TEACHER OR TRAITOR

By Richard Lacayo

Take a deep breath. That's supposed to be one way to undermine a lie detector. Inhale deeply before any questions that make you nervous. Applied breathing during polygraph tests is an old trick Russian agents were taught, a small deception in a business that knows all the big ones.

Harold J. Nicholson may have had good reason to be nervous last December. He was sitting down to his third lie-detector test in eight weeks. The first of them had been a routine examination, the kind given every few years to agency employees. Since coming on board in 1980, Nicholson had been quietly but smoothly rising through the agency ranks. Now he was an instructor at Camp Peary, the CIA training facility near Williamsburg, Virginia, teaching new spies what older ones know. For instance, what to do when the other side is on to you.

But during that first routine polygraph, something wasn't quite right. In Nicholson's replies to some important questions, a sophisticated new computer program spotted the shadows of a lie. When the test was repeated four days later, the signs of a false answer showed up again. So on Dec. 4 Nicholson was sitting before the machine again. And this time, just before the most sensitive questions, he appeared to be taking long, deep breaths. The examiner, who knew that trick, told him to stop, then proceeded to ask the crucial question. "Since 1990, have you had contact with a foreign intelligence service that you are trying to hide from the CIA?" Nicholson said no.

The agency thinks it has the real answer now, along with substantial evidence to support its conclusion that for more than two years Nicholson has been spying for the Russians. With the cold war over, the intelligence services of both nations are trying fitfully to cooperate on some matters of mutual interest, like terrorism and international crime. At the same time, as old enemies and uneasy friends, they probe each other by habit and inclination, looking for weak spots. Nicholson may have been one of them, and a potentially spectacular one at that. A branch chief in the CIA counterterrorism center, he is the highest ranking agency officer ever charged with espionage. He is also proof of something the intelligence community has long feared and expected: that Aldrich Ames, the career CIA officer and career Soviet spy, wasn't the last of the moles.

Though Nicholson was a spy teacher, he doesn't seem to have been much good at practicing what he preached. Though less extravagant than Ames, who drove a Jaguar to work and paid $540,000 in cash for a big house, Nicholson began spending in ways that would be a conspicuous stretch on his agency salary. There were frequent trips to East Asia--where investigators say he was handing over information to the Russians--followed by unexplained payments to various Nicholson accounts. And in June there was his cloak-and-dagger passage through Singapore, this time under the eyes of a special team of U.S. agents, trained to track a seasoned operative, who photographed it all. According to an FBI affidavit that details some of the evidence against him, one morning Nicholson left his $300-a-night room at the Shangri-La Hotel and scuttled through the nearby streets for four hours on what any rookie spy would call a "surveillance-detection run." Along the way he backtracked, studied passing faces closely to see if any kept reappearing, checked out his reflection in store windows to see if he was being followed, then dove into a subway station and out again.

Later that same day, he made much the same walk. This time in the subway station he was met by a man who walked with him toward a taxi stand, where they were met by a car with the diplomatic plates of the Russian embassy, all in full view of his FBI tail. After Nicholson threw a camera bag into the trunk and got into the back seat, the car drove away. The affidavit notes drily: "This meeting with Russian nationals was not authorized."

From there Nicholson flew on to Bangkok for some time off with the Thai woman he hoped to marry, before heading back to Washington. Meanwhile, the FBI continued the investigation it had begun in January. Agents searched Nicholson's Virginia town house and Chevy van, dredged his computer hard drive, checked his accounts and finally used a hidden camera to videotape him as he photographed documents under his desk. On Nov. 16, the day before his 46th birthday, Nicholson was at Dulles International Airport in Washington, planning to board a flight for New York and from there a connection to Zurich. Waiting on the tarmac, disguised as ground crew, were two FBI agents, members of the bureau's supersecretive counterintelligence squad. As Nicholson headed for the open door of his plane, they blocked his path and told him he was under arrest. At that moment, three more squad members slid out from among the pack of passengers, eased up on either side of him and led him away. After agent Michael Lonergan read him his rights, Nicholson spoke just one sentence: "I want to talk to a lawyer."

