07.23.11

The Billionaire and the Fugitive

The story of how Hollywood producer Arnon Milchan worked with Israeli intelligence. An exclusive excerpt from 'Confidential: The Life of Secret Agent Turned Hollywood Tycoon Arnon Milchan.'

In Hollywood, Arnon Milchan is best known as the billionaire producer of films like Pretty Woman and LA Confidential, and as the owner of Fox-based New Regency. But there is another Arnon Milchan, as Meir Doron and Joseph Gelman reveal in their new biography, Confidential: The Life of Secret Agent Turned Hollywood Tycoon Arnon Milchan.

For the first time, the writers expose how in the mid-1960s, while still in his early 20s, Milchan was recruited by Israel’s secretive spy agency, LAKAM; how he became a key operative for Israel’s top master spies, Benjamin Blumberg and Rafi Eitan, and a confidant of such powerful Israeli politicians as President Shimon Peres and Prime Minister Benjamin Netanyahu; and how he participated in a web of complex undercover schemes to procure armaments for his country.

In this adaption from their book, they detail Milchan’s controversial relationship with American aerospace engineer Richard Smyth, a friend who became a fugitive after the U.S. accused him of illegally smuggling nuclear-bomb triggers to Israel. We pick up the two men’s story in May 1985.

Arnon Milchan was nervous, very nervous. He had just received a phone call at his Paris apartment from a Newsweek reporter seeking his reaction to the stunning indictment of Dr. Richard Kelly Smyth, president of California-based Milco Ltd.—an Israeli intelligence front company—for shipping krytrons to one of Milchan’s Tel Aviv companies.

Krytrons are sophisticated triggers for the detonation of nuclear bombs. According to Smyth, Milchan’s company had pushed him hard for the krytrons and knew perfectly what they were for—even though it was illegal to export them from the U.S. without a U.S. State Department munitions license. Milchan’s Heli Trading Ltd. had ordered 14 shipments totaling 810 krytrons from 1979-82. Now U.S. Customs and the FBI had moved in and the entire Milco operation was in jeopardy. Milchan feared that a politically ambitious and publicity-hungry U.S. prosecutor would come hunting for him, he told us.

After a short conversation with the Newsweek reporter, in which Milchan pleaded ignorance, he booked the first available flight to Tel Aviv. Within hours, TV crews were camped in front of his penthouse and the phone was ringing off the hook.

There was one call he could not avoid—from his mother, Shoshanna. “Everyone is calling my son an arms dealer,” she said, bursting into tears. “It’s embarrassing.”

Arnon was devastated.

“Mother, it’s not like I’m instigating wars in third-world countries and shipping them guns,” he told her. “I’m doing this to help our country.”

***

Milchan first met Smyth in 1968, when U.S.-based defense contractor Rockwell Inc. sent its newly appointed vice president to Tel Aviv to downgrade relations, under pressure from the Arab world.

Smyth was a senior engineer who had grown up in rural Oklahoma and struggled to put himself through school, obtaining a B.S. in physics from Caltech as well as a Ph.D. in electrical engineering and mathematics from USC. Along the way, he’d gotten married and fathered five children.

In his early 40s, he couldn’t be more different from the flamboyant figure he now met at the Tel Aviv airport. Tall, athletic and rich, Milchan was only 24 years old but had already made a mark in Israel, where he had taken over his late father’s fertilizer company and transformed it from near-bankruptcy to mega-million success.

'I am restrained from recommending any single individual for our highest defense-related honor,' Shimon Peres told us, 'but undoubtedly Milchan is worthy of such an acknowledgement.'

As Milchan grew the business, he had come to the attention of up-and-coming politician Shimon Peres, who introduced Milchan to Benjamin Blumberg, nicknamed Israel’s “prince of silence,” the head of LAKAM (a Hebrew acronym for the Science Liaison Bureau). LAKAM’s very existence was unknown to the United States at the time.

