Do You Sincerely Want To Be Rich? (51 page)

manipulate the price of its own shares, creating a 'false market'. The buying of IOS Ltd shares, including those taken up by the

    
¹
See Early Travels in the Offshore World.

    IOS Stock Option Ltd., sucked back more than 15% of the common shares issued. This undoubtedly did create a false market.

    Cowett says that sometime in October he and Cornfeld, in Geneva, had a conference-phone conversation with John King in Colorado. King was in the bar at his ranch house. They all agreed that IOS shares were a fine investment at $14 each, and that they should form a pool to buy them. The idea, said Cowett, was to buy the shares in Cornfeld's name, and divide them up afterwards. A special account was created at the odb to handle the purchases.

    If, in October 1969 you still thought that IOS Ltd would actually produce the $25 million profit on which the public offer was predicated, and if you knew that a $10 million profit boost would come with the announcement of the Arctic manoeuvre in December, then you might have thought IOS a smart buy at $14. However, if that was his motivation, rather than price support, then Cowett was committing a commercial sin of an opposite nature. Directors of public companies are certainly not supposed to buy up its shares on the strength of inside information, which they have not given to the investing public.

    Cowett says that what he was doing was not insider trading, because Cornfeld had mentioned the idea of Arctic revaluation to a conference of IOS salesmen in the summer. The trouble with that is that (a) a talk to the salesmen was scarcely a public disclosure, and (b) why wasn't the information in the prospectus, finalized September 24, 1969?

    Cowett himself denies that the programme was begun as a price-support operation, whatever it looked like in the end. And indeed, there was such a tangle of purchases, in Cornfeld's name, in the names of Cowett's and John King's family trusts, and by the IOS Stock Option Plan Ltd that it is difficult to ascribe any one purpose to the operation. During the months it went on, it may indeed have had different emphases at different times. It could have been part of an attempt by John King to become a dominating shareholder in IOS. When the 'profits' of the Arctic performance in December gave a brief fillip to the market price, it may have been a programme of speculative personal investment. In retrospect, Cornfeld told us that as in 1962, 'Cowett fell for the delusion that he could support stock prices through leverage.'

    In any case, though Cowett may have believed that the IOS shares ought to be rising, the reality was that they were going down. The price slid from $14 on October 15 down to $11½ by the end of December. Then it recovered briefly to $13½, when speculators computed the results of the Arctic performance fee on IOS profits. The price would certainly have fallen much faster had Cowett not spent nearly $11 million buying back IOS shares from the market during November and December.

    The market in IOS shares had little to do with any regular exchange. Essentially, it consisted of deals done with and between a group of banks scattered around Europe. One of the leading lights of this market was Mel Rosen, an old friend of IOS's New York broker, Arthur Lipper III. Rosen had left New York to work for an offshore fund group, and helped to set up the Deposit & Finance Bank in Luxembourg, a specialist dealer in the so-called 'Euro-equities', like Gramco Management shares. Shortly before the IOS offer, Cowett brought Rosen into IOS, and under Rosen's guidance the Overseas Development Bank became a leading dealer in shares of IOS Ltd.

    Rosen and the odb worked closely with Banque Troillet, another Euro-equity specialist owned by the large Swiss Banque Romande: together odb and Troillet led the dealing in IOS shares in Geneva and Luxembourg, where both had branches. In Amsterdam, the dealing was led by the Slavensburg bank, and in London by Guinness Mahon. This market, which Cowett himself had helped to set up was strikingly free: just a few bankers with busy telexes, arbitrating between supply and demand rather like bookmakers. There were none of the minimal stock exchange rules on, for instance, disclosure of buying-in operations. Therefore Cowett's operations could be conducted in great secrecy.

    Indeed, Cowett did not even tell the IOS board what he was doing, and Cornfeld himself claims not to have known until February just what was happening. Cornfeld admits to remembering some general talk about a pool with King and Cowett in the autumn of 1969, but says he heard no more until February when he was in New York to address the Institutional Investor seminar. Allen Cantor, he says, called from Geneva to say that big blocks of IOS shares were being bought on Bernie's odb account, and did Bernie know?

