Do You Sincerely Want To Be Rich? (42 page)

    Both re fa and foss called themselves open-end funds, and in doing so refa ran quite counter to the regulatory principles of the Board of Trade, which in Britain is the department responsible for investment companies. The Board of Trade
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working in this case on similar lines to the sec, says that no fund which promises to redeem its own shares can invest in land or buildings - on the grounds that, unlike shares, buildings cannot be swiftly and objectively valued, and often cannot be sold expeditiously.

    The prospectus refa offered to investors was distinctly vague, and that of foss, which consisted largely of pictures of ships owned by other people, was possibly the most ridiculous ever put out by a financial organization. Yet both bore the name of a respectable firm of lawyers in the City of London, Joynson-Hicks and Co. The fact was that neither of the International Investment Group's funds were susceptible to British law or regulation, even though IIG proposed to administer them from London. The two fund companies were registered in Hamilton, Bermuda, and the management company in which Hoffman made his distinguished colleagues shareholders was registered in Liberia.

    The head of Joynson-Hicks and Co, Lord Brentford, formerly a Tory mp, director of an insurance firm and chairman of the Automobile Association, served from the start on the board of IIG Management. So did his son, the Honourable Crispin

    

    
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Renamed the Department of Trade and Industry in 1970.

    

    Joynson-Hicks, so did Maudling, Holmes Brown, Dixon Donnelley (formerly an Assistant to the Secretary of the US Treasury), John F. Lang (a New York lawyer whose firm represented the British Government in the Torrey Canyon oil pollution dispute) and other respectable folk.

    If the structure of IOS was flexible, that of IIG was primitive. The arrangements for safeguarding the customers' money were so sketchy that late in 1970 Hoffman was able to admit breezily that he had shifted 'a couple of million dollars' of refa money into the Investment Bank, Zurich. This was a very small Swiss bank which Hoffman was about to take over personally. (In the end, he never finished paying for the shares.) The nature of the IIG sales operation, a rough and ready copy of the IOS model, was made plain by Guillermo Gutierrez, IIG's Latin American sales director, and an IOS veteran. Asked how many countries his sales area covered, he said: 'Twenty-nine.' Asked in how many it was legal to sell the fund shares, he said: 'Only two.' Gutierrez said that one of his salesmen was accustomed to getting money out of Brazil by canoeing across the river into Paraguay.

    In July 1969 one of the present authors revealed the facts of Hoffman's background in New York to Mr Maudling. Some of these facts were apparently known already to Holmes Brown and John Lang in New York. Yet neither Mr Maudling nor the others chose to resign. Maudling remained a shareholding director of IIG Management for another two months, and when he did resign, he did not express any doubts about the IIG operation. On the contrary, Maudling gave Hoffman an open letter repeating that refa was a good, sound investment. John Lang, Holmes Brown, Lord Brentford and Crispin Joynson-Hicks remained throughout most of 1970.
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    Without his eminent supporters, it is difficult to believe that Hoffman could ever have floated his enterprise. As it was, he kept it swimming long enough to collect nine or ten million dollars, which was parlayed via some hefty mortgages into an alleged $100 million in US real estate. How was it possible that Hoffman could be taken seriously at all?

    
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M Spaak's position is that he wrote a letter of resignation which Hoffmann ignored.

    

    It was possible in general terms because Bernie Cornfeld and Ed Cowett had more than two billion dollars under their control by then, and had been in business for ten years without their company blowing up. Financial experts were willing to admit privately that IOS's fortunes were probably built upon flight capital, and much of it illegal at that. Few of them found that worrying. Even fewer were impressed by the complaints of the sec staff, who were widely regarded as killjoys. And beside the general inspiration of the IOS spectacle, people were beginning to understand just how profitable a business it could be to run a company managing offshore mutual funds. From that realization proceeded the idea that the shares of such fund management companies might be very interesting propositions indeed. It was, as it happened, Gramco rather than IOS which first drove home to the international financial community the attraction of the mathematics involved. At the same time, the Gramco story - and the careers of some other newcomers - drove home a rather different point to IOS. This was that one of the things that was unregulated offshore was the competition.

    The funniest effect of the appearance of people like Hoffman and Lefferdink was the suggestion that the offshore funds should get together and form their own, voluntary regulatory body. This offshore Securities and Exchange Commission, predictably, never got beyond discussion stage.

did, however, make a lot of money. Barish made his start in business at eighteen, when some friends of his were trying to start a bank in a Miami suburb. The banking commission thought that the district already had enough banks, but Barish persuaded the commission otherwise. A clue to his powers of persuasion lies in the fact that he had already served a term as a White House 'intern', traditionally a job for a youth who has some influence in his state, and aspires to more. The upshot was that Barish became a shareholder in the new bank while he was still so young that his mother had to attend shareholders' meetings on his behalf.

    Together with some associates from the bank, he formed Gramco, under its original name of the Great American Management and Research Corporation. But Barish developed ambitions that outran the visions of his former banking colleagues. He parted company with them, teamed up with Rafael Garcia Navarro, and abbreviated Great America, etc to 'Gramco'. The Gramco literature asserted that Navarro had previously been a 'high-ranking career diplomat', when aged only twenty-one. (His father, was a prime minister of Cuba in the declining years of Batista.)

    Barish and Navarro were obviously impressed by offshore possibilities, and when they started business in 1967 they employed some of the same devices as IOS. The salesmen, who were called associates, were graded in a similar fashion, and offered a stock option plan which was very similar to the IOS model. The technique of decorating the operation with eminent names was reminiscent of IOS - and a certain number of the salesmen were people tempted away from Bernie.

    What tempted these men was the prospect of selling Gramco's 'product', one even more audacious than anything which IOS had produced. According to their own account, Barish and Navarro toyed with the simple mutual fund principle, and with a fund-on-funds, before they decided to concentrate on the idea of 'liquid real estate'. The pitch on this, put over with great polish, was that it offered safety, coupled with steady capital growth
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- and by 1967, there had been enough ups and downs on the world's stock markets to make the pitch attractive.

    The straight legal problem of offering an open-end fund with non-liquid investments was overcome easily enough. Barish and Navarro's basic company was Gramco International sa, registered in Panama. It controlled Gramco Management Ltd, a Bahamas company, which was the sole distributor of shares in the 'United States Investment Fund', also registered in the Bahamas, and known usually as 'usif Real Estate'. The administrative hq of Gramco Management was in London, which was handy for banking services, but no sales were undertaken in Britain. The main sales efforts were in Germany, the Middle East and Latin America.

    Overcoming customers' doubts about the liquidity of a real estate fund might have been more difficult. Much solemn hocus-pocus, some untruthful, was addressed to the problem.

    Gramco carried to a high pitch the device of boldly reconciling opposites. For instance, they assured the public that usif valuation methods were 'at the same time orthodox and revolutionary'. But the main reassurance was that Gramco promised to keep a proportion of fund assets in cash, ready for repurchases. The ratio of cash to real estate was supposed to have been settled after 'careful analysis of liquidity requirements of US and international funds on an historic basis'. However, having started out with a promise to keep 30 % in cash, Barish and Navarro quietly adjusted that downwards to 20%, while pretending that such had been their idea in the first place.

    
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This growth was aided by a quintessentially offshore device. Real estate was depreciated for US tax purposes, and then written back when calculating the fund's growth. Thus assets which were losing value in one set of books were gaining value in another. Price, Waterhouse, the usif auditors, did not put their name to this device.

    Doubts about liquidity were overcome so successfully that Gramco could claim by 1969 that its fund was the largest single buyer of US real estate, usif, directed by Gramco, bought the nus building in Washington dc, Clermont Towers in Manhattan, 1000 Lakeshore Drive in Chicago; they bought Troy Towers in New York, the Arizona Title Building in Phoenix, and they bought that conglomerate shrine, the Ling-Temco-Vought Tower in Dallas, Texas.

    The Gramco salesmen claimed to be selling the 'perfect investment', and suitably enough one of the Gramco sales contests was called the Best of Both Worlds Contest. The pitch even had a pleasing ingredient of caution in it, for the customers were told that, although their money would rise in value with the inexorable rise of the US property market, there could be no pretence that it would rise as fast as the hottest shares on the stock exchange. They were not told that they were paying for a structure which gave Barish, Navarro and their friends an investment of a sort which would rise considerably faster than the fastest stocks on a boom market.

    A sales load was taken, of course, to feed the Gramco sales force, and there was also a management fee. But far more important, the customers' money had to bear a brokerage charge of 5 or 6 % of the value of all properties bought in the United States. And as Gramco did not use real estate brokers, but made its own direct purchases on behalf of usif, Gramco Management Ltd appropriated the brokerage itself.

    At this point, leverage was applied to the customers' money. usif, like most property purchasers, bought on mortgage, borrowing between three and four dollars for each dollar of fund money. But Gramco took its brokerage fee on the full price paid for the property. Thus if the fund bought a building for $5 million cash and $15 million borrowed, Gramco took 5% of $20 million, or $1 million. In this way, over the three and a half years to June 1970, Gramco Management took $43 million out of the usif fund for its own profits: roughly 17 % of all the money the customers put in. The result was that Gramco Management Ltd, so long as the flow of cash continued, was a sensational money-making device. And as if the basic dynamic were not enough, usif's growth was stoked with another ingenious application of leverage. Gramco arranged for its customers to buy usif shares on credit.

    The