JERUSALEM — It started out as a family feud. But a small-time computer break-in has erupted into Israel's biggest business scandal in decades, reaching into some of the country's powerful corporate suites and jolting the cozy world of the industrial elite.
Top Israeli blue chip companies, including a high-tech giant that trades in New York, are suspected of using illicit surveillance software to steal information from their rivals and enemies.
The list of victims is equally impressive, ranging from a cigarette importer to the local operations of the Ace hardware chain and Hewlett-Packard Co. Even a well-known TV entertainment reporter is caught up in the affair, claiming hackers invaded his computer to get phone numbers of celebrities.
The investigation has shed an unflattering light on the Israeli business world, where cutthroat competition in a small market, high-tech sophistication and the secretive traditions of the army form a volatile mix.
The case is also attracting the attention of top security software makers. Software firms in the U.S. have been updating their products to defend against similar outbreaks.
Sever Plocker, a leading Israeli economic commentator, said the scandal could have "unpleasant consequences" for foreign investment.
"People don't like to invest in countries where companies do some very unethical things," he said. "I think it is bad for Israel, bad for the image of Israel and nothing to be proud about."
The "Trojan horse" scandal, named after the monitoring software secretly planted on the corporate computers, has been front-page news since police lifted a gag order this week. Police say 22 people have been arrested, and more arrests are expected.
"It's getting bigger every day," said Nir Nateev, head of the police computer and cyber crime department in Tel Aviv, who said some 100 computers have been confiscated. "In the end, there will be dozens (of companies) involved."
The burgeoning scandal has sent a shudder through the business world. The country's central bank chief, American economist Stanley Fischer, warned this week that the case could harm foreign investment.
Amir Barnea, a business professor at the Interdisciplinary Center, a prestigious Israeli university, attributed the scandal to the hypercompetitive business atmosphere in a tiny market of 7 million people.
"Unfortunately some managers may lose the distinction between a legitimate fight for survival and doing illegal acts," he said.
Others said the combination of Israel's high-tech culture, fine-tuned in secretive military units, and a penchant for independent thinking made the scandal inevitable. Some of the world's top computer security companies, including Check Point Software Technologies Ltd., are Israeli.
"If Israelis see a wall, they will try to break it," said TV commentator Motti Kirshenbaum. "It is a challenge to break a wall. Israelis don't say, 'There's a fence, let's respect it.'"
Police say they stumbled upon the case after author Amnon Jackont discovered excerpts on the Internet of a book he was still writing. More documents from his computer began appearing on the Internet and someone tried to use his bank details to make transactions.
Jackont realized his computer had been invaded and told police he suspected the spy was his stepdaughter's ex-husband, Michael Haephrati.
In a newspaper interview, he said Haephrati became "vengeful and obsessive" after the collapse of his marriage. Police subsequently found the surveillance software on Jackont's machine.
Nateev said the discovery snowballed into an international investigation involving British, German and American authorities. "We never saw this in the past," he said. "They were very, very, very surprised by the size of the case and helped us a lot in this."
Investigators determined that Haephrati sold customized copies of his program to three Israeli private investigators. Haephrati, who reportedly lives in London and Germany, has been detained with his new wife by British authorities. The Metropolitan Police decline to say whether he was cooperating.
Some versions of the spy software tempted victims into installing it by posing as a package of confidential documents delivered via e-mail. Once installed, the software recorded every keystroke and collected business documents and e-mails on a victim's PC and transmitted information to a server computer registered in London.
"This was not designed very well," said Robert Sandilands, the head of the virus research lab for Authentium Inc., a Florida security firm. "This does not seem to be the work of an experienced virus writer."
The suspects in Israel include senior executives from three prominent private investigation firms, among them a former top military investigator, retired Shin Bet security agent and former police officers. Police said 12 people are in jail and eight others are under house arrest.
The list of clients implicated in the affair reads like a Who's Who of Israeli blue chips: Amdocs Ltd., a business-software maker that trades on the New York Stock Exchange; the Cellcom phone carrier and three subsidiaries of the Bezeq phone monopoly, a long-distance carrier, cell phone provider and satellite TV firm.
Most of the companies have denied wrongdoing or said they were unaware of the tactics used by investigators they hired.
The alleged victims, meanwhile, reportedly include Hewlett-Packard and the Ace hardware chain, as well as the Globes business daily, Strauss-Elite food group, the HOT cable company, and the Bezeq parent company.
Ira Winkler, author of the book "Spies Among Us," said Trojan horses are a relatively new tactic in a growing epidemic of global high-tech espionage.
He said the break in the case — tracing the scandal to a vindictive relative — was typical. "Never underestimate the stupidity of criminals."
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