Do You Sincerely Want To Be Rich? (49 page)

to generate a little controversy', and Cowett had to issue bold denials. 'If anything,' he said, 'we feel that we are being too conservative, and the Natural Resources Fund is still an undervalued account.' He asserted disingenuously that 'the sale was made to three large companies, two of which were publicly held'.

    Once the break did come, it became plain that the manipulations of the Natural Resources Fund were only part of the financial symbiosis between the empires of John King and Bernie Cornfeld. Other links, growing out of rather more individual schemes of self-enrichment, had existed back in 1968 and continued through the astonishing year of 1969. During that year, it must be said, Ed Cowett manoeuvred with the ubiquitous velocity of a financial Superman. Casual visitors to his office in Geneva saw only a quiet, bespectacled executive. But all and any of the terrifying financial problems which swirled around IOS were brought to him, and he eliminated them with instantaneous dispatch. It was as though he slipped behind a filing cabinet, like Clark Kent in the strip cartoon, and peeled off his business suit to reveal a magic cloak and a glove tight body-tunic - except, presumably, that the 's' on Superman's chest would be replaced in his case by a large dollar sign. Then Super-Ed would leap into action faster than the eye could follow. Zap! new triumphs of conglomerate financing were achieved. Powee! the underwriters fears were assuaged, and IOS's own public offer was assured. Bam! the natural resources invention produced new vistas of speculative investment. Wham! Ker-chunk! new investment 'products' were produced for the hungry salesmen to sell.

    In between times, Cowett undertook another labour, the importance of which, in IOS values, could scarcely be overstated. This was to eliminate his colleagues' tax problems - an undertaking which was bound to lead back to John King, who was in tax avoidance on an industrial scale.

    The incomes IOS generated for its chieftains brought problems because most of them were Americans, subject to the US government's unique habit of asking its citizens to pay tax even if resident abroad. Although it is possible to defy the Internal Revenue Service, an American abroad who wishes to keep his citizenship in working order is well advised to make some obeisance to the tax men. Adroit avoidance, naturally, counts as well as payment.

    During 1968, Ed Cowett agreed, on the request of George Landau and other colleagues, to investigate systems of personal tax relief. Landau heard nothing more, he says, till the Overseas Development Bank told him that he had a debt of several thousand dollars, which had been written into his account on Mr Cowett's orders. Taken aback, Landau told Cowett to inform him next time before putting him in debt to the bank. Cowett said it was 'no problem': he had just been putting George into a little tax avoidance scheme.

    It was called Foundation Equipment Associates, and Landau was in it along with Cowett himself, C. Henry Buhl, Allen Cantor, Richard Hammerman and some other big IOS earners. The 'associates' were to borrow money, with which oil well equipment would be bought, and then leased out. They would then be able to claim tax relief both for the depreciation of the equipment and for the interest on the loans used to buy it. But that was only the start: the real attraction of such schemes sprang from the fact that the US Government was still allowing investment credits against tax on purchases of oil equipment. Where ordinary taxation reliefs merely diminish the proportion of an income which is assessable for tax, investment credits acted as straight deductions from an actual tax bill, thus providing the most attractive tax relief of all. And few groups of people have been more passionately attracted by it than the top brass of IOS.

    Foundation Equipment Associates was quite a modest scheme, rather like those used by a number of US companies to assist valuable executives. The fact that IOS itself had lent $500,000 to the project was scrupulously recorded in the prospectus when IOS went public. The same could not be said of the schemes which followed - and which were too late to be noted in the prospectus. They were not modest at all: by now, the needs of the masters of IOS for tax relief were so pressing that the necessary devices soaked up nearly all the free cash in the company which had not been diverted into more orthodox follies. It was not just a question of override incomes: by early summer 1969, the people who had big shareholdings which had been acquired cheap under the stock option plan faced appalling capital gains tax liabilities as the moment of cashing in approached. George Landau was now only one of a large and slightly desperate crowd when he asked Ed if he was 'going to have anything for us this year?'

    To deal with this large problem, Ed Cowett recruited the help of a New York lawyer named Joel Mallin. The first difficulty was that the investment credit, that useful concession, was due to be abolished in the summer of 1969, which meant that any scheme following along the fines of the previous year's Foundation Equipment would have to be devised well in advance of the public issue in order to claim the investment credit.

    Cowett and Mallin rapidly assembled Beta Foundation Equipment Associates - the alphabetical flavour of the name perhaps conveys the eventual scope they had in mind. The participants included themselves, Henry Buhl, Arthur Feder, a lawyer on IOS's real-estate side, Dick Hammerman, the insurance boss, Barry Sterling, the investment banker, Ira Weinstein, the former Iranian chieftain, now in Canada, and Allen Cantor. Ed Coughlin, the 'happy birthday' troubleshooter.

    had a small piece, and there was a large participation for Bobby Freedman, who had no formal connection with IOS at all, and was usually known just as the Tennis Player. According to Mallin, he was put in 'as an old friend of Bernie's and Ed's, who had rendered them various services'. The aim of Beta Foundation Equipment Associates was to acquire and lease oil-well 'foundation equipment': the pumps, tanks and associated gear required in an actual working oil-well. The equipment it was to buy was already to hand: it was already installed and operating in various wells being run by King Resources Company for the uncertain benefit of investors in the Colorado Corporation drilling funds.

    Beta promised to provide some useful tax-relief for its hard-pressed members - but the problem now was to find the necessary money. There is little point to such a scheme if one only uses one's own money, for the whole idea is naturally to 'gear up' the size of the investment credit obtained by putting in borrowed money, thus covering as large a section as possible of one's original income with tax relief. And as the interest on money borrowed can also be taken off taxable income, the system possesses great structural elegance.

    Could a bank be found to lend the money for Beta -$4.7 million was required - in time to catch the investment credits? American banks who had once been willing, even eager, to lend money for such devices were becoming less and less so as the credit squeeze tightened during 1969. There was nothing for it but to turn to IOS's own banking system, and on July 24 the Overseas Development Bank (Geneva), acting as agent for odb (Bahamas), advanced $4.7 million to Beta Foundation Equipment Associates. Reviewing later the havoc caused by the liquidity of the IOS group by the demands of Beta and similar schemes, Joel Mallin said sadly that 'the company was the victim of Nixon's credit squeeze' - in other words, if the President had not been so unsporting as to tighten up US bank credit, it would not have been necessary to remove so much cash from IOS to rescue its officers from their tax problems. But even in those tight times it might have been easier to find an outside bank, but for the fact that Beta wanted to operate on terms that would give the maximum possible comfort to its participants: the Beta financing was to be repaid over eight years in level instalments of interest and principal. This would have the effect that in early years the repayments would be virtually all interest, and thus tax-deductible.

    Oil-well foundation equipment was far from being the only avenue of tax avoidance available to the men at IOS, for John King, IOS's great ally, was looking into virtually every kind of tax advantage that might be obtained by purchasing equipment, from bottling-machines to airliners, and leasing it out again. This, indeed, was the 'humane, compassionate and exciting' business which the astronaut Walter Schirra undertook as president of John King's Regency Investors Company. 'Leasing,' said the King publicity material, 'is the new economic way of life.' Ed Cowett and his friends at IOS seem to have been enthusiastic converts to it.

    Aeroplanes - with which John King was always fascinated - entered into many of his leasing projects, and IOS became involved in an especially complicated one, which concluded with the bankruptcy of a British aircraft company, and left EH Wallitt, Harvey Felberbaum and Roy Kirkdorffer (head of the British sales force) landed with one expensive and unwanted miniature airliner apiece.

23, the day before the Beta advances, and, with interest, came to $1.65 million altogether. The advances were to be repaid out of leasing income from the aeroplanes themselves - which was unfortunate for the Uquidity of the IOS banks because, as it turned out, the investment depreciated all too abruptly, and the income ceased.

    Handley Page, being very short of cash, fell behind on the development programme that was required to bring the Jetstream up to its original specification. Jetstream performance was not matching requirements, which was awkward for Regency and for International Jetstream. During autumn 1969, hectic attempts were made to keep at least the Jetstream section of Handley Page alive: at one point John King himself made a midnight flight to consult with International Jetstream backers, the Craven Corporation of St Louis. Kenneth Craven himself was willing to put up $5 million to try and save Handley Page, but King did not join in the rescue bid.

    Then Kenneth Craven fell seriously ill, and the usaf, growing sceptical about the Jetstream's performance, cancelled its order. Cal-State ran into financial trouble, and into difficulties over its Civil Aeronautics Board licence. Towards the end of 1969, it emerged that the IOS banking system was in the position of having lent out $1.65 million against three of a batch of ten unwanted aeroplanes, whilst their manufacturer, Handley Page Aircraft, swooned gently into the hands of the Official Receiver.

    George Landau was not a beneficiary of either of these deals, but Cowett still 'had something' for him. Landau, along with several other members of the IOS elite, was to become a part-owner of that interesting beast, the Colorado nopi.

    A nopi is a Net Operating Profits Interest - we have met the idea before - and John King had a specimen for which he was anxious to find a good home. King, with the approval of his fellow directors, had determined that King Resources, the public company which he effectively controlled, should purchase Colorado Corporation, the private company which he owned. King was to receive King Resources shares in exchange for his Colorado shares, and a deal had been roughed out which would make his new holding worth around $200 million. In effect, this deal would put a market valuation on the Colorado Corporation without all the tedium and disclosure involved in making a public offering. But the precise details of the scheme were to be fixed up in 1970 - and the higher Colorado's 1969 profits, then the more John King would get. He therefore wished Colorado to make some profitable sales, and so he turned to the 'net operating profits interest' which the corporation took on the funds under its management.

    These, it will be recalled, had been designed to exclude so many costs that they closely resembled a 25% royalty on all drilling funds operations. Colorado's problem, however, was that most of these interests were in properties which had yet to be explored for oil and gas. Their value, therefore, could not be readily determined, and Colorado Corporation could not include such interests in its 1969 income. If, however, those interests could be sold off, then the proceeds could be included.

