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Wall Street Journal

Smartmatic to Shed U.S. Unit,

End Probe Into Venezuelan Links

By BOB DAVIS

December 22, 2006; Page A6

WASHINGTON -- Voting-machine company Smartmatic Corp. said it would sell its U.S. subsidiary to end a review by the Committee on Foreign Investment in the U.S. into whether Smartmatic is partially owned by the Venezuelan government.

Smartmatic, owned by Venezuelan entrepreneurs who split their time between Caracas and Boca Raton, Fla., portrayed itself as the latest victim of a U.S. protectionist response to foreign investment in sensitive industries. Earlier this year, a company owned by the government of Dubai, a Gulf emirate that is part of the United Arab Emirates, drew opposition in Congress and some media outlets with plans to buy a company that runs commercial operations at several U.S. ports. The company later sold the port-operations business.

"Given the current climate of the United States marketplace, with so much public debate over foreign ownership of firms in an area that is viewed as critical U.S. infrastructure -- election technology -- we feel it is in both companies' best interests to move forward as separate entities with separate ownership," Smartmatic said. The company said it plans to sell Sequoia Voting Systems Inc., headquartered in Oakland, Calif., which it purchased in early 2005 for $16 million.

The Committee on Foreign Investment, known as the CFIUS, reviews foreign acquisitions to see if they pose national-security concerns. Normally, such reviews are conducted before deals close. The Smartmatic acquisition drew attention earlier this year because of concerns that the government run by Venezuelan President Hugo Chávez, an opponent of U.S. policy, owns a stake in the company.

Since its purchase by Smartmatic, Sequoia's sales have risen sharply to a projected $200 million in 2006, said Smartmatic's chief executive, Anthony Mugica. He said the firm has a "healthy" profit but didn't provide a specific figure. Nevertheless, the CFIUS investigation, as well as a separate Justice Department probe into whether Smartmatic had paid bribes in Venezuela, had become a "distraction" for senior management, Mr. Mugica said.

With the 2008 election on the horizon, Mr. Mugica said, "it would be an extremely big mistake to not capitalize on the opportunity [of selling voting-machine equipment] by having a handicap, even if it was only a fantasy or a myth about Sequoia."

Sequoia voting machines were used in 16 states and the District of Colombia in 2006. Smartmatic, which has revenue of about $100 million, focuses on Venezuela and other markets outside the U.S. After selling Sequoia, Mr. Mugica said, he hoped Smartmatic would work with Sequoia on projects in the U.S., though Smartmatic wouldn't take an equity stake.

The proposed sale may dim the spotlight on the Justice Department probe and make it easier to resolve. Among the issues the department is looking at are whether Smartmatic paid bribes to Venezuelan officials to win an election contract in 2004 and failed to pay taxes owed in the U.S. Smartmatic said it is cooperating with that probe and that the Justice Department hasn't issued any subpoenas to Smartmatic employees.

Jeffrey Bialos, a lawyer for Smartmatic, said the Justice Department investigation didn't play into its sales decision. Rather, he said, the attitude in the U.S. to foreign acquisitions had hardened since the Sept. 11, 2001, terror attacks.

A spokeswoman for the Treasury, which takes the lead on matters regarding the CFIUS, said the committee agreed to end the Smartmatic review but added that "CFIUS will closely monitor the sale process."

Smartmatic came to prominence in 2004 when its machines were used in an election to recall President Chávez, which Mr. Chávez won handily -- and which the Venezuelan opposition said was riddled with fraud. Smartmatic put together a consortium to conduct the recall elections, including a company called Bizta Corp., in which Smartmatic owners had a large stake. For a time, the Venezuelan government had a 28% stake in Bizta in exchange for a loan.

Bizta paid off the loan in 2004, and Smartmatic bought the company the following year. But accusations of Chávez government control of Smartmatic never ended, especially since Smartmatic scrapped a simple corporate structure, in which it was based in the U.S. with a Venezuelan subsidiary, for a far more complex arrangement. The company said it made the change for tax reasons, but critics, including Rep. Carolyn Maloney (D., N.Y.) and TV journalist Lou Dobbs, pounded the company for alleged links to the Chávez regime.

Write to Bob Davis at bob.davis@wsj.com