Nightmare in San Francisco

The history of the Central Intelligence Agency's role with man-made drugs is long and ugly. One of the most revolting aspects as been the manner in which so-called professionals armed with the cloak of government secrecy have dallied and dabbled with innocent people's lives, all under the lame cover of national security.What a joke it would be, had they not destroyed so many people. Now, another shooting makes us wonder whether the same thing continues unabated. Is there a hidden connection between James E. Holmes and some secret research project funded by the CIA?

Operation Midnight Climax: 
How the CIA Dosed S.F. Citizens with LSD

By Troy Hooper Wednesday, Mar 14 2012

 

A Spiked Drink in 1957

It's been over 50 years, but Wayne Ritchie says he can still remember how it felt to be dosed with acid. He was drinking bourbon and soda with other federal officers at a holiday party in 1957 at the U.S. Post Office Building on Seventh and Mission streets. They were cracking jokes and swapping stories when, suddenly, the room began to spin. The red and green lights on the Christmas tree in the corner spiraled wildly. Ritchie's body temperature rose. His gaze fixed on the dizzying colors around him.

The deputy U.S. marshal excused himself and went upstairs to his office, where he sat down and drank a glass of water. He needed to compose himself. But instead he came unglued. Ritchie feared the other marshals didn't want him around anymore. Then he obsessed about the probation officers across the hall and how they didn't like him, either. Everyone was out to get him. Ritchie felt he had to escape.

He fled to his apartment and sought comfort from his live-in girlfriend. It didn't go as planned. His girlfriend was there, but an argument erupted. She told him she was growing tired of San Francisco and wanted to return to New York City. Ritchie couldn't handle the situation. Frantic, he ran away again, this time to the Vagabond Bar where he threw back more bourbon and sodas. From there, he hit a few more bars, further cranking up his buzz. As he drank his way back to Seventh and Mission, Ritchie concocted a plan that would change his life.

Victim of MK-ULTRA

Tries to Rob Bank?

Now in his mid-eighties and living in San Jose, Ritchie may be among the last of the living victims of MK-ULTRA, a Central Intelligence Agency operation that covertly tested lysergic acid diethylamide (LSD) on unwitting Americans in San Francisco and New York City from 1953 to 1964.

"I remember that night very clearly, yes I do," he said in a recent interview. "I was paranoid. I got down to where I thought everyone was against me. The whole world was against me."

After the day had bled into night on Dec. 20, 1957, Ritchie returned to his office in the Post Office Building and retrieved two service revolvers from his locker. He was going rogue.

"I decided if they want to get rid of me, I'll help them. I'll just go out and get my guns from my office and hold up a bar," Ritchie recalls. "I thought, 'I can get enough money to get my girlfriend an airline ticket back to New York, and I'll turn myself in.' But I was unsuccessful."

Out of his skull on a hallucinogen and alcohol, Ritchie rolled into the Shady Grove in the Fillmore District, and ordered one final bourbon and soda. After swallowing down the final drops, he pointed his revolver at the bartender and demanded money. Before joining the marshals, Ritchie served five years in the Marines and spent a year as an Alcatraz prison guard. But the cop had suddenly become the robber.

It was over in a flash. A waitress came up behind him and asked Ritchie what he was doing. When Ritchie turned around, a patron hit him over the head and knocked him unconscious. He awoke to a pair of police officers standing over him. Ritchie says he had expected to get caught or killed.

The judge went easy on him and Ritchie avoided prison. He resigned from the Marshals Service, pleaded guilty to attempted armed robbery, paid a $500 fine, and was sentenced to five years' probation.

Ritchie's story is certainly peculiar, but not unique. Other San Franciscans were unsuspecting participants in a strange research program in which the government effectively broke the law in an effort to fight the Cold War.

George White's Personal Diary

Seymour Hersh first exposed MK-ULTRA in a New York Times article in 1974 that documented CIA illegalities, including the use of its own citizens as guinea pigs in games of war and espionage. John Marks expertly chronicled more of the operation in his 1979 book, The Search for the Manchurian Candidate.

View from 225 Chestnut

There have been other reports on the CIA's doping of civilians, but they have mostly dished about activities in New York City. Accounts of what actually occurred in San Francisco have been sparse and sporadic. But newly declassified CIA records, recent interviews, and a personal diary of an operative at Stanford Special Collections shed more light on the breadth of the San Francisco operation.

