I.F. Stone Reports: Behind the ITT Scandal

Bribery comes naturally to conglomerates. These giant holding companies, like ITT, sprawling all over the business map, expand by one form of bribery or another, some more or less legitimate, some just plain garden-variety odoriferous. In the former category was the half-billion-dollar premium¹ ITT dangled before Hartford Fire Insurance Company stockholders to get control of that company’s fat cash surpluses. In the latter category were the profitable stock options and favorable employment contracts promised Hartford management by ITT to win their approval for a merger; these so “troubled” the Connecticut Insurance Commissioner, William R. Cotter, that he at first vetoed the acquisition, on the ground that these favors created a “conflict of interest.” The corruption of management to facilitate corporate takeovers appears over and over again in the comprehensive but little noticed report on conglomerates filed by a House Judiciary subcommittee on anti-trust last September 7.²

When ITT made its “noble commitment” (in the language of the famous memo written by its Washington lobbyist, Mrs. Dita Beard) to guarantee up to $400,000 to bring the 1972 Republican Convention to San Diego, it may not have been strictly a bribe. But it was certainly another “conflict of interest,” especially since it was soon followed by a Justice Department decision to drop its antitrust suit challenging the acquisition of Hartford and to file a consent decree instead, allowing ITT to keep the prize it wanted. Conglomerate operations dull the feeling for such niceties.

Writing midway in the Senate Judiciary Committee investigation of the ITT affair and the Kleindienst nomination, I would like to touch on some of the broader economic and social issues. The first is the menace to free government by holding companies grown so gigantic that they become private empires, financing the election campaigns of both major parties and in a position to treat public officials as errand boys. When the Judiciary Committee hearings were reopened at Richard Kleindienst’s request after Jack Anderson’s revelations, the Attorney General designate, in his opening statement, was quick to emphasize ITT’s bipartisanship. Of Felix Rohatyn’s private meeting with him as emissary for ITT and Lazard Freres, Mr. Kleindienst said archly:

He also, I think, by way of introduction, stated that he had no political credentials by which to introduce himself to me—that as a matter of fact he was an economic adviser to Senator Muskie in his national committee, and was on his finance committee.

Felix Rohatyn could strengthen his bipartisan credentials if he should volunteer the information, not yet elicited by the Judiciary Committee as this is being written, that ITT used its hotel subsidiary, Sheraton; to butter up the Democrats at the state capital in Hartford just as it used Sheraton to butter up the Republicans in San Diego. There were two hurdles to the acquisition of the Hartford Fire Insurance Company. One was to win or settle out of court the federal antitrust suit. The other was to get the Connecticut Insurance Commissioner to reverse himself and allow the deal, which required his approval under a 1969 “model statute” designed to protect Connecticut’s no. 1 industry, insurance, from takeover raids.

This is a story the Democrats would rather not tell and the Republicans cannot exploit because it would hurt their benefactor, ITT. The Insurance Commissioner, Cotter, was a candidate for Congress from Hartford while the merger was before him. The Democrats in the city of Hartford were embarrassed because a $15 million bond issue they had floated to build a civic center was falling short about $7 or $8 million. Just before the Insurance Commissioner reversed himself, he held a meeting with the Democratic town chairman and its corporation counsel on this problem. Ralph Nader’s appeal from that reversal as filed last January 27 in the superior court of Hartford County says:

During the meeting, Commissioner Cotter indicated a willingness to request that ITT help out with the Civic Center, in the light of ITT’s expressions of desire to make contributions to the city. The Corporation Counsel and his deputy were asked for a legal opinion whether it would be possible for a private corporation to make a “multi-million dollar” gift or charitable contribution to the City or to the Civic Center project.

During this meeting Commissioner Cotter made a telephone call to ITT in New York to arrange for a conference in his office for the following Friday. The purpose of this meeting, according to Mr. Cotter, was to ascertain “the sincerity of ITT building a Sheraton Hotel in Hartford and being a participant in some manner in the construction of the Civic Center.”

That meeting was in fact held in Commissioner Cotter’s office on Friday, May 22 [1970], one day before the Commissioner’s decision was issued approving the exchange offer [of Hartford common for ITT convertible preferred].

