Do You Sincerely Want To Be Rich? (44 page)

of the trouble was the scope of IOS ambitions. Gramco only offered a million shares, and although the prospectus quoted some wondrous profits, it was reasonably plain that the thing was fairly chancy. 'It seemed like a good speculation for our own account' said one London merchant banker. Few of the banks who underwrote Gramco actually sold the shares actively: they merely waited for inquiries, which as it happened were plentiful.

    But where Gramco came along with a few hot shares and a terse fourteen pages of prospectus, IOS appeared with a 67-page tome in various editions on the strength of which they proposed to sell a total of eleven million shares. At f 10 apiece, that meant the offer was intended to raise $110,000,000. And when Ed Cowett declared that this was the biggest public offering of shares since the Ford Motor Company went public in 1956, and was the second biggest on record, he was virtually asking you to agree that a large part of the future of capitalism lay somewhere out beyond the continental shelf. For some people, that was too much to swallow.

    The Gramco operation might be little more than an agreement to 'make a market' in some shares. But there was no getting away from the fact that the IOS operation was presented as a proper underwriting business. The six banks whose names appeared on the cover of the main prospectus were supposed to have made a thorough-going investigation of IOS and its affairs. On the strength of the reputation, and the inquiries of the principal underwriters, the other 116 underwriters accepted and represented that IOS was a serious well-organized financial concern whose shares were worth $10 apiece in their opinion.

    The London Rothschilds were not alone in refusing to underwrite IOS. A number of important London banks refused, including Warburg's and Hambros. And although some big Wall Street names came in, Kuhn Loeb - normally part of any important underwriting - did not appear. None of the big German banks came in, although Commerzbank Aktiengesellschaft had unbent so far as to join in the Gramco fun. But despite such exceptions, the big list was an imposing one.

    There were twelve French banks, including the Banque de l’Indochine, Banque Worms et Cie., and the Banque de Suez et de l'Union des Mines. There were 34 British banks and financial concerns - the biggest contingent - which included major stockbrokers (Cazenove & Co, Panmure Gordon & Co) two of the biggest banks (Westminster and Barclays), Lloyds Bank Europe, J. Henry Schroder Wagg & Co, Samuel Montagu & Co, and Slater Walker Ltd. There were 25 American firms, including Bache Bear, Stearns Loeb Rhoades and Goldman Sachs & Co. There were four Japanese securities companies, and banks from Sweden, Norway, Switzerland, Finland, Denmark, Belgium and Australia.

    Yet the prospectus for the offer was marred by misrepresentations and inconsistencies. Its different editions did not even agree as to the arithmetic of the number of shares being offered, and the company which was under offer was actually so ramshackle that within six months its shares were barely saleable.

    Accidents happen in the best of underwriting operations, but this was a very big accident. General responsibility may be ascribed to the offshore euphoria of the year, but particular responsibility belongs to the six banks which were principal underwriters for IOS, and which therefore received principals' portions of the $3.2 million, plus expenses, which the offering produced in fees and discounts. As ranked in the prospectus, they were: Drexel Harriman Ripley Inc; Banque Rothschild; Guinness Mahon Hill Samuel Pierson, Heldring Smith Barney & Co Inc.

    Drexel, which led the principal underwriters and therefore bore the chief responsibility of investigating IOS, was at that time a new amalgamation of a New York house with an old-line Pennsylvania house. The amalgamation broke up almost immediately after bringing IOS to market: Drexel's senior partner, and two other partners, departed.

    Banque Rothschild, of course, ranked as one of the most eminent investment banking names in Europe. But before the public offer IOS and Banque Rothschild were already working on the joint promotion of IOS's first French 'product', Expansion Rothschild. Granted this, Banque Rothschild could scarcely decline to underwrite the offering of IOS itself.

    Similar considerations applied to Guinness Mahon, first named, but smaller, of the two London merchant banks. Since 1966, Guinness Mahon had been handling a block of IOS investments on the London Stock Exchange. Martin Brooke, a Guinness Mahon director, was also on the IOS board. In effect, both Banque Rothschild and Guinness Mahon had taken the position that IOS was a sound concern before the underwriting inquiries began.