There were at least three CIA safe houses in the Bay Area where experiments went on. Chief among them was 225 Chestnut on Telegraph Hill, which operated from 1955 to 1965. The L-shaped apartment boasted sweeping waterfront views, and was just a short trip up the hill from North Beach's rowdy saloons. Inside, prostitutes paid by the government to lure clients to the apartment served up acid-laced cocktails to unsuspecting johns, while martini-swilling secret agents observed their every move from behind a two-way mirror. Recording devices were installed, some disguised as electrical outlets.

To get the guys in the mood, the walls were adorned with photographs of tortured women in bondage and provocative posters from French artist Henri de Toulouse-Lautrec. The agents grew fascinated with the kinky sex games that played out between the johns and the hookers. The two-way mirror in the bedroom gave the agents a close-up view of all the action.

George White

The main man behind the mirror was burly, balding crime-buster George H. White, a Bureau of Narcotics maverick who made headlines breaking up opium and heroin rings in Europe, the Middle East, Latin America, and the U.S. Few knew he doubled as a CIA spook for Uncle Sam. He oversaw the San Francisco program, gleefully dubbing it Operation Midnight Climax.

"[White] was a real hard head," said Ritchie, who regularly ran into him in courtrooms and law enforcement offices in downtown San Francisco. "All of his agents were pretty much afraid to do anything without his full approval. White would turn on them, physically. He was a big tough guy."

American chemist Sidney Gottlieb was the brains behind White's brawn. It was the height of McCarthyism in the early '50s, and government intelligence leaders, claiming fear of communist regimes, were using hallucinogens to induce confessions from prisoners of war held in Korea, and brainwash spies into changing allegiances. What better way to examine the effects of LSD than to dose unsuspecting citizens in New York City and San Francisco?

The mind-bending laboratory on Telegraph Hill was called "the pad" in White's leather- bound journals. White's widow donated 10 boxes of his personal effects to Foothill College in Los Altos Hills after he died of cirrhosis of the liver in 1975. Now warehoused at Stanford, the journals, letters, and photographs provide a window into the mischievous life of a secret agent during the Cold War.

1955 S.F. directory; White at 2454 Vallejo, 2 miles from safehouse

Truth Serums in the OSS

Before White joined the narcotics bureau, he worked in the Office of Strategic Services (OSS), a World War II-era intelligence agency that preceded the CIA. In a quest for truth serums, White and other OSS agents slipped concentrated tetrahydro-cannabinol acetate (THCA) into the food and cigarettes of suspected communists, conscientious objectors, and mobsters in the 1940s. The experience wasn't a prerequisite for working in MK-ULTRA, but it helped.

Dr. James Hamilton, a Stanford Medical School psychiatrist, knew White from their OSS days. He was among the small group of researchers who had clearance to the pad. Gottlieb visited, too, but Operation Midnight Climax had no regular medical supervision.

And that became problematic. The first CIA brothel that White and Gottlieb ran in New York City had already gone awry. U.S. biological warfare specialist Frank Olson either jumped or was pushed from a 10th-floor hotel window in 1953, nine days after the CIA gave him LSD. When a CIA chemist, who was sharing the hotel room with Olson, met with police, they found White's initials and the address of a Greenwich Village safe house on a piece of paper in his pocket. The New York City operation was temporarily suspended when police investigated Olson's death, and restarted later.

Dr. Sidney Gottlieb

Dr. Sidney Gottlieb in Charge

White, a native Californian and former San Francisco newspaper reporter, yearned to return home. In 1955, Gottlieb let him.  Aside from Gottlieb's scattershot visits, White, now a "CIA consultant," had free rein over the S.F. safe houses. Ritchie says that White's right-hand man, Ike Feldman, ran around dressed like "a hot-shot drug dealer." Ritchie adds: "He tried to act like Al Capone." The pad quickly became something akin to a frat house for spies. "Eight-martini lunches" were enjoyed regularly, White noted in his journal. And on some occasions he watched the dubious research unfold while sitting on a portable toilet a friend donated to him. It was his "observational post."

What went on in the pad, apparently stayed in the pad.

1955 San Francisco directory

Dr. John Erskine has lived next door [at 233 Chestnut] to the location since 1954. "I had a feeling that things went on there that were none of my business. It wasn't overt. People weren't screaming out the windows," says Erskine, standing outside the acid house.

The property is undergoing renovation. Just a few months ago, a construction crew pulled microphones, wires, and recording instruments out of the walls.

Ruth Kelley was a singer at a San Francisco club called The Black Sheep. Her unexpected trip into another dimension happened to her onstage. Young, attractive Kelley caught White's eye, though she rejected his advances. White or one of his men eventually dosed her with LSD just before she went onstage, according to a deposition of Frank Laubinger, a CIA official who led a program in the 1980s that made contact with victims of MK-ULTRA. 

