainder of the investment group.

Senator WILLIAMS. Now, is it a matter of State law that notwithstanding obvious discussions and negotiations between the company and Shakir, he still had to receive an offering questionnaire?

Mr. MENELL. Yes; because of the risky and speculative nature of the investments, in light of Vinnell's financial condition. In order to protect itself under both State law and Federal securities laws, investments of this type are accompanied by detailed information about the company in which the investor may make a substantial investment. Senator WILLIAMS. And the questionnaire that went to Shakir, you were told, was returned unopened?

Mr. MENELL. The questionnaire was returned. The required information was supplied by Mr. Shakir and returned to the company. All that does is indicate some very sketchy material about Mr. Shakir's

identity, residence, net worth, employment, and other investments. That was executed and returned to the company.

And it enabled the company to make a determination that it would be interested in pursuing further the possibility of an investment by Mr. Shakir.

They then sent him an offering circular, something similar to a prospectus, which is what he returned unsigned and unopened. Senator WILLIAMS. Oh, I see. It was called a subscription agreement?

Mr. MENELL. Yes, sir.

Senator WILLIAMS. This was returned unsigned and unopened? Mr. MENELL. That's right. That is my understanding although I have not seen it. It was returned after I left Los Angeles.

Senator WILLIAMS. Did you determine what Mr. Shakir's other business activity was?

Mr. MENELL. Aside from being listed as president of a Lebanese bank, the confidential information that I had access to, copies of which are in the subcommittee's possession, revealed no further information.

Apparently the U.S. Army, which is responsible for administering this particular Saudi Arabian contract, is also making inquiries into Mr. Shakir's investment in Vinnell.

The reason that I was sent to California was that neither the State Department here in Washington nor the Defense Department either had in its possession any information about Mr. Shair or was unwilling to make available to the subcommittee such information.

Senator WILLIAMS. By the way, what was the contract price on this training?

Mr. MENELL. The contract which was signed between the Saudi Arabian Government and the State Department involves an amount much larger than the contract that was let to Vinnell. Vinnell is responsible for only $77 million of the total amount involved.

Senator WILLIAMS. You said the contract was with the State Department. Now let me understand. Who is the contracting agency?

Mr. MENELL. The State Department, acting on behalf of the U.S. Government, entered into a memorandum of understanding some years ago with the Saudi Arabian Government, covering the Saudi Arabian National Guard modernization program. Major services expected to be provided include the development, construction, management, and operation of communications, training, logistics and maintenance support facilities. The plan calls for equipping and training four mechanized infantry battalions and one light field artillery battalion. The modernization program covers training and equipping of approximately 3,600 Saudi Arabian National Guard troops. This strength consists of 3,000 mechanized infantry troops and 600 field artillery troops.

A day or two ago it was announced that we had entered into a contract to sell some $15 billion worth of nuclear technology, among other things, to certain Middle Eastern countries. I assume that arrangement was the result of a similar memorandum of procedures.

Vinnell received this contract under a competitive bid basis from the Department of Defense, who is responsible for administering the U.S. side of the Saudi Arabian memorandum of understanding.