Nader’s appeal says “the blatant impropriety” of this procedure was compounded by the fact that Mr. Cotter “was at that very time an active candidate for Congress and was actively soliciting support for his campaign.” He reported spending “approximately $100,000,” no small sum for such a local election, which he won by a narrow margin. It is extremely doubtful that his original decision against the merger could have been reversed, at least not without a considerable public outcry in Connecticut, if ITT had said in Connecticut what we now know it was saying in its private negotiations with the Justice Department: that its inability to keep Hartford Fire would be a financial disaster for ITT, and indeed for the stock market and the country.

If ITT is that shaky, the deal was not to Hartford’s benefit. One of the first results of the takeover was an increase in Hartford dividends which added $14.3 million to its annual payouts, “virtually all of which,” according to the Nader appeal, “is paid directly to ITT as majority stock-holder.” The whole Connecticut story would make a far better GOP riposte to the San Diego revelations than Senator Dole’s silly press conference on the Democratic telephone bill, but it’s a safe bet this is one scandal the Republicans won’t air.

Another and broader example of bipartisanship is what has happened during the past two administrations to the need for action against the swift growth of conglomerates. During Johnson’s four years, litigation was held up on the plea that the law had to be strengthened. During Nixon’s Administration, changes in the law were held up on the plea that conglomerates could be blocked under existing law by Justice Department litigation. The two main test cases revolved around LTV (Ling-Temco-Vought, Inc.) and ITT, and both have now been settled by consent decrees. Thus the conglomerates avoided the danger of an unfavorable Supreme Court ruling and the hazards for the insiders of trials that would have spread their manipulations on the record and might have involved them in serious personal charges.

So almost eight years have passed without remedial action. Richard W. McLaren came in like a lion as Assistant Attorney General in charge of the anti-trust division and has gone out—a judge. His earlier zeal had earned him the applause of the trust busters. His metamorphosis recalls that of another famous Republican who began as trust buster. Stanley N. Barnes, Assistant Attorney General in charge of anti-trust under Eisenhower, was elevated to the bench (9th Circuit Court of Appeals) just six weeks after another notorious—and toothless—consent decree, that which ended the case against AT&T and its manufacturing subsidiary, Western Electric. This combination still costs telephone users hundreds of millions of dollars in rigged telephone equipment prices. The notion that the Republicans are more militant on anti-trust than the Democrats has a large mythical component.³

The Senate Judiciary Committee hearings on Kleindienst are another illustration of how little communication there is between the two ends of the Capitol. It is not the first time a Senate committee has shown itself unaware of the relevant findings of a House committee way down yonder at the other side of the building. Felix Rohatyn of Lazard Freres figured prominently in the House anti-trust report on conglomerates last September and in the almost 1,500 pages of testimony and documents it published on ITT, but he might have been Joe Blow off the sidewalks of New York as far as the senators seemed to be aware.

ITT’s greatest period of expansion was from 1965 through 1968. From 1965 on, after Lazard Freres sold Avis to ITT, this banking firm became deeply involved in ITT affairs.⁴ In 1967 Mr. Rohatyn, a director of Lazard Freres, also became a director of ITT and, according to the House committee report, “the major thrust in ITT’s acquisition program came after Mr. Rohatyn’s appointment and election to the ITT board. ITT’s acquisition activity greatly accelerated both in terms of numbers and size of companies acquired.” In this period ITT acquired, among many other companies, Continental Baking, Rayonier, and Sheraton, each the leader in its respective industry.

The Hartford Fire Insurance Company, which the House report does not discuss, was the biggest prize of all. That merger united the nation’s eighth largest industrial corporation with the fourth largest liability and property insurance company. The earnings of the firms ITT agreed to sell in the consent decree were estimated at about $35 million a year, while Hartford earned about $105 million, or three times as much. Even more attractive was Hartford’s cash flow of about a billion a year in premiums and its huge “surplus surpluses,” i.e., balances over and above those required by law. One exhibit in the Connecticut litigation discloses that an ITT executive estimated in a memorandum to Harold S. Geneen, its president, that Hartford “could comfortably invest $250 million of its assets in the acquisition of other companies.”⁵

These surpluses, which of course provide extra protection to policy-holders, make insurance companies a favorite target of the conglomerate operators. Obviously it is bad public policy to allow insurance companies to become part of larger speculative razzle-dazzle operations. This is a point that merits study and remedial action.

A related point is the role played by the big banks and banking houses in conglomerate operations. The House report shows that the big conglomerate managers, brilliant as they may be in financial manipulations, could not operate without open lines of credit from their banks and access to funds and securities in the trust departments of their bankers. Essentially the conglomerate enables the bank to do what the reform legislation of the Roosevelt period—the Securities Act and the Glass-Steagall Banking Act—forbade. The purpose was to correct the evils of the Twenties and keep deposit banking separate from stock market speculation. The big bank can do through its satellite conglomerate—Chase Manhattan with Gulf and Western is an outstanding example—what it cannot do directly.⁶

The conglomerate opens rich sources of profit, legitimate and illegitimate, to its bankers, whether they are deposit or investment bankers. Banking officials and partners can play the market on the basis of inside information. The bank derives revenues from all kinds of services as the conglomerate swallows up one business after another. This was the case in the relationship of ITT with Lazard Freres. “During the period 1964 to 1968,” the House report said (p. 151), “the merger and acquisition function became increasingly important in relation to its other business. From January 1, 1964, through September 5, 1969, Lazard Freres received $16,058,243 in merger fees. During this period, the firm’s gross income increased roughly 2 1/2 times, 256 percent, while at the same time its income from merger and acquisition services increased nearly 6 times, 584 percent.” ITT was its major customer for these services.

The unprecedented expansion of conglomerates from 1965 through 1968 was only made possible by the Vietnam war. It was fueled by blood and inflation. The operators could afford to pay far more than their acquisitions were worth because the stock market boom made it possible to unload fresh securities representing these inflated prices. A table in the House report (p. 414) shows that ITT acquired thirty-one domestic companies from 1964 to 1968. Their net worth on acquisition was $534 million. But ITT paid $1,278 million. The House report estimated that if this excess investment in “goodwill” had been accounted for and amortized over ten years, “ITT’s reported net income for 1968 would be overstated by 70.4 percent.”

The tricky “pooling” method of handling these mergers enabled ITT to make these huge over-payments look like growth because pooling did not require them to write off the over-payment against earnings. This is how Insull operated in the Twenties and Hopson in the Thirties. The House report found that in most cases businesses acquired by conglomerates proved less profitable and less financially stable than before they were taken over by these “wonder boys” of the conglomerate world. The report said of ITT (p. 147):

Notwithstanding ITT’s growth record, in both net income and sales, there are indications that efficiency and performance of its constituent units deteriorate after they are taken into ITT’s system. In the absence of the ability to maintain a constant inclusion of large and profitable outside companies, ITT’s performance record would not be outstanding. Constant additions to sales and profits through acquisitions have obscured the record on ITT’s ability to manage its corporate complex.

Three long-range factors have cut into the competitive power of American business. One is the growth of monopolies and administrative price systems which shield obsolescence, inefficiency, and inflated capital accounts from market forces. The second is the “cost-plus” mentality engendered by the huge and profligate spending on the military machine since the Fifties. The third is the conglomerate movement which siphons off management energies and ingenuity into speculative activities at the expense of business efficiency. You can’t mind the store properly with one eye on the stock market. No one is genius enough to run a dozen business well. With few exceptions, the bigger they get the more sloppily they are run.

Perhaps the biggest issue in the ITT affair is that these huge corporations can make up in political influence what they lack in the capacity to survive the normal tests of the free market. ITT got its consent decree, just as LTV did, by negotiating from a position of weakness, by pleading that unless they were allowed to get away with their acquisitions they might collapse, adversely affecting the stock market and Nixon’s re-election chances. As in the Penn Central bankruptcy and the Lockheed affair, economic power paid off in political power at the expense both of good business management and of good government.

As the assorted liars and prevaricators wriggle on the witness stand before the Senate Judiciary Committee, this is the reality behind the scandal of the ITT fix.

Why Richard Kleindienst Is Unfit to be Attorney General

In 1970 a group of underworld characters was indicted for stock manipulation and strong-arm tactics in an effort to take over a Miami investment company. They went to Robert T. Carson, then administrative assistant to Senator Fong, a Hawaii Republican. One member of the ring who pleaded guilty testified that another defendant, a stock operator, met with Carson in the senator’s office and offered to pay Carson up to $1 million if he could quash the indictments.

On November 24, 1970, Carson went to the office of Deputy Attorney General Richard Kleindienst to try to arrange a fix. This was how Kleindienst on direct examination described the meeting at Carson’s trial on November 20, 1971:

Q. Now, would you tell the court and jury what Mr. Carson said to you and what you said to him on November 24, 1970?

A. Well, after we had exchanged pleasantries, Mr. Carson sat down in a chair in front of my desk and said that he had a friend in New York who was in trouble, and that if I could help him with respect to his trouble, his friend was a man of substantial means and would be willing to make a substantial contribution of between 50 and 100 thousand dollars to the reelection of President Nixon.

I asked him what kind of trouble this man had. Mr. Carson said he was under indictment for federal offenses, and I said that under no circumstances could I do anything about this matter, even look into it, as a result of the fact that a grand jury had returned an indictment. That was just about all the conversation that existed.

We immediately thereafter—we turned the subject matter to other matters, exactly what I don’t recall, but very possibly matters involving the State of Hawaii and appointments pertaining to the Department of Justice.

Under Section 201 of Title 18, US Code, entitled “Bribery of Public Officials and Witnesses,” the offer to Kleindienst was a crime. The act provides a fine of up to $20,000 or up to fifteen years in jail, or both, for “directly or indirectly” making any offer or promise “to give anything of value” to a public official to induce him “to do or omit any act in violation of his lawful duty.” It was the Deputy Attorney General’s duty to report the crime. He was asked, still on direct examination:

Q. Now, Mr. Kleindienst, did there come a time when you reported the substance of this conversation to the Attorney General of the United States?

A. Yes, I did.

Q. When was that?

A. That was approximately 9o’clock in the morning, one week later; on Tuesday, December 1.

The question arises: why did Mr. Kleindienst wait a whole week before reporting this felonious offer? On direct examination, Mr. Kleindienst offered an explanation which proved deceptive:

Q. Between November 24 and December 1, did you see the Attorney General?

A. I did not.

Q. And was December 1 the first time that you saw the Attorney General after you had spoken to Mr. Carson?

A. Yes, it was.

Thereupon the US Attorney said he had no further questions. The impression so far was that Mr. Kleindienst did not report the offer sooner because he had not seen the Attorney General earlier. But on cross-examination, some surprises turned up.

The first was the conversation that followed the offer. One might have expected Mr. Kleindienst to throw Mr. Carson out of the office for making such an offer, and warn him that he would report this as a bribery attempt to his employer, Senator Fong, and to the Attorney General. Instead, Mr. Kleindienst, as if nothing untoward had happened, talked with Mr. Carson about a judicial appointment to the 9th Circuit Court of Appeals to fill the seat left vacant by the retirement of Judge Barnes!^*

At first Mr. Kleindienst could not recall that after the bribe offer he talked with Carson about the appointment of Herbert Y. C. Choy to fill the vacancy, as requested by Senator Fong. But when his memory was “refreshed” by a document dealing with the appointment, Mr. Kleindienst agreed that this was the topic of conversation. It does seem unusual that a Deputy Attorney General would discuss an appointment to the Court of Appeals with a man who had just committed a crime by offering him a bribe. Mr. Kleindienst was asked by defense counsel about the bribe offer:

Q. Did you make any record of that portion of the conversation?

A. No, sir.

* * *

Q. Did you make any report or initiate any investigation with respect to that portion of the conversation?

A. No, sir.

Q. Isn’t it true that the first time you ever said or wrote anything about that subject was on December 1, 1970?

A. Yes, sir.

* * *

Q. And you made it on the basis of what was in your head?

A. You mean the reason why I made the memorandum?

Q. No, no, what you based it on. Was it your recollection?

A. You mean the memorandum that I wrote a week later, was that based upon my recollection?

Q. Yes.

A. Solely upon my recollection.

Why, a week later, did he decide to write the memorandum? The testimony on direct examination implied that he waited a week until he had an opportunity to see the Attorney General. But now we have a different answer:

Q. And it was made, was it not, after you were informed that on that very day there was going to be an electronic surveillance in the new Senate Office Building?

A. No. It was after I had been shown a memorandum dated November 30 addressed to the Attorney General from the director of the FBI which had reference to Mr. Carson.

Q. Did it say that there would be an electronic surveillance scheduled for that very morning, December 1?

A. I don’t recollect, Mr. [Joseph E.] Brill [defense counsel].

Again Mr. Kleindienst’s memory was refreshed. He was shown the memorandum sent to the Attorney General by the head of the FBI. But he still sought to evade the implication that he acted only after he learned that Carson’s office was being “bugged” and that the FBI might learn in this way of the bribe offer Kleindienst had failed to report. He was asked by defense counsel:

Q. And is that the fact that you wrote it [the memorandum about the bribe offer] after you were so advised [of the electronic surveillance]?

A. I wrote….

Q. Would you answer my question please, sir?

A. I don’t understand your question then, sir. Would you restate it?

Q. Did you write that memorandum after you had been advised that there was scheduled to be conducted that morning an electronic surveillance?

A. Well, the information I got I got [sic] at 9 o’clock on this day. I wrote this at 10. So I got this information between 9 and 10 in the office of the Attorney General.

Q. Well, didn’t you say that you had been informed or advised that there was scheduled to occur that morning an electronic surveillance?

A. I received that information.

Q. Yes.

A. That’s what it was about.

Q. And it was after you received it that you wrote this memorandum?

A. Yes, sir.

Q. Now, you knew when you received it that the electronic surveillance would be conducted in the New Senate Office Building, did you not?

A. I don’t know whether I knew that specifically, whether it made any difference to me to know that specifically, Mr. Brill.

Q. Are you saying now you just don’t recall?

A. Yes.

Q. Okay.

A. Whether that was a significant—I don’t recall it now.

Q. All right.

This is hard to believe. What follows is even harder:

Q. So that between November 24 and December 1, you gave no further thought to that portion of the conversation which lasted a minute or two, if that much, in which you said Mr. Carson told you he had a friend who would contribute $100,000 to the Nixon campaign?

A. That’s correct.

Are $100,000 offers to fix criminal prosecutions so common as to be so easily forgotten? On December 12, 1970, as a result of his belated report to Mitchell, the Deputy Attorney General was placed under oath by an FBI agent and questioned about the bribe offer. He admitted he had one other talk with Carson after December 1. That was to discuss the appointment of Judge Choy. Defense counsel still wanted to dig into why Mr. Kleindienst did not report the bribe offer earlier:

Q. It is true, then, is it not, that on November 24, 1970, you did not regard that in the conversation you had with Mr. Carson that he offered you a bribe?

A. No, I did not.

Q. If you had regarded that conversation as containing a bribe offer, you would have immediately reported it, would you not?

A. Yes, sir, I would have.

Q. And you would have initiated the appropriate action to deal with it, isn’t that true?

The answer indicated that the Deputy Attorney General was still unwilling to face up to the fact that the offer was a crime:

A. Well, I would have reported it and taken that action that the circumstances warranted.

* * *

Q. It was with respect to a matter which on November 24 you did not regard as a bribe, isn’t that true?

A. That is correct.

Defense counsel had no further questions until the US Attorney Mr. Morvillo asked:

Q. After learning what you learned on December 1, with regard to the fact that there was an investigation involving Mr. Carson, did you then consider what had happened on November 24 to have been a bribe?

A. Yes.

And now defense counsel chimed in again.

Q. Mr. Kleindienst, are you really serious about that last question?

A. Well, I am serious about it, but I have to explain that, Mr. Brill.

Mr. Kleindienst never was given a chance to explain this extraordinary testimony on which Carson was convicted and sentenced to eighteen months in jail and a $5,000 fine. This testimony is known to the senators on the Judiciary Committee. But Mr. Kleindienst has never been questioned about it. Presumably this is for fear of embarrassing Senator Fong, who sits on the Judiciary Committee. Mr. Kleindienst ought to be asked to give the explanation he never gave at the trial. His slippery testimony there reads now like a dress rehearsal for his equivocations before the Senate Judiciary Committee.

As it stands, on that trial record alone, Mr. Kleindienst is not qualified to be Attorney General of the United States.