"The LSD definitely took some effect during her act." Kelley reportedly went to the hospital, but was fine ... once the effects of the drug, that she didn't know she was on, wore off.

North Beach

How test subjects were chosen by the agents varied. In the case of the Telegraph Hill safe house, working girls would pick up johns in North Beach bars and restaurants, then bring them back for experimentation and observation. Other times, White and his wife would host dinner parties where guests might get dosed with a hallucinogenic cocktail without their knowledge. And seemingly random San Franciscans like Kelley were victimized for no other reason than their paths crossed with White and his men at the wrong time. White wrote in his diary how he slipped acid to unsuspecting civilians at local beaches, and in city bars and restaurants.

Fun, Fun, Fun...until

There were two other Bay Area safe houses where the CIA researched LSD and other chemicals: Room 49 of the Plantation Inn at Lombard and Webster streets [only .6 of a mile from White's home], and 261 Green [Greene?] St. in Mill Valley [north of San Francisco in Marin County], not far from Sausalito.

***

Dr. Timothy Leary

CIA operatives also admitted to experimenting with LSD themselves. In a 1970 letter to UC Berkeley psychiatry professor Harvey Powelson, White wrote how he "served as a guinea pig from time to time. [Note: Powelson also worked with Timothy Leary, who was the Director of the Kaiser Foundation Psychological Research from 1952 to 1958.] My personal observation was that the effect of all of these drugs was essentially the same, except for the degree or extent of the effect. THCA was more potent than marihuana [sic] and LSD more potent than THCA. So far as I was concerned, 'clear thinking' was non-existent while under the influence of any of these drugs. I did feel at times I was having a 'mind-expanding' experience but this vanished like a dream immediately after the session."

By all accounts, White enjoyed the undercover work he was doing. Perhaps a little too much. He would write in a 1971 letter to Gottlieb, 

"Of course I was a very minor missionary, actually a heretic, but I toiled wholeheartedly in the vineyards because it was fun, fun, fun. Where else could a red-blooded American boy lie, kill and cheat, steal, deceive, rape and pillage with the sanction and blessing of the All-Highest? Pretty Good Stuff, Brudder!"

Few inside the CIA even knew about MK-ULTRA and its sub-projects. The domestic experiments escaped scrutiny for a decade, until President John F. Kennedy, smarting from the botched Bay of Pigs invasion, forced CIA director Allen Dulles, who first signed off on MK-ULTRA, to resign. The agency's activities in San Francisco were so secret that not even the CIA's new director, John McCone, was informed of them when he took over in 1963. 

But incoming CIA Inspector General John Earman didn't sugarcoat what he learned. 

"The concepts involved in manipulating human behavior are found by many people both within and outside the Agency to be distasteful and unethical," he wrote, questioning whether the clandestine activities were even legal. "Public disclosure of some aspects of MKULTRA activity could induce serious adverse reaction in U.S. public opinion, as well as stimulate offensive and defensive action in this field on the part of foreign intelligence services."

Earman noted numerous civilians grew ill from the effects of the psychoactive drugs they were secretly slipped, and it would be embarrassing if doctors were to discover what the government had been doing. He recommended closing the safe houses. Yet high-ranking intelligence officers called for the continuance of Midnight Climax. "While I share your uneasiness and distaste for any program which tends to intrude upon an individual's private and legal prerogatives, I believe it is necessary that the Agency maintain a central role in this activity," wrote Richard Helms, then the CIA's deputy director of plans.

Testing of unwitting individuals was suspended in 1964, at least officially. Still, the CIA safe houses in San Francisco and New York City continued to operate for a year and a half longer. Scrutiny of the program intensified at CIA headquarters in Virginia, and subsequently the Bay Area safe houses shut down in 1965. New York City's operation stopped in 1966. Intelligence officers conceded that the drug-testing exposed the agency to a serious "moral problem."

Fire Marshal at Stinson Beach

The fun was over. White retired from law enforcement in 1965 and became the fire marshal at Stinson Beach [near Mill Valley]. He wrote a swashbuckling autobiography titled A Diet of Danger that crowed about his Bureau of Narcotics adventures. It conspicuously left out Operation Midnight Climax. Publishers rejected the book in 1971.

Lawmakers were incredulous when they learned of the CIA's secret plots. But specifics at the time were scant.

Helms, one of MK-ULTRA's original architects, succeeded McCone as CIA director in 1966. Before Helms and Gottlieb resigned in the early 1970s, they ordered all of the project's paperwork destroyed. A massive paper purge occurred in 1973, just as Washington found itself in the throes of the Watergate scandal. In an attempt to clean house, that same year new CIA Director James Schlesinger ordered agency employees to inform him of illegal government activities. That's when he learned of Olson's fatal plunge in New York City, and the acid tests.

