Elizabeth Warren demands answers from Pentagon on 'cozy' relationship with Wall Street

Warning that a U.S. Department of Defense office created by Defense Secretary Lloyd Austin has created "clear conflicts" of interest as the agency works to finance technological advances, Sen. Elizabeth Warren on Sunday evening wrote to the department with a number of questions about how the Office of Strategic Capital operates and what officials are doing to ensure a separation between the Pentagon and investment firms vying to capitalize on the agency's work.

Austin announced the creation of the Office of Strategic Capital (OSC) in 2022, saying it would help the U.S. win "a global competition for leadership in critical technologies...and build enduring national security advantages."

As Warren noted on Sunday, the office provides "investment priorities in the form of an investment prospectus" to the Strategic Capital Advisory Council, which includes Under Secretary of Defense for Research and Engineering Heidi Shyu, to whom the Massachusetts Democrat addressed her letter.

The senator warned that at least two advisers at the OSC have maintained their senior positions at their consulting and venture capital firms, creating the appearance of multiple conflicts of interest.

"While some experts see this office supporting the development of key national security capacities, others have called it merely 'good innovation theater.' I am concerned that this office is already too cozy with private investment firms."

OSC consultant Linda Lourie works as a senior adviser for WestExec Advisors, which has helped technology startups with defense contracts, while OSC policy adviser Kirsten Bartok Touw has remained in her role as a managing partner at venture capital firm New Vista Capital.

Both Lourie and Touk were hired as special government employees (SGEs), exempting them from many of the ethics rules that apply to most federal employees.

SGEs are prohibited from "participating personally and substantially in any particular matter that has a direct and predictable effect on their own financial interests" and are subject to fines or imprisonment if they violate those rules, but, Warren noted, they are "not barred from lobbying on behalf of or representing outside entities to federal agencies in all cases, and may continue to receive outcome income."

While the DOD has said consultants including Lourie and Touk are only involved in "broad policy discussions" and not decisions about investments the OSC becomes involved in, Warren cited a Government Accountability Office report that said the employees can access "non-public political intelligence information" via "briefings, meetings, committee hearings, public or non-public documents, personal conversations, and other communications" at the Pentagon or on Capitol Hill.

"The OSC appears to be providing these consultants an opportunity to refresh their rolodexes without having appropriate guardrails in place to protect the public interest. As one of the consultants has observed, winning defense contracts is 'about relationships and connectivity,'" wrote Warren, quoting a comment Touk made in 2022.

The senator further noted that SGEs who serve for less than 60 days are not subject to a typical one-year "cooling-off period" during which they are barred from contacting their former agency regarding official matters.

The OSC and its reliance on SGEs seems "perfectly designed to generate conflicts of interest," said Jonathan Cohn of the advocacy group Progressive Massachusetts.

Warren wrote that the creation of the OSC by Austin—a former board member of defense contractor Raytheon—serves as an argument for the passage of her proposed legislation, the Anti-Corruption and Public Integrity Act. The bill would require all federal ethics laws to apply to SGEs and would require such employees to recuse themselves from "matters that might financially benefit themselves, a previous employer, or client from the preceding four years."

As it stands, Jeff Hauser of the Revolving Door ProjecttoldVox in April, "it would take Herculean firewalls in one's brain—that human beings are not capable of—to ignore the fact that you continue to be employed at an entity that has ongoing interest in certain outcomes on decisions you're working on in government."

In her letter, Warren also pointed to reporting in The Intercept in April which said that as Silicon Valley Bank (SVB), which served as a lender to several tech startups, neared collapse in March, the OSC sent an internal email saying it was "assessing impacts to national security" that could arise from the bank's failure.

Because the OSC has "moved to provide loans, guarantees, and other financial instruments to technology companies it considers crucial to national security," reported The Intercept, "the defense agency advocated for government intervention to insure the investments. The Pentagon had even scrambled to prepare multiple plans to get cash to affected companies if necessary."

Warren on Sunday called on Shyu to disclose which companies contacted OSC about SVB's collapse and asked if "any of the companies that contacted OSC about SVB's collapse [were] current or former employers or clients of OSC personnel."

"While some experts see this office supporting the development of key national security capacities, others have called it merely 'good innovation theater,'" said Warren. "I am concerned that this office is already too cozy with private investment firms."