Passing out 'Hustle' cards

Darwin Deason built a vast fortune in the computer-services industry, and he has used it to live well. He vacationed in his sprawling Palm Desert, Calif., compound next to a private golf course. He remodeled his 14,000-square-foot penthouse apartment in Dallas. He appeared in a Vanity Fair photo spread aboard his 205-foot yacht in Monte Carlo's harbor with a drink in one hand and his bikini- and stiletto-clad companion in the other.

Darwin Deason and his companion pictured in Vanity Fair aboard his yacht.

Now he is in the spotlight again, caught up in the billowing national scandal over backdating of stock options. Although Mr. Deason, who retired as CEO in 1999 and is still ACS's chairman, received two option grants dated on extremely favorable days, two internal probes didn't find evidence that Mr. Deason knew about or took part in any backdating. But federal officials are looking at his conduct and that of other ACS figures, according to someone familiar with the matter.

The backdating scandal has focused attention on CEOs from corporate giants like UnitedHealth Group Inc. to small firms. But few have the colorful history of Mr. Deason, 66, or his record of bouncing back from controversy.

In the late 1980s, regulators accused ACS of using options on its stock in a sweetheart deal with savings-bank executives. ACS paid a fine but went on to grow phenomenally. In the process it became a $5 billion company. Mr. Deason holds around $420 million worth of ACS shares.

Years later, a bankruptcy trustee alleged that Mr. Deason looted another firm, spending its money on plastic surgery, dry cleaning and ranch expenses. Mr. Deason paid $3.75 million to settle, though he now denies the allegations.

This spring the scandal over backdating of stock options enveloped ACS, prompting questions as to whether it had enriched executives at shareholders' expense. A preliminary probe found no intentional misdating. A second said there was indeed backdating, and blamed four people. ACS's two top executives lost their posts.

Among the unanswered questions: How Mr. Deason, who founded ACS and was CEO and head of the compensation committee through much of the backdating era, could have been unaware if such an egregious infraction was occurring.

Mr. Deason declined several requests for an interview. Through a spokesman, he denied any impropriety. His role in the matter was "exhaustively investigated," the spokesman said, and "there was no misconduct found."

Friends and business associates describe Mr. Deason as a talented leader. "He could run General Motors," said Thomas Rouse, who helped Mr. Deason found ACS in the 1980s and was an executive there. He said Mr. Deason was a demanding but fair boss -- "If he needed to kick your butt, he did" -- but was disciplined and an expert negotiator.

He has parlayed his success into an ostentatious lifestyle. Besides the giant yacht, Mr. Deason, who has been divorced four times, favors travel on well-equipped private jets. His penthouse apartment in Dallas has three wet bars.

"Darwin likes things big," said Larry North, a Texas friend who owns a health-club chain. "You look at the boat, you look at the penthouse, you look at the limo -- by golly, if his name is associated with it, he wants it to be the best."

Mr. Deason grew up near Rogers, Ark. His father raised chickens, hay and grapes. His mother was religious and strict. Relatives remember the young Darwin as good at math but mischievous and independent. He played high-school football, his spokesman said, but quit in his senior year because he preferred to hang out with friends and chase girls.

"Darwin was always pretty much a rebel," getting in trouble for drinking, skipping school and general hell-raising, said a cousin, Ann Kistler, who added that "he was meaner than crud." Mr. Deason's spokesman said the cousin's memory is accurate.

A day after he got out of high school, Mr. Deason left Arkansas with $50 and a 1949 Pontiac, heading for the nearest big town with "tall buildings and concrete streets," his spokesman said. That was Tulsa, Okla. He got a job at Gulf Oil, then moved to MTech Corp., a Dallas data-processing firm where he eventually rose to CEO. When it was sold in the late 1980s, he was rich. But he was restless, and within days was raising money to start ACS.

Its birth in 1988 led to a scandal. Mr. Deason made an arrangement with officials of a local thrift institution called Gibraltar Savings. Gibraltar and a related thrift bought around half of the newly formed ACS. They gave ACS a contract to handle their computer services. As part of the deal, the head of Gibraltar, J. Livingston Kosberg, and other thrift officials personally got options to buy ACS shares. When the savings associations later failed, federal regulators claimed the thrift executives had drained their assets by overpaying ACS.

The regulators also focused on the options ACS gave to the thrift executives. "They're trying to take a small part of the transaction and make it look like some big bribery deal," Mr. Deason complained to the Dallas Morning News at the time. His spokesman says Mr. Deason "vigorously defended" the deal, which he said had been approved beforehand by state regulators. But ACS settled the matter in 1991, paying a $500,000 fine while neither admitting nor denying any wrongdoing.

Mr. Kosberg, a politically active Texas businessman, made a payment to federal regulators in a settlement. As part of ACS's settlement with regulators, Mr. Kosberg was removed from the company's board.