It didn't take long before details leaked to Hersh. The investigative journalist's groundbreaking article in the New York Times exposed the CIA's vast illegal domestic surveillance programs. The government had been screening U.S. mail, wiretapping journalists' phones, and plotting assassinations. And, oh yeah, it had also been dosing hundreds of civilians with LSD, as well as significant military populations, in the name of defense. Americans demanded answers.

Donald Rumsfeld, then chief of staff for President Gerald Ford, and Rumsfeld's deputy, Dick Cheney, wanted Hersh prosecuted for revealing government secrets. But Ford didn't heed their advice. He appointed a committee chaired by Vice President Nelson Rockefeller to investigate the intelligence improprieties. U.S. Sen. Frank Church also headed a congressional investigation of CIA malfeasance in 1974, and Sen. Edward Kennedy held hearings on MK-ULTRA in the Subcommittee on Health and Scientific Research.

While most of the CIA's records detailing the top-secret programs were destroyed, bureaucratic bumbling spared a cache of 20,000 documents from the shredder. In 1977, Marks, author of The Search for the Manchurian Candidate, filed a Freedom of Information Act request, which provided him with many redacted versions of the surviving MK-ULTRA records.

Then, in exchange for immunity from prosecution, Gottlieb answered questions before the Senate. To gain "firsthand knowledge," he said, agents "extensively" experimented with LSD on themselves before giving it to the public.

Kennedy tried to put it in perspective. "There is a light side to it, but there is also an enormously serious side," he said. "There are perhaps any number of Americans who are walking around today on the East Coast or West Coast who were given drugs, with all the kinds of physical and psychological damage that can be caused."

CIA Grants to Universities, Etc.

CIA Director Adm. Stansfield Turner testified that 44 colleges and universities, 15 research foundations and pharmaceutical companies, 12 hospitals and clinics, and three penal institutions across the country were used for MK-ULTRA research that included LSD, painkillers, and other drugs.

Using a front organization, Gottlieb distributed millions of dollars in drug research grants to Stanford, UC Berkeley, and other institutions, which only later learned the money's source. Stanford acknowledged its faculty received close to $40,000 over eight years from the CIA's secret program. It had hosted several studies on the effects of drugs on interrogations, and also spent money developing miniature lie detectors and other spy equipment.

Lawmakers denounced the CIA's covert domestic activities, but ultimately no disciplinary action was taken. Gottlieb and the others behind the acid experiments were not prosecuted or punished. But the innocent victims of these programs had to be notified, the Senate subcommittee concluded. Tracking down victims proved difficult, since so little of that data survived the CIA's paper-shredding.

A victim's taskforce was established, but despite estimates of hundreds, maybe thousands of people exposed to the CIA's mind-control program, records show only 14 of them were notified.

Dr. Olson's family sued the government, claiming the scientist's death was not actually connected to the LSD he took. They claimed a government operative pushed him out of the window so he wouldn't divulge information about a classified CIA interrogation program concerning the use of biological weapons in the Korean War. Olson's family ultimately accepted an out-of-court settlement from the U.S. government for $750,000. There have been other lawsuits, including a class-action from alleged victims of the CIA's programs in Canada, and other reparations have been paid.

The Vietnam Veterans of America filed suit in San Francisco federal court in 2009, claiming at least 7,800 soldiers were, without their knowledge, given as many as 400 types of drugs and chemicals, including sarin, amphetamines, barbiturates, mustard gas, and LSD by the Army and CIA. Just last month, the group filed a petition in San Francisco seeking class-action status. The suit does not ask for money but instead seeks to overturn a 1950 Supreme Court decision that effectively insulates the government from liability under the Federal Torts Claims Act. The vets also want to discover the substances and doses they received, and get care for any resulting health conditions.

George White at Same Christmas Party!

In spring 1999, Ritchie opened a copy of the San Jose Mercury News and read Gottlieb's obituary. Then it hit him.

"I didn't know that name at all. I'd never heard of him," Ritchie said. "But what caught my eye were LSD and George White. George White was a supervising narcotics officer in 1957 in San Francisco and I knew him. When I read the article, it said he was working with the CIA testing mind-control drugs with the help of drug-addicted prostitutes. I put it together. He was drugging people without their knowledge. I thought, 'My God, how could he have done that to me?'"

