Original October Surprise (Part 3)

By Robert Parry
Created Oct 30 2006 - 8:14am

Editor's Note: Part 3 of our series about the "Original October Surprise" of
1980 addresses the troubling question of whether disgruntled CIA officers
collaborated with their former boss, George H.W. Bush, to sabotage President
Jimmy Carter's Iran-hostage negotiations -- and thus changed the course of
U.S. political history.

To read the first two parts of the series -- dealing with the inept
investigation by Indiana Democrat Lee Hamilton and the role of banker David
Rockefeller in the 1980 affair -- click here for Part 1 [1] or here for Part
2 [2]. The series is adapted from Robert Parry's Secrecy & Privilege: Rise
of the Bush Dynasty from Watergate to Iraq [3]:

There are few threats to a democracy more serious than the possibility that
the nation's intelligence services would abuse their extraordinary powers
and secretly influence the election of the nation's leadership, in effect
turning their clandestine skills for manipulating overseas events on their
own country.

That is why Congress and Presidents have barred the Central Intelligence
Agency since its founding in 1947 from operating domestically. It also
explains why the core questions of the 1980 October Surprise case remain a
sensitive mystery even today:

Did disgruntled CIA officers conspire with their former boss, George H.W.
Bush, to exploit the Iranian hostage crisis in 1980 to defeat President
Jimmy Carter whose policies had infuriated many CIA veterans? Did that
secret CIA operation change the course of American politics, paving the way
for a quarter century of Republican dominance?

On Nov. 4, 1980, after a full year of frustrating efforts to free the 52
American hostages held in Iran, Carter lost in a landslide to Ronald Reagan
and his running mate, George H.W. Bush. The hostages were finally freed
after Reagan was sworn in on Jan. 20, 1981.

While the full story is still unclear a quarter century later, the evidence
leaves little doubt that former CIA Director Bush - first as a Republican
presidential candidate and then as the party's vice presidential nominee -
supervised a team of bitter ex-CIA officers whose careers had suffered under
Carter.

These ex-intelligence officers were so angry with Carter that they cast off
their traditional cloak of non-partisanship and anonymity in 1979 and
enlisted in the Republican drive to unseat the sitting President.

During Bush's bid for the Republican nomination, these veterans of CIA
covert operations worked as his political foot soldiers. One joke about
Bush's announcement of his candidacy on May 1, 1979, was that "half the
audience was wearing raincoats."

Bill Colby, Bush's predecessor as CIA director, said Bush "had a flood of
people from the CIA who joined his supporters. They were retirees devoted to
him for what he had done" in defending the spy agency in 1976 when the CIA
came under heavy criticism for spying on Americans and other abuses.

Reagan's foreign policy adviser Richard Allen described the group working on
the Bush campaign as a "plane load of disgruntled former CIA" officers who
were "playing cops and robbers."

All told, at least two dozen former CIA officials went to work for their
former boss. Among them was the CIA's director of security, Robert Gambino,
who joined the Bush campaign immediately after leaving the CIA where he
oversaw security investigations of senior Carter officials and thus knew
about potentially damaging personal information.

Besides the ex-CIA personnel who joined the Bush campaign, other pro-Bush
intelligence officers remained at the CIA while making clear their political
preference. "The seventh floor of Langley was plastered with 'Bush for
President' signs," said senior CIA analyst George Carver, referring to the
floor that housed senior CIA officials.

Carter administration officials also grew concerned about the deep personal
ties between the former CIA officers in Bush's campaign and active-duty CIA
personnel who continued to hold sensitive jobs under Carter.

For instance, Gambino, the 25-year CIA veteran who oversaw personnel
security checks, and CIA officer Donald Gregg, who served as a CIA
representative on Carter's National Security Council, "are good friends who
knew each other from the CIA," according to an unpublished part of a report
by a House Task Force, which investigated the October Surprise issue in
1992. [I found this deleted section - still marked "secret" - in unpublished
task force files in 1994.]

'Blond Ghost'

Perhaps most significantly, Bush quietly enlisted Theodore Shackley, the
legendary CIA covert operations specialist known as the "blond ghost."
During the Cold War, Shackley had run many of the CIA's most controversial
paramilitary operations, from Vietnam and Laos to the JMWAVE operations
against Fidel Castro's Cuba.

In those operations, Shackley had supervised the works of hundreds of CIA
officers and developed powerful bonds of loyalty with many of his
subordinates. For instance, Donald Gregg, the CIA liaison to Carter's White
House, had served under Shackley's command in Vietnam.

When Bush was CIA director in 1976, he appointed Shackley to a top
clandestine job, associate deputy director for operations, laying the
foundation for Shackley's possible rise to director and cementing Shackley's
loyalty to Bush. Shackley had a falling out with Carter's CIA director,
Stansfield Turner, and quit the agency in 1979.

Shackley believed that Turner had devastated the CIA by pushing out hundreds
of covert officers, many of them Shackley's former subordinates. The
prospect of George H.W. Bush rising to be President or Vice President
rekindled speculation that Shackley still might get the top CIA job.

By early 1980, the Republicans also complained that they were being kept in
the dark about progress on the Iran hostage negotiations. George Cave, then
a top CIA specialist on Iran, told me that the "Democrats never briefed the
Republicans" on sensitive developments, creating suspicions among the
Republicans.

So, the Republicans sought out their own sources of information. Shackley
began monitoring Carter's progress on the hostage negotiations through his
contacts with Iranians in London and Hamburg, West Germany.

"Ted, I know, had a couple of contacts in Germany," said Cave. "I know he
talked to them. I don't know how far it went. ... Ted was very active on
that thing in the winter/spring of 1980."

Author David Corn also got wind of the Shackley-Bush connection when he was
researching his biography of Shackley, Blond Ghost.