    And purchasers were to hand. Late in 1969 Ed Cowett, using IOS's Investors Overseas Bank as agent, agreed to buy a total of $45 million of Colorado nopis: $15 million for each of 1969, 1970 and 1971. It was arranged that 25% of each year's nopi would be paid in cash and the balance would be paid off in four annual instalments.

    The nopi was then divided up among a number of the IOS people confronted with terrifying capital gains liabilities - a predicament in which a piece of nopi is very useful, US capital gains tax rules allow an investor to include half of a year's gains lumped in with his ordinary income, and have the whole lot taxed as income. This eliminates all capital gains tax liability - and meanwhile, taxable income may be reduced by setting various types of losses against it. One such permitted offset is the loss involved in abandoning oil and gas properties which have been explored and found to contain no resources.

    The charms of the Colorado nopi thus become apparent: the more dry holes Colorado drilled, the better for the IOS investors. In the event, the nopi performed heroically, recording abandonment losses of something like 70% of the face value paid over.

    Actual production of income from wells need not be totally embarrassing in a nopi deal, because the investor can then have recourse to the depletion allowance. Indeed, some income must be made in the end, whether the deal be done on borrowed money or in cash, if the investor is to come out ahead in the end. There is a delicate balance between 'sheltering' income and merely pouring money that would otherwise have gone to Uncle Sam into the ground. The evidence is that in the euphoric days of 1969, most people in IOS were more interested in finding some way of protecting their immediate wealth than in thinking out the ultimate implications of dry-hole operations. Cowett was able to assemble an impressive team of nopi-hunters fairly rapidly. There was Landau and his partner Don Q. Shaprow; Harvey Felberbaum and Roy Kirkdorffer (whose problems could not be solved by Jetstreams alone); there was Allen Cantor (who also had a piece of Beta Foundation Equipment Associates); there was Gladis Solomon, Ambassador Roosevelt, Martin Seligson, the real-estate expert; and there was Bernard Cornfeld himself, who took the biggest bite of all, with $5 million of Colorado's 1969 nopi.

    The Investors Overseas Bank paid out the 25% down payment required to secure the nopi, amounting to $3,540,000. (A small part found a separate home in New York.) Some of the IOS participants, including Cornfeld himself, paid the iob off for their pieces of nopi, so that by the end of the year the bank only had $1.6 million of the original $3.54 million outstanding. Nevertheless, the iob found itself stuck with $1 milhon worth of nopi on its own account, because the whole of the purchase had not been taken up. The bank issued a promissory note for $10.6 million to cover the balance of the $15 million price for purchase of 1969 nopi.

    The general strain of financing the tax-avoidance devices was telling rather heavily on the balance-sheets of the IOS banks during the latter months of 1969. Formally, the Overseas Development Bank (Geneva), the Overseas Development Bank

    (Bahamas) and the Investors Overseas Bank were all separate entities under the holding company called IOS Financial Holdings Ltd. In practice, they were handled during 1969 simply as different taps on the same pool of credit.

    This was shown clearly in the history of the Beta Foundation Equipment financing. The money was advanced first by odb (Geneva) as agent for odb (Bahamas), which then accepted the loan. By October, the whole system was suffering a little from the demands of Commonwealth United Corporation, and some fresh liquidity was required. On this occasion IOS abandoned subtlety altogether, and, as Cowett told us, they turned to Investment Properties International, the real-estate fund which had just been launched, and was flush with cash, and caused it to deposit $6.5 million of its cash reserves with odb (Bahamas), the bank bearing the Beta and Jetstream loans. This was putting the customers' money to work very directly for the bosses of IOS.

    Cowett later defended this manoeuvre by saying that ipi was not an open-end fund. It was a defence which ignored the fact that ipi shares were at that time being stuffed into the Fund of Funds at such a rate that ipi was becoming little more than a real-estate sub-account of FOF - which certainly was open-end. But anyway, when he said it, Cowett must have forgotten that he had inserted in the IOS prospectus for the public offering a firm declaration that IOS banks 'do not make loans to, or accept deposits from, Company-managed investment companies'. That promise was abandoned almost as soon as it was made.

    However, the depositing of ipi cash at odb (Bahamas) aroused the ire of the Bank of New York, which was Depository of Cash for ipi. The Bank was also Custodian of Securities for FOF, and it had not been disturbed to see the fund's investments being lent out to brokers.
¹
Nor had the shenanigans with the Natural Resources Account disturbed the officials of the bank, so far as we can discover. However, the shifting of the ipi deposit was thought objectionable.

    This problem came to a head at the very end of the year, when Ed Cowett, together with Bernie, had retired to Acapulco

    
¹
See Chapter 18 A Very Long Way Offshore.

    for a well-earned rest (leaving the Arctic deal set to mature). Cowett was forced to spend a good deal of time on the phone from Mexico to Geneva, trying to sanitize the various balance-sheets involved before 'twelve thirty-one', as accountants call the year-end balance. Money, however, had to be found, because the commitment to the Beta and Jetstream financing remained. So, when the ipi cash went back to New York, money had to be taken directly from the IOS corporate treasury in order to cover the position. First, IOS Ltd put a deposit into odb (Bahamas), but this was found to have some esoteric tax drawback. Therefore, the money wa