Ritchie began his own research into the CIA's drugging activity, and grew convinced the CIA dosed him. Ritchie brought a lawsuit against the United States and its agents, claiming his attempted armed robbery at the bar was set in motion when agents slipped LSD into his drink at the Christmas party. White's journal puts him in the same place as Ritchie the day the dosing and robbery occurred. An entry in White's leather-bound book for Dec. 20, 1957, reads: "Xmas party Fed bldg Press Room."

Ritchie's complaint leaned heavily on the deposition of Feldman, the former agent under White. Feldman's testimony was at times incriminating, contradictory, and combative. "I didn't do any follow-up, period, because it wasn't a very good thing to go and say 'How do you feel today?' You don't give them a tip. You just back away and let them worry, like this nitwit, Ritchie," Feldman said in a deposition.

A district court ruled in 2005 that Ritchie failed to prove that an LSD-induced psychotic disorder triggered his failed robbery attempt. The judge called it "a troubling case and that if indeed true [Ritchie] has paid a terrible price in the name of national security." Noting that federal agents in San Francisco were doing "things that were reprehensible," the judge concluded "it was not clear by a preponderance of the evidence that Mr. Ritchie was administered LSD. It may be what happened. But we don't operate on hunches." To this day, Ritchie says he is "absolutely shocked" he lost the case.

Now house-bound and suffering from emphysema and other ailments — all of which he attributes to old age — Ritchie isn't bitter about his long, strange trip. He simply chalks it up to the government doing the best it could during difficult times.

"They thought they were helping the country," Ritchie said.

Did Newt Make a Deal with a Devil?

Look out for it to hit the fan soon. And if it doesn't hit it, you'd better duck. If the word does not reach the American public soon about what Newt Gingrich's deal, made by taking money from Sheldon G. Adelson and his wife, Dr. Miriam Adelson (born in Tel Aviv in 1945 as Miriam Farbstein), really means, then it's clear that Republicans voting in primaries leading up to the nomination of their candidate this summer will be missing out on a crucial tidbit of information they desperately need to know. In referring to the support Adelson has given to Gingrich, The Daily Beast recently called Adelson Newt's "sugar daddy."


Dr. Miriam Adelson is a physician who treats drug addicts with methadone at the Adelson Clinics in Las Vegas and Tel Aviv. The irony is that her husband allegedly cooperates with Asian Triad gangs to bring in revenues to his Venetian resort/casino in Macao--gangs closely tied to the illegal drug trade, according to documentation developed in previous reports from the U.S. Senate Committee on Permanent Investigations.

The Adelsons at Opening Night of Venetian Casino in Macao

"Adelson is a whale of a donor, listed by Forbes as the eighth-richest man in America with a net worth of $21.5 billion, and his company controls the Venetian, the Sands, and the Palazzo along the Vegas Strip, as well as three gambling resorts in Macao." 

Aram Roston in The Daily Beast

Special Report from Reuters

The Macau Connection

By Matt Isaacs

March 11, 2011

BERKELEY, Calif  (Reuters) - When Steve Jacobs joined Las Vegas Sands in 2009, the company was sinking.


The Sands, which owns the Venetian resort, saw its stock price hit an alarming low, below $2 a share, around the time Jacobs, a 47-year-old Harvard graduate with a boyish face and close-cropped silver hair, took a job heading Sands China, which runs the company's Macau operations.


But over the course of the next year, Sands mounted a remarkable recovery, thanks in large part to Jacobs' leadership in Macau, a gambling boomtown bigger than Las Vegas and 16 time zones ahead of the Strip.


"There is no question as to Steve's performance," Sands COO Michael Leven told the company's board of directors in early 2010, according to court records. "The Titanic hit the iceberg. (Jacobs) arrived and not only saved the passengers, he saved the ship."


The feel-good story, however, was not to last.


Within months, Jacobs was clashing with the company's CEO Sheldon Adelson over several issues, according to a legal complaint, including whether to hire more so-called junket operators who bring in high rollers. Jacobs says he objected, citing their corrupt reputation -- and last July, the company unexpectedly fired him effective immediately. Two security guards escorted him out of the casino without allowing him to gather his belongings, and then unceremoniously escorted him out of town, Jacobs alleges.

"Some junket operators have in the past been linked to China's notorious triad criminal gangs and some have murky dealings when it comes to collecting debts from customers. A lack of transparency is common in the industry, with most firms keeping a low profile." --Reuters

Today, Jacobs is firing on the ship he once saved. The former chief of Macau operations is suing Sands, and his description of unsavory business dealings in the lawsuit has touched off a criminal investigation.



