Do You Sincerely Want To Be Rich? (52 page)

having returned from his holiday in Acapulco, received this warning with equanimity. He was contemplating the one important piece of expansion that was actually mounted with IOS's new capital. This was the purchase of the Canadian Channing fund group. Effectively, it was Ed's last deal.

    To assume the management of the three Channing funds, IOS

    
¹
See Chapter 18 A Very Long Way Offshore.

    

    paid $7 million cash. But then Cowett did a very odd thing. He caused IOS Ltd to switch the ownership of Channing to IOS's own subsidiary, IOS Management - the entity which IOS floated off before itself going public, and which drew its income from fees on the proprietary funds. In payment for Channing (for which they had just paid $7 million cash) IOS Ltd received 400,000 shares of IOS Management, and the funny thing about this was that on the ruling market price, 400,000 Management shares were worth $13 million.

    It was a deadly error: market operators instantly assumed that IOS itself thought that IOS Management was overpriced, and therefore that income from the funds was falling.

    On February 4, Cornfeld informed the admiring institutional investors of New York that IOS was 'experiencing a net cash flow of over $100 million a month', and having accused the sec of plotting the overthrow of the stock market, departed for Acapulco with Hugh Hefner and his bunnies. Seven days after Cornfeld's speech, Mel Lechner and his staff finished their preliminary computation of the 1969 profit. As we have seen, it was not $30 million, or even $25 million; it was $17.9 million.

    Nobody then knew that closer examination would bring that figure down to $10.3 million - meaning that without the performance fee on the Arctic deal IOS would have made virtually nothing. But the figure Lechner had, in terms of the current IOS share price, was disaster enough: he took it at once to Cowett's executive assistant, an ex-State Department man called Hal Vaughan. It was Wednesday, February 11, and Cowett was in Tokyo looking into a real estate fund project. Together, Lechner and Vaughan put in a call to Cowett, and gave him the figure over the phone. He said, coolly, that he would fly back to Geneva, and that Lechner should come to his villa on the following Sunday with the papers.

    The Sunday meeting precipitated an almost continuous round of meetings between Cowett, Cantor, Vaughan, Norman Rolnick (Comptroller of IOS), George Landau, now in charge of administration, and Lechner and his accountants. By the end of February the accountants were able to predict, correctly, that IOS was going to lose money in the first quarter of 1970. At the same time, it was impossible not to see that sales operations were in the red. Allen Cantor concedes that in February he began to get a little worried. Cowett's version is that there was a conference, at which Cantor reported that sales were 31% higher than in February 1969, only to be told brutally by one of his own executives: 'Shit, Allen! That's face volume. Cash sales are down.'

    Yet the 'winter series' of board meetings, beginning on March 9 and ending on March 13, passed off, ostensibly, in peace and harmony. Cowett, to Lechner's amazement, told the IOS Board that profits for 1969 would be $20 to $25 million - and when Lechner asked, afterwards, why he had not given the $17.9 figure Cowett said blandly: 'Those were preliminary figures, right, Mel?' There were two main items on the agenda for these meetings. The first was to approve 'aggregate investment of $44 million of company money' during 1970. The directors did not commit themselves to 'any specific projects', which was wise, because by this time even a 44-cent expansion would have taxed the corporate treasury. Second, the directors conferred promotions upon some of their number.

    Cornfeld remained Chairman of the Board, but Cowett took over from him as President of IOS, and Allen Cantor became Vice-Chairman. Eli Wallitt was elected Executive Vice-President, and James Roosevelt, Senior Vice-President. Wallitt's friend Ossie Nedoluha and Malcolm Fox from Hong Kong joined the main IOS board. This, said Cornfeld, 'realigned corporate titles to clarify… actual responsibilities'. What it really showed was that unease was spreading among the directors, and beginning to take the form of personal dissatisfaction with Cornfeld.

