Lawsuit Blames Government-Industry Collusion for Slew of Potential Sales

Tel Aviv
, Israel —


srael’s Ministry of Defense and some of the country’s leading industry executives repeatedly squashed Venezuelan bids to buy high-resolution commercial

satellite imagery, twice by sabotaging potential procurement deals and more recently by ignoring a personal offer by President Hugo Chavez to buy a significant stake in ImageSat International (ISI), a local satellite imagery firm, according to a lawsuit filed July 2 in the U.S. District Court in Manhattan.

In their lawsuit, the ISI minority shareholders accuse major investors and the firm’s current management of “spurning lucrative … opportunities in Venezuela in order to devalue the company [Imagesat].”

The plaintiffs represent a cross section of minority shareholders in ISI, including members of the founding management and some other former company employees. The plaintiffs note that they invested millions during “Imagesat’s highest risk start-up and development stages and at times when the company was in financial crisis, for which they received common or preferred shares or bridge warrants.”

Although Imagesat is a Netherlands Antilles company now headquartered in Israel, the plaintiffs contend they have standing in U.S. courts because the company regularly does business in New York.

Their 197-page complaint provides a rare glimpse beyond the veil obscuring most sensitive international business deals, and chronicles intimate details surrounding nearly seven years of foreign trade negotiations. It provides names, dates, copies of contracts and electronic mail communications, as well as a behind-the-scenes account of the geopolitical and defense considerations influencing military and dual-use trade.

Prior to the complaint’s entry into U.S. public record, ISI had adamantly refused even to identify current or prospective strategic operating partners. But as the lawsuit reveals, ISI entered into such exclusivity agreements with India, Taiwan and Angola, the latter two of which were later terminated by customer demand.

In the Venezuelan case, the plaintiffs allege that from 2001 through late 2006, ISI management, Israel Aerospace Industries Ltd. (IAI), Elbit Systems Ltd.

and other major shareholders of Imagesat “sabotaged and recently flat-out rejected the opportunity to sell satellite imaging services” to Venezuela


According to the complaint, IAI sought to secure the bulk of the Venezuelan Air Force’s available budget for its own “high-tech intelligence program” and proposed upgrades to Venezuela’s

F-16 and Mirage fighter fleets instead of imagery purchases.

According to the complaint, ISI began exploratory talks with Venezuela in 1999, about a year after obtaining a

Ministry of Defense license to sell imagery generated from the Eros-A, a commercial version of Israel’s Ofeq-3 spy satellite.

By 2002, Venezuela had

earmarked funding for the exclusive rights to the Eros footprint, meaning all imagery captured within an approximately 2,500-kilometer radius of the Venezuelan ground station. However, the lawsuit alleges that misinformation provided to Venezuela by IAI, but withheld from ISI’s Caracas-based representative – a lead plaintiff and founding executive of the satellite firm – prompted a reprogramming of the funding that had been earmarked for buying imagery from ISI.

After an intensive effort

by ISI’s local representative to reverse that reprogramming, the Venezuelan Air Force once again requested $77 million in 2003 funding for the Eros-A program. But yet again, plaintiffs claim, IAI intervened to reduce that amount to a mere $6 million “in order to make a greater portion of the Air Force’s budget available for allocation to IAI programs.”

According to the complaint, the Venezuelan government

once more attempted in 2005 to revive the imagery program, but by then U.S. political pressure to suspend ties with Chavez and his leftist government prompted ISI foot dragging in the transfer of financial and other data required under Venezuelan law, according to the lawsuit.

Throughout 2005 and the first months of 2006, Chavez became increasingly bellicose in his anti-U.S. policies, prompting Washington to declare an arms embargo in May 2006.

During that period, a

Ministry of Defense official told Space News in an interview last year

that Israel did not yet view Chavez as a threat, but nevertheless agreed to tighten its own export controls in attempts to improve ties

with Washington. At the time Tel Aviv was just starting to emerge from a two-year crisis of confidence with Washington over alleged Israeli arms transfers to China.

According to the complaint, Chavez was aware that

U.S. pressure was being applied to Israel, and made a last ditch bid to seal the deal by personally offering to acquire up to a 30 percent interest in ISI. He did so, the lawsuit alleges, “to negate claims made by some of his advisors … that ISI was no longer an apolitical commercial company but instead had become a front for IAI, the Israel Ministry of Defense

and their counterparts in the U.S. defense establishment.”

But by that time, it was too late.

In August


Israel officially joined Washington in its arms embargo against Venezuela. ISI’s formal rejection of the Chavez offer was communicated in November 2006 along with instructions for the immediate return of all Eros-related equipment.