At the time of his arrest Nicholson was allegedly en route yet again to meet his Russian contacts. Investigators say he not only turned over classified documents repeatedly to the Russians but may also have told them the names and assignments of Camp Peary's recent graduates, blowing their covers at the outset of their careers. And he may have identified "access agents," business travelers in Russia who agreed to be debriefed by the CIA, jeopardizing them and making it harder to get others to cooperate in the future. "I would consider the damage to be significant," CIA Director John Deutch said in an interview with Time. "We're going to take measures on all these to minimize the damage."

If the charges are true--Nicholson's two attorneys, Jonathan Shapiro and Liam O'Grady, say their client will fight them vigorously--then Nicholson would have been either a very cool customer or a weirdly reckless one; maybe both. He allegedly went to work for the Russians just as the CIA was in an uproar over Ames, the most important mole ever discovered within the agency. On the basis of information Ames provided over almost nine years of betrayal, Moscow executed at least 10 Soviets working secretly for American intelligence. Anger and embarrassment led the agency to swear it would never happen again. Two months after Ames was sentenced to life in prison, Nicholson was allegedly getting $12,000 from the Russians.

In both cases, old spyhands see instances--exacerbated by post-cold war ambivalence--where spies turned traitor not out of ideological passion for the other side--what "other" side?--but from devotion to the ultimate free-market incentive, cash. To Nicholson's stunned family, who spoke to Time last week, that image didn't square with the idealistic, spiritual man and devoted father they knew. "Jim's whole life has been a commitment to the U.S. government and to his job," said his father Marvin, a retired Air Force master sergeant living near Eugene, Oregon. "Greed?" asked brother Robert. "That's not him."

Nonetheless, the 31-page FBI affidavit and subsequent indictment detail a series of sizable but unexplained payments to Nicholson's various bank accounts, $180,000 in all. That money, more than double his $73,000 salary, started to arrive just as Nicholson's financial circumstances were getting tighter. During the years he was posted abroad with diplomatic cover, a large house, car and private schools for his three children went with the job. When he was moved back to the U.S. in 1994, the expatriate good life disappeared. That same year he divorced his wife and won custody of his children. That meant a property settlement, plus alimony payments that claimed a fourth of his take-home pay.

If Nicholson was paid $180,000, that would still be far less than the $2.5 million that Moscow sent to Ames over the years. But Nicholson may have been at the start of a beautiful friendship with the Russians. With one more promotion at work he would have had access to the kind of top-level agency secrets that Moscow lost when Ames went down. "I think this fellow was on the way to becoming a big spy for the Russians," says a senior CIA official. "He could have done us serious damage."

The agency insists that Nicholson's arrest is a vindication of safeguards put into place after Ames had evaded detection for so long. For years the CIA ignored signs that Ames was on the Soviet payroll. Now any personal troubles or financial windfalls are noted in an officer's file as "anomalies." Those can cluster into an incriminating "matrix" that might lead to a full investigation. "At any given time we have literally dozens and dozens of cases at every agency that raise questions," says FBI Director Louis Freeh. "Sometimes it's just a polygraph, and sometimes someone has plunked down $100,000 for a boat."

Officials say the new procedures alerted them to potential trouble with Nicholson months before the full criminal investigation began in January. But for most of his career, Nicholson had few of the markers that are supposed to identify a soft spot in the ranks. He lived moderately and got first-rate performance evaluations. He was congenial but, as a good spy should be, inconspicuous, "kind of a gray figure," one CIA senior official recalls.

As an Air Force brat, Nicholson moved constantly as a kid. Friends remember him as conventional, ambitious and, in a time of student rebellion, deeply patriotic. At Oregon State University, he earned a degree in geography and learned how to interpret satellite reconnaissance data. At graduation, he married and went straight into the army. With his wife Laura, he resumed the life of perpetual motion he had always known, moving frequently among military bases while he served as a cryptologist and rose to the rank of captain.

In 1980 Nicholson joined the CIA. After almost two years of training, he was posted to Manila, then Bangkok and Tokyo, stations where young agents generally played the complicated game of recruiting spies from among the Soviet and East bloc officials. Some of them were intelligence officers themselves, who attempted in return to recruit the Americans. Within 10 years, fast progress by agency standards, he had landed a station chief's job in Bucharest, Romania.

