PROJECT X : A Tale of Technobanditry

A new class of international criminal has emerged since the end of the 1970s: the technobandit. With the development of sophisticated electronic weapons and communications systems driven by powerful computers, this renegade band of entrepreneurs has sprung up to serve the technology-hungry nations of the Soviet Bloc. The Soviets, barred from importing a range of advanced technology from the United States because of its potential military applications, now spend an estimated $1 billion to $2 billion annually to acquire the latest American developments in computer hardware and software through the black market. This underground business is particularly intense--and lucrative--in California, especially near the microelectronics and aerospace industries of the Silicon Valley. Though an FBI spokesman says that several KGB agents have been expelled from the state in recent years, FBI sources told the Los Angeles Times in 1981 that as many as 30 KGB operatives were active in California.

Federal investigators describe the flow of Western technology to the Soviet Union as a “hemorrhage,” saying that virtually every Soviet military research project--as many as 5,000 per year--benefits from Western products and technological secrets. The most damaging example in recent years was the recent Toshiba Machine case, in which the Japanese company and two of its executives were convicted in Tokyo of selling to the Soviet Union, in 1983 and 1984, advanced milling machines for submarine propellers. The new technology significantly reduces the subs’ noise level, helping them escape detection by sonar. In the five years ending in September, 1987, federal agents arrested 909 people on charges relating to allegedly illegal transfer of technology, and turned in more than 1,100 indictments.

But Congress and the Reagan Administration have long wrangled over the Department of Commerce’s list of sensitive items covered by the export law. Many Congressional leaders insist that the United States has been going to absurd lengths to police technology, even prohibiting the export to Communist countries of certain personal computers, which can easily be purchased anywhere in the world.

Nevertheless, there is a general consensus that the most advanced developments in Western high technology should be restricted from the Soviet Bloc. At the leading edge of such technology are super-computers, which can process information at unprecedented speeds and can be used, experts say, for everything from economic forecasting to genetic engineering to directing the weapons that can sink U.S. submarines or shoot down missiles. In effect, such machines consist of several high-speed multi-processors working in parallel on the same task, sifting through a jumble of sensory data much as a group of problem-solvers might work together to assemble a single jigsaw puzzle. The super-computers can instantaneously make order out of billions of pieces of information per second--to pin down, for example, the size, type and exact location of an incoming nuclear weapon.

According to federal prosecutors, one of the most notorious purveyors of such technology in recent years has been Charles McVey II, 63, an Anaheim entrepreneur who fled the country after he was indicted here in 1983 and moved his base of operations to Switzerland and Malta. Using at least two different identities, he traveled around the world until August of last year, when he was seized in the Yukon Territory by the Royal Canadian Mounted Police.

What follows, gleaned from government documents and interviews, is the story of McVey and one of his associates, Kevin Eric Anderson, a 36-year-old computer engineer from the San Fernando Valley who became swept up in the world of international intrigue. On March 25, McVey was ordered extradited from Canada. Anderson is awaiting trial. Both face felony charges of conspiring to commit illegal export, interstate racketeering, wire fraud and other crimes in connection with the sale of Saxpy Computer Corp.’s Matrix 1 super-computer technology to the Soviet Union. Two other men, Ivan Pierre Batinic and his brother, Stevan, have also been charged with assisting Anderson and McVey in the same case. They have all pleaded not guilty. Through their attorneys, three of the men declined repeated requests to be interviewed for this article. Stevan Batinic’s attorney could not be reached for comment.

The Plan

ONE EVENING early last October, in a restaurant in rural Washington state, Kevin Anderson sat with his former girlfriend Pamela Kelley and bragged to her about a grand scheme that he said would soon make him a multimillionaire.

He was almost broke, down to his last $1,500, he said. But that was going to change, he told Kelley, once the contract was signed. Once “Project X” was in the hands of his friends in what he called the “Big City”--Moscow--he was going to be a very, very rich man.

