Do You Sincerely Want To Be Rich? (19 page)
Read Do You Sincerely Want To Be Rich? Online
Authors: Charles Raw,Bruce Page,Godfrey Hodgson
Tags: #Non Fiction
Cornfeld refused, for a long time, to give up his ambition to negotiate a return to Brazil, and this was hardly surprising, for in essence it was Brazil that had made him and his company rich. Efforts were made at negotiation by everyone from ex-Ambassador James Roosevelt, whom IOS hired to improve its relationships with foreign governments, to Robert J. Haft, once Ed Cowett's attorney, and now retained for IOS. All were icily refused.
On May 30, 1968 the President of the Brazilian Republic issued a statement that he had communicated to Mr James Roosevelt that the memorandum by Mr Robert Haft was totally rejected, and that discussions could continue only if, within ten days from the receipt of the President's letter, IOS put forward new proposals, starting by handing over a complete list of IOS clients in Brazil. He went on to state his own terms for what amounted to unconditional surrender.
IOS clients would be amnestied from further charges on condition they paid any fines due to the revenue department, and then repatriate all the dollars they had invested in IOS, and re-invest it in Brazilian state bonds.
Long before that, the sales force had melted away although the police tried to block the obvious exits. Venturini managed to find a Pole who had flown for the raf in World War II and was willing to fly Venturini and Jessen out of the country. They flew south down the coast and landed at the Aeroclub at Punta del Este, near Montevideo, where there is a big casino. Luckily for them the immigration officials assumed they were gamblers and didn't ask for their papers.
Borlin also had to smuggle himself out. Luckily one of his wife's relations was the agent for Piper Aircraft. Borlin persuaded him to arrange two planes, one in a Brazilian city and one in a town just over the frontier in Paraguay. After 'fifteen' changes of cars, he took off in the first Piper, but when they were airborne there was a terrific electrical storm, and they were forced to land inside Brazil at an airstrip in Rio Grande do Sul.
As they circled in to land, Borlin - to his horror - saw soldiers, with trucks, tanks and even artillery. He had visions of being dragged back to jail, perhaps to the dreaded Island of Flowers.
But it turned out to be routine Brazilian army manoeuvres. The Piper managed to get off the ground and landed Borlin in safety at last in a Paraguayan potato field.
By 1970, virtually nothing was left of the mighty treasure Venturini, Borlin and the rest had heaped up. Funds under management for all IOS clients in Brazil had dwindled to just over $1 million, less than one-hundredth of the face volume on which the sales force had drawn commission.
The Brazilian debacle created fall-out all over the southern half of Latin America. Fred Borlin soon found himself back in Argentina, where it took him three weeks to find the first IOS man. The whole operation had gone underground, and half a dozen salesmen and clients had been arrested. 'They were in panic: they had split for the high pampas.' In Chile, things were even worse.
Gradually, in the end, IOS was able to rebuild some of its operations in Latin America. They were eventually allowed to start an insurance company in Argentina, for example. But as a market the southern continent never recovered from the shock of Brazil. And steadily the official climate was turning chilly.
Bolivia is a good enough example. A sales group had been at work there at least since 1964, under Mario Granado, a man of sufficient substance in that country to be subsequently appointed its consul-general in Buenos Aires. In 1967, presumably with what had happened in Brazil in his mind, Granado applied for official permission for IOS activities.
On January 3,1968 he was given permission, by the President of the Republic, no less, to set up an IOS branch, but only for 'promotional work of consultation, propaganda and information.' 'Transactions' were specifically forbidden.
The IOS representative in Bolivia admitted that selling did continue, however. But in October 1969 the new revolutionary-nationalist Ovando government took power. Almost immediately the IOS representative got a nasty letter from the Superintendent of Banks, which ended:
'… As a consequence of your participation in these operations, which have clearly not been in
ad honorem
form, you must present a concrete declaration of your income from them for consequent taxation.'
ad honorem
form, you must present a concrete declaration of your income from them for consequent taxation.'
A few days later the Superintendent of Banks wrote another letter, to his Minister of Finance, which is worth quoting in spite of its length. It gives a very good idea of how the IOS operation looked to the government of a very poor country indeed.