In Malaysia, where Nicholson arrived in 1992, he was what the CIA calls a declared asset, meaning the U.S. informed the Malaysian government, though no one else, that he was a spy. In the expatriate community, he made little impression except as a genial neighbor and a leader of the Eagle Scout troop that included son Jeremiah. During Nicholson's two years in Kuala Lumpur, one of the main jobs for American intelligence agents was tracking leads in the terrorist bombing of the World Trade Center in New York City. The suspected mastermind of the bombing, Ramzi Yousef, had passed through Malaysia. While in Kuala Lumpur, Nicholson had got agency permission to meet with a Russian agent by telling his CIA superiors he thought he could recruit the man. According to the FBI affidavit, in June 1994, one day after Nicholson's last reported meeting with the Russian, $12,000 was wired to Nicholson's savings account in Eugene, Oregon. Later agency hands would remember how Aldrich Ames had offered himself to the Russians: by getting permission to meet a Soviet agent that he told his superiors he was trying to recruit.

Early the next month Nicholson returned to the U.S. to start his teaching job at Camp Peary. But twice each year he made personal trips to East Asia, and each one was followed by a payment to one of his accounts. After the meeting with Russians that agents say they observed in Singapore, for instance, Nicholson paid $8,300 cash into his American Express account, purchased two gold commemorative coins and paid his $1,679.59 bill at the Shangri-La Hotel in cash.

Last month FBI agents also watched Nicholson drop a sealed airmail envelope into a mailbox in Dunn Loring, Virginia. Inside the envelope was a picture postcard that read:

"Hello Old Friend,

"I hope it is possible that you will be my guest for a ski holiday this year on 23-24 November. A bit early but it would fit my schedule nicely. I am fine, and all is well. Hope you are the same and can accept my invitation.

"Best Regards, Nevil R. Strachey"

The card is presumed to be a signal from Nicholson to his Russian handlers that he wanted a meeting in Switzerland earlier than previously scheduled. Seasoned spies say Nicholson's method is almost quaint. An up-to-the-minute agent today would have cellular phones and portable computer linkups. "Nobody would use those techniques today unless you were an awful agent or cutting corners like hell," says David Whipple, president of the Association of Former Intelligence Officers.

But the government may have a harder time building its case and assessing the damage done. Unlike Ames, Nicholson is pleading not guilty. For starters, attorney Shapiro wants to subpoena the tape of the lie-detector tests, which he says can be used to refute some of the CIA's claims. The affidavit against Nicholson already contains at least one apparently inflated charge. It accuses him of selling to the Russians the name of the CIA station chief in Moscow. But as a symbol of warming ties, the U.S. and Russia actually inform one another these days of the identities of their spy chiefs in their respective capitals.

The unauthorized files in Nicholson's notebook computer also allegedly included a fragment from one document that described the planned undercover assignment to Moscow of a new case officer whom Nicholson had trained at Camp Peary. In his Chevy van, agents also found a computer diskette that contained a document summarizing seven secret reports from the debriefing of business people who had visited Russia. Investigators say they won't compile a complete damage assessment until after Nicholson's trial. They fear creating a document that could be obtained by the defense during discovery proceedings and revealed in open court.

In some ways an open trial is what they fear most. That could dump a flood of classified information onto the public record. To obtain a conviction for espionage, the government must prove that the information passed to a foreign power affects national security. To say it was classified is not enough. The defense can call in still more classified information. So right now the intelligence community is also taking a deep breath. "The one thing they really want is a confession, so they can avoid a trial," says a retired CIA official.

In the Ames case, the government squeezed a guilty plea from him by promising to drop charges against his wife. It's not clear what comparable leverage it has against Nicholson, except to offer reduced charges in return for a confession. At present, prosecutors don't have enough evidence to seek the death penalty, but if convicted on the current charge, Nicholson still faces life in prison without parole. So silence, and the threat of taking his case to trial, may for now be Nicholson's greatest weapon. For the CIA, it also means a nightmare, as it wonders just what damage he may have done.

--Reported by John Colmey/Kuala Lumpur, and Elaine Shannon and Douglas Waller/Washington

With reporting by JOHN COLMEY/KUALA LUMPUR, AND ELAINE SHANNON AND DOUGLAS WALLER/WASHINGTON