In August 2004, the FBI and the US Justice Department counter-intelligence bureau announced that they were investigating a top Pentagon analyst suspected of spying for Israel and handing over highly confidential documents on US policy toward Iran to AIPAC which in turn handed them over to the Israeli Embassy. The FBI had been covertly investigating senior Pentagon analyst, Larry Franklin and AIPAC leaders, Steven Rosen and Keith Weissman for several years prior to their indictment for spying. On August 29, 2005 the Israeli Embassy predictably hotly denied the spy allegation. On the same day Larry Franklin was publicly named as a spy suspect. Franklin worked closely with Michael Ledeen and Douglas Feith, then Undersecretary for Defense in the Pentagon, in fabricating the case for war with Iraq. Franklin was the senior analyst on Iran, which is at the top of AIPAC's list of targets for war.
As the investigation proceeded toward formal charges of espionage, the pro-Israeli think tanks and neo-con ideologues joined in a two-prong response. On the one hand some questioned whether "handing over documents" was a crime at all, claiming it involved "routine exchanges of ideas" and lobbying. On the other hand, Israeli officials and media denied any Israeli connection with Franklin, minimizing his importance in policy-making circles, while others vouched for his integrity.
The FBI investigation of the Washington spy network deepened and included the interrogation of two senior members of Feith's Office of Special Plans, William Luti and Harold Rhode. The OSP was responsible for feeding bogus intelligence leading to the US attack of Iraq. The leading FBI investigator, Dave Szady, stated that the FBI investigation involved wiretaps, undercover surveillance and photography that document the passing of classified information from Franklin to the men at AIPAC and on to the Israelis.