Israel Accused of Blocking Commercial Satellite Imagery Deal with Venezuela

TEL AVIV,Israel ? Israel?s Ministry of Defense and some of the country?s leading industry executives repeatedly squashed Venezuelan bids to buy high-resolution commercial satellite imagery.

According to a lawsuit filed July 2 in the U.S. District Court in Manhattan, Venezuela's potential procurement deals were sabatoged twice and more recently a personal offer by Venezuelan President Hugo Chavez to buy a significant equity stake in ImageSat International (ISI), a local satellite operating firm, was ignored.

In theirlawsuit, the ISI minority shareholders accuse major investors and the firm?scurrent management of ?spurning lucrative ? opportunities in Venezuela in orderto devalue the company [Imagesat].?

Theplaintiffs represent a cross section of minority shareholders in ISI, includingmembers of the founding management and some other former company employees. Theplaintiffs note that they invested millions during ?Imagesat?s highest riskstart-up and development stages and at times when the company was in financialcrisis, for which they received common or preferred shares or bridge warrants.?

Although Imagesatis a Netherlands Antilles company now headquartered in Israel, the plaintiffs contendthey have standing in U.S. courts because the company regularly does businessin New York.

Their197-page complaint provides a rare glimpse beyond the veil obscuring mostsensitive international business deals, and chronicles intimate details surroundingnearly seven years of foreign trade negotiations. It provides names, dates,copies of contracts and electronic mail communications, as well as abehind-the-scenes account of the geopolitical and defense cooperativeconsiderations influencing military and dual-use trade.

Prior tothe complaint?s entry into U.S. public record, ISI had adamantly refused evento identify current or prospective strategic operating partners. But as thelawsuit reveals, ISI entered into such exclusivity agreements with India,Taiwan and Angola, the latter two of which were later terminated by customerdemand.

In theVenezuelan case, the plaintiffs allege that from 2001 through late 2006, ISImanagement, Israel Aerospace Industries Ltd. (IAI), Elbit Systems Ltd. and othermajor shareholders of Imagesat ?sabotaged and recently flat-out rejected theopportunity to sell satellite imaging services? to Venezuela.

 Accordingto the complaint, IAI sought to secure the bulk of the Venezuelan Air Force?savailable budget for its own ?high-tech intelligence program? and proposedupgrades to Venezuela?s F-16 and Mirage fighter fleets instead of imagerypurchases.

Accordingto the complaint, ISI began exploratory talks with Venezuela in 1999, about ayear after obtaining a Ministry of Defense license to sell imagery generatedfrom 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 ofthe Venezuelan ground station. However, the lawsuit alleges that misinformationprovided to Venezuela by IAI, but withheld from ISI?s Caracas-basedrepresentative ? a lead plaintiff and founding executive of the satellite firm? prompted a reprogramming of the funding that had been earmarked for buyingimagery from ISI.

After anintensive effort by ISI?s local representative to reverse that reprogramming,the Venezuelan Air Force once again requested $77 million in 2003 funding forthe Eros-A program. But again, plaintiffs claim, IAI intervened to reduce thatamount to a mere $6 million ?in order to make a greater portion of the AirForce?s budget available for allocation to IAI programs.?

Accordingto the complaint, the Venezuelan government once more attempted in 2005 torevive the imagery program, but by then U.S. political pressure to suspend tieswith Chavez and his leftist government prompted ISI foot dragging in thetransfer of financial and other data required under Venezuelan law, accordingto the lawsuit.

Throughout2005 and the first months of 2006, Chavez became increasingly bellicose in hisanti-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 aninterview last year that Israel did not view Chavez as a threat yet, butnevertheless agreed to tighten its own export controls in attempts to improveties with Washington. At the time Tel Aviv was starting to just emerge from atwo-year crisis of confidence with Washington over alleged Israeli armstransfers to China.

 Accordingto the complaint, Chavez was aware that U.S. pressure was being applied toIsrael, and made a last ditch bid to seal the deal by personally offering toacquire up to a 30 percent interest in ISI. He did so, the lawsuit alleges, ?tonegate claims made by some of his advisors ? that ISI was no longer anapolitical commercial company but instead had become a front for IAI, theIsrael Ministry of Defense and their counterparts in the U.S. defenseestablishment.?

But by thattime, it was too late.

