Million Dollar Yeggs

In 1939 a British businessman of my acquaintance was sent by the Department of Economic Warfare to Ankara. His mission was to buy up certain Turkish commodities of strategic value and thus deny them to the Germans. Generously supplied with cash, he went to work with a will. But he began to find his patriotic labors impeded at every turn by the British ambassador in Ankara, Sir Hughe Knatchbull-Hugessen, a person subsequently best remembered for having had the misfortune to employ a German spy as his valet. The businessman tried to explain to Sir Hughe the strategic importance of his activities. The ambassador brushed his explanations aside. “Don’t speak to me of commerce and finance, sir,” he impatiently exclaimed. “It goes in one ear and out the other.”

Recollection of what we might term the Knatchbull-Hugessen response is appropriate here since we are considering the swindler Robert Vesco. The sad fact seems to be that coarse details of financial speculation lack the general appeal of crimes of violence or even of political skullduggery. To put it another way, there is a market for stories about people violently robbing banks, less of one for stories about banks peacefully robbing people. Yet contemplation of banking practices would lead one to suppose the latter to be the more thriving and popular of the two industries.

Indeed the potency of the Knatchbull-Hugessen response seems to be readily conceded by artists and journalists. Alain Resnais recently managed to make a film about the noted swindler Stavisky with little more than the barest indication of what Stavisky actually was up to in the swindling line. His tedious love life, on the other hand, received copious attention. Resnais’s scriptwriter, Jorge Semprun, avoided examining French capitalism by making mysterious references to Leon Trotsky—loyal of Semprun but not very illuminating about Stavisky.

Accusations of vagueness on the topic of Robert Vesco cannot be leveled at Robert Hutchison. Hutchison, in his account of Vesco’s business career from its commencement in an East Detroit car repair shop to its current phase in Costa Rica, proves himself no devotee of the Knatchbull-Hugessen rule. He speaks of nothing but commerce and finance. For over 350 pages he unrolls a saga of unrelieved financial chicanery, culminating in this final citation of the central character’s achievements:

The total IOS swindle, therefore, clearly qualified as unprecedented and gigantic: More than $1 billion in unprotected investments had evaporated or been diverted. In cash and hard assets, Vesco and his group accounted for the removal of at least $500 million—although, obviously, no exact accounting existed. Concerted action by the [US government’s] inter-agency committee resulted in three-fifths of the plundered assets being blocked. By all accounts, that left the Vesco group with between $200 and $300 million secreted in offshore havens, in foreign banks, hidden trusts, and little known Hong Kong trading companies.

Should one allow oneself a tinge of admiration for Vesco for having engineered so colossal a theft? Actually it is impossible to generate any such emotion. At least as Hutchison presents him, Vesco becomes the business equivalent of a pornographer’s creature, grinding through his acquisitive program with vehement and undiluted greed.

As a matter of fact we should be alert to the benefits of Hutchison’s somewhat soulless approach to his material. Stories about businessmen, particularly those by journalists unfamiliar with balance sheets and the entrails of the business world, often retreat into the study of epiphenomena—the businessman’s style of life, his philosophy, and so forth. This type of material diverts attention from the central question about businessmen, particularly criminal ones, namely what happened to the cash. Hutchison really does seem to know what he is talking about here. The quality of his achievement and the difficulties of this type of business investigation should not be underestimated. What we might term aggressive investigative journalism in the business world is rare, partly because most journalists are not trained accountants and partly because corporate secrecy, particularly in Europe, can be totally impossible to penetrate. There is often simply no way to get behind a business address in Liechtenstein or in the Caymans.

The situation in the United States, with its more strenuous regulatory traditions, is a little better. But anyone who has read the 17,000-word complaint charging civil fraud against Vesco and forty-one other defendants, assembled by the SEC and made public in November, 1972, will realize the difficulties of independent investigation. The SEC, after all, worked on the case for twenty months, using eight lawyers. It also had subpoena power. A fair amount of Hutchison’s material evidently derives from the facts assembled in the SEC’s dramatic story of Vesco’s swindles. The SEC account is in fact a classic. Connoisseurs rank it with Carmine Bellino’s less spacious work on the Rebozo-Hughes check connection for the Senate Watergate Committee. But one’s admiration for Bellino or for Stanley Sporkin, who led the SEC investigation into Vesco, should be tempered with the thought that their work is impossible for independent investigators to duplicate. Newspaper reports about business, therefore, often subsist on leaks from the SEC, which is all very well up to a point, but leaves—assuming newspaper proprietors were ardent to see the material published—large regions of our economic and business environment undescribed.

At any rate, undisturbed by any psychological complexities, we can contemplate the successful conquest and pillage of the IOS empire of mutual funds that had been assembled by Bernard Cornfeld in Switzerland. This victory has been somewhat obscured by a distracting detail. Vesco’s $200,000 cash contribution to Maurice Stans in April, 1972, ultimately failed to deflect the immense SEC investigation. Yet the reverberations of that contribution—among them the prosecution of John Mitchell and Maurice Stans—gave Vesco the notoriety he should justly have earned for the manner in which he managed to take over IOS.

Vesco, to be sure, should not get all the glory for that and subsequent achievements of plunder. Balzac remarked that every fortune hides a crime. He forgot to add that every such crime usually hides a good accountant. Accountants slither through the pages of Hutchison’s book, usually from “reputable” firms and usually swift to sign a bogus balance sheet or statement of assets. By far the most ingenious of them appears to have been Norman LeBlanc, Vesco’s accountant after 1970, formerly an employee of the prominent firm of Coopers & Lybrand, and in 1956 the winner in his final accountancy examinations of the highest marks in Canada. But LeBlanc’s hour of glory came only in the third act, as he engineered the looting of the IOS funds, forging complex labyrinths of paper companies through which he shoveled the millions from the IOS funds.

The first interesting phase of Vesco’s business activities began in 1965 when he bought a small concern called Captive Seal. It cost him $50,000 to be paid in five yearly promissory notes, and with its acquisition he launched himself as a conglomerateur. He was twenty-nine and could look back on engineering jobs with Reynolds and Olin Mathieson. His transfer from engineering to entrepreneurial preoccupations came with his discovery of a firm called Eagle Aluminum Products, which had a plant in Dover, New Jersey, with excess capacity. Vesco became a kind of agent for Eagle, finding customers to fill this excess capacity and taking a part of the profits from the business he brought in; he also took a share of some of Eagle’s customers’ profits in return for giving them credit. Finally, from those companies which could not pay at all he took equity instead. Gradually Vesco became more and more involved with the financial and administrative problems of these companies. One of them was Captive Seal.

Captive Seal was a money-losing concern making valves, regulators, and switches for NASA and the US Navy. Vesco’s efforts to keep it afloat led to a couple of introductions that paved his way to the big time. First he met Malcolm McAlpin, a brokerage company executive and chairman of a Delaware company called All American Engineering. Although McAlpin was interested in acquiring Captive Seal, he decided that the majority stockholders were asking too much for it; but he was much taken with Vesco. Indeed All American Engineering immediately offered the “very charming, bright, and presentable” young Vesco a job. Vesco turned it down, but stayed in touch with McAlpin as a splendid guide to those contacts in Wall Street essential for his further advancement. Even more opportune for Vesco was the fact that a 50 percent owner of the venture capital firm that provided the initial funding for Captive Seal was Banque Privée, the Geneva merchant bank owned by Baron Edmond de Rothschild. Vesco had met an American adviser to the Banque Privée, who in turn introduced him to its managing director, Georges Karlweis.

At length the venture capital firm half-owned by Banque Privée decided to wind up Captive Seal as an irreversible loss. Vesco took this opportunity to acquire an operating concern. He made the venture capital firm an offer to acquire all outstanding Captive Seal stock. Presumably his acquaintance with the Rothschild adviser in the US and also with Georges Karlweis helped to finance the purchase entirely by credit, in the form of the $50,000 worth of promissory notes mentioned above. Vesco then went to McAlpin, inviting him to join the board and telling him, incidentally, that he had paid between $100,000 and $200,000 for Captive Seal.

Almost immediately Vesco formed International Controls Corporation, into which he poured Captive Seal’s assets and debts. Finally, he bought 51 percent of a nearly defunct Florida business called Cryogenics Incorporated. Since Cryogenics was a public company with a million shares of over-the-counter stock, Vesco was able to merge ICC and Cryogenics Inc. to produce a public company already registered for stock trading purposes.

So by a few fortunate coincidences Vesco was already hooked into European sources of finance in the mid-Sixties. Banque Privée remained an enthusiastic backer of Vesco for quite a while, and indeed it was Karlweis, at a moment when Vesco was searching for offshore capital in 1968, who introduced him to Henry Buhl, the senior investment officer for IOS.

Now equipped with a mini-conglomerate, Vesco set out to create income for his outfit by a bout of fresh acquisitions. In 1968 more than 4,000 corporate mergers took place in the United States. Vesco accounted for eight of them. By the end of the year the Fortune directory of the 1,000 largest US corporations ranked ICC as 688th in sales. Of course the strength of the Vesco conglomerate was largely illusory, held together by an enormous debt and with earnings per share constantly inflated by “creative accounting.” To keep his momentum going Vesco had constantly to service his debt by making new acquisitions to inflate his corporate balloon even further. So even though ICC was able, at the end of 1969, to post sales of just over $100 million, with a net worth of $41.7 million, the combine still had to report a net loss for 1968 of just over $3 million. Vesco desperately needed to acquire more assets to keep the conglomerate from collapsing under its own weight of debt.

By the fall of 1970, Vesco managed to save himself by offering IOS a $5 million loan. For by the acceptance of that loan, together with the stringent conditions Vesco’s lawyers had attached to it, IOS had delivered itself up to Vesco’s merciless attentions.

To set this matter in perspective we should remember that in April, 1970, IOS was managing twenty mutual funds and investment trusts containing $2.3 billion of other people’s money. Its sales of shares in these funds and trusts were running at a record rate of $4.5 billion in face amount per year. It had one million clients, with the largest sales force of its kind in the world and, as Hutchison concludes, the potential of writing the same amount of cash business in a month as the entire US mutual funds industry.

This is not to say that IOS was a well-run enterprise. In fact it would be nearer the mark to say that since its inception in 1956 IOS was one of the most chaotically organized and incompetently run outfits in the world. The basic proposition of IOS was simplicity itself. Its founder, Bernard Cornfeld, realized that there were more than a million people in the world prepared to invest in mutual funds, provided they were offered freedom from exchange controls and freedom from tax collectors. He dispatched hundreds of salesmen across the face of the globe, promising not merely a confidential haven for savings, but one which would multiply those savings at a rapid rate.

Some who knew Cornfeld allege he could not read a balance sheet. But he had his own equivalent of Norman LeBlanc in his lawyer, the late Ed Cowett, who figured out how to match the freedoms promised to the investors with actual freedom for IOS from any regulatory restraints. He initially incorporated IOS in Panama, subsequently in