Article: Original October Surprise (Part 3)

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 or here for Part 2. The series is adapted from Robert Parry's Secrecy & Privilege: Rise of the Bush Dynasty from Watergate to Iraq:

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. To obtain a copy of Secrecy & Privilege, click here.]