"Within the spook world the belief spread that Shackley was close to Bush,"
Corn wrote. "Rafael Quintero [an anti-Castro Cuban with close ties to the
CIA] was saying that Shackley met with Bush every week. He told one
associate that should Reagan and Bush triumph, Shackley was considered a
potential DCI," the abbreviation for CIA director.

Shackley's monitoring of hostage developments for Bush continued at least
into the fall of 1980.

According to handwritten notes of Reagan's foreign policy adviser Richard
Allen, Bush called on Oct. 27, 1980, after getting an unsettling message
from former Texas Gov. John Connally, the ex-Democrat who had switched to
the Republican Party during the Nixon administration. Connally said his oil
contacts in the Middle East were buzzing with rumors that Carter had
achieved the long-elusive breakthrough on the hostages.

Bush ordered Allen to find out what he could about Connally's tip. "Geo
Bush," Allen's notes began, "JBC [Connally] -- already made deal. Israelis
delivered last wk spare pts. via Amsterdam. Hostages out this wk. Moderate
Arabs upset. French have given spares to Iraq and know of JC [Carter] deal
w/Iran. JBC [Connally] unsure what we should do. RVA [Allen] to act if true
or not."

In a still "secret" 1992 deposition to the House October Surprise Task
Force, Allen explained the cryptic notes as meaning Connally had heard that
Carter had ransomed the hostages' freedom with an Israeli shipment of
military spare parts to Iran. Allen said Bush instructed him, Allen, to get
details from Connally. Allen was then to pass on any new details to two of
Bush's aides.

According to the notes, Bush ordered Allen to relay the information to "Ted
Shacklee [sic] via Jennifer." Allen said the Jennifer was Jennifer
Fitzgerald, Bush's longtime assistant including during his year at the CIA.
Allen testified that "Shacklee" was Theodore Shackley, the legendary CIA
covert operations specialist.

Though various foreign leaders and intelligence operatives have alleged that
by mid-October 1980, the Reagan-Bush campaign had struck its own hostage
deal with the Iranian government, there apparently continued to be
nervousness among the Republicans that whatever arrangements they had with
Iran might come unglued.

The Allen notation, which I discovered among the House Task Force's files in
late 1994, was the first piece of documentary evidence to confirm the
suspicions that Bush and Shackley were working together on the Iranian
hostage crisis in 1980.

Babe in the Woods

From the beginning of the hostage crisis, Jimmy Carter never appreciated how
much he was surrounded by his enemies. He was the proverbial babe in the
woods.

Out of necessity or naivety, Carter also turned to people he believed might
help resolve the hostage crisis while not knowing their ties to his enemies.

Frantically looking for emissaries to Iran's revolutionary government in
late 1979, the Carter administration accepted the assistance of an Iranian
banker named Cyrus Hashemi, who presented himself as a conduit to the
Iranian mullahs.

A worldly businessman in his 40s with one foot in the West and the other
back in Iran, Hashemi seemed a reasonable candidate. He was well-tailored,
well-schooled and well-connected. When he visited Europe, he stayed at the
best hotels; when he crossed the Atlantic, he took the supersonic Concorde.

Gary Sick, a Middle East expert on Carter's National Security Council staff,
said Hashemi established himself in December 1979 as a well-informed Iranian
who could help the administration sort out Iran's new ruling elite.

"Cyrus Hashemi quickly demonstrated that he had access to a number of
high-level officials in the Iranian revolutionary government, most notably
the governor-general of Khuzistan [Ahmad Madani] but also individuals within
Khomeini's own family," Sick wrote in his book, October Surprise.

Besides helping the Carter administration, however, Cyrus Hashemi was
maintaining personal and business ties to key Republicans, most notably
former U.S. intelligence officer John Shaheen, a Lebanese-born, New
York-based businessman who was a close friend of William Casey, himself a
former spy.

Shaheen and Casey had served together in the World War II-era Office of
Strategic Services, the forerunner to the CIA. After the war, Shaheen and
Casey remained friends and became business associates.

In the 1970s, Casey, then a lawyer at the politically well-connected firm of
Rogers and Wells, advised Shaheen on a troubled oil refinery that Shaheen
built at the wind-swept coastal town of Come-by-Chance, Newfoundland,
Canada.

Casey traveled with Shaheen to Kuwait to negotiate a source of oil for the
refinery, though the poorly engineered facility would ultimately fail, never
having produced a drop of gasoline. Shaheen and Casey also kept their hands
in the intelligence business and maintained close ties to the CIA.

According to Cyrus Hashemi's older brother, Jamshid, the dealings between
Cyrus and Shaheen dated back to the late 1970s.

"For many years, he [Cyrus] had been cooperating with Mr. Shaheen," Jamshid
told me in an interview. "I asked him [Cyrus] in 1979, at the end of 1979.
He was very open about it. He knew that Mr. Shaheen had contacts with the
government of the United States. At that time, I did not know which section
or which organization."

The Shaheen connection led Cyrus Hashemi to William Casey even before Casey
took over Ronald Reagan's presidential campaign, according to Jamshid
Hashemi and a 1984 CIA memo that surfaced later.

According to the CIA memo, former Attorney General Elliot Richardson said in
1984 that Casey had recruited Shaheen and Cyrus Hashemi in 1979 to sell off
property in New York City belonging to the deposed Shah's Pahlavi
Foundation.

At the time, the radical Islamic government in Teheran was claiming the
property as its own and the Shah's family was desperate for the cash.

Shaheen also appears to have been the first person to put Cyrus Hashemi in
touch with the CIA. A Shaheen friend whom I interviewed told me that Shaheen
was the person who introduced Hashemi to the spy agency, helping to make him
and his bank a conduit for funneling CIA funds to a variety of covert
operations.

In Iran, the Hashemi brothers already were known as politically dexterous
businessmen. They managed to end up on the right side of the Iranian
revolution by smartly throwing their support to the anti-Shah forces and
exploiting family and personal connections.