In fact, Anderson said, he had just returned from his third foray to the Soviet capital, where he had met again at the Soviet space agency with the KGB contact he called “Andrei II.” The Soviets were falling all over him in adulation, he boasted, amazed at his skill with computers. Pam Kelley listened intently, probing him for the details of the plot.

“These (KGB) guys love to laugh, especially the director,” Anderson said enthusiastically. “He’s a little imp of a man. He’s no more than 5-foot-4 . . . and he’s absolutely brilliant.”

“What does he say to you? . . . Does he know about the project?” Kelley asked.

“He better. He’s in charge of it. He and his boss, a guy named, ah, Gorbachev.”

“Gorbachev knows about this?” Kelley asked. “Wow. That’s heavy.”

“Let me tell you something,” said Anderson. “This is gonna be the biggest single expenditure for foreign technology that the Soviet Union will make next year. . . . It’s very important to them.”

But the big payoff that Anderson had long dreamed of would never take place. What he didn’t know was that the woman to whom he was pouring out his heart had gone to the FBI. Now, sitting in the restaurant, she was wearing a hidden microphone. Eleven days later, partly on the basis of hours of clandestine recordings of Anderson’s conversations with Kelley, the FBI and the Santa Clara County Sheriff’s Department arrested the computer expert and charged him with working with McVey to sell to the Russians the plans for a super-computer called the Matrix 1, made by Saxpy Computer Corp., of Sunnyvale. Anderson claimed to close friends that the Soviets were willing to pay $4 million for the information.

Anderson had once been one of the hottest software programmers in the Silicon Valley, acclaimed for his ability and noted for his obsessive work habits. He was cultured and sophisticated, with an intellectual curiosity that went far beyond algorithms and matrix processing. But somewhere along the line, Anderson went wrong. Somewhere along the line, friends say, his talents led him to unreasonable visions of his own invulnerability. Anderson started bragging. The men later accused of helping him undoubtnedly would rather that he had kept his mouth shut.

The Whiz Kid

KEEPING A LOW profile had always been difficult for Kevin Anderson. In the San Fernando Valley back in the 1960s, where his Mormon father worked as a public school principal, Anderson was awkward and un-athletic. But he was also an extrovert, a math genius, a classical guitarist and an amateur opera singer. “Kevin was recognized early by his teachers as a gifted child,” says his mother, Virginia Anderson. “But he was anything but a super-nerd.” Indeed, after graduating from UCLA, Anderson developed a computer-designed children’s literature series called “The Me Book,” personalized fairy tales in which the child and his or her parents and pets were integrated into fanciful plots.

In 1977, Anderson was recruited by Magnuson Computer Systems, Inc., a tiny start-up in the Silicon Valley, whose two dozen engineers were then building one of the early competitors of the $600,000 IBM 360 and 370 series. “Most young computer geniuses were joining new companies,” says Charlotte Gramms, his high school sweetheart, whom he later married. “That was the only way to get ahead. You create something, then you’re a part of it.”

Anderson’s job was to design the operational software, the soul of the machine. In writing complex codes that told the circuitry how to process information, he was shaping the computer’s personality. “Kevin was a star,” says Joe Straub, vice president of marketing at Saxpy Computer Corp., which later tried to recruit Anderson. “He wrote computer language with fluency and eloquence.”