    It seems most unlikely that it would have occurred to Cornfeld at this point - with the applause of half Wall Street ringing in his ears - that IOS shares could even need supporting. On the strength of the gigantic, but deceptive, sales inflow of the previous summer, he was now predicting that IOS would become the most important economic force in the world. And on his own account, he was at that time less interested in present details of the business, than in certain plans to set up a chain of hotels throughout Latin America in collaboration with Playboy. As he put it to us later, this was another farsighted attempt to create investments which would transcend falling stock markets: Cornfeld reasoned that 'people would always go to the Playboy Hotel, in the hopes of getting laid'. However, he diverted himself from this, and his denunciations of the sec, for long enough to tell Cowett that he would not have all of the volume of IOS shares put on his account.

    The better part of a million shares had now been bought in. Cornfeld eventually agreed to keep about 30,000 shares, whereupon large blocks had to be shifted to Bahamas trusts which had been set up for the Cowett and King families. These trusts financed their purchase with the aid of loans from that gallant, but now wilting, little institution, the Overseas Development Bank (Bahamas). Altogether, Cowett borrowed $2.8 million to finance his family trust, and the King trust probably had rather more than $5 million by mid-February. (The King trust did a last burst of buying just before the collapse in April, which brought its loan up to $6.7 million.)

    Whatever names originally footed the bill, all this money came in the end from the proceeds of the public offer, via IOS bank credit. King and Cowett ended up with 600,000 common shares between them, but Cowett also wheeled out the IOS Stock Option Plan Ltd which bought another 270,000 common shares of the parent company which owned, but theoretically did not control it. These purchases cost the IOS treasury $3.75 million, taken in this case directly rather than via bank credit. Cowett's share-buying programme thus sucked back 900,000 shares out of the market, at a total cost of
£12
million, which together with the Foundation purchase from the Investors Overseas Bank, meant that IOS Ltd expended over $20 million on buying its own shares.

    A point can be reached at the height of speculation booms when transactions become so complicated that they baffle the very minds which devised them, so that men, and companies, end up swindling themselves. That point had now been reached: IOS was now supporting itself into a state of collapse.

    Curiously enough, Cowett's programme was not the only case of IOS money going into its own shares. Late in 1969, an IOS director paid a visit to one of the IOS investment banks, the Investors Bank of Luxembourg. He suggested that IOS shares might be a good buy, and the bank, which had been dealing in them for its customers, now started buying them direct for itself. In this case, there was no Stock Option Plan to separate the Investors Bank from its parent. The buying was therefore simply illegal. But no-one found out until 1970 when the value of IOS shares was largely hypothetical. Some $300,000 had to be written off.

    Presumably, Cowett must have hoped that if a bold front could only be maintained, IOS might yet declare those luscious profits that Bernie was predicting. Granted, anyone who could engineer the Arctic deal might reasonably assume that while confidence endured his ingenuity would be equal to any occasion. (Cowett and King were busily planning a whole new fund to be devoted to natural resources.)

    But even while the money was being poured out to buy IOS shares it was becoming less and less likely that IOS would be able to turn in anything other than notional profits for 1969.

    Cornfeld, Cowett, Cantor and several other IOS luminaries have consistently declared that they only discovered things were going wrong when it was too late. This, they say, was because the IOS financial system was archaic. It takes some nerve, after the corporate boasting they had done, to excuse oneself by saying that one was looking after two billion dollars of other people's money with archaic accounting services. But it wasn't even true. The IOS accounting services were competent enough to produce a weekly cash report which showed with fair clarity how fast the money was being siphoned away. Nobody, however, seems to have been much interested in these reports, until the final process of revelation.

    This occurred at two sets of IOS board meetings. There was a traumatic, but relatively orderly double session on the weekend of April 11-12. This was followed by a strident, frequently comic, sometimes bitterly emotional set of meetings from May 3 to May 9, which brought the regime of Bernie and Ed to an end.

    As the New Year began, a process of revolt was under way inside the empire, confined at first within the IOS bureaucracy. As th