When Sources Go Bad

He walked into the Dallas office of the FBI late on a Friday afternoon in 1980. Frank Varelli said he had information about some killings in his native El Salvador. He listed dates and places. He named names.

“We contacted the CIA and they verified the killings were committed,” recalled Gary Penrith, then acting head of the FBI office. “So this guy looked like he might be giving us reliable information.”

With the FBI’s blessing, Varelli infiltrated the Dallas branch of a group he said was behind the slayings -- the Committee in Solidarity with the People of El Salvador, which opposed U.S. policy in Central America. Varelli reported, among other things, that members of the group were plotting to assassinate President Reagan. The FBI launched a massive investigation.

Years passed. Penrith went on to Washington to become one of the bureau’s highest-ranking intelligence officials. Then he got the sickening news: Varelli had concocted his allegations. The investigation had been a costly waste of time.

“He was a wacko,” said Penrith, one of six FBI officials disciplined for the embarrassment. Instead of receiving a hoped-for promotion to assistant director, he finished his 24-year career running the FBI’s Newark, N.J., office.

“I’m not crying the blues,” he said. “I’m just telling you what happens when an informant goes bad.”

Whether investigating a terrorism conspiracy or trying to bust a burglary ring, authorities depend on insiders willing to share information. Yet dealing with informants is a treacherous business. Sometimes, as in Varelli’s case, they mislead their handlers. Sometimes they seduce them. Sometimes they corrupt them. And sometimes, they turn the tables, leaking state secrets to foreign governments.

In April, authorities in Los Angeles arrested a Chinese American informant and alleged that she carried on affairs with two FBI counterintelligence agents who supervised her activities. The informant, Katrina Leung, allegedly passed classified information to the Chinese government. She has denied any wrongdoing.

Last fall, John J. Connolly Jr., a former FBI agent in Boston, was sentenced to 10 years in federal prison for protecting the sort of gangsters he was supposed to put behind bars.

Connolly became so close to his mob informants that he looked the other way while they committed extortion, ran bookmaking operations and allegedly killed rivals.

In an earlier but no less sensational case, Mark Putnam, an FBI agent in Kentucky, strangled an informant in 1989 after she threatened to expose their affair and her pregnancy.

People who provide information on criminal activities are called sources or snitches. Those who trade in foreign intelligence are known as “assets.” By whatever name, they need to be handled with care, say FBI veterans.

“You hold on to a source the way you hold on to a snake,” said Steve Moore, an agent in Los Angeles. “Very carefully and very firmly. And the problem is knowing how to let go of them.”

FBI and congressional investigators are examining the recent scandals in Los Angeles and Boston, searching for insights into what causes some agent-informant relationships to go bad.

Sharing Secrets

The FBI has stringent rules for employing informants and is tightening those rules. Yet the nature of the relationship between agents and their sources creates powerful temptations.

They share secrets, including the secret of their relationship. They spend lots of time together, often in private. Each wants something, and each works hard to build the other’s trust -- and wear down the other’s defenses.

Rick Smith, a retired counterintelligence agent from San Francisco, said that anyone peddling information about a foreign government needs special scrutiny.

“You have to figure out why they’re talking to you,” Smith said. “Because ultimately in counterintelligence, when you get someone to be a mole, they are betraying their country. And you need to know why.”

In many cases, money is the motivation.

Smith recalled a European businessman whom the FBI recruited in the early 1980s to help foil espionage efforts by Soviet and Eastern European agents. In one case, the foreign agents asked the businessman to help them buy sophisticated computer equipment from the U.S.

“We found out about it,” Smith said. “And we were able to alter the equipment and send them back things that didn’t work.”

The foreign agents went to a government-sponsored trade show in Sofia, Bulgaria, to show off their newly acquired gear, and were embarrassed. “They turned the stuff on and it didn’t work,” Smith said, chuckling.

Afterward, the European businessman felt he was worth more than ever to the FBI. “We’d already paid him a lot of money over the years, hundreds of thousands of dollars,” Smith said. Now, the man was demanding $2 million and threatening to quit if he didn’t get it.