In their complaint, plaintiffs claim

potential losses of at least $210 million. And beyond damage to the ISI bottom line, plaintiffs claim ISI’s decision to cut ties with Venezuela abrogated understandings and contractual commitments to maintain the company’s autonomy and commercial integrity.

“Defendants breached their fiduciary duties of loyalty, due care and good faith … by allowing IAI, Elbit and the

[Israel Ministry of Defense] to decide that the fundamental purpose of ISI is now and henceforth to serve the military and strategic interests of Israel, rather than the interests of all the Company’s shareholders, including Plaintiffs,” the complaint states


In separate July 4 notifications to their respective shareholders

IAI and Elbit, both principal defendants in the suit,

rejected the

plaintiff allegations as baseless. “Based upon a preliminary review of the claim, Elbit Systems believes that there is no merit to the allegations made against it or the current or former [ISI] directors who were nominated by Elbit Systems’ subsidiary.”

Both Elbit and IAI used similar words in their commitment to vigorously defend against the allegations, and both firms expressed their belief that the suit provides a basis for countersuits against the plaintiffs. Likewise, in a July 10 interview, Shimon Eckhaus, ISI’s chief executive, also rejected complaints against him and his company by the ISI minority shareholders.

In another July 10 interview, however, one of the defendants expressed some sympathy for the plaintiffs with regard to the collapsed Venezuelan deal. “ISI knew some things were a no-no with respect to U.S.-Israeli agreements and Israeli national security interests. But providing a footprint to Chavez had no bearing on existing agreements or on the security of the state of Israel … and at

least up until summer 2006 when Chavez went nuts and started supporting Hizbollah, Iran and other enemies,” he said.

According to the ISI shareholder, the company should have enjoyed at least three years of significant income from Venezuela, prior to changes in geopolitical circumstances. “The plaintiffs are way off-base on many, many points. But they are asking some legitimate questions: Is ISI the autonomous, Dutch Antilles-incorporated international company it was created to be? Or is it another subsidiary of Israeli defense establishment, whose interests are subordinate to a wide array of relevant and not-so-relevant palace intrigue?”

Yet another ISI executive told Space News July 11 that the company planned to recover some losses from the Venezuelan affair through “the very likely, near-term signing” of Colombia

as ISI’s newest strategic operating partner.

More Secrets Revealed

Plaintiffs revealed that by 2000, ISI had an extensive global presence that included “formal associations” with leading remote sensing entities in Argentina, Austria, Canada, India, Italy, Japan, Russia, Singapore, South Africa, South Korea, Sweden and Taiwan. But they alleged that the mid-2000 appointment of IAI General Counsel Jacob Weiss to the firm’s top management post marked an abandonment of longstanding commitments to maintain ISI’s international profile.

According to the complaint, during Weiss’ short 18-month tenure, ISI operations outside of Israel were “abruptly terminated,” in contravention of ISI’s agreed to business plan and to the detriment of future strategic partnership opportunities. Plaintiffs accused defendants of “spurning” ISI’s international marketing efforts in general and specific prospective partnerships with Russia and South Korea due to the “competitive threat … [such deals posed] to the conflicted interests of IAI and Elop,” an Elbit subsidiary.

Moreover, they accused IAI and majority shareholders of “fraudulent acts” associated with the firm’s planned Eros-B satellite that forced Taiwan

in 2002

to terminate its strategic partnership agreement. When ISI ultimately launched its second satellite in 2006 after a two-year delay, Taiwan considered renewing its exclusivity agreement. But by then, Israel’s

Ministry of Defense had rescinded ISI’s export license for Taiwan so as not to anger mainland China.

“The failure of the [ISI] board and current management to pursue the Taiwan opportunity is at the instance [sic] of IAI, Elbit and the

[Israeli Ministry of Defense] … and is a direct reflection of their inappropriate redirection of the Company’s business to serve their own conflicted interests,” the lawsuit states.

As for Angola, a strategic operating partner since mid-2002, plaintiffs allege financial and operational mismanagement, including “outright fraudulent commission and other payments or bribes to agents” in connection with the program. Angola terminated its ISI contract in mid-2006.

Plaintiffs allege that in the four years since the signing and subsequent termination of the Angolan deal, “ISI never delivered a single day of autonomous SOP service to Angola and even failed to deliver to the Angolan authorities the permanent tasking and reception antenna.”

According to the complaint, “the highly suspect circumstances surrounding the Company’s nonperformance of its obligations under this contract are yet another indication of the misuse and misdirection of [ISI] as a captive vehicle of IAI, Elbit and their government sponsors.”


Ministry of Defense declined to comment on the suit, as did Weiss and numerous defendants who said they had not yet been formally served with the complaint.