    The latter three principals played somewhat lesser parts. Pierson, Heldring and Pierson is a distinguished Amsterdam concern which is affiliated with Rothschild interests - on IOS, they agreed with the French, rather than the English branch. Hill, Samuel is a London bank with a taste for large, international deals, and Smith Barney, the last ranked principal underwriter, is a well-known New York investment banker.

    If, from time to time, any of the underwriters were worried by any antic of Cornfeld's, they found relief in the suave, masterful person of Ed Cowett - easy-going, tireless, with every figure at his fingertips. 'All the underwriters liked the look of Ed,' said one IOS accountant.

    There were actually three different, but simultaneous offerings of IOS shares. What the international banking group underwrote was the selling, to investors at large, of 5.6 miUion newly-minted common shares of IOS at $10 apiece. After underwriters' commission, this put $52 million of new cash into the IOS corporate treasury.

    At the same time, on September 24, 1969, people who already held existing IOS shares offered parts of their holdings, at the same price of $10. Through J. H. Crang & Co, IOS's Toronto broker, 1.45 million common shares were offered to the Canadian public. Through IOS's own Investors Overseas Bank, another 3.92 million shares were offered to salesmen, customers and employees of IOS itself. These two offers, totalling 5.4 million shares offered for $54 million, constituted the long-awaited 'cashing in'. At that sort of money, it seemed to have been worth waiting for.

    There were some doubts about the wisdom of IOS going public, especially among the staff, as against the salesmen and big shareholders. Essentially, all these doubts were about whether IOS could stand the searching glare of public examination, and the obligation to publish detailed accounts. These were misgivings, of course, which were amply justified, but they were only expressed at the time in disguised form. When plans for the issue were discussed, in March 1969, one objection was that the markets were generally in poor shape. Cowett simply replied that a poor market would make the IOS offer look all the better.

    He had an inspiring example to offer, because in November 1968, IOS had floated off 600,000 shares of one of the principal subsidiaries of the empire, IOS Management Ltd. This was a Canadian registered concern through which IOS channelled the straight management fee income from three funds: the Fund of Funds, IIT, and the Canadian Regent Fund. In effect, IOS was selling off part of the income from its large funds, and the markets certainly appeared to think that this income was going to increase. The httle parcel of IOS Management shares were formally offered at $12.50: trading began at $75 and in March 1969, when anything that could be called 'offshore' was at a hectic premium, IOS Management shares stood at $180 each.

    The prospectus for a public offering of its shares is perhaps the most serious document a company ever produces. There must be no puffing, no concealment and no misrepresentation. The prospectus must give investors a truthful description of the company, upon which they can make rational estimates of its capacity to earn profits. Drexel Harriman Ripley and their legal counsel in New York, Shearman & Sterling, were acutely aware that IOS, because of its past history, was something of a tricky proposition for them. In the early summer of 1969, Drexel and their legal advisers spent a good deal of time trying to get some kind of blessing for their project from the sec. They made eloquent assurances that they would conduct a thorough investigation of IOS. and would make sure that the prospectus was right up to sec standards. The Commission officials, however, were stolidly noncommittal. They merely said that the project was not illegal, and if Drexel wanted to go ahead, it was up to Drexel's own business judgement. As none of the IOS shares were to be sold to US citizens - the offer Drexel was underwriting was an international one - the sec ban on IOS in America did not apply.

    At one meeting, in June, the men from Drexel and Shearman & Sterling suggested that the underwriters might be able to get to the bottom of things at IOS that the sec had not been able to do. According

that IIT attracted more mutual fund investors in the latter Sixties was that it appeared to have a better rate of investment growth than the Fund of Funds, which had begun to fade somewhat. The records on which IOS sold IIT said that the shares of the fund had been worth $3.53 in 1962, and by the autumn of 1969 each IIT share was worth $8.82. It thus appeared that the fund's shares had increased in value by 150% over seven years under IOS's management - an impressive record.

