Israeli 'Trojan horse' scandal widens

updated 8:44 p.m. ET June 1, 2005

JERUSALEM - It started out as a family feud. But a small-time computer break-in has erupted into Israel's biggest business scandal in decades, reaching into some of the country's powerful corporate suites and jolting the cozy world of the industrial elite.

Top Israeli blue chip companies, including a high-tech giant that trades in New York, are suspected of using illicit surveillance software to steal information from their rivals and enemies.

The list of victims is equally impressive, ranging from a cigarette importer to the local operations of the Ace hardware chain and Hewlett-Packard Co. Even a well-known TV entertainment reporter is caught up in the affair, claiming hackers invaded his computer to get phone numbers of celebrities.

The investigation has shed an unflattering light on the Israeli business world, where cutthroat competition in a small market, high-tech sophistication and the secretive traditions of the army form a volatile mix.

The case is also attracting the attention of top security software makers. Software firms in the U.S. have been updating their products to defend against similar outbreaks.

Sever Plocker, a leading Israeli economic commentator, said the scandal could have "unpleasant consequences" for foreign investment.

"People don't like to invest in countries where companies do some very unethical things," he said. "I think it is bad for Israel, bad for the image of Israel and nothing to be proud about."

The "Trojan horse" scandal, named after the monitoring software secretly planted on the corporate computers, has been front-page news since police lifted a gag order this week. Police say 22 people have been arrested, and more arrests are expected.

"It's getting bigger every day," said Nir Nateev, head of the police computer and cyber crime department in Tel Aviv, who said some 100 computers have been confiscated. "In the end, there will be dozens (of companies) involved."

The burgeoning scandal has sent a shudder through the business world. The country's central bank chief, American economist Stanley Fischer, warned this week that the case could harm foreign investment.

Amir Barnea, a business professor at the Interdisciplinary Center, a prestigious Israeli university, attributed the scandal to the hypercompetitive business atmosphere in a tiny market of 7 million people.

"Unfortunately some managers may lose the distinction between a legitimate fight for survival and doing illegal acts," he said.

Others said the combination of Israel's high-tech culture, fine-tuned in secretive military units, and a penchant for independent thinking made the scandal inevitable. Some of the world's top computer security companies, including Check Point Software Technologies Ltd., are Israeli.

"If Israelis see a wall, they will try to break it," said TV commentator Motti Kirshenbaum. "It is a challenge to break a wall. Israelis don't say, 'There's a fence, let's respect it.'"

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