“So I let him go,” Smith said. “You can’t be extorted. You can’t let that happen.”

Informant Ted Eley, who helped the FBI bust a Kentucky drug operation nearly 20 years ago, had a different motivation.

An ex-con, he hoped to be pardoned by the governor so he could regain the right to vote, recalled FBI agent Nancy Savage, who for years has taught colleagues how to develop criminal sources.

“He was a decent guy ... a really significant informant in a major drug case,” said Savage, now an agent in Portland, Ore., and president of the FBI Agents Assn. “He bought the drugs, wore a wire several times. He was willing to go the whole nine yards.”

Eley helped the FBI obtain convictions against 13 people who were running the nation’s third-largest methamphetamine lab in Hog Wallow, Ky. But he never received a pardon for his own, earlier drug conviction.

“He accidentally drowned,” Savage said. “It was sad. He had no wiles or guiles or anything like that. His only motivation was to be able to vote again.”

Handling informants requires a deft balance. Agents must get close to sources without letting down their guard.

“In almost every occasion, the decision to provide information depends on some kind of personal relationship and trust with the agent,” said Savage, who likens the relationship to that between physician and patient.

Some informants try to treat their handlers like friends, even family.

“You have to keep in mind it is a business relationship,” said Bill Gore, a former assistant director of the FBI’s inspection division. “On the other hand, if you have a good asset, it is hard not to develop a friendship. The stakes are extremely high, and if you have a valuable asset, it is hard not to go beyond an arm’s-length relationship.”

It certainly was hard for Connolly, the disgraced former agent. He grew up in a South Boston housing project and bragged that his credentials as a “hometown boy” gave him special access to the New England underworld.

In 1975, Connolly recruited mob boss James “Whitey” Bulger, a childhood friend, as an informant. The relationship lasted nearly 20 years and was corrupt to the core. Connolly protected Bulger, tipping him to investigations into his activities and even identifying disloyal members of his gang. Bulger reciprocated with information about his mob competitors.

Connolly became a star in the FBI, and Bulger and his associates enjoyed a kind of impunity as they ran drugs, continued gambling operations and did away with rivals.

Connolly delivered bribes from Bulger to an FBI supervisor. He wrote an anonymous letter on Boston police stationery that accused a local detective of falsifying evidence against Bulger and his top lieutenant, Stephen “The Rifleman” Flemmi.

Four years after retiring from the bureau, Connolly tipped Bulger in 1994 that he was about to be indicted on extortion, murder and racketeering charges. Bulger disappeared and remains on the FBI’s 10 Most Wanted list.

Back in 1983, Connolly taped an FBI training video in which he warned new agents against becoming too cozy with gangsters. “You can get friendly with them and you can like them,” he said. “But you can never forget who you work for and that you’re an FBI agent.”

Mark Putnam would have done well to consider that advice. Thirteen years ago, he became the first FBI agent ever charged with murder.

A married father of two, Putnam was seen as a rising star in the bureau. Then he began to spend time with Susan Daniels Smith, an informant in a Kentucky bank robbery case.

“We were in the car one night, Susan and I talking, and she sensed that I was down, and we just came together right there,” Putnam said in a 1993 jailhouse interview with ABC-TV.

“I knew right at that point that I had compromised everything that I had worked for, because I broke the first rule of an FBI agent-informer relationship: Never sleep with your informant.”

Smith, 28, became pregnant. In June 1989, Putnam strangled her, dumped the body off a coal-mining road in eastern Kentucky and returned to his wife and children.

A year later, Putnam confessed to the crime and led authorities to Smith’s body. In return, he was allowed to plead guilty to manslaughter.

Putnam said he killed Smith because she was threatening to expose their affair. He was sentenced to 16 years in prison and paroled in 2000.

Agents say that such egregious misconduct is extremely rare and that FBI regulations, peer pressure and rigorous monitoring usually prevent agent-source relationships from becoming too intimate.