After the revolution, as Cyrus Hashemi pursued his banking business outside
Iran, older brother Jamshid Hashemi received an appointment from the new
government to oversee the national radio network. That job, in turn, put him
in touch with other influential Iranians, he said. One was a radical Islamic
cleric, named Mehdi Karrubi.

Meanwhile, Cyrus Hashemi's First Gulf Bank & Trust Co. was emerging as a
bank which handled clandestine money transfers for the new Iranian
government.

"It was ordered that all these monies be transferred to an account of my
brother, into his bank, which was done," Jamshid Hashemi said. "The order of
the transfer was from Admiral [Ahmad] Madani [who served as Iran's defense
minister]. We went to the admiral with the telex and then we went to the war
room of the navy in Teheran and we faxed it ... so he [Cyrus] could take
over all the money, in late 1979, $30 to $35 million, to the account of the
First Gulf."

According to Jamshid Hashemi, the attorney advising Cyrus Hashemi and John
Shaheen about these transactions was William Casey.

Casey "was the man who was actually putting all these things together for
both of them," Jamshid Hashemi said. "Casey was the adviser."

Exploiting his American contacts with the CIA, Cyrus Hashemi also arranged
covert U.S. funding for Madani's presidential campaign.

In late 1979, Jamshid Hashemi said he received a call from his brother,
summoning him from Iran to London and then to the United States. It was
during the London stopover that Jamshid Hashemi said he met John Shaheen.

Shaheen "came and took my passport," Jamshid Hashemi said. "The next day I
have my passport [back] with a piece of paper with a signature giving me a
multiple entry visa into the United States. ... In those days for an Iranian
to get a visa within a few hours, it would have been a miracle."

But after arriving in the United States on Jan. 1, 1980, Jamshid soon
figured out that Shaheen's links to the CIA explained the miracle.

The CIA gave the Hashemi brothers $500,000 to deliver to the struggling
Madani campaign. But only a small amount reached Iran - about $100,000 - and
Madani lost badly to Abolhassan Bani-Sadr in the election.

After the CIA demanded an accounting of the money, the Hashemis returned
$290,000 to the agency. Though the Madani campaign strategy had failed, it
had opened - or at least widened - channels for the Hashemi brothers to the
U.S. government and the CIA.

Soon, Cyrus Hashemi had entrenched himself as a middleman for contacts
between the Carter administration and the Iranian government.

GOP Race

On Jan. 21, 1980, George H.W. Bush stunned the Republican presidential field
by beating Ronald Reagan in the Iowa caucuses. In the glow of victory, Bush
saw his face on the cover of Newsweek and claimed to possess the "Big Mo," a
preppyish phrase for momentum. Bush next took aim at New Hampshire, next
door to Maine where his family vacationed in the summer.

But Bush's Big Mo would last only long enough to force one historic change
in the Reagan campaign. Reagan decided to fire John Sears as head of the
campaign. Foreign policy adviser Richard Allen was among the Reagan
loyalists who recommended Bill Casey, a crafty old spymaster who had worked
for Richard Nixon and had bounced around the tough world of Long Island
politics.

On Feb. 26, the day of the New Hampshire primary, which Reagan would win,
the former California governor replaced Sears with Casey.

"I feel very strongly that this country is in trouble, that it needs to be
turned around and I have felt for over a year that Governor Reagan is the
only man in America who's ever turned a government around," Casey said in
accepting the job.

Years later, Casey's widow, Sophia, gave me an unpublished paper containing
Casey's personal reflections on the campaign. Though the report focused on
campaign mechanics, it also revealed Casey's dread at the prospect of four
more years of Jimmy Carter in the White House.

"Everyone [in Reagan's camp] agreed that Jimmy Carter had to be removed from
office in order to save the nation from economic ruin and international
humiliation," Casey wrote. He also recognized the pivotal role played by the
Iranian hostage crisis in highlighting Carter's shortcomings. "The Iranian
hostage crisis was the focal point of the failure of Carter's foreign
policy," Casey wrote.

After his appointment, Casey went to work building a staunchly conservative
organization that soon was rolling up victories for Ronald Reagan. But Casey
also didn't forget what he viewed as the single-most important variable of
the campaign: the 52 hostages whose continuing plight was growing into a
national obsession.

Casey, the old OSS veteran, wanted to know all he could about Carter's
progress toward resolving the crisis. "Over the ensuing months, Casey and
the Republican campaign systematically constructed an elaborate and
sophisticated intelligence organization targeted on their own government,"
wrote former NSC official Gary Sick in his book, October Surprise.

By early spring 1980, Reagan was rolling toward victory in the Republican
race, though Bush hung on as the representative of the party's more moderate
wing.

In the background, the Iran-hostage stand-off continued to loom as a
political wild card. The crisis threatened Carter's reelection chances if it
lingered but offered hope for a rebound if the hostages returned home at a
timely moment.

In the tradition of the best spy tradecraft, Casey wanted to have sources
right in the middle of the action - and as it turned out, one of Casey's
longtime friends, John Shaheen, was already in tight with Cyrus Hashemi, one
of President Carter's intermediaries to the Iranian government.

A Shaheen associate told me that Casey and Shaheen, the two old OSS guys,
often discussed the hostage crisis in the context of their experience in the
intelligence world. Sometimes their conversations turned to batting around
their own ideas for how to resolve the standoff and how to show up Carter,
the Shaheen associate said.

Shaheen also was in touch with Arab leaders in Europe and sounded them out,
too, about ways for resolving the Iranian impasse, the associate said.

"Shaheen," the associate said, "loved this clandestine stuff. He ate it up.
These guys [Casey and Shaheen] were real patriots. They would have been
involved in it under the table, over the table and on the side of the table.
But they would have done it."

Jamshid Hashemi said Casey's obsession with the hostage issue led the Reagan
campaign chief to approach the Hashemi brothers directly. Jamshid Hashemi
said that in March 1980, he was in his room at the Mayflower Hotel in
Washington when Casey and another Shaheen associate, Roy Furmark, arrived.