Those were heady years at Magnuson, whose programmers worked 18-hour days in furious competition with Control Data and RCA to build a better, cheaper version of the IBM-style mainframe. And Anderson, a Falstaffian figure with a blond beard, work shirts and blue jeans (some co-workers called him “Grizzly Adams”), was the most obsessive of a driven lot, sometimes working 72 hours at a stretch without sleep, coffee or other stimulants. Associates remember him as pasty-faced, greasy-haired, 320 pounds at 6-foot-2 and perpetually exhausted. Still, his blue eyes burned with a ferocious mental energy. “I could have a conversation with Kevin on a Friday, discussing at a high level how the software should manipulate the data,” remembers a Magnuson founder. “Monday, Kevin would come in and say, ‘I’ve got it running.”’ They were also happy times for Anderson. He became a vice president of Magnuson, earning a salary of about $75,000 annually by the time he was 27. He married Gramms and started rehabilitating a dilapidated Tudor-style house in East San Jose. In the yard, Anderson designed a French-style garden and raised orchids. In the living room, remembers an acquaintance, Virginia McCullough, “the fireplace would swing away, and there would be a room filled with first-edition books by Isaac Asimov.” Yet Anderson was developing a reputation at Magnuson as a prima donna. “He was a freewheeling guy with an irreverence toward authority,” remembers one colleague. “Kevin always skated on thin ice. He always had a scheme.” He drove a souped-up Mustang and associated with programmers whom a colleague describes as “eccentric”--night owls, partiers and lovers of fast cars. At work, Anderson talked about how he’d ordained himself a minister in the Universal Life Church, a mail-order religious group. “The I.R.S. isn’t going to get my money,” one colleague remembers him joking.

The Fat Man

ANDERSON TRAVELED internationally as part of his job, debugging Magnuson computers that ran into problems after they were installed in clients’ offices. It was the part of the job he enjoyed most, says a source close to Anderson. He liked the travel--to places such as South Africa, Great Britain and Norway. He enjoyed facing, as he put it, “the pressure of a customer about to kick the machine because it wasn’t working, being the hero. Going in and finding out what was wrong, getting attention.”

According to Magnuson employees, that is how he came in contact with Charles McVey in 1980--by helping to service the M 80/40 that McVey had just purchased to help run his Anaheim computer-export firm, Facilities Management Ltd. Friends recall how impressed Anderson had been by the older man, and how quickly he seemed to adopt McVey as a role model. Like Anderson, McVey was a mountain of a man--more than 350 pounds. And McVey had everything Anderson wanted: wealth, an adventurous life style and a couple of small planes--a World War II-era Comanche and a new twin-engine Mitsubishi MU-2.

An avid pilot who is said to have kept a flight simulator in his office, McVey spent his vacations roving up the Pacific coast, fishing for bass and trout. He jetted from South America to Europe to the Orient for Facilities Management and one of his other firms, Land Management Systems, both of which bought, then resold, computer systems for analyzing satellite data. Lumber companies might buy systems such as those sold by McVey, for instance, to determine the locations of the richest groves of mahogany in Borneo. His customers ranged from India to Argentina, and he’d even spent time in Beijing dealing with the Chinese government.

Friends say McVey loved to tell stories--grandiose yarns that glorified his past. Squeezed into the cockpit, the gray-haired entrepreneur would entertain clients and friends like Anderson with anecdotes as they flew to Catalina Island for a lunch of buffalo burgers or to Las Vegas for a round of gambling. He told some that he’d been a semiprofessional football player in the 1940s; others were told that he’d earned a Ph.D. in nuclear physics and had worked side by side with H-bomb creators Edward Teller and J. Robert Oppenheimer.

Yet, according to friends, McVey had no scrapbooks from his gridiron days; and an employee remembers that when one client called the university from which McVey claimed to have received his doctorate, the physics department said it had no record of him. “But the client finally accepted his story, because Chuck had an aura of credibility,” says Edgar John English, an electronics consultant who worked for McVey for five years. “He was a colorful, dominant personality who always wanted to be the center of attention.”

Friends say Anderson affectionately called McVey the “Fat Man.” He flew with McVey and visited him at his large home in Villa Park, where he lived with his wife, Marilee, and eight children. Anderson, says a source close to him, was fascinated by McVey’s flamboyant affectations. “He typically carried $20,000 to $30,000 in his wallet--elephant-choking wads of hundred-dollar bills,” says the source. “He would pay a $10 restaurant tab by pulling out $20,000.”

The more time they spent together, the more admiring Anderson became. Recalls a Magnuson colleague: “From Kevin’s standpoint, McVey led a pretty attractive life style. Doing what he wanted to, making fast money, traveling around the world. It’s easy to understand the fascination.” And the admiration was apparently mutual. Later, McVey would write to Anderson: “You and I are the only geniuses left in the world. . . .”

And then, one day in the spring of 1982, Charles McVey vanished.

During the next few weeks, word spread rapidly that the government was making serious allegations against McVey. Land Systems Management, according to government agents, was a vehicle for McVey’s lucrative, highly illegal business smuggling the latest Silicon Valley technology to the Soviet Union. Floating Point AP 120 array processors, Tektronix oscilloscopes, Memorex disc drives, Stanford Technology Model 70 Image Computers, Bendix multi-spectral scanners--McVey was providing the Soviets with a range of equipment denied them bythe U.S. Commerce Department. And McVey had a steady supply from Silicon Valley manufacturers, who believed that he was packaging the stuff and reselling it to legitimate clients.

It wasn’t that McVey--who through his attorney and relatives has refused numerous requests for comment on these charges--was a Soviet sympathizer, friends say. Rather, he was a consummate opportunist, a dyed-in-the-wool capitalist. He had a desperate customer willing to pay preposterous prices--five times retail value or more--and a seemingly foolproof means of funneling the goods out of the country without an export license. According to court papers filed by the U.S. Customs Service in a civil suit against against McVey, he would package the equipment in plywood crates labeled with a code number “20” to indicate its final destination: Moscow. He’d mark it “generators” or “photographic equipment” on his export declaration, then fly it in his Mitsubishi MU-2 to Mexico City. From the Mexican capital, the crates would be placed aboard a commercial airline to Western Europe, where they would be picked up McVey’s Swiss contact in Geneva. Then, the Justice Department claims, it was onward to Moscow and Yuri Boyarinov, a Soviet national who worked as a consultant for Electronorgtekhnika, which procured high-tech equipment from abroad.

Federal agents say that McVey’s scheme had operated flawlessly for about four and a half years--grossing him more than $15 million--until John Sutherland, former president of Land Management Systems, discovered the deception and went to the U.S. Customs Service in Los Angeles in February, 1982. Sutherland knew the precise date of an imminent shipment to the Soviets of multi-spectral scanners. Installed in an airplane or satellite, they use infrared sensors to record objects and features many miles below. In the hands of the Soviets, the scanners theoretically could have been used to track NATO troop movements.

Those wooden crates never arrived in Moscow. In mid-March, 1982, customs agents from “Operation Exodus,” a government program aimed at halting technology shipments to Soviet Bloc countries, intercepted a KLM plane bound for Amsterdam from Mexico City when it refueled in Houston, and confiscated the scanners--worth about $2 million. Two weeks later, agents armed with search warrants burst into McVey’s Anaheim offices. They found packing crates stuffed with e1903520112indicted on charges of illegal export and making false statements to the U.S. government, though federal officials wouldn’t catch up to him again for five and a half more years.

The Tailspin

CHARLES MCVEY’S disappearance coincided with a sudden change of fortune in the life of Kevin Anderson--a series of traumatic events that, according to sources close to Anderson, would ultimately drive the computer programmer straight into McVey’s intrigue.

First came the death of Magnuson Computer Systems, Inc. Beset by design flaws in its new M 80/40 computer, another IBM-compatible machine that processed data faster than its original M 80/30, and bled by overambitious expansion, Magnuson in 1982 plunged, in months, from prosperity to bankruptcy. “The Shooting Comet Which Fell From the Sky,” one local newspaper described it. Anderson, who’d seen it coming, bailed out before the collapse. He landed with founder Paul Magnuson, who had sold out his interest, at a start-up called Prodigy, later called Saber Technology Corp.

But matters soon got worse. In December, 1982, shortly before McVey’s indictment, Anderson, Magnuson and another Magnuson Computer Systems ex-employee were arrested by the Santa Clara County Sheriff’s Department and charged with stealing software programs that remained the property of Magnuson Computer. The accusation came after the ex-employee, who left Magnuson a few months after Anderson, copied some of Anderson’s computer tapes at Anderson’s request and delivered them to him at Saber. The duplicated, or “dumped,” tapes included not only some of Anderson’s own personal reference material but also a program that would enable the user to design the circuit board for the Magnuson M 80/32.

Anderson vigorously denied that he knew the proprietary programs were on the tape. But others saw the troubles as something he brought on himself, another example of his refusal to adhere to convention.

The criminal proceedings dragged on for nearly a year, with Anderson maintaining he was innocent. Because it was one of the first cases of computer-software theft in the Silicon Valley, it was heavily covered by the local media. Anderson became a celebrity in Santa Clara County--although it wasn’t the kind of fame he wanted. “It was horrible,” remembers Magnuson. “The neighbors came over and put (excrement) on Kevin’s doorknobs. Everybody thought he was guilty. He would get calls at 4, 5 o’clock in the morning, evidently from people who saw his name in the papers. Kevin had to change his unlisted phone number at least three times.”

The ordeal also created friction at home. “Kevin was being used. He was doing all the work, getting nothing, and now he found himself in the middle of corporate wars,” says Gramms. “I said to Kevin, ‘Let’s get out of computers. It’s getting us nowhere.’ It was such chaos, such a waste of our energy. But he said, ‘Computers are my life.’ ”

Anderson eventually passed a polygraph test in which he was asked whether he had intended to take the program, says his attorney Thomas J. Nolan. The district attorney dropped all charges against the three defendants for lack of evidence. But the experience stayed with Anderson. His marriage broke up. Venture capitalists now shunned the tainted Saber, which collapsed after eating up more than $10 million of private investment money. To make matters worse, Anderson had a $100,000 debt to the Internal Revenue Service, the legacy of some stock granted him when he joined Magnuson. In 1984, he was forced to re-mortgage and then to sell his beloved house in San Jose. Now, at age 32, he found himself alone, stigmatized and looking for work. And in a deepening financial crisis--until, federal agents say, Charles McVey offered relief.

The Deal

THE FAT MAN apparently continued his black-market trade even after his Anaheim businesses collapsed and the U.S. Customs Service launched a civil suit to seize his plane, a truck and millions of dollars’ worth of computers. During the 12 months between the raid on his office and the time he was indicted, McVey stayed out of sight. He traveled in and out of the United States a couple of times, dying his hair black and using a passport that had belonged to his deceased brother, Robert. Then, shortly after the felony indictment was returned against him in March, 1983, he relocated his operations to Zurich and Neuchatel, Switzerland, and, later, the Mediterranean island of Malta. By 1985, McVey was directing a booming computer-export business, trading regularly with the Soviets, federal investigators say. He traveled frequently around the world--avoiding the United States--using different passports. Although he was on the U.S. Customs Service’s list of the 10 most wanted high-tech smugglers, he was able to c1869505653 While McVey continued living the international high life, Anderson was foundering. After Saber collapsed, he reportedly phoned ex-colleagues for job tips, sounding increasingly desperate, until he finally landed a position as a programmer at Synthesized Computer Systems, Inc., in early 1985. “The ’82 arrest had really damaged Kevin’s reputation,” says Magnuson, who has quit the computer business altogether and started a real estate company.

Then, just when Anderson seemed to have turned his life around, he got involved with Karen Nicole Hobson. Hobson, according to FBI documents, described herself as a former prostitute, and Anderson’s attorney has said in court that she had been a heroin user and on a methadone treatment program. Anderson and Hobson moved into a rented apartment in Fremont. And before long, Anderson was spending thousands of dollars, according to both his attorney and his mother, to support her. He was, according to his attorney, sinking deeper and deeper into debt.