FBI field offices are required to review the files of all informants every 90 days. Every 18 months, field offices conduct internal inspections that include a look at informants. Every three years, each FBI office is subjected to an inspection by agents from headquarters, who review the files of every criminal informant and intelligence asset.

Still, the secrecy inherent in handling informants can make it difficult to discover problems at an early stage.

The more valuable the informant, the closer the bureau guards his or her identity. Penrith, the former top FBI official, said the names of double agents providing foreign intelligence were known only to a handful of senior officials.

Leung, the Chinese American informant arrested in April, carried on a clandestine affair with her FBI handler, James J. Smith, for nearly 20 years, authorities said. For much of that time, Smith was head of the FBI’s Chinese counterintelligence squad in Los Angeles.

A prominent San Marino businesswoman, Leung began providing information on China in the early 1980s. During regular visits to her home, Smith would leave his briefcase unattended and Leung would remove and photocopy documents, according to FBI affidavits.

Smith knew as early as 1991 that Leung was secretly communicating with Chinese agents, but he continued to vouch for her credibility with higher-ups, authorities say.

The Double-Cross

Smith learned of Leung’s improper contacts from his FBI counterpart in San Francisco, William Cleveland Jr., who had heard Leung’s voice on an intercepted conversation with a Chinese agent, FBI affidavits say.

Cleveland, it turned out, was also having an affair with Leung.

Leung is charged with obtaining and copying national security documents. Smith, who retired from the FBI in November 2000, is accused of gross negligence. Both have pleaded not guilty. Cleveland, also retired, has not been charged and is cooperating with authorities.

For all the potential pitfalls, current and former agents say, there is no exaggerating the importance of reliable informants. Many cite the case of Raymond J. Takiff, a flamboyant Miami defense attorney who played a key role in an FBI corruption probe called Operation Court Broom.

Takiff approached authorities in August 1989 and claimed that Roy Gelber, a judge on Florida’s highest trial court, was corrupt. “He offered immediately to wear a wire,” said retired FBI agent Tom Becker. “He was crucial, critical to the case. Without him, we would have had nothing.”

Takiff recorded about 500 conversations with the judge and other principals that showed Gelber could be paid to fix cases.

The judge pleaded guilty to racketeering and agreed to cooperate. Nearly a dozen Dade County judges and defense lawyers ultimately were convicted in the probe.

Takiff, who died five years ago, never shared with Becker his reasons for helping the FBI. “My guess,” Becker said, “was that he wanted to do something good.”

*EXCERPTS

A Glimpse Into an Alleged Affair

Federal authorities say retired FBI agent James J. Smith carried on a nearly 20-year affair with Katrina Leung, an informant he supervised. Leung allegedly passed U.S. secrets to China. She and Smith have denied wrongdoing. FBI affidavits outlining the government’s case against the pair offer glimpses of their relationship. Excerpts:

“Leung admitted to first becoming intimate with Smith in the early ‘80s -- ‘very long ago, but I cannot tell you what year.’ ”

*

“Smith stated he had traveled to Hong Kong in February 2001, and again a year or so later. Each trip was for about a week. Smith initially stated that he had traveled alone each time and had not met anyone there.... Later in the interview, Smith again stated he traveled alone to Hong Kong, and that he had not gone with his wife or son.

“When specifically asked if Leung had accompanied him, Smith stated: ‘She’s, she was there.’ ”

*

“Smith ... acknowledged that Leung (and not his wife) had picked him up on his last day of work. Smith also acknowledged he had invited Leung to attend his FBI retirement party in November 2000. He also acknowledged that he had permitted Leung to videotape the party, even though FBI agents and CIA officers were in attendance.”

*

“Also recovered [from a search of Leung’s home] was a photograph of Smith seated at Leung’s kitchen table posing near large coin sacks, with many coins in his hands. The photograph appeared to be comic in intent, as Smith had an exaggerated expression and pose.”

*

“Smith stated at several points in the interview that he had probably told Leung too much in the course of operating her as an asset.”

Source: Affidavits of probable cause filed by FBI Special Agent Randall Thomas