Milchan’s recruitment in the 60’s was gradual. “It was almost a glamorous thing to be involved,” he acknowledged in a March 5, 2000 60 Minutes interview. “Everybody looked to me as a James Bond.” He confirmed his involvement to us in a November 2009 interview at his offices on the 20th Century Fox lot, one of a number of meetings we had with him between August 2009 and March 2010.

confidential arnon milchan
Confidential: The Life of Secret Agent Turned Hollywood Tycoon, Arnon Milchan by Meir Doron and Joseph Gelman. 310 pages. Gefen Books. $24.95. ()

Blumberg taught Milchan how to establish front companies and secret bank accounts; meanwhile, foreign arms suppliers like Rockwell and Raytheon were encouraged to hire Milchan as their “representative” in Israel. Within a few years, he was acting as a middleman for weapons transactions, raking in hundreds of millions of dollars in commissions that in fact would fund LAKAM and Mossad activities.

Now here he was, meeting Smyth on Israel’s behalf, to do a deal with Rockwell. Its representative, he discovered, was a modestly successful functionary with a strong taste for the good life, money and women, possessed of a rather inflated ego, who insisted on using his “doctor” title at every opportunity.

Over the ensuing years, this disparate pair would grow closer.

Their first joint endeavor was a Rockwell–Israel Aircraft Industries project called Ibex, designed to develop a sophisticated ring of electronic listening posts around the borders of Iran, as Milchan confirmed in our interview.

“I established strong connections between Rockwell and Israel Aircraft Industries,” Milchan acknowledged, adding that he tried but failed to connect Rockwell, Smyth and other companies in Israel.

Throughout these early years, Smyth remained a devoted employee of Rockwell—which, at its peak, was number 27 on the Forbes 500 list. But Smyth’s desire to do bigger and better was evident, and Milchan, a man of considerable charm, knew how to exploit it. So in late 1972, over dinner at Tel Aviv’s Kasbah restaurant, he suggested this was the moment for Smyth to make “real money” in his own procurement business by striking out on his own. It was a risk; matters like health insurance, retirement pension and job security weighed heavily on Smyth.

But when Milchan emphasized that he could supply him with all of the orders he could possibly handle, Smyth agreed.

“Greed was certainly a factor,” Milchan reflected when we asked about Smyth’s thinking.

Smyth broached the notion to Rockwell and was surprised that his bosses were delighted: Having him operate independently gave them a solution to the constant pressure they’d felt from the Saudis to cut ties with Israel. Instead of ordering from Rockwell directly, trade with Israel could be funneled through Smyth’s new company, Milco International Inc.

And so on January 19, 1973, Smyth officially registered Milco in Orange County, Calif., and got his new business under way. Its dealings with Milchan Brothers—Arnon’s Israel-based company—were simple: Milchan’s office manager, Dvora Ben Yitzhak, working directly with Blumberg, would send a coded telex to Smyth listing sensitive items that they wished to order on behalf of Israel. Milchan himself would make contact only when necessary.

“Everything I did, I did in coordination with Mr. Milchan and was in contact with him almost on a daily basis,” Dvora told us in October 2009.  

“Milco and their employees had secret clearances that permitted them to [obtain] consulting contracts with government agencies and contractors,” Smyth wrote in an extraordinary book about his exploits, Irrational Indictment & Imprisonment For Export Krytrons to Israel, written in 2008 under the pseudonym Dr. Jon Schiller—one of several sources for Smyth’s true story, in addition to documentation from his legal proceedings and confirmation supplied by a high-level Israeli intelligence operative.

After a while, that included the purchase of krytrons, a small, seventy five dollar, cold-cathode gas filled tube intended for use as a high-speed switch, which among other things, serves as triggers for the detonation of nuclear bombs. It was illegal to export krytrons at the time without a munitions export license, and its export to Israel had been rejected before.

“It’s always the little things that cause the most problems,” Milchan shrugged, when we asked him about it.

***

Over the following decade, Smyth’s business moved briskly.

He was able to ship long lists of sensitive products to Israel: training simulators for air defense missiles, voice scramblers and lasers, computerized flight control systems, thermal batteries, gyroscopes for missile guidance systems, neutron generators, high-speed oscilloscopes, high voltage condensers, and many other dual-use components—almost everything a country might need to turn itself into a high-tech, nuclear armed powerhouse.

Smyth’s relationship with Milchan was all-important; over 80 percent of his business with Israel was done through Milchan Bros. and satellite companies such as Heli Trading. Thanks to Milchan, Smyth grew wealthy, maintaining two waterfront properties in Huntington Beach and an apartment on Catalina Island, Calif. He joined the local Cabrillo Beach Yacht Club there and by 1977 had reached the membership rank of commodore.