During this period, a source close to Anderson says, McVey became almost a Svengali figure to the increasingly unsteady man. McVey hadn’t contacted Anderson while the software-theft case was going on, but called him after the theft charges had been dropped, to commiserate with a “fellow victim of the system,” the source says. He sent Anderson the first of several tickets to Switzerland and tried to arouse his sympathy by telling him that selling American technology to the Soviet Union would help feed hungry children. The scanners seized by the U.S. government, McVey told Anderson, were old technology that would be used not for military purposes but to help fight rust diseases on Soviet wheat crops by identifying blighted fields, the source says. “He believed he was in conflict with an unjust law, and (said) that Russian kids should have the same right to eat as American kids.”

Sometime in 1986, a source close to Anderson says, McVey and Anderson began discussing a new super-computer called the Matrix 1 that had just been developed by a start-up firm called Saxpy Computer Corp. Anderson had heard about the machine the previous year, when he was interviewed for a job at Saxpy.

The Matrix 1 was one of several super-computers whose sale to the Soviet Bloc was prohibited under the U.S. government’s Export Administration Act as a threat to national security. The Matrix 1 uses standard components, easily purchased anywhere in the world. But when these components were coordinated with Saxpy’s “operational software,” they could perform a few specific tasks at amazing speeds: 1 billion calculations per second, versus 13 million for the IBM commercial mainframe computer. Saxpy had already sold a Matrix 1 to the Martin Marietta Corp., a federal defense contractor, for use in an antisubmarine warfare project.

In November, 1986, according to court papers and Anderson’s conversations with his former girlfriend Pamela Kelley, McVey and Anderson flew together from Malta to Moscow. They were met at Moscow’s airport by a KGB contact Anderson called “Andrei II.” After they checked into a hotel on the outskirts of the city, McVey introduced Anderson to Raoul Sagdeyev, director of the Soviet Space Science Institute, his friend of 20 years. They also met McVey’s associate Yuri Boyarinov. (Boyarinov had been indicted by a federal grand jury in absentia with McVey in 1983 for illegal export of high technology, but the charges against him were withdrawn in 1986.) In the following months, the Soviets made McVey and Anderson a proposition: If they could secure diagrams of the Matrix 1’s complex circuitry, plus the tapes, floppies and hard discs containing the operational instructions, and if Anderson could build an exact replica, the Russians would be willing to pay them $4 million--$2 million in advance, $2 million upon completion of the computer.

But first, Anderson needed to get his hands on the plans for the Matrix 1. He needed to find an employee who could get the detailed blueprints.

Ivan Pierre Batinic, 30, was an old friend from Anderson’s Magnuson days. Born in France, the son of a wealthy real estate man on the U.S. East Coast, Batinic had been a computer whiz kid himself in the late 1970s. He also had a rebellious streak that drew him into Kevin Anderson’s circle. Colleagues remember him as Silicon Valley’s answer to James Dean: A wild teen-ager who liked to party and race around the Valley in a foreign sports car. Batinic always looked up to the older Anderson, say colleagues. They were driving around the Santa Clara Valley one day last spring, Ivan Batinic would later tell the FBI, when Kevin Anderson hit him with the proposal. Since June, 1986, Batinic had been employed as a diagnostician at Saxpy. The handsome programmer was working nights, isolating bugs in the instructional software--the diskettes that contained, in effect, the blueprints of the Matrix 1. Now Anderson was feeling out how amenable his ex-colleague would be to duplicating the precious material and smuggling it out of the building. As Batinic remembers it, Anderson was rather coy at first.

Batinic recalls, he told the FBI later, that Anderson said, “I just hate to ask you to steal something.” According to his statement to the FBI, Batinic didn’t think he was serious. Then Anderson told him that his share of the proceeds would be $1 million. Batinic agreed to cooperate, though he later told investigators that he did not believe the computer data he copied would be useful to anyone because it was not complete.

According to the statement he made to the FBI after his arrest, Ivan Batinic began duplicating the software in the middle of the night while sitting at his terminal in his cubicle at Saxpy. Ivan also said in his statement to the FBI that his brother, Stevan, a 29-year-old garage mechanic, kept watch outside the one-story, white concrete building. Kevin Anderson, meanwhile, was flying around the globe at McVey’s expense, conferring with McVey at his Swiss home and negotiating with the KGB in Moscow. “The best computer minds in their country come and meet with me, and we talk for hours. It’s just great,” he later told Kelley. The End Game

ANDERSON BOASTED frequently to his lover Nicole Hobson in 1987 about his rendezvous with the KGB, she later told police. But he saved the bulk of his confessions for Kelley. A pug-nosed, brown-haired, attractive woman, she had met Anderson through a personal ad in the San Francisco Chronicle and had lived with him briefly, according to a friend of Anderson. Now, in hours of late-night, long-distance phone conversations, Anderson spelled out the details of the software theft and his negotiations with Soviet agents. In May, by which time she had moved to Hawaii, Anderson asked Kelley to be a courier. He suggested that she carry some of the materials to his clients abroad in exchange for a couple of thousand dollars. She refused but continued to listen to his tales. Then, in August, for reasons federal prosecutors won’t discuss, she decided to betray him.

As summer turned to fall, and Kelley uprooted herself again and moved to Washington state, hours of incriminating talks with her garrulous friend were secretly being recorded.

“Most of it’s from Ivan, then?” Kelley asked him about the purloined software.

“All of it. . . . Oh, nothing that they’ll ever miss.”

“So he copied it?”

“Yeah. . . . No one’s gonna know. . . . Only the computer knows. (McVey and I are) going to make one very much like it. This gives us a two-year head start. And a two-year head start in this business is worth a lot.”

It was as if Anderson saw himself as the hero of a spy novel and couldn’t bear to keep the plot to himself.

Even without the tapes of his conversations with Kelley, Project X was beginning to unravel. Anderson and the Batinic brothers were stopped and searched by U.S. Customs Service agents in Vancouver, B.C., on Aug. 9, 1987, shortly after, federal agents say, they had delivered to McVey a couple of samples to dangle before the Russians--a Saxpy manual and a diagram of some circuits. Agents found the three were carrying more than $15,000 in cash--more than enough to arouse suspicions. Under questioning, Ivan Batinic admitted he had received the money at a hotel in British Columbia from a man they knew as Carlos Julio Williams, an alias used by McVey.

Nine days later, McVey was enjoying a brief fishing trip in Teslin, a remote village in the Yukon Territory. As McVey sat on the terrace of a coffee shop, a vacationing Royal Canadian Mounted Policeman named Daniel Fudge recognized him from a just-issued wanted poster. McVey surrendered without a struggle. After more than five years as a fugitive, the U.S. Customs Service’s1836020596Vey and Anderson in the alleged plot.

The news of McVey’s capture stunned Anderson. Now that McVey was in jail, Anderson told Kelley, the deal might be in jeopardy. McVey had been funding Anderson’s travels around the world, he said. Without him, there was no steady supply of cash, no one to help him negotiate with the Soviets. Anderson talked about McVey’s impressive influence on their contacts in the Soviet Union: “The guy that’s our shepherd while we are in Moscow,” he told Kelley, “. . . said with 24 hours’ notice, Chuck can land anywhere in the Soviet Union, no documentation whatever, and would be welcome to a direct connecting flight to Moscow.”

All along, Kevin Anderson had been telling Pam Kelley and Nicole Hobson that there was nothing unethical about selling computers to the Soviets. According to transcripts of tape-recorded conversations between Anderson and Kelley, the computer engineer maintained that the Soviets wanted the super-computer to aid their space program--certainly not for any military purposes. “(McVey) never sold (the Russians) anything that has to do with military or with spying,” he told Kelley after McVey’s arrest. “The U.S. government has been exaggerating, to try and scare the Canadians into giving him up.”

But when it became clear to him that McVey was not getting out of jail, he sent a desperate letter to McVey’s wife, Marilee, in Malta, that indicated that he was well aware of the illegality of his enterprise.