    It was also a false record, because the life of IIT began in December 1960, not autumn 1962, and at a value of $5 per share, not $3.53. The fund's shares only fell to $3.53 each during 1962, under the impact of a series of investment disasters, including the collapse of a number of Ed Cowett promotions.

    On the true record, IIT had not increased 150 %. Over nearly a decade, it had increased by 76.4%. As 'performance', that was mediocre to say the least. Taking the salesload into account a customer would have done better - with much less risk - by getting into a fixed interest investment at 6 % and reinvesting his interest each year.

    The usual rationalization advanced by IOS executives to justify selling IIT on incomplete records was that the fund management had been reorganized in October 1962, when IIT was first offered under the IOS Investment Programme. The accompanying implication - though misleading - was often that IIT had not been managed by IOS before then, even if IOS sold its shares. It was a rationalization which avoided the whole purpose of fund records, which is to help investors discover whether a fund has suffered from just such afflictions as would require its management to be reorganized.

    Sometimes, IOS men suggested that the point was 'unimportant'. The suggestion that it didn't matter if most of the customers of one of the world's biggest funds had bought after receiving false information scarcely requires comment. And it hardly squares with the devious means which were used to obscure the facts at the time of the IOS offering.

    There were three editions of the IOS prospectus: a Drexel edition, which bore the names of the principal underwriters, an Investors Overseas Bank edition which generally followed the Drexel one, and a Crang edition containing information required by Ontario securities law. They differed on the IIT point.

    

    drexel prospectus

    A table on page 15 encapsulated the history of the IOS funds. One column gave the year when each of them had been 'organized or acquired' - but without saying which word applied. Against IIT's name, this column gave the year '1962'.

    On page 17, this statement was qualified in text, IIT was described as 'an open-end mutual fund, organized in December 1960 as a unit investment trust under the laws of Luxembourg, which came under the company's management in 1962' (Our italics).

    Taken together, the two statements could have only one meaning. Since the second said that IIT was 'organized' before 1962, the first could only mean that IOS had 'acquired' it in 1962. Therefore, IIT had been organized and run for some time by someone else, who sold it to IOS in 1962.

    This was a plain falsehood in the main prospectus, but so worded as to seem to fit in with the rationalization usually given for IIT's incomplete record. It suggested that IOS had had nothing to do with the sad early history of IIT.

    The lie is exposed by placing alongside the prospectus IOS's Annual Report for 1961 (a document which it took us some time to find.) The report records plainly that IOS 'organized' IIT in December 1960, and that IOS owned 100% of the stock of IIT Management Company. The 1961 report is confirmed by company registration records in Luxembourg.

    crang prospectus

    This was the prospectus in which misrepresentation would be most dangerous - IOS being by now a Canadian company offering shares to Canadians. Even so, there was some blurring of the IIT date. On page 4, giving a history of IOS, the prospectus said it was in 1961 that 'IOS sponsored its first mutual fund. .. IIT'. On page 9, in a table, the prospectus gave the correct year, 1960. (IIT was never sold in Canada.)

    investors overseas bank prospectus

    An early version gave, correctly, 1960 for the start of IIT. But the final version repeated the Drexel formula - thus suggesting, in its table on page 15, that IIT was not acquired until 1962.

    Interestingly enough, Arthur Andersen, the auditors to IOS and to IIT from 1960 on, specifically assured the underwriters that they had read page 15 of the prospectus. They took no specific responsibility for the accuracy of the prospectus at this point, but they did not report any omissions or distortions.

    The falsification over IIT not only allowed IOS to exaggerate its success in its basic line of business, namely, managing investments: it also obliterated clues pointing towards a discreditable, but still recent, episode in the history of Ed Cowett - the architect of the public offering; and to a great extent, the man on whose personal standing the company was brought to the market with the imprimatur of the international financial community.

    Another corpse was buried at the point where the prospectus implied that IOS was actually making profits on its sales operations - when, in truth, it was making whacking losses. At the top of page 10, a table declared that 'sale and management of mutual funds and related income' provided 37% of the company's profits during the first half of 1969. The text then said: 'The Company does not allocate operating expenses between the sale and the management of mutual funds.'