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Behind The Fall Of Ability Inc -- The Israeli Hackers Who Can Tap Your Cell For $20M

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Forbes

By the end of 2016, when looking at his plans for global domination, Israeli businessman Anatoly Hurgin could look with a modicum of pride at the reach of his surveillance company Ability Inc. and its cornucopia of cellphone snooping technologies.  A portion of sales data from 2015-2016, handed to Forbes by an anonymous source close to the company, showed China, Germany and Israel were customers, amongst others.

The most significant score, according to that data, was a single deal with Mexico, Ability's biggest client with $42 million in sales, in which an unspecified Mexican client became the first-known buyer of a hugely powerful surveillance technology: the Unlimited Interception System. ULIN allows silent and remote snooping on mobile phone calls, texts and location via a huge vulnerability in a core part of global telecoms infrastructure, the Signalling System No. 7 (SS7). All that’s needed is a target’s phone number.

Licensing the technology from an anonymous third-party, Hurgin has banked his company's future on ULIN, phasing out Ability’s older surveillance tools. But ULIN's $5 to $20 million price range and the possibility it may soon be obsolete has left Ability unable to find new buyers.

Now Ability is tanking hard, falling from a $225 million self-declared valuation in 2015 with plans to break America, to a foundering firm that just reported quarterly revenue of a measly $35,000. Its market cap dropped to $17.3 million this month, its stock on the Nasdaq to less than $1.

The firm also faces an SEC investigation and investor-led lawsuits in the U.S. and Israel, all asking if Ability presented false or misleading statements about its surveillance arsenal and financials. Twice Hurgin has seen boards resign en masse after relations between handpicked directors and what they perceived as an increasingly secretive and hermetic CEO soured. As one of the the chief’s former colleagues said: "He understands he's in very, very deep shit."

A big bet goes bad

Shareholders and sources close to the company spoke of a small firm with fewer than 20 staff that once had much promise. "The company had very solid product lines that provided most [of Ability’s] income. The company was very stable around $10 million to $14 million a year," said one. Indeed, in the first quarter of 2015, Ability turned over $20 million.

Sales data handed to Forbes, dated 2015-2016, shows shipments of a variety of spy tools, including its Touchdown tech for intercepting and decrypting 3G cellphone communications and its In-Between Interception System (IBIS) product for 2G. The 3GCat, meanwhile, would downgrade connections from 3G to 2G, the latter having weaker security protections and therefore easier to snoop on.

According to the data, after Mexico, Israel was Ability’s second biggest client, spending as much as $10 million on a mix of the non-ULIN tech; customers in China and Singapore bought between $5 million and $7.5 million; Myanmar and the Czech Republic purchased between $1 million and $5 million, while clients in Germany and Switzerland spent around $1 million each, as had Vietnam. (Forbes was unable to independently verify the data, which didn't specify what government bodies purchased the tools; Ability only sells to law enforcement and intelligence agencies. CEO Hurgin declined to comment on customers due to the nature of the business.)

But in 2015, in a bid to profit from big spenders in the American surveillance market, Ability went public on the Nasdaq via a merger with Cambridge Capital Acquisition Corporation, which effectively became a sponsor and shareholder. From December 2015 onwards, the company shifted focus to ULIN, phasing out older products. That decision backfired.

As the company admitted in SEC filings, ULIN was developed by an unnamed third-party who's maintained substantial control over the technology. Though Ability has exclusive rights to sell the product, the developer is due to receive 50% of profits from ULIN sales and the deal terminates in October 2018, with no public plan on what happens next. The third-party, revealed in the SEC filing to hail from Singapore, also has the right to claim a 15% penalty on sales from Ability if total shipments are under $10 million at the end of a contract year.

ULIN, what’s more, may have a shelf life. Jean Gottschalk, an SS7 security expert, believes he knows how the Ability product works, telling Forbes it used the same techniques as those in his penetration tests and training programs for security professionals. Of ULIN’s limitations, he said once operators roll out firewalls globally, as congressmen Ron Wyden and Ted Lieu have been urging telecoms to do, the technology is doomed. "Long term, this particular technology is going away," Gottschalk added.

In an interview with Forbes, Ability CEO and former Israeli military engineer Hurgin admitted some shortcomings in ULIN, in particular its inability to intercept data-based communication apps like WhatsApp and Signal. "Five years ago it was the golden age of interception," Hurgin added. "The client paid $300,000 to $400,000 and he got what he wanted to get. Today we have 3G and 4G, more technologies, more frequency bands and systems become more complicated, much bigger in size. You get less than you used to get… Not many capabilities exist today to intercept these data channels."