Earlier this month, the company acknowledged it had received a subpoena for documents pertaining to possible violations of the U.S. Foreign Corrupt Practices Act, which bars U.S. corporations from bribing foreign officials. Not only are the Securities and Exchange Commission and Justice Department looking at Sands' actions, but the FBI has joined in.


A Reuters investigation in collaboration with the Investigative Reporting Program at U.C. Berkeley has learned that casino executives, U.S. diplomats and the Chinese government share the concerns raised by Jacobs about Macau's booming junkets industry, which they describe as rife with organized crime.


An extensive review of court records, interviews with high-level federal officials, and State Department cables obtained by WikiLeaks and released to Reuters through a third party, reveal widespread corruption in a region that resembles a Chinese version of the early years of Las Vegas.


Among the Reuters-IRP investigation's findings:

• The FBI has joined the federal investigation of Sands, prompted by the Jacobs allegations.
• Sands has an internal background report on an alleged criminal figure who had financial links to the company.
• Mainland China restricted visas to Macau based on its distress about the growing power of criminal groups, known as triads, in the region.
• U.S. casino executives have discussed with U.S. diplomats the pervasive influence of the triads in the junkets for years -- yet nothing has changed.

Sands says that it has denied all allegations in the Jacobs lawsuit from the outset and on January 21 a subsidiary filed documents seeking to initiate a criminal complaint against Jacobs. It declined to provide a copy of the complaint.


The SEC and Department of Justice inquiries appeared to be a result of Jacobs' allegations in his wrongful termination lawsuit, Sands said by email to Reuters.


"Neither the SEC nor the Department of Justice has accused the company of any wrongdoing. The subpoena is described as a fact-finding inquiry and does not mean the SEC has concluded anyone has broken the law," it said.


BIGGER THAN LAS VEGAS


Macau, a former Portuguese colony located less than 40 miles west of Hong Kong, for centuries served as a center for trading and piracy in the South China Sea, a base for vice, gold smuggling and espionage.


But the brazen town on the tip of a Chinese peninsula has evolved into much more than a backwater den of iniquity.


Today Macau is a super-charged conduit for cash on the lip of the world's fast-growing major economy. The once worn casinos huddled near the ferry docks have gone upscale. And in the last ten years, it has become a major source of cash for America's largest casino operators.


Since 2001, when China opened its doors to U.S. casinos, annual revenues have increased more than tenfold to reach $23.5 billion today -- more than two and half times the revenues of the Las Vegas Strip and Atlantic City combined. The enclave provides two-thirds of Sands' revenue worldwide, according to securities filings.


Behind the gaudy numbers, however, public records suggest the region is becoming a growing geopolitical concern.


The U.S. Department of State, in its 2011 International Narcotics Control Strategy Report, said Macau is "vulnerable to becoming a hub for the laundering of criminal proceeds."


Beyond the casinos, the report says, the "close proximity border with PRC (China) and Macau's open economy, including lack of controls on cross border physical movement of cash, are factors that create a risk of money laundering and terrorist financing activities."


And the triads, according to diplomatic cables, are expanding. A trusted academic told diplomats that China had clamped down on Macau visas, "at least in part to stem the rise of organized crime in the mainland."


The source of this criminal expansion is Macau's unique junket system, which whisks VIPs into casinos, stakes them, and offers legally suspect services to avoid China's strict currency and debt collection laws. The junket companies -- widely linked to the triads, according to diplomatic cables -- generated an incredible 72 percent of the region's gaming revenues last year.

"Casino operators regret the growing power of 'junket' operators in mainland China that account for most of the Macau casinos' earnings," one U.S. consulate official reported in a cable. "They believe the operators are directly or indirectly involved with organized crime in Macau and the mainland."

The U.S. casinos operating in Macau are bound by Nevada laws that prohibit them from bringing "disrepute" upon the state. But they have immersed themselves in the junkets -- while privately, according to cables, confiding their concerns about the criminality of the industry to diplomats.


Another cable quoted a senior U.S. executive saying the growth of the triads was leading to expanding corruption in China. Provincial officials were providing "sweetheart" land sales, business licenses, and government contracts to junket operators, in exchange for bank deposits or cash sums paid to the officials upon arrival in Macau.


SANDS' COMBATIVE STYLE


No U.S. casino has more aggressively pursued the Macau dream than Las Vegas Sands.


Sands was the first U.S. casino to plant roots in Macau in 2004, and has since grown into the largest American company in the region, dwarfing the operations of competitors like Wynn Resorts and MGM Resorts International.