1
1
'… allow me to draw to your attention and authority the draft of a Supreme Decree, whose objective is to put an end to the increasing amount of the public's funds that is being obtained for deposit and investment abroad, particularly in those known as "mutual funds."
These savings, which in no way benefit the country,… not only mean an outflow of money abroad, but are also in practice not subject to taxation…
We are assured that the considerable sum of tens of thousands of dollars is sent out of the country monthly by methods which have been indicated and denounced by the Association of Private Banks…
Evidently those known as "Fund of Funds",' 'mutual funds"… obtain savings from members of the general public through real promotion and pressure, carried out by agents, brokers and pseudo-representatives, working clandestinely and avoiding all payment of tax.
1
Average income per head in Bolivia in 1969: $147 p.a.
… The investments make no contribution to the national economy… primarily they feed the North American economy.'
Once one has grasped how important flight capital was in Phase Four, it comes as no surprise to learn that Latin America's only rival among the regions of the earth as an IOS market in those years was the Middle East. The difference was that there were no large clandestine operations. The region was divided into countries, such as Egypt and Iraq, where it would have
1
Average income per head in Bolivia in 1969: $147 p.a.
taken a foolhardy man indeed to try to get round exchange control; and other territories, such as the Lebanon, Kuwait, and the Trucial States in the Persian Gulf, where selling mutual funds was not illegal.
The first ambassadors of IOS to the region were itinerant American individualists like Jack Himes, Bret Davidson and Lou Ellenport. One of the few veterans of this early period who was shrewd and resourceful enough to carve a sales fief for himself in the Middle East was a tall Coloradan called Sam Welker. Welker had known George Tregea when they both worked for the same oilfield equipment supply company in Venezuela, before Tregea joined IOS. He got around the difficulty his IOS predecessors had experienced in establishing themselves for more than three months in Libya by boldly registering himself as an investment and insurance broker. He built up a profitable business there selling to British, German and Italian businessmen. Then he opened up Malta, he became manager over three branches in Saudi Arabia, in Dhahran, Riyadh and Jedda; and finally he found himself responsible for sales in twelve countries in North Africa, and the Middle East.
But the hub of the IOS operation in the Middle East in its most profitable years was Beirut. In 1954 IOS recruited a man called Ray Tabet, a Lebanese who had formerly owned a small bank. Tabet is said to have made the first million-dollar sale to one of his rich Lebanese contacts. But Beirut did not begin to reach its full potential as a sales centre until around 1962. It was then that Tabet began to open up rich markets in the Persian Gulf, where Arab sheikhs, Indian merchants and European expatriates all rushed to invest their money. In that same year Tabet recruited Sameera Abou-Haidar, the attractive wife of a fashionable Beirut doctor, who proved to be one of IOS’s most dynamic sales organizers. Within two years, she had sold over $2 million of face volume. 'When I decide to sell him, I sell him,' was her motto.
It was towards the end of 1964 that one of Tabet's star salesmen, an Egyptian called Adel Gennaoui, pulled off a coup that is still talked about in Beirut to this day. In the closing days of the 1964 sales contest, he flew down to Jeddah, and came back after nine days with enough sales to take second place in the whole world-wide contest. Le
gend insists that he made £72,000 ($173,000) for his week's work. There never was any serious obstacle to the IOS sales operation on capital flight grounds in those parts of the Middle East where is was operating. (Iran was an exception which we discuss elsewhere.) What did close it down in 1968, was an Arab boycott. The reason for this seems to have been partly that Cornfeld himself and several of the senior executives of IOS were Jewish, and partly that IOS had been operating in Israel.
The Israeli authorities, in fact, showed themselves far more watchful in their surveillance of IOS than any Arab government.
Bernie Cornfeld had spent some time in Israel, or Palestine as it then was, as a child. When he visited Jerusalem in 1970, he insisted on taking General Haim Herzog, one of the directors of the IOS insurance subsidiary in Israel, to see a particular old building in the old Russian compound neighbourhood in Jerusalem. Before World War II it had been an American school, run by a lady called Miss Deborah Kalen, and the young Bernie had spent about a year there. He pointed out to the General a tree he remembered climbing as a child.