But Hurgin claimed a data interception product is on the way, most likely in 2018, with the help of ULIN’s developer, with whom the CEO said relations are positive. "I can't say much, as it's still under development, but it's very similar to what we do with conversation, when you're in the middle, between two mobile phones and all the traffic goes through you."

There's another detail Ability has to iron out, Hurgin revealed: ULIN customers typically need to jump on Ability's infrastructure and plug into the SS7 network. That means Ability will know who the client is targeting. For most intelligence agencies, that's unacceptable, the CEO noted.

Along with an unwillingness to share target identities, governments are likely hesitant to invest tens of millions on tools that, whilst potent, won't work in a few years. When the 2017 second quarter results landed, Ability noted "slower than anticipated customer adoption" for its next-gen product. That was on top of another problem: getting payment from a client. In its SEC filing, Ability admitted it had "suspended recognizing revenues from one of its customers due to collectability issues," further contributing to its low income. The filing reveals a net loss of $6.1 million for the first half of the year, leaving Ability with "substantial doubt about its ability to continue as a going concern."

Lawsuits and love lost

Those who threw money at Ability now fear they've lost any chance of a return. A class action was filed in federal court in New York in May last year, claiming investors were misled, in particular over the third-party control of ULIN and Ability's 2016 revelation that it had to restate results for the years between 2012 and 2015 as it failed to properly report allocation and timing of revenue. In February this year, it emerged an SEC investigation was underway too, looking not only at the restatement of financials, but also into the Cambridge merger. Details are scarce, with the SEC declining to comment.

A similar action was launched in May 2016 in Tel Aviv, alleging shareholders suffered damages of approximately $6.13 million, according to an SEC filing from the firm. A stay has been put on that case to await the outcome of the U.S. litigation. Hurgin told Forbes that he couldn’t comment on any specific, ongoing legal proceedings. The company has declared it plans to defend itself, and Ability lawyers are set to meet with plaintiffs in the U.S. in October to discuss a possible settlement. Proceedings in Israel have been put on hold pending the U.S. case outcome. "We hope to finish it somehow, not drag it on for years," said Hurgin.

Some investors remain deeply unimpressed. Benjamin Capital's Michael Salzhauer - the firm's fourth biggest investor behind Keybank National Association, Greenwich Wealth Management and JPMorgan Chase & Co at number one - told Forbes his positive impression of Hurgin's business soon turned to disillusionment. "I think the management isn’t capable of running a public company," Salzhauer said.

"The likelihood that I'll dump this thing to get other gains is 99%. And 1% hoping for the fairy godmother to wave her magic wand."

Another of Hurgin's former colleagues was so concerned about their bad relationship with the leadership, they feared their cellphone and computer had been tapped by Ability tech. Hurgin strongly denied any such snooping, adding: "Whoever it was, he probably overestimates his importance to us."

Former board member and Ability investor Ben Gordon, in an open letter to the board in June, also expressed concern about Ability’s leadership. Noting that minority stockholders had invested $60 million in Ability in December 2015, Gordon wrote that management had "burned through most of its cash" and the company had "dramatically reduced its communication with investors." As Gordon is CEO of Cambridge Capital, he's also a defendant in the class action suits alongside Hurgin. His counsel is also joining the mediation discussions in October.

Gordon claimed that Hurgin and Russian co-founder Alexander Aurovsky had stowed away 1.2 million shares in $12 million cash in escrow. "Considering the company’s poor performance, we think it would be irresponsible and morally reprehensible for the founders to personally take those funds out of the company," Gordon wrote. He recommended that the $12 million should be either be handed to minority shareholders as a dividend, or to get Ability back on track.

The $12 million in escrow will only go into the firm if he  and his partner Aurovsky deem it necessary, Hugrin told Forbes. Thus far they don’t see the need, the CEO added.

In Tel Aviv, dignitaries of the Israeli intelligence world were twice brought on board, only to resign within months. In  his April 9th resignation letter, former Israel Defense Forces intelligence director Amos Malk, complained that the company’s state of affairs was "vastly different from what was presented to me before joining the board." Former Mossad director Efraim Halevy resigned on the same day. Forbes attempted to contact past members of the board but all declined or provided no response at the time of publication.

As with American investors, one former director said a core reason for the resignations was Hurgin’s secrecy. "Anatoly knows this is a disaster situation. He’s under huge pressure. He's trying very hard to take the company forward, but he became very closed and very protective," the source said.

Hurgin says he still has faith in the firm’s future, despite what he admitted "hasn't been a good quarter." He's already been transparent with previous boards, he told Forbes, but would be even more so with a new, harmonious board in place.  Responding to the stockholders' criticism of his management of a public company, Hurgin simply said: "I think I’m a great CEO."

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