Sands raised the stakes for the entire territory. From a swath of reclaimed land, it created a new gambling resort called the "Cotai Strip," an Eastern rendition of Las Vegas with plans for shopping, restaurants and fancy hotels. The Chinese government planners wanted a diverse assortment of properties, and Sands has delivered, building the Venetian Arena, the Grand Canal Shoppes and the Four Seasons apartments.

Sands' Cotai Strip in Macao

But where Las Vegas rivals went in softly, working with local businesses and regulators, Jacobs' suit and diplomatic cables suggest Sands wasn't there to make friends.


One diplomat in a cable referred to the casino's "combative" style. Others describe how Sands executives have gone over the heads of Macau politicians to lobby ranking members of China's politburo, much to the chagrin of the locals.


Jacobs says in court filings that one of his primary tasks involved repairing "strained relationships with local and national government officials in Macau who would no longer meet with Adelson due to his rude and obstreperous behavior."


Adelson, Jacobs charged, instructed him to secretly investigate senior Macau government officials. "Any negative information could be used to exert 'leverage' in order to thwart government regulations/initiatives," the lawsuit claims.


Jacobs in his suit also notes that he was repeatedly threatened with termination if he "objected to and/or refused to carry out Adelson's illegal demands."


In particular, Adelson insisted Jacobs hire a local lawmaker named Leonel Alves, he says in his lawsuit. For more than a year, Alves, a public official in a position to help the corporation, was also listed as its counsel -- a potential conflict of interest central to the U.S. federal bribery investigation.


A Sands senior executive acknowledged a potential conflict in an interview with the Macau Daily Times last fall. "When we deal with an individual that is a government official, we have to follow the rules of the United States," said Chief Operating Officer Leven. "So we are working our way through that."


Jacobs, meanwhile, says Adelson was pushing to "aggressively grow the junket business." In his lawsuit, he says that he himself objected to expanding the VIP segment, citing low profit margins and "given recent investigations by Reuters and others alleging (Sands') involvement with Chinese organized crime groups" connected to the industry.


Now, the FBI has joined the probe into Sands and is exploring the full range of Jacobs' allegations, "getting into all of it," a source familiar with the probe said.


Leven, the COO, told the Macau Daily Times last week that there were some "mentions" in the federal subpoena about "triads and things like that," adding vaguely, "but we think that's cover."


SANDS: RETURN OR DESTROY DOCUMENTS


According to the Jacobs suit, Sands has already done its own poking around within Macau's criminal underworld. The casino commissioned background checks on local officials as well as two alleged criminals.


Sands has given at least one report to Nevada, a casino regulatory source said, but it has gone out of its way to stop the reports from reaching the public eye.


Last year, Reuters published a report on a man named Cheung Chi-tai, described in court testimony as the mastermind behind a plot to murder a dealer suspected of cheating.


At trial a witness identified Cheung as a leader of the Wo Hop To -- one of the largest triads in Hong Kong.


Cheung was also, according to witness testimony, "the person in charge" of a VIP room at the Sands Macao, and Hong Kong stock exchange filings showed him to be a "substantial shareholder" in a junket company with ties to the cloistered room.


The allegations emerged in a routine trial, barely noted beyond the crime pages of Hong Kong newspapers. Yet the revelations were historic: this was one of the first documented examples of an alleged criminal figure financially linked to a U.S.-based, publicly traded casino.


The article led to an ongoing Nevada investigation. The company then commissioned its own private background report on Cheung, said a person involved in the Sands effort who requested anonymity.


The company also ordered a report, according to documents in the Jacobs case, on another figure who was identified as a member of a triad in a 1992 U.S. Senate Subcommittee probe. Charles Heung was described in a Subcommittee chart of organized crime as an officer of the Sun Yee On triad.


In a 2007 public hearing, the former chair of the Nevada Gaming Control Board, Randy Sayre, also said he had seen three public documents identifying Heung as "a high-ranking member of the triads," according to a transcript.


Heung has repeatedly denied any participation in organized crime.


The Sands background reports on Cheung and Heung are the subject of a series of letters in the Jacobs case. Documents show the former executive still holds copies of at least one of the reports based on the investigations commissioned by the casino.


Sands' displeasure is reflected in its legal team's demand for the "immediate" return of the internal inquiries.


"All copies," the attorneys insisted, should "be returned to us or destroyed."


COMMON KNOWLEDGE


Nevada spent decades cleansing itself of criminal elements. By the 1980s, as casinos largely assumed corporate control, gambling was widely considered one of the most heavily regulated industries in the United States. Nevada's oversight became the gold standard.


And from the moment Sands landed in Macau, the industry and state regulators insisted the same rules that apply at home apply there. Casinos can lose their licenses if they consort with the wrong characters.


Nevada has no office in Macau and largely depends on local oversight, which casinos executives quoted in cables describe as lax.


Diplomats relay widespread concern about Macau's police and gambling regulator.


The Macau police force is "afraid of triad groups," a diplomat quoted the academic who was a trusted source as saying. Organized crime leaders in Macau "know the identity of each police force member and where they live," the diplomat continued.


Macau's Gaming Inspection and Coordination Bureau, which goes by DICJ for its Portuguese acronym, barely enforces its own rules, according to accounts in the cables.


Sands executives approached diplomats with particular frustration about the agency's oversight. "They alleged that junket operators are routinely licensed after cursory DICJ investigations," a diplomat wrote in a cable, "while the DICJ does not enforce its own reporting requirements."


A senior executive at MGM told the consulate that "there are some good people at DICJ, but if they're not directed to take enforcement action by Macau's political leadership, they won't."


One Macau casino executive, quoted in a U.S. State Department cable, reported that 

"all of the junket operators are directly or indirectly involved with the triads."

Other cables show U.S. diplomats and casino operators routinely discuss corruption in the Chinese enclave.


Another diplomat divulged that "private sector leaders have noted many loopholes that enable junket operators -- and the casino concessionaires themselves -- to enter legal gray zones with little fear of investigation."


Then there is Manuel Joaquim das Neves, the long-standing head of DICJ, who was remarkably candid when discussing the junkets industry with diplomats. During a conversation with a U.S. official about the worldwide economic downturn, he implicitly linked the triads to Macau's gaming sector, saying that "triads' revenues will probably decline in 2009 along with Macau's gaming earnings."


Neves acknowledged some wiggle room in his agency's licensing, which judges candidates primarily on their criminal history. "If you make hard rules in the beginning, no one applies," a cable quotes him telling U.S. diplomats. "So we forgive small crimes in an applicant's background."


Neves told Reuters "there's no logic" to any assertion that his agency is falling short of its duties. "The majority accept that we are doing a good job in Macau," he said.


"I cannot say that in Macau we don't have triads, but things are under control," he added.


CHINA'S CONCERNS


The scale of the corruption in Macau has drawn fire from the most powerful and important critic of all -- the mainland China government. And China's ire already has been felt once as the government choked off the supply of gamblers to Macau.


Criminality within the VIP segment made China "very concerned," one U.S. diplomat revealed in a cable. In late 2008, according to a missive, it changed the rules of the game, cutting the number of visas from mainland China to Macau in a move that was disastrous for U.S. operators, including Sands.


"The fact that mainland gamblers account for the majority of funds flowing into Macau appears increasingly undesirable to Beijing," says one post. "The perception is widespread that, with the implicit assistance of the big 'junket' operators, some of these mainlanders are betting with embezzled state money or proceeds from official corruption, and substantial portions of these funds are flowing on to organized crimes groups in mainland China, if not Macau itself."


SO MUCH POWER


Early last June, at G2E Asia, a conference for casino industry insiders, the Venetian Macao hosted a session to discuss "The Future of VIP."


On stage, beneath a massive, glittering chandelier, sat three men: a former executive from Sands Macao, an academic, and Sean Monaghan, a junket analyst, who proclaimed: "These guys are huge, they're growing, and they hold so much power."


Monaghan was articulating what had already begun to be well understood by the U.S. diplomatic corps. By plunging millions of dollars into the development of the VIP sector, casinos had, in essence created a monster.


Jacobs, quoted in a cable, spoke to this point when he told a diplomat that "the junket operators maintain significant economic and political influence in Macau."


"The government and all the concessionaires rely heavily on the junket operators for the bulk of their revenue streams," says another cable. "They won't make any big moves against the junkets."


Another missive points out that as Macau derives over half of its revenues from the VIP market, it has "proven itself either incapable or unwilling" to rein in the companies.


Toward the end of the session, an emissary from the U.S. consulate rose to make a comment. "I find it remarkable," he said, "that we're talking here about junkets, yet not a single representative from the industry sits before us."


A murmur circulated through the crowd.


The gentleman had identified the 800-pound gorilla -- who was not in the room.

Jacobs had grown wary of the dangers of this gorilla, he said in his complaint. His private objection to expanding the junket business was one of the final battles he fought with his boss [Adelson]. Soon enough, their differences would reach the point of no return.

Now Jacobs is shouting his concerns for all the world to hear, and federal authorities in Washington DC appear to be paying heed.

(Additional reporting by Peter Henderson; Editing by Peter Henderson, Lowell Bergman, Jim Impoco and Claudia Parsons)