Life for the commodore was good.

It was also good for Milchan, who had started producing movies, initially with the David Soul starrer The Stick-Up, “a movie so bad that I had my name removed from the credits,” he told us. That was followed by Black Joy, The Medusa Touch starring Richard Burton, and the Robert De Niro vehicle King of Comedy

Then on Christmas Eve, 1984, just as Milchan was working on Once Upon a Time in America, Smyth flipped through his mail and found a letter ordering him to appear before a federal prosecutor in Los Angeles to answer questions about the krytrons and face possible charges of high crimes and misdemeanors.

Smyth felt a sudden sinking feeling. Even though he would later claim he was ignorant about the illegality of his exports, he knew just how severe the punishment could be.

He tried desperately to reach Milchan—and failed.

“I felt bad, but I was ordered to cut all contact with Smyth,” Milchan maintained.

Informing his attorney that his court appearance was scheduled to take place at the precise time his family would be on vacation in Israel—true, as it turned out—Smyth was granted permission to leave the country, provided he post a $1 million bond.

In Israel, Smyth began a frantic search for his patron. He went to Milchan’s office, dialed every number he knew, stopped by restaurants they had frequented together, even reached out to LAKAM and high-level officials he had met there. Every door snapped shut.

Then he received a call from Dvora, who agreed to meet with him.

During that meeting at the Tel Aviv Hilton, the two discussed Smyth’s situation at length. Dvora asked what information Smyth had divulged about her boss, along with any other activities he might have unveiled. Smyth insisted he’d said nothing incriminating; even so, he was never allowed to speak to Milchan himself.

Back home, petrified, Smyth couldn’t sleep. He was facing 105 years in prison for what he portrayed as essentially a clerical error. Terror consumed him. He’d become radioactive as far as his former friends were concerned.

“When we went to social meetings and walked towards longtime friends to talk to them, they would turn their backs and walk away,” he wrote in Irrational Indictment. Worse, he was strapped for cash, too, as almost all of Milco’s orders had dried up, and attorneys’ fees were piling up.

Tempted to throw himself at the mercy of the prosecutor, he didn’t only because his wife, Emilie, refused. Then in 1985, Emilie herself broke down. Rushing out of the Milco offices where she worked with her husband, sobbing, she drove home and drank an entire bottle of vodka. Her daughter found her unconscious on the floor and raced her to the hospital, where she recovered. 

Finally, in August, Smyth received a call from his attorney’s assistant urging a plea bargain and informing him it was the firm’s considered opinion there was a good chance he’d face prison.

“How can I go to prison?” Smyth demanded, according to the book. “I haven’t done anything wrong!”  

“Don’t you know prisons are full of people who didn’t do anything wrong?” the assistant responded.

In that moment, Smyth knew he and his wife must follow a plan they had already set in motion that would change their lives forever.

Taking Milco’s $15,000 emergency cash reserve, Smyth dyed his gray hair black. The couple packed lightly, in a state of deep fear and paranoia, then drove randomly for about 20 minutes, making U-turns and detours, hyper-alert to the danger of being followed. Once satisfied they were safe, they headed for Los Angeles International Airport, where they abandoned their car with the keys in it, and paid cash for one-way paid tickets out of the country.

“We hurried to board the aircraft,” Smyth recalled in the book. “All we were carrying after our 34 years of marriage were two under-the-seat luggage pieces.”

In Frankfurt, a German official opened the passport of one Dr. Jon Schiller. Everything was spot-on. After a brief hesitation, he stamped the passport and said, “Welcome to Germany.”

***

While the Smyths were on the run, Milchan was engaged in a battle with Universal over executive Sidney Sheinberg’s refusal to release his and director Terry Gilliam’s movie Brazil. The drama led Gilliam to take out a full-page ad in the trades demanding that the movie be released; it also strained Milchan’s dealings with a top Hollywood power player, Lew Wasserman’s right-hand man.

But the “Schillers” were dealing with bigger problems. They quickly left Frankfurt for Zurich, Switzerland, where they waited desperately for financial support from LAKAM. At last, the money arrived and the Smyths relocated to a new safe house in Malaga. Incremental deposits to their bank account gave them the means to survive and allowed them, for the first time in months, to breathe easier.

Time passed; weeks turned to years; their paranoia faded and the couple almost forgot they were fugitives. Under the Schiller alias, they even voted in the Malaga municipal elections.

