11 August 2000

Cryptome has asked Verio for a public statement on the confidential surveillance agreement reached with the FBI. Verio's main telephone number: 303-645-1900; press: 703-642-2800, ext. 518.

Source: US national newspaper, August 11, 2000, pp. A3, A8.

FBI and NTT May Have Pact On Verio Sale

By NEIL KING JR. And DAVID S. CLOUD Staff Reporters

WASHINGTON -- In an agreement with broad implications for the future of the Internet, the Federal Bureau of Investigation has resolved U.S. national-security concerns over a Japanese phone company's $5.5 billion plan to buy the U.S. Web-hosting company Verio Inc.

The agreement, aspects of which still need to be finalized, was crafted over weeks of intense negotiations between Nippon Telegraph & Telephone Corp. and officials from the FBI and the Justice Department, U.S. officials said. The Clinton administration has struggled for months to allay worries that the NTT purchase of Verio could present a foreign-espionage risk by giving the Japanese-government-controlled company access to U.S. wiretapping activity.

The FBI's handling of the NTT-Verio transaction will set an important precedent for law-enforcement involvement in the growing, but largely unregulated Internet. U.S. officials have long scrutinized foreign acquisitions in the aerospace, defense and telecommunications sectors, but this is the first time they have weighed an Internet deal for national-security implications.

The NTT negotiations highlight growing law-enforcement fears that the entry of foreign companies into the booming U.S. telephone and Internet markets could undermine the FBI's ability to investigate criminals by tapping into their digital communications.

Experts say the NTT case is the best example yet of how the government is trying to get a regulatory foothold over the Internet before globalization leads companies to rnove equipment and data out of the U.S., making law enforcement's job all the harder.

"It's a problem and it's going to become a bigger problem and the governiment's view is, 'We better set our stake while we have the chance,"' said Marc Zwillinger, the former deputy director of the Justice Department's computer-crime squad.

The FBI has engaged in similaily tough negotiations in recent years with foreign telephone companies entering the U.S. market. What made this deal all the more sensitive was that NTT remains majority owned by the Japanese government. U.S. officials insist they had to set down a marker on the NTT deal, and say future transactions involving foreign-govemment ownership will face similar scrutiny because of the national-security issues raised.

Critics, however, contend the FBI has no business laying down conditions on who invests in the Internet. "If there's a lesson learned, it's get the FBI out of these transactions, because they're extracting concessions that may be beyond what the law requires," said Albert Gidari, a Seattle telecommunications lawyer who specializes in regulatory issues.

Officials say the FBI pushed for a series of safeguards to protect U.S. law-enforcement investigations, including a strict ban on Japanese government involvement in Verio's day-to-day activities. The FBI was particularly concerned that NTT sign a detailed binding agreement to assure that its management of Verio not undermine U.S. national security.

Worried that the talks were at an impasse, Treasury Secretary Lawrence Summers called a top-level meeting yesterday morning to try to resolve the matter before a Monday deadline, at which time officials are supposed to recommend to President Clinton whether to approve or bar the deal. The session was canceled at the last minute when signs of progress emerged from the talks, officials said.

Signs that NTT had broke the government logjam drove up Verio's stock price $3.6875, or 6.9%, to $57.1875 on the Nasdaq Stock Market. NTT offered in May to pay $60 a share to acquire Verio, a top Webhosting company for U.S. corporations, but has had to extend the offer four times.

A spokesman for NTT said the company had no comment on the negotiations.

The apparent breakthrough averts an unwelcome decision for President Clinton. In early June, NTT submitted the deal for clearance by an obscure multiagency panel, the Committee on Foreign Investment in the U.S. When the FBI raised a number of security concerns, the review dragged on for more than two months, raising concerns that Mr. Clinton might have to reject the acquisition on nationalsecurity grounds.

Source: US national newspaper, August 11, 2000, p. C9.

U.S. Is Said to Be Near Deal For N. T. T. Unit to Buy Verio

F.B.I Security Terms Are Apparently Met


WASHINGTON, Aug. 10 -- Clinton administration officials are close to resolving national security concerns and allowing NTT Communications of Japan to buy Verio Inc., a United States Internet service provider, people involved in the negotiations said today.

The $5.5 billion deal has become a test case of the F.B.I.'s power to police the Internet and guard against espionage when a company controlled by a foreign government buys an American Internet gateway. NTT Communications is a subsidiary of the Nippon Telegraph and Telephone Corporation, which is 53 percent owned by the Japanese government.

Facing a Monday deadline, NTT Communications officials ended a prolonged standoff and offered to adhere to F.B.I. terms that would effectively set up a separate American-controlled office within the Japanese-American company that could execute court-ordered wiretaps without oversight of the Japanese parent company, the people said.

American officials are also insisting on legally binding commitments that give the government recourse if the combined company fails to cooperate with investigators or compromises the secrecy of law enforcement actions, the people said. Negotiations were continuing today on the details, and a final resolution could come on Friday, they said.

Shares of Verio rallied today on hopes that NTT Communication's proposed $60-a-share purchase will proceed after a three-month delay. Shares of Verio rose $3.6875, or almost 7 percent, to $57.1875.

The United States often insists on safeguards when companies controlled by foreign governments buy American telecommunications and military concerns. But this is the first time national security considerations have been raised in the case of a cross-border Internet company acquisition.

The F.B.I. wants to raise a firewall that would make it harder for a company controlled by a foreign government to interfere with official eavesdropping or to use Internet service providers for espionage. Internet service providers route data for their customers, very much in the way phone companies handle voice and data communications.

Until negotiations resumed today, NTT Communications and Verio had been reluctant to agree to set up a structure like the one the F.B.I. wanted, people involved in the talks said.

The companies were said to fear that doing so might put them at a competitive disadvantage because customers might think that their data would be better protected by other service providers.

The case prompted an investigation by an interagency task force known as the Committee on Foreign Investment in the United States, which is headed by the Treasury secretary, Lawrence H. Summers. Unless the matter is resolved amicably, the committee must report to President Clinton by Monday with a recommendation on whether the president should block the deal for national security reasons.

Mr. Summers called a high-level meeting with numerous cabinet officers and senior White House officials to discuss the standoff, but canceled the session this morning after NTT Communications put a new offer on the table, people involved in the matter said. The remaining disagreements were described as relatively minor.

American officials said Mr. Summers could convene the committee's principals by phone on Friday to end the investigation and remove obstacles to the merger if the negotiations produce an agreement.

Clinton administration officials were thought to be highly reluctant to block the transaction, fearing it would send a negative signal about foreign investment in the fast-growing American Internet sector.

The investigation comes as Deutsche Telekom's proposed $50 billion purchase of the VoiceStream Wireless Corporation has run into Congressional opposition on national security grounds. Senator Ernest F. Hollings, a South Carolina Democrat, has introduced legislation that would prevent an acquisition like the one proposed by Deutsche Telekom, which is 58 percent owned by the German government. The Clinton administration has opposed the Hollings legislation.

Brett Lambert, a security expert with DFI International who has followed the NTT CommunicationsVerio proceedings, said the merger, if completed successfully, could become the standard for foreign puxchases of Internet service providers.

"I think everyone will breathe a sigh of relief because they want this to be a model," Mr. Lambert said. "NTT basically has had to carry water for other Internet deals down the road."

Public relations professionals for the two companies involved did not return phone calls seeking comment.

Treasury department spokeswoman declined to comment.

Verio's main telephone number: 303-645-1900.