The firm Mr. Deason founded grew rapidly. After going public in 1994, it expanded into processing insurance claims and child-support payments and storing mortgage documents. It performs back-office work for the E-ZPass highway toll system.

Mr. Deason was an exacting chieftain. Former managers say a 7 a.m. start to the workday wasn't unusual, and he sometimes scheduled meetings at 6 a.m. so they wouldn't cut into selling time.

He often began his own day with a 5 a.m. workout at one of Mr. North's gyms, in the tony Highland Park part of Dallas. Mr. Deason's home reflects the same sort of discipline he exerted in business, say people who have seen it. His cars get cleaned at least twice a week. The house staff knows to place Coke cans in his refrigerator just so, labels facing out.

Mr. North, who besides his gym business sold a diet regime through an infomercial called The Great North American Slimdown, says, "I've never seen a closet, even in the movies, like his: Every shoe in place, all the jeans pressed and way folded on the hanger. I bet if you took one tie off the rack he would notice it."

ACS gave employees "Hustle cards" with Mr. Deason's sayings. "Remember, good things come to those who are patient, but normally they're the leftovers from those who Hustle," read one card, with a picture of a stern Mr. Deason. On the back were "The Darwin Principles," such as "Hard work solves (almost) everything" and "Loyalty is a two-way street."

ACS still uses Hustle cards. Chief Executive Lynn Blodgett keeps one in his wallet. "Darwin is a salesman. He always believed in doing more for the customer than the competition would do," says Mr. Blodgett, who got his post in November after the backdating scandal forced out his predecessor.

A decade after the scrape involving the thrift executives, Mr. Deason faced controversy again. This time it involved a onetime ACS subsidiary called Precept Business Services, which had a grab bag of operations such as limousine services and business supplies. ACS spun it off as a separate company in 1994. Mr. Deason controlled it. One of its main customers was ACS. Precept later became a public company, with Mr. Deason as chairman.

It ran into trouble and filed for bankruptcy protection in 2001. A court-appointed federal bankruptcy trustee alleged that both before and after it was a public company, Precept paid for Deason-family personal expenses such as bodyguards, sports tickets, liquor and car maintenance.

Precept owned the giant penthouse apartment Mr. Deason lived in and let him have it rent-free, the trustee said, spending $1.5 million to renovate and furnish it with a Jacuzzi, a grand piano and 16 television sets. Just before going public, Precept sold him the apartment for what the trustee said was nearly $1 million below appraised value.

As a public company, Precept paid expenses at a Texas ranch used by the Deason family, including utility bills, taxes and ranchhand wages, according to invoices and other documents reviewed by The Wall Street Journal. The trustee made similar allegations. In bankruptcy court, the trustee alleged a "looting" of a public company that was "a private piggy-bank" for the Deason family.

Mr. Deason paid $3.75 million to settle the trustee's claims. His spokesman, Michael Buckley, said the allegations were "outrageous and in almost every case inaccurate, unproven and untrue." He said Mr. Deason personally guaranteed more than $2 million in Precept loans and ultimately bore their cost. He said Mr. Deason can't respond to particulars because he doesn't have the relevant records. He settled to avoid legal costs that would have been even higher, said the spokesman.

A Louisiana businessman who sold his business-forms company to Precept in 1998 for Precept stock is still seething over the deal, which he says cost him $13 million when Precept stock lost its value. "They raped the company," said the businessman, Joseph D. Greco, calling Mr. Deason "probably the worst son-of-a-bitch I ever met."

Mr. Greco said Mr. Deason cares only about himself. "He's had all these face-lifts. He's got skin stretched so tight it's going to blow his nostrils out. Every tooth is crowned. It looks like a surrender flag when he smiles." Mr. Deason's spokesman said Mr. Deason laughed when told about the comment.

Mr. Greco described an early encounter with Mr. Deason, at a directors' meeting before Precept ran into trouble. Mr. Greco said Mr. Deason, gazing at him and another new director, Robert Bazinet, asked: "Ya'll been married before? I'll bet my wife is younger than your wife." Mr. Greco said he told Mr. Bazinet afterward, "This guy is nuts!"

Mr. Bazinet agrees that Mr. Deason was "very proud that his wives were very young." He said Mr. Deason "had one rule: He wouldn't date a woman younger than his son." Mr. Deason's current companion, at 39, is younger than both of his sons.

Mr. Deason's spokesman said it's unlikely the conversation took place because Mr. Deason considered both Mr. Greco and Mr. Bazinet "dishonest and unethical" men who "grossly misrepresented the financials" of their businesses before selling them to Precept. He said Mr. Greco failed to disclose that his sales force had threatened to quit en masse if Mr. Greco's firm was sold to Precept. They did quit after the sale, driving the business's revenue to nearly zero, the spokesman said. Mr. Greco denies misrepresenting anything, as does Mr. Bazinet, who says the accusation is "bogus."