According to Smyth’s self-published book—something confirmed by Dvora herself—Milchan’s assistant maintained regular communication with him, via telephone and fax, though he and Emilie never heard directly from Milchan. Little by little, they grew to feel secure, with enough money to meet their basic needs. Life wasn’t luxurious, but at least it was free from danger.

By 1994, Smyth had spent nine years in Spain as a fugitive. Turning 65, unhappy with his modest lifestyle, especially when compared to his glory days of yachting and multiple residences, he took a mind-boggling risk and applied for his U.S. Social Security benefits, betting that no low-level bureaucrat in the Social Security Administration would make the connection.

He was right—at first. For seven more years, the Smyths lived on both that income and the money LAKAM had supplied them. And then, in June 2001, everything unraveled.

It began harmlessly enough, with a call from the manager of Banco Bilbao in Malaga, who asked Schiller to stop by. During their meeting, he informed him he’d have to obtain a non-resident permit in order to continue banking there. This, in turn, meant a visit to the local police station.

Upon arriving at the station, Smyth and his wife were instructed to go to the back office and wait. After 15 minutes, Smyth turned to Emilie and asked, “What’s taking so long?” Then a tall officer in a dark blue uniform entered the room, walked over to a fax machine and pulled out a paper. He handed it to Smyth without a word. The fugitive was shocked to see a black-and-white photo of himself, taken some 20 years earlier. The word “Interpol” was marked at the top of the page.

A sudden sense of dread overcame him.

“Is this you?” the officer asked. Smyth confirmed it was. Then the officer turned to Emilie and announced, “I am placing this man under arrest.”

Overnight, Smyth’s life was transformed.

He was shoved into a concrete, windowless cell with a raised cement area that served as a bed and two filthy blankets. The toilet down the hall was a simple hole in the ground with no toilet paper. Food was served in small plastic containers. There were no guards at night, so when the 72-year-old prisoner had to urinate, he did so on the floor of his cell.

That first night was hell. He went through the process that led to his capture over and over, knowing he’d had multiple opportunities to dodge this outcome: He could have avoided applying for Social Security; he could have walked right out of the police station; he could simply have denied that the man in the picture was him. He could have stayed at Rockwell all those years ago and avoided the whole mess. 

When Milchan heard of Smyth’s arrest, he knew it would be a big deal. His name would be mentioned—not for the first time—in connection to what he’d described to The Los Angeles Times in 1992 as “the unbelievable stupid krytron story.” On the one hand, he was furious at the carelessness of it all; on the other, he felt sorry for the man.

On November 15, 2001, more than 16 years after Smyth’s escape to Frankfurt, he was extradited to the United States. There, Judge Pamela Ann Rymer handed down a prison sentence of 40 months and a $20,000 fine, with two years’ probation—a light sentence compared to what he had faced 16 years earlier. Still, Smyth sat in the courtroom in shock, unable to move.

It would be four years before he was a free man.

***

Milchan has always insisted he knew nothing about the krytrons. “I’m not saying I’m an innocent person, but in this specific case, I knew nothing about it,” he told Premiere magazine in June 1993.

When interviewed for this book, he insisted he never profited from the arms deals, but merely took part in them as a service to his country—something confirmed by Shimon Peres.

“I am restrained from recommending any single individual for our highest defense-related honor,” he told us, “but undoubtedly Milchan is worthy of such an acknowledgement.”

The Smyth incident has barely affected Milchan. His business has grown; he is now married to his second wife, Amanda Coetzer, a former South African tennis star; he has residences all over the world, from Tel Aviv to South Africa to Malibu. He also has friends at the highest echelons of power, in Hollywood and politics. Rupert Murdoch, an investor in New Regency, calls him one of the most honest men he knows. He is admired, if not always loved.

As for Smyth, today, he ekes out a living conducting investment seminars. He is still living with his wife of 60 years, Emilie, and his past as a celebrated fugitive has almost been forgotten. But he has lost his money, his reputation and his various houses.

When we tracked him down in August, 2009, he looked old and frail and was living in a mobile home in Lompoc, Calif.—ironically, just 30 miles from Arnon Milchan’s vineyard.

It’s been 26 years since the two men last spoke.

All rights reserved. Hardcover: Gefen and Ebook: 21st Street Books.