It was natural, therefore, that Cornfeld, once he had created IOS, should want it to be established in Israel too.
In December 1965, Joseph Melamed, himself a former Israeli Treasury official, set up a small office in Tel Aviv and a small sales group. Both have been in operation ever since, with the exception of one brief period during which sales were suspended in 1968.
In 1969 inquiries were made by the Israeli government, partly as a result of concern over IOS operations, as many Israelis had lost money by redeeming shares at well below the value of their original investments.
That was not the Finance Ministry's only worry. 'What we didn't like,' an official told us, 'was their door-to-door canvassing. We felt it would lead to a great outflow of capital.'
So IOS was asked to give an undertaking to the authorities, which it gave, to invest at least as much in Israel as the value of its sales there. In May 1970, in answer to a question in the Knesset, the Deputy Finance Minister, said that IOS had sold us $6.5 million worth of securities to Israelis, and had invested $14.6 million in Israel in return. More than half of that was the Midbar oil prospecting venture.
The low profile was maintained until October 1969. By that time the Arab Boycott had happened anyway. In that month both Bernie Cornfeld and Ed Cowett visited Israel.
Bernie proceeded to make a series of spectacular gestures. He planned to buy a bank, and started negotiations to acquire one.
He announced plans to build a whole chain of IOS hotels in Israel, in Tel Aviv, Jerusalem and Eilath. And he tried to buy the Tel Aviv Hilton for a reported $14.5 million. (If so it is not surprising the offer was unsuccessful, as that is less than the net value of the hotel, the stock of which belongs to the government.)
He offered to provide expertise for the young Israeli fashion industry through his contacts with Oleg Cassini and Guy Laroche. And he offered to lend the government of Israel his private black executive jet for flying vips around.
Such friendly gestures have not, however, in any way had the effect of inducing the Israeli government to modify what remains a sceptical and cautious attitude to mutual fund selling in general, whether by IOS or by its competitors. New and stricter regulations governing their operations are due to come into force at the time of writing.
'Talk about hot money!' Bernie Cornfeld said to our colleague James Fox. 'We've got a million clients, and if any major proportion of those million clients represents hot money, there must be a lot of it about.' There is.
Cornfeld was cleverly evading the point. The proportion, of the million
clients
that 'represent hot money' doesn't matter, because a small proportion of IOS’s customers provided a very large share of the money.
clients
that 'represent hot money' doesn't matter, because a small proportion of IOS’s customers provided a very large share of the money.
IOS always talked a great deal about 'small investors'. But in 1968 Allen Cantor, as head of the sales company, became so convinced of the exceptional importance of individual very large investors that he set up a 'VIP department' to give them special treatment. It was run by Georges Gerard, a former professional interpreter for international organizations, IOS classified two kinds of clients as vips: those who as heads of state (there were at least half a dozen of these), finance ministers, or for some other reason might be able to help IOS with influence or protection; and any clients, whoever they were, who committed themselves to invest more than $100,000.
It is clear that a far higher proportion of the clients came from among the rich, as opposed to the merely comfortably-off, then IOS publicity liked to tell the world. Gerard's department never had more than two thousand clients. That is 0.2% of Bernie's million clients. According to Gerard, they owned just under 20 % of the funds. Cowett told us that in mid-1969 some 8,6oo clients had investments of more than $40,000 each. Not much more than one per cent of the customers had about one quarter of the money in the funds.
Phase Four, the phase when IOS was profiting from capital flight from the underdeveloped world, only tapered off after 1966-7 for two hard-headed reasons. The first was, as we have seen, that government after government woke up with a bang to the fact that mutual fund salesmen, and IOS in particular, were walking off with hundreds of millions of dollars worth of their countries' slender supply of capital.
But this general tightening-up of the currency laws coincided with a new stage in the internal logic of the sales organization. Originally the sales bosses were looking for rich, compact markets that could be mined by one or two men working from a hotel room - a naval base, an oilfield, a construction camp at a dam site.
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