    It was not just his penchant for bell-bottom trousers and the beard. Cornfeld was now frequently absent from Geneva, and was increasingly less effective in his once crucial role of inspiring the salesmen. Late in 1969, for instance, he missed an important meeting which was designed to boost morale in Germany, and instead of the magic presence, the Germans had to make do with an hour's talk about boutiques and other investments, amplified from the transatlantic telephone. In January, Cornfeld was diverted by a cbs project to make a tv documentary about his life: much energy went into mounting an eighty-first birthday party for Sophie Cornfeld, which was filmed by cbs at the Villa Elma. Such was Cornfeld's obsession with the film that Sir Eric Wyndham White, who was threatening to resign because of the difficulty of discovering what was happening inside IOS, found himself discussing his resignation in front of the cbs cameras. Granted, all this was eccentric behaviour in the president of a financial institution. But it was ironic that the directors should have chosen to augment Ed Cowett's authority as a means of curing the ills of IOS.

    Cowett's own eccentricities were not to be hidden much longer. The original agent of the revelation was Professor George von Peterffy, one of the more colourful members of the faculty of the Harvard Business School. The professor joined the IOS board in September 1969, having decided to spend a year developing his interests outside Harvard.

    Von Peterffy is not the cloistered kind of academic. He is a powerful young man, standing six foot four. He was to cause some consternation at one tense board meeting by telling Ed Cowett that he had a gun with him. His explanation was that he had just returned from the Middle East, where he feels it is de rigeur to carry sidearms.

    Von Peterffy was distinctly unhappy about IOS by the beginning of 1970: apart from anything else, he did not care for the fact that part of the Italian operation still appeared to be illegal.

    Late in February, Cowett admitted to von Peterffy that the 1969 profits would not match the prophecies, and after the March board meetings, he gave von Peterffy, together with a small group of executives, the task of examining IOS's profitability. The history of von Peterffy's exercise suggest that Cowett did not mean it to make any significant discoveries, but that by this stage the pressures inside the much abused professional bureaucracy were at bursting-point.

    Lechner declares that as Treasurer of IOS Ltd he received no details of odb loans, and that the odb manager Phil Doubre had strict instructions to respect Swiss bank secrecy. However, Lechner claims that in the last days of March he deduced the extent of the loans from the IOS cash position. In the first week of April, von Peterffy got down to his task, and on the 7th, he met Lechner, who described the meeting in these terms:

    'Von Peterffy turned to me and said, "What is the current cash position of the company? Give me a number. Is it $100 million? $20 million? $5 million?"

    ‘I said, "George, I have not been authorized to make this information available. Talk to Ed. Get clearance."

    'He blew up. He said, "This meeting is adjourned," and he stomped out of the door.'

    Then, says Lechner, it came to him four hours later that 'maybe George is the guy to talk to. Maybe he can be the link.' The treasurer found von Peterffy in the office of a young IOS executive, Abe Carmel, who had been a student of von Peterffy's. 'He wouldn't see me at first, he was so pissed off. I said to him, "George, I have to talk to you - it's not only the cash position." '

    The Harvard Business School trains its sons well. Von Peterffy walked to the door, locked it, and said that no one was leaving the room until the truth was known. 'I talked for three hours,' Lechner recalled. ‘I explained to him about everything, including the banking transactions. He listened, sort of shocked and fascinated.'

    Lechner's disclosures burst upon an atmosphere which was thick with rumour. Henry Buhl told us that all through January he 'kept hearing from Swiss bankers that we were lending people money to buy our own shares'. Mel Rosen told Jo Melse that he was having to buy wads of IOS shares - for purchasers whose identity he didn't know. And the boasts about 'expansion' had dismayed the accountants at Ferney, who knew enough to know that IOS could not conceivably find $44 million for expansion.

    But whatever financial links existed in the mind of Ed Cowett, the clandestine tradition of IOS had divided the company into a series of separate compartments. A great many people knew that particular things were going wrong. 'But what could you do?' said one of Lechner's assistants. 'Ed Cowett was the guy running the company. Suppose you went to him. You know the bit in the Western, where the guy goes in to tell the sheriff that the baddies are in town? And while the guy's talking, you see the sheriff opening the desk drawer with the gun in it-because the sheriff's the chief of the baddies?'

von Peterffy, C. Henry Buhl III, Richard M. Hammerman and Sir Eric Wyndham White.

    After his session with Lechner on Tuesday April 7, von Peterffy talked urgently with Henry Buhl. Buhl says that although he had not seen the weekly cash reports, he had already heard some disturbing whispers from the accountants. Next Friday, April 10, a meeting of the Executive Committee of the IOS Board was due: Buhl decided that a secret cabal must meet first. He spoke to Sir Eric Wyndham White, who promised support. Next, Buhl called Hammerman at the London office, and asked him to arrive quietly the day before the Executive Committee meeting was due. Finally, on Thursday April 10, the Four Horseman met Lechner: not at 119 Rue de Lausanne, but privily in another set of IOS offices at Number 147. Lechner said that if they promised to defend his right to speak, he had 'a lot to say'.

    In other words, it was necessary to mount an intrigue before the company's cash position could be discussed by its own directors.

    At 3.30 the next afternoon, the Executive Committee met, with Cornfeld in the chair. The scene was Ambassador Roosevelt's office, draped with a large Stars and Stripes. Buhl's horsemen were all there, and so were Cowett and Cantor together with Roosevelt, Ed Coughlin, Wallitt and a few others. Lechner was ready with 'twenty copies of everything'.

    After half an hour, Cornfeld turned to Lechner and said: 'What is your cash position?'

    Lechner took out a five page report.

    Cornfeld said: 'Just give me a number!'

    Buhl and von Peterffy said together: 'Let Mel speak!'

    And then Allen Cantor weighed in with: 'Let's get this on the table.'

    So Lechner spoke, for the next six hours. 'I went all through the loans,' recalled Lechner, 'the integrity gap. I pointed out that Cowett had been talking about $25 million profits, when the goddamned number was $17.9 million. Cowett spoke from time to time, sinking lower in his chair. They tried to shut me up at first, but I wouldn't let them. That was my day in court.'

    It was an unnerving set of sums that faced the Executive Committee. For in the six months since the public offer all the $52.4 million raised in the public offer, and more, had been dissipated. This must set some sort of record for commercial profligacy.

    What follows is as close as we can get, from the weekly and monthly cash statements, checked with interviews, to the financial facts which emerged at the Executive Committee meeting. (The proviso should be made that in the shock and confusion of that Friday night, not all the details were clearly grasped.)

    There was, first of all, the money which had been spent to buy shares of IOS Ltd and IOS Management:

    

    There were some transactions which would be put in a more orthodox light, although they consisted largely of much-needed additions to the capital of the sorely tried IOS banks:

    Millions of dollars

    New offices, etc. 2.5

    Increase in capital for odb 2.3

    Increase in capital of Orbis Bank

    (Germany) 1.5

    There was the money paid over to keep Commonwealth United going, and to buy the Canadian Channing fund group in February (and which eventually made a loss).

    

    There was then a disturbing batch of personal loans to IOS insiders, or to their taxation-avoidance vehicles, and loans to King personally, beside those to companies and connections of King's. Also Bernie had decided that he would like to have a bac One-Eleven airliner fitted out to rival Hugh Hefner's Douglas dc-9, the all-black Big Bunny - and this cost too was being guaranteed by the odb:

    

    Millions of dollars

    

    Grand total of transactions: $75.0 million

    The members of the executive committee were as shocked and fascinated as von Peterffy had been in the first place. Cornfeld himself proclaimed throughout that he had been ignorant of the havoc wrought. ‘I apologize, Mel,' he muttered, more than once. 'I just didn't know.' Some of those present, like Wallitt and Hammerman, must at least have known that Cowett had been organizing loans for their tax avoidance projects. Others had had their suspicions. But perhaps even Cowett himself had never looked, until then, at anything like the whole picture. For the executive committee, the experience was akin to the one