In August2006 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 theircomplaint, plaintiffs claim potential losses of at least $210 million. Andbeyond damage to the ISI bottom line, plaintiffs claim ISI?s decision to cutties with Venezuela abrogated understandings and contractual commitments tomaintain the company?s autonomy and commercial integrity.

?Defendentsbreached their fiduciary duties of loyalty, due care and good faith ? byallowing IAI, Elbit and the [Israel Ministry of Defense] to decide that thefundamental purpose of ISI is now and henceforth to serve the military andstrategic interests of Israel, rather than the interests of all the Company?sshareholders, including Plaintiffs,? the complaint states.

 Inseparate July 4 notifications to their respective shareholders IAI and Elbit,both principal defendants in the suit, rejected the plaintiff allegations asbaseless. ?Based upon a preliminary review of the claim, Elbit Systems believesthat there is no merit to the allegations made against it or the current orformer [ISI] directors who were nominated by Elbit Systems? subsidiary.?

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

In anotherJuly 10 interview, however, one of the defendants expressed some sympathy forthe plaintiffs with regard to the collapsed Venezuelan deal. ?ISI knew somethings were a no-no with respect to U.S.-Israeli agreements and Israelinational security interests. But providing a footprint to Chavez had no bearingon existing agreements or on the security of the state of Israel ? and at leastup until summer 2006 when Chavez went nuts and started supporting Hizbollah,Iran and other enemies,? he said.

 Accordingto the ISI shareholder, the company should have enjoyed at least three years ofsignificant income from Venezuela, prior to changes in geopoliticalcircumstances. ?The plaintiffs are way off-base on many, many points. But theyare asking some legitimate questions: Is ISI the autonomous, DutchAntilles-incorporated international company it was created to be? Or is itanother subsidiary of Israeli defense establishment, whose interests aresubordinate to a wide array of relevant and not-so-relevant palace intrigue??

Yet anotherISI executive told Space News July 11 that the company planned to recover somelosses from the Venezuelan affair through ?the very likely, near-term signing?of Colombia as ISI?s newest strategic operating partner.

MoreSecrets Revealed

Plaintiffsrevealed 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, SouthKorea, Sweden and Taiwan. But they alleged that the mid-2000 appointment of IAIGeneral Counsel Jacob Weiss to the firm?s top management post marked anabandonment of longstanding commitments to maintain ISI?s international profile.

Accordingto the complaint, during Weiss? short 18-month tenure, ISI operations outsideof Israel were ?abruptly terminated,? in contravention of ISI?s agreed tobusiness plan and to the detriment of future strategic partnershipopportunities. Plaintiffs accused defendants of ?spurning? ISI?s internationalmarketing efforts in general and specific prospective partnerships with Russiaand South Korea due to the ?competitive threat ? [such deals posed] to theconflicted interests of IAI and Elop,? an Elbit subsidiary.

Moreover,they accused IAI and majority shareholders of ?fraudulent acts? associated withthe firm?s planned Eros-B satellite that forced Taiwan in 2002 to terminate itsstrategic partnership agreement. When ISI ultimately launched its secondsatellite in 2006 after a two-year delay, Taiwan considered renewing itsexclusivity agreement. But by then, Israel?s Ministry of Defense had rescinded ISI?sexport license for Taiwan so as not to anger mainland China.

?The failureof the [ISI] board and current management to pursue the Taiwan opportunity isat the instance [sic] of IAI, Elbit and the [Israeli Ministry of Defense] ? andis a direct reflection of their inappropriate redirection of the Company?sbusiness to serve their own conflicted interests,? the lawsuit states.

As forAngola, a strategic operating partner since mid-2002, plaintiffs allegefinancial and operational mismanagement, including ?outright fraudulentcommission and other payments or bribes to agents? in connection with theprogram. Angola terminated its ISI contract in mid-2006.

Plaintiffsallege that in the four years since the signing and subsequent termination ofthe Angolan deal, ?ISI never delivered a single day of autonomous SOP serviceto Angola and even failed to deliver to the Angolan authorities the permanenttasking and reception antenna.?

Accordingto the complaint, ?the highly suspect circumstances surrounding the Company?snonperformance of its obligations under this contract are yet anotherindication of the misuse and misdirection of [ISI] as a captive vehicle of IAI,Elbit and their government sponsors.?

Israel?sMinistry of Defense declined to comment on the suit, as did Weiss and numerousdefendants who said they had not yet been formally served with the complaint.

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