“Chuck was carrying a document which, with some detective work could put us away for many years,” he wrote in the letter, which was later presented at Anderson’s bail hearing. “I’m holding materials, part of the next project, which would be worth $2 million to your family and $1 million each for my family and that of my friend. If you are willing to help me I should be able to get the material and my friends to Malta for safekeeping. . . . I’m deeply involved, and the U.S.A. knows it. . . . I have a trusted friend totally unknown to our enemies who would be willing and able to be able to take the materials to Malta. If you give me the means and the go-ahead, her identity and route will be known only to me, until she arrives in Malta and phones you. What I need to make it happen: (1) $21,500 to cover expenses Chuck already agreed to. (2) An additional $4,000 to cover the expenses of the courier. (3) Help with my travels to the Big City to finalize the contract.”

But over the next month, transcripts of conversations with Pam Kelley indicate, a change came over Kevin Anderson. Even as he asked McVey’s wife for money to complete the deal, he was gradually turning on the Fat Man. Although McVey had made the initial introductions to the KGB in November, 1986, and escorted Anderson to Moscow again in April, Anderson now knew the key Soviet players and had been treated like visiting royalty on his most recent trip. He apparently began to feel that he could handle the mission himself. On Sept. 10, he told Kelley that, whether or not McVey made it to Switzerland to free up some cash, he was going to Moscow to negotiate the contract.

In early fall, as Anderson and Kelley sat in a restaurant in Ferndale, Wash., talking about McVey, he said conspiratorially: “. . . This is something that you don’t tell anybody in the world.”

“OK.”

“If we get this deal, I’m cutting him out. . . . I’m going to pay him what I owe him, which is a lot of money. . . . Because he paid my expenses and stuff.” But the man is unreliable and dishonest, and he’s cheated me many, many, many times.”

Anderson talked about reducing McVey’s share of the profits from $2 million to $1 million. On Sept. 19, using money from sources that remain unknown to the government, he procured an Aerofl1869881460to Moscow via Malta to negotiate the terms of the deal. Perhaps aware of Anderson’s growing sense of independence, the Soviets exploited his distrust of McVey. Upon his return from Moscow, Anderson told Kelley that the KGB was furious with the Fat Man.

“He wants an immorally high price for what we’re doing. And I don’t think that’s right. . . .”

“Well, do the people in the Big City still want to do business with you?”

”. . . They can’t give me an answer until the first of December,” Anderson replied. “If the answer is yes, they’ll ask me to visit them one more time to discuss terms. . . . That has to be done using Chuck’s money. So he has to think that old loyal Kevin is still sitting by and doing things his way. . . . Once I’ve made that trip, they told me to cut him loose.”

But Anderson’s final act of opportunism would never take place. On Oct. 22, the FBI, which had been monitoring Anderson’s activities through Kelley, picked up the Batinic brothers for questioning; Anderson waited two anxious days without hearing from them. Then, on Oct. 24, he hurriedly threw his passport, some underwear and $1,500 in cash--all the money he had in the world--into a bag and drove to the storage locker in Fremont where he had secreted the stolen computer tapes and floppies. By then, however, the FBI had already removed the evidence from the locker and replaced it with dummies. And when Anderson attempted to transfer the phony material to another locker, government agents arrested him. Declared a “flight risk” by the U.S. government, he remains held without bail in Oakland City Jail.

It was a hard fall for a powerful personality who once dazzled Silicon Valley. His attorney, David Ellison, insists that San Jose federal prosecutors have exaggerated the military importance of the Matrix 1 super-computer.

The same traits that made Kevin Anderson so magnetic--his indifference to convention, his egomania, his love of adventure--also seem to have led to his undoing. As he told Pamela Kelley during a phone call last September, just one month before he was handcuffed and led to prison, he expected that the money from the Russians would finally give him the life of international travel and wealth he had long dreamed of. All he needed, he told Kelley, was to deliver the goods and get the money in his “hot little hand.”

As he considered the prospect of spending the next decade behind bars, Anderson made only one request of his jailers: That they provide a computer in his cell. They turned him down.