In 1999, before Precept's bankruptcy, Mr. Deason handed over the CEO job at ACS to his deputy, Jeffrey Rich. Mr. Deason's gym workouts moved to mid-morning. Still chairman, he began spending six to eight months a year out of Dallas, sometimes at his Palm Desert home, which he sold two years ago. Recently he has lived for about half the year aboard his yacht, the Apogee, often cruising the Mediterranean or Caribbean.

ACS thrived under Mr. Rich. Its share price surged, even during the tech-stock crash of 2000-2001, as clients were bitten by the outsourcing bug. The rapid growth later eased, and ACS also faced a number of contract disputes and government investigations.

In one, the Alberta Department of Justice charged early this year that a Canadian unit of ACS bribed Edmonton police officials to try to get a contract renewed. Documents filed by the Royal Canadian Mounted Police said ACS paid for travel and sports tickets for police officials. ACS said it believes its subsidiary has "valid defenses." The company also said it doesn't believe it has "an unbalanced number of disputes or government investigations" for a company its size.

ACS's problems with stock-options backdating started in March. A Wall Street Journal article identified the company as one of several that awarded options at improbably beneficial times. Options -- which typically convey a right to buy shares later at the price when the options are given -- are more lucrative if given on days when the stock price is low. Grants to Mr. Rich, chief executive from 1999 to late 2005, were dated at lows with such regularity that a Journal calculation put the odds of it happening by chance at one in 300 billion. Mr. Rich called it "blind luck."

ACS launched an internal investigation. In early May, it said a preliminary probe had found some options-dating problems but no "intentional backdating" by any director or officer.

A week after its probe exonerated officials, ACS, whose shares trade on the New York Stock Exchange, received a subpoena from federal prosecutors in Manhattan. In addition, ACS lawyers heard that regulators in Washington weren't happy the probe had been done by the company's usual outside lawyers. Mr. Deason decided there should be a second investigation. He hired Bracewell & Giuliani LLP, the firm of former New York Mayor Rudolph Giuliani. "Give us your toughest guy," Mr. Deason said, according to his spokesman.

The law firm sent Marc Mukasey, a former prosecutor who had nailed Colombian drug traffickers. Among the option grants to be reviewed was one to Mr. Deason in 1998. It was especially lucrative: dated on the day ACS's stock closed at its lowest point all year. A second grant to Mr. Deason, in 2002, was dated the day the stock hit a quarterly low. Mr. Deason told Bracewell lawyers he knew nothing of any backdating.

Unlike most executives, Mr. Deason has never exercised any ACS options. He currently holds unexercised options with potential profit of about $15 million, though not all of them can be cashed out immediately. His spokesman said it would have been easy for Mr. Deason to "lavish" himself with hundreds of millions of dollars worth of options, but he didn't because he is a "shareholder- obsessed founder."

Among the four directors who oversaw this probe was Mr. Kosberg, the thrift official whom banking regulators once ordered off the ACS board. ACS had brought him back in 2003, saying his appointment would improve the board's independence.

A director said the board pushed hard to find out what happened, asking Mr. Mukasey at least a dozen times whether Mr. Deason had any involvement in the backdating.

The Bracewell & Giuliani lawyers faced hurdles. Mr. Rich was no longer an employee and chose not to talk to them. Also, the lawyers had difficulty assessing certain pre-2000 documents because of the lack of metadata -- tell-tale clues embedded in electronic documents that help investigators determine when they were actually created. For later documents, they found electronic traces indicating some had been created after the date they bore and then backdated.

ACS announced the probe's results last month, saying it implicated four people in backdating: Mr. Rich; his successor as CEO, Mark King; the ACS finance chief, Warren Edwards; and an unnamed employee. Lawyers for Messrs. King and Edwards have said their clients had acted in good faith, fully cooperated and engaged in no "intentional misconduct." A lawyer for Mr. Rich declined to comment.

ACS said the probe found Mr. Deason had been closely involved in initiating option grants. It said that when the stock price seemed low to him, he would contact a director on the compensation committee and an executive to suggest it was time to grant options, and then Mr. Rich, Mr. King or Mr. Edwards would pick the exact dates -- often retroactively.

Addressing Mr. Deason's 2002 option grant, ACS said investigators "could not conclude" it was backdated. ACS didn't address the 1998 grant bearing the lowest price of the year.

When Bracewell & Giuliani's Mr. Mukasey presented his findings to some ACS directors at the law firm's Dallas office, Mr. Blodgett, ACS's new CEO, says Mr. Deason clearly was pained by the allegations against his protégés: "I watched his eyes. And it was killing him." Directors agreed the implicated executives still employed had to leave.

Messrs. Deason and Blodgett took a limousine to ACS's headquarters. They went to the 10th-floor office of Mr. King, who was CEO, to tell him and Mr. Edwards, the chief financial officer, that they must go. Mr. Deason wasted little time delivering the bad news, says Mr. Blodgett. Nonetheless, "it's the hardest thing he has ever been through," Mr. Blodgett said. "It would not be overstating it to say he was devastated."