"The door was opened and Mr. Casey came in," Jamshid said. "He wanted to
talk to me. I didn't know who he was or what he was. So I called my brother
on the phone. I said, 'there's a gentleman here by the name of Mr. Casey who
wants to talk to me.' I remember that my brother asked me to pass him the
phone and he talked with Mr. Casey."

In spring 1980, Jamshid Hashemi asserted that he met Donald Gregg, the CIA
officer serving on Carter's NSC staff. Jamshid said he encountered Gregg at
Cyrus Hashemi's bank in Manhattan, and Cyrus introduced Gregg as "the man
from the White House."

The alleged involvement of Gregg is another highly controversial part of the
October Surprise mystery. A tall man with a trim build and an easy-going
manner, Gregg had known George H.W. Bush since 1967 when Bush was a
first-term U.S. congressman.

Gregg also briefed Bush when he was U.S. envoy to China. Gregg served, too,
as the CIA's liaison to the Pike Committee investigation when Bush was CIA
director.

"Although Gregg was uniformly regarded as a competent professional, there
was a dimension to his background that was entirely unknown to his
colleagues at the White House, and that was his acquaintance with one of the
Republican frontrunners, George Bush," Sick wrote in October Surprise.

During later investigations, Gregg denied participation in any October
Surprise operations. But Gregg's alibis proved shaky and he was judged
deceptive in his denial when questioned about the October Surprise by an FBI
polygrapher working for Lawrence Walsh's Iran-Contra investigation in 1990.

Gregg flunked the "lie detector" test when he gave a negative answer to the
question: "Were you ever involved in a plan to delay the release of the
hostages in Iran until after the 1980 Presidential election?" [See the Final
Report of the Independent Counsel for Iran/Contra Matters, Vol. I, 501]

Spying Operation

Less than two months after Casey had taken command of the Reagan campaign,
an internal structure for monitoring Carter's progress in Iran was in place.

On April 20, 1980, the Reagan campaign carved out from a larger body of
Republican foreign policy experts a subgroup known as the Iran Working
Group, congressional investigators later discovered. The foreign policy
operation was run by Richard Allen, Fred Ikle and Laurence Silberman.

Back on the campaign trail, Reagan's robust conservatism was helping him
pile up delegates as he gained control of the Republican primaries.

Bush managed to pull out some wins in Massachusetts, Connecticut,
Pennsylvania and Michigan, but was dealt a crushing blow when he lost his
home state of Texas on May 3. The path to the GOP nomination was now clear
for Reagan.

As the Republican nominating battle drew to a close, Cyrus Hashemi and John
Shaheen busied themselves more with business than politics as they tried to
stave off Shaheen's financial ruin. Because of his failing Come-by-Chance
refinery, Canadian courts had frozen Shaheen's bank accounts.

In a bid to avert disaster, Shaheen sent a personal assistant to London with
a power of attorney to arrange a desperately needed loan, according to a
close Shaheen associate whom I interviewed. Shaheen told the assistant to
contact Cyrus Hashemi, who took the assistant to the London offices of the
Bank of Credit and Commerce International and Marine Midland Bank, seeking a
$3 million bail-out.

Cyrus negotiated the loan for Shaheen on his second try, at Marine Midland.
Since Shaheen's accounts were frozen, the money apparently was funneled
through a Bermuda-based front company called Mid Ocean. FBI documents showed
a $2.5 million deposit from "Mid Ocean" into Cyrus's First Gulf bank in
summer 1980, possibly the Marine Midland loan minus $500,000 for expenses.

Shaheen's reliance on Cyrus Hashemi for the infusion of cash also made clear
that the two men were not just casual business associates. Shaheen counted
on Hashemi to toss a $3 million life preserver that kept Shaheen's head
above water. Yet even as their financial predicament worsened, the pair
continued to plunge into the Iranian negotiations.

In July - four months after Jamshid Hashemi said William Casey approached
the Iranian brothers in Washington - Cyrus Hashemi began a series of trips
to Madrid on the hostage crisis. Ostensibly, the meetings were part of his
initiative on behalf of the Carter administration, seeking inroads to the
Iranian regime. But in Teheran, word spread that Cyrus Hashemi's real goal
was to strike a deal on behalf of the Republicans.

Iranian President Abolhassan Bani-Sadr said he first learned of the
Republican "secret deal" with the Iranian radicals in July after Reza
Passendideh, a nephew of Ayatollah Ruhollah Khomeini, attended a meeting
with Cyrus Hashemi and Republican lawyer Stanley Pottinger in Madrid on July
2, 1980.

Bani-Sadr said Passendideh carried a plan back to Teheran "from the Reagan
camp," according to a letter that Bani-Sadr sent to the House October
Surprise Task Force on Dec. 17, 1992.

"Passendideh told me that if I do not accept this proposal, they [the
Republicans] would make the same offer to my [radical Iranian] rivals. He
further said that they [the Republicans] have enormous influence in the
CIA," Bani-Sadr wrote. "Lastly, he told me my refusal of their offer would
result in my elimination."

Bani-Sadr said he resisted the threats and sought an immediate release of
the American hostages, but it was clear to him that the wily Khomeini was
playing both sides of the U.S. political street.

Reagan's Victory

On July 14, 1980, the Republican National Convention opened in Detroit.
After a brief flirtation with the possibility of enlisting former President
Gerald Ford as the vice presidential nominee, Reagan settled on George H.W.
Bush.

After accepting the No. 2 spot, Bush began merging his CIA-heavy campaign
apparatus with Reagan's.

The united Reagan-Bush campaign created a strategy group, known as the
"October Surprise Group," to prepare for "any last-minute foreign policy or
defense-related event, including the release of the hostages, that might
favorably impact President Carter in the November election," according a
draft report of the House October Surprise Task Force.

"Originally referred to as the 'Gang of Ten,'" the draft report said the
"October Surprise Group" consisted of Richard V. Allen, Charles M.
Kupperman, Thomas H. Moorer, Eugene V. Rostow, William R. Van Cleave, Fred
C. Ikle, John R. Lehman Jr., Robert G. Neumann, Laurence Silberman and
Seymour Weiss.

While that part of the draft made it into the Task Force's final report in
January 1993, another part was deleted, saying: "According to members of the
'October Surprise' group, the following individuals also participated in
meetings although they were not considered 'members' of the group: Michael
Ledeen, Richard Stillwell, William Middendorf, Richard Perle, General Louis
Walt and Admiral James Holloway."

Deleted from the final report also was a section describing how the ex-CIA
personnel who had worked for Bush's campaign became the nucleus of the
Republican intelligence operation that monitored Carter's Iran-hostage
negotiations for the Reagan-Bush team.

"The Reagan-Bush campaign maintained a 24-hour Operations Center, which
monitored press wires and reports, gave daily press briefings and maintained
telephone and telefax contact with the candidate's plane," the draft report
read. "Many of the staff members were former CIA employees who had
previously worked on the Bush campaign or were otherwise loyal to George
Bush."

Though post-convention polls showed Reagan leading Carter, Reagan's campaign
chief Casey remained fixated on the Iran-hostage crisis.

Since March, Jamshid Hashemi said he had given the Mayflower Hotel meeting
little thought. But in summer 1980, Jamshid said his brother, Cyrus,
confided that his role in the hostage negotiations had taken another turn.

"I was asked by my brother, since he thought the Republicans had the
possibility of winning the election, that we should not play only in the
hands of the Democrats," Jamshid Hashemi told me. He quoted his brother as
saying "it was the wish of Mr. Casey to meet with someone from Iran."

"That's when I started getting on this work of inviting both Mehdi [Karrubi,
a politically powerful Iranian cleric], to come directly, and Hassan
[Karrubi, the cleric's brother], to come indirectly to Madrid," Jamshid
Hashemi said.

At Madrid's Plaza Hotel, Jamshid Hashemi said the Iranians met with Casey
and another American whom Hashemi identified as Donald Gregg, the CIA
officer working on Carter's NSC.

"What was specifically asked was when these hostages should be released, and
it was the wish of Mr. Casey that they be released after the Inauguration,"
Jamshid Hashemi said. "Then the Reagan administration would feel favorably
towards Iran and release the FMS [foreign military sales] funds and the
frozen assets and return to Iran what had already been purchased."

The FMS sales referred to $150 million in military hardware that had been
bought by the Shah but held back by Carter after Khomeini took power and the
hostages were seized. Casey's offer also included F-14 spare parts, which
were crucial to the maintenance of Iran's high-tech air force, Jamshid
Hashemi said.

After the July meeting with Casey, Jamshid Hashemi said, cleric Mehdi
Karrubi returned to Teheran, where he consulted Ayatollah Ruhollah Khomeini
and the ayatollah's senior advisers. Two to three weeks later, Karrubi
called and asked that a second meeting with Casey be arranged, Jamshid
Hashemi said.

New arrangements were made for a meeting in mid-August again in Madrid, he
said. Karrubi "confirmed" that Khomeini's government had agreed to release
the hostages only after Reagan gained power. "Karrubi expressed acceptance
of the proposal by Mr. Casey," Jamshid Hashemi said. "The hostages would be
released after Carter's defeat."

After the Madrid meetings, Jamshid Hashemi said his brother, Cyrus, began
organizing military shipments - mostly artillery shells and aircraft tires -
from Eilat, in Israel, to Bandar Abbas, an Iranian port. Jamshid Hashemi
valued the military supplies in the tens of millions of dollars.

Election Battle

After Labor Day 1980, with the start of the general election campaign, Jimmy
Carter began to show new signs of political life. Carter had survived a
Democratic primary challenge from liberal Massachusetts Sen. Edward Kennedy
and was benefiting from a uniting of Democrats after their national
convention.

There also were widespread public doubts about Ronald Reagan, who was viewed
by many as an extremist who might unnecessarily heat up the Cold War. Carter
began to slowly close the gap on the former California governor. But the
Iranian hostage crisis hovered over his campaign like an accursed spirit.

Though little noticed in Washington, political battles also were breaking
out inside the Iranian leadership. Iran's acting Foreign Minister Sadegh
Ghotbzadeh told Agence France Presse on Sept. 6 that he had information that
Reagan was "trying to block a solution" to the hostage impasse.

The secret Republican plan to delay release of the hostages until after the
U.S. elections also had become a point of tension between Iranian President
Bani-Sadr and Ayatollah Khomeini, according to Bani-Sadr's account sent to
the House October Surprise Task Force in 1992.

Bani-Sadr said he managed to force Khomeini to reopen talks with Carter's
representatives. Bani-Sadr said Khomeini relented and agreed to pass on a
new hostage proposal to Carter officials through his son-in-law, Sadegh
Tabatabai.

The Tabatabai initiative surprised the Carter negotiation team, which had
pretty much given up hope that the Iranians would agree to any serious
talks. NSC official Gary Sick described the proposal for settling the
hostage impasse as "a set of conditions for ending the crisis that were
really much gentler than anything Iran had offered before."

The sudden shift in the Iranian position coincided with a renewed concern
among Republicans that Carter might actually pull off his October Surprise
of a hostage release. A flurry of meetings ensued involving Iranian
emissaries and representatives of the Republican October Surprise monitoring
operation.

On Sept. 16, Casey was focusing again on the crisis in the region. At 3
p.m., he met with senior Reagan-Bush campaign officials Edwin Meese, Bill
Timmons and Richard Allen about the "Persian Gulf Project," according to an
unpublished section of the House Task Force report and Allen's notes. Two
other participants at the meeting, according to Allen's notes, were Michael
Ledeen and Noel Koch.

That same day, Iran's acting foreign minister Ghotbzadeh again was quoted as
citing Republican interference on the hostages. "Reagan, supported by
[former Secretary of State Henry] Kissinger and others, has no intention of
resolving the problem," Ghotbzadeh said. "They will do everything in their
power to block it."

While the Republicans were busy in Washington, Carter's emissaries in West
Germany were hammering out the framework for a hostage-release settlement
with Tabatabai.

"I was very optimistic at the time," Tabatabai said in an interview with me
a decade later. "Mr. Carter had accepted the conditions set by the Iranians.
I sent an encrypted message to the Imam [Khomeini], saying I would be back
the next day."

A settlement of the hostage crisis seemed to be in the offing. But
Tabatabai's return was delayed by the outbreak of the Iran-Iraq War on Sept.
22. Tabatabai had to wait two weeks before he could return to Iran.

October Surprise

With little more than a month to go before the U.S. election, Republicans
and Iranian representatives continued to meet in Washington. Indeed, one of
the first public references to secret Republican-Iranian contacts was to a
meeting at the L'Enfant Plaza Hotel supposedly in late September or early
October.

Three Republicans - Allen, Silberman and Robert McFarlane, an aide to Sen.
John Tower - have acknowledged a session with an Iranian emissary at the
hotel. But none of them claimed to remember the person's name, his
nationality or his position - not even McFarlane who purportedly arranged
the meeting.

In early October, Israeli intelligence officer Ari Ben-Menashe said he
learned from superiors in Israel that Carter's hostage negotiations had
fallen through because of Republican opposition, according to his memoirs,
Profits of War.

The Republicans wanted the Iranians to release the hostages only after the
Nov. 4 election, Ben-Menashe wrote, with the final details to be arranged in
Paris between a delegation of Republicans, led by George H.W. Bush, and a
delegation of Iranians, led by cleric Mehdi Karrubi.

Also present, Ben-Menashe wrote, would be about a half dozen Israeli
representatives, including David Kimche, and several CIA officials,
including Donald Gregg and Robert Gates, an ambitious young man who was
considered close to Bush. At the time, Gates was serving as an executive
assistant to CIA Director Stansfield Turner.

In retrospect, some of Carter's negotiators felt they should have been much
more attentive to the possibility of Republican sabotage. "Looking back, the
Carter administration appears to have been far too trusting and particularly
blind to the intrigue swirling around it," said former NSC official Gary
Sick.

By October 1980, however, Carter was clawing his way back into the
presidential race, with the possibility that an Iranian hostage settlement
still could change the dynamic of the campaign.

Sensing the political danger, the Republicans opened the final full month of
the campaign by trying to make Carter's hostage negotiations look like a
cynical ploy to influence the election's outcome.

On Oct. 2, Republican vice-presidential candidate George H.W. Bush brought
up the issue with a group of reporters: "One thing that's at the back of
everybody's mind is, 'What can Carter do that is so sensational and so
flamboyant, if you will, on his side to pull off an October Surprise?' And
everybody kind of speculates about it, but there's not a darn thing we can
do about it, nor is there any strategy we can do except possibly have it
discounted."

With Bush's comments, Carter's supposed "October Surprise" was publicly
injected into the campaign. But there was "a darn thing" or two that the
Republicans could do - and were doing - to prepare themselves for the
possibility of a last-minute hostage release, including gathering their own
intelligence about the Iranian developments.

Little scraps of news and rumors about the hostages were rushed to the
campaign hierarchy. Richard Allen recalled one urgent memo he wrote when he
was told by a journalist that Secretary of State Edmund Muskie had floated
the possibility of a swap of military spare parts for the hostages.

Like a scene in a spy novel, Allen coded the journalist as "ABC" and Muskie
as "XYZ" and compiled a quick memo on the hot news. "I breathlessly sent
this out to the campaign, to [campaign director William] Casey, to [pollster
Richard] Wirthlin, to [senior adviser Edwin] Meese, I think [to] the
President and maybe [to] George Bush."

The big October Surprise question, however, has always been whether the
Reagan-Bush campaign sealed the deal for a post-election hostage release
with direct meetings in Paris between senior Iranians and senior
Republicans, including vice presidential candidate George H.W. Bush.

The idea of Bush slipping away during the final weeks of the campaign for a
secret trip to Paris has always been the most explosive part of the October
Surprise story and, for many, the most implausible.

The secret trip would have required the cooperation of at least a few Secret
Service agents who would have had to file inaccurate reports on the
candidate's whereabouts and activities. The trip also would have carried a
high political risk if exposed, though the senior George Bush's experience
at the CIA had taught him a lot about how to contain embarrassing
disclosures especially when a national security claim could be asserted.

If a flat denial didn't work, perhaps he could have tried a patriotic cover
story about trying to get the hostages home when Carter couldn't. But often
the most effective tactic is simply to deny, deny, deny.

Ben-Menashe said he was in Paris as part of a six-member Israeli delegation
that was coordinating the arms deliveries to Iran. He said the key meeting
occurred at the Ritz Hotel in Paris.

"We walked past the vigilant eyes of the French security men to be
confronted by two U.S. Secret Service types," Ben-Menashe wrote in Profits
of War. "After checking off our names on their list, they directed us to a
guarded elevator at the side of the lobby. Stepping out of the elevator, we
found ourselves in a small foyer where soft drinks and fruits had been laid
out."

Ben-Menashe said he recognized several Americans already there, including
Robert Gates, Robert McFarlane, Donald Gregg and George Cave, the CIA expert
on Iran.

"Ten minutes later, [cleric Mehdi] Karrubi, in a Western suit and collarless
white shirt with no tie, walked with an aide through the assembled group,
bade everyone a good day, and went straight into the conference room,"
Ben-Menashe wrote.

"A few minutes later George Bush, with the wispy-haired William Casey in
front of him, stepped out of the elevator. He smiled, said hello to
everyone, and, like Karrubi, hurried into the conference room. It was a very
well-staged entrance. My last view of George Bush was of his back as he
walked deeper into the room - and then the doors were closed."

Ben-Menashe said the Paris meetings served to finalize a previously outlined
agreement calling for release of the 52 hostages in exchange for $52
million, guarantees of arms sales for Iran, and unfreezing of Iranian monies
in U.S. banks.

The timing, however, was changed, Ben-Menashe said, to coincide with
Reagan's expected Inauguration on Jan. 20, 1981.

"It was such a secret arrangement that all hotel records of the Americans'
and the Israelis' visits to Paris - I cannot speak for the Iranians - were
swept away two days after we left town," Ben-Menashe wrote.

Ben-Menashe testified under oath before Congress about seeing Bush and other
Republicans in Paris in October 1980. Gates, McFarlane, Gregg, Cave, Karrubi
and Bush have all denied participating in the meeting, although their alibis
were either shaky or were never checked out by the House Task Force in 1992.

Mysterious Flights

My own resistance to the October Surprise tales came, in part, from my
middle-American background. I simply had trouble picturing the various
players taking secret, night-time flights across the Atlantic to meet with
foreign leaders in luxury hotels surrounded by security agents.

The "James Bond factor" made the story seem more like a pulp novel or an
escapist movie than a real historic event. But in covering intelligence
operations since the early 1980s, I also had come to grips with the fact
that people who joined that clandestine world thrive on risks that the
average person - or politician - would aver.

Many critics of the October Surprise story have insisted that it is
impossible to conceive of George H.W. Bush, the former CIA director,
arranging for a secret flight to Paris while under Secret Service protection
in mid-October 1980.

These critics have argued that this story must have been concocted for
political reasons after the Iran-Contra scandal broke in late 1986 when a
"conspiracy fever" gripped Washington.

But whatever the larger truth, the suspicion that the October Surprise
allegations were invented after the Iran-Contra scandal has turned out to be
wrong. The story of George H.W. Bush's alleged trip to Paris was circulating
among Republicans in mid-October 1980.

David Henderson, then a State Department Foreign Service officer, recalled
the date as Oct. 18, 1980, when Chicago Tribune correspondent John Maclean
arrived at Henderson's house in Washington for in interview about
Henderson's criticism of the Carter administration's handling of Cuban
refugees from the Mariel boat lift.

But Maclean, the son of author Norman Maclean who wrote A River Runs Through
It, had something else on his mind, Henderson recalled. Maclean had just
been told by a well-placed Republican source that vice presidential
candidate George H.W. Bush was flying to Paris for a clandestine meeting
with a delegation of Iranians about the 52 American hostages.

Henderson wasn't sure whether Maclean was looking for some confirmation or
whether he was simply sharing an interesting tidbit of news. Henderson had
not previously heard of the Bush trip and wondered out loud if it might be
part of a bipartisan effort to finally resolve the long-running hostage
crisis.

Maclean never wrote about the leak he had received from his well-placed
Republican source because, he said, a campaign spokesman subsequently denied
it.

As the years passed, the memory of that Bush-to-Paris leak faded for both
Henderson and Maclean, until the October Surprise allegations surfaced again
in the early 1990s.

Several intelligence operatives were claiming that Bush had undertaken a
secret mission to Paris in mid-October 1980 to give the Iranian government
an assurance from one of the two Republicans on the presidential ticket that
the promises of future military and other assistance would be kept.

Henderson mentioned the meeting in a 1991 letter to a U.S. senator, a copy
of which was forwarded to me while I working at the Public Broadcasting
Service's Frontline program. In the letter, Henderson recalled the
conversation about Bush's trip to Paris but not the name of the Chicago
Tribune reporter.

A producer at Frontline then searched some newspaper archives to find the
story about Henderson and the Mariel boat lift as a way to identify Maclean
as the journalist who had interviewed Henderson.

Though not eager to become part of the October Surprise story in 1991,
Maclean confirmed that he had received the Republican leak. He also agreed
with Henderson's recollection that their conversation occurred on or about
Oct. 18, 1980. But Maclean still declined to identify his source.

The allegations of a Paris meeting also received support from several other
sources, including pilot Heinrich Rupp, who said he flew Casey from
Washington's National Airport to Paris on a flight that left very late on a
rainy night in mid-October.

Rupp said that after arriving at LeBourget airport outside Paris, he saw a
man resembling Bush on the tarmac. The night of Oct. 18 indeed was rainy in
the Washington area. Also, sign-in sheets at the Reagan-Bush headquarters in
Arlington, Virginia, placed Casey within a five-minute drive of National
Airport late that evening.

The sign-in sheets showed Casey stopping in at the campaign headquarters at
about 11:30 p.m. for a ten-minute visit to the Operations Center, which was
staffed by CIA veterans monitoring developments in Iran.

There were other bits and pieces of corroboration about the Paris meetings.
As early as 1987, Iran's ex-President Bani-Sadr had made similar claims
about a Paris meeting.

A French arms dealer, Nicholas Ignatiew, told me in 1990 that he had checked
with his government contacts and was told that Republicans did meet with
Iranians in Paris in mid-October 1980.

A well-connected French investigative reporter Claude Angeli said his
sources inside the French secret service confirmed that the service provided
"cover" for a meeting between Republicans and Iranians in France on the
weekend of October 18-19. German journalist Martin Kilian had received a
similar account from a top aide to the fiercely anti-communist chief of
French intelligence, Alexandre deMarenches.

During the final weeks of the House Task Force investigation in 1992,
another witness came forward: the biographer for deMarenches, the legendary
leader of France's Service de Documentation Exterieure et de
Contre-Espionage (SDECE).

The biographer, David Andelman, an ex-New York Times and CBS News
correspondent, testified that while working with deMarenches on the book,
the spymaster said he had helped the Reagan-Bush campaign arrange meetings
with Iranians about the hostage issue in the summer and fall of 1980, with
one meeting held in Paris in October.

Andelman said deMarenches ordered that the secret meetings be kept out of
his memoirs because the story could otherwise damage the reputations of his
friends, William Casey and George H.W. Bush.

DeMarenches "thought the world of Casey and Bush, and never wanted anything
to come out that would hurt Bush's chances for reelection [in 1992] or
Casey's legacy," Andelman told me in an interview.

Andelman said that when he again raised the issue of Bush's alleged
participation in the Paris meetings during a 1992 book promotion tour,
deMarenches refused to discuss it, responding: "I don't want to hurt my
friend, George Bush."

The Weapons Flow

While the Republicans have long denied the claims of a Paris meeting and an
October Surprise deal, there is no doubt that military hardware was soon
heading to Iran and that some of the principals in the hostage intrigue were
active in the shipments.

Back in New York, with the FBI listening in, Cyrus Hashemi began work with
Republicans lining up arms shipments to Iran, including parts for helicopter
gun ships and night-vision goggles for pilots.

The FBI wiretap summary also contained references to Cyrus Hashemi facing
accusations at home that he had been duplicitous about the hostage issue. On
Oct. 22, 1980, the FBI bugs caught Hashemi's wife, Houma, scolding her
husband for his denials that he had discussed the hostages with a prominent
Iranian. "It is not possible to be a double agent and have two faces," Houma
warned Cyrus.

On Oct. 23, the FBI listened in on John Shaheen using one of the bugged
phones in Hashemi's Manhattan office to brief a European associate, Dick
Gaedecke, on the latest hostage developments.

On Oct. 24, an FBI agent wrote down another cryptic note from the wiretaps
indicating that Cyrus Hashemi may have had ties to Ronald Reagan himself.
Using Cyrus Hashemi's initials, the FBI's notation read: "CH-banking
business about Reagan overseas corp."

Meanwhile, back in Europe, a French-Israeli arms shipment to Iran was under
way. Iranian arms merchant Ahmed Heidari said he had approached deMarenches
in September 1980 to seek help getting weapons for the Iranian military,
which was then battling the Iraqi army in Khuzistan province.

Heidari said deMarenches put him in touch with a French middleman, Yves
deLoreilhe, who facilitated the arms shipment. The flight left France on
Oct. 23, stopped in Tel Aviv to load 250 tires for U.S.-built F-4 fighters,
returned to France to add spare parts for M-60 tanks, before going to
Teheran on Oct. 24. When Carter learned of the shipment, he protested to
Israeli Prime Minister Menachem Begin.

On Nov. 4, 1980, one year to the day after the Iranian militants seized the
U.S. Embassy in Teheran, Ronald Reagan routed Jimmy Carter in the U.S.
presidential elections. Reagan carried 44 states for a total of 489
electoral votes, with Carter claiming only six states and the District of
Columbia for 49 electoral votes.

After the election - because the FBI had picked up evidence of Cyrus
Hashemi's arms dealing with Iran - the Carter administration finally froze
the shady Iranian banker out of the hostage talks. But Hashemi kept his hand
in, still moving money to key players.

On Jan. 15, 1981, Hashemi met with Iranian Revolutionary Guard officials in
London and opened an account for them with 1.87 million pounds (roughly
equal to $3 million), according to the FBI wiretaps.

The money apparently was to finance more arms sales, but also had the look
of a possible payoff to Khomeini's hard-line military backers.

On Jan. 19, 1981, the last day of the Carter Presidency, Cyrus Hashemi was
back on one of the bugged phones, describing to a cohort "the banking
arrangements being made to free the American hostages in Iran." Hashemi was
also moving ahead with military shipments to Iran, amid concern that there
might be more competition ahead.

"How should we proceed with our friend over there?" the associate asked
Hashemi. "I'm just a little bit nervous that everyone is trying to move in
on the action here."

As the Inauguration neared, Republicans talked tough, making clear that
Ronald Reagan wouldn't stand for the humiliation that the nation endured for
444 days under Jimmy Carter. The Reagan-Bush team intimated that Reagan
would deal harshly with Iran if it didn't surrender the hostages.

A joke making the rounds of Washington went: "What's three feet deep and
glows in the dark? Teheran ten minutes after Ronald Reagan becomes
President."

On Inauguration Day, Jan. 20, 1981, just as Reagan was beginning his
inaugural address, word came from Iran that the hostages were freed. The
American people were overjoyed.

The coincidence in timing between the hostage release and Reagan's taking
office immediately boosted the new President's image as a tough guy who
wouldn't let the United States be pushed around.

President Reagan named his campaign chief, William Casey, to head the CIA.
Donald Gregg became Vice President Bush's national security adviser. Richard
Allen became Reagan's NSC adviser, followed later by Robert McFarlane.
Though relatively young, Robert Gates quickly climbed the CIA's career
ladder to become deputy director and later CIA director under President
George H.W. Bush.

In the mid-1980s, many of the same October Surprise actors became figures in
the Iran-Contra scandal when that secret arms-for-hostages scheme with Iran
was revealed in late 1986, despite White House denials and a determined
cover-up.

According to the official Iran-Contra investigations, that plot to sell U.S.
weapons to Iran for its help in freeing American hostages then held in
Lebanon involved Cyrus Hashemi, John Shaheen, Theodore Shackley, William
Casey, Donald Gregg, Robert Gates, Robert McFarlane, George Cave, Ronald
Reagan and George H.W. Bush.

But a political firewall was quickly built between the Iran-Contra Affair
and the October Surprise case. No aggressive investigation was ever
conducted into whether the origins of the Iran-Contra scandal traced back to
the 1980 election and whether CIA operatives, working with George H.W. Bush,
had used their covert skills to alter the course of American political
history.

[To examine the some of the long-hidden Task Force documents, click here
[4]. To obtain a copy of Secrecy & Privilege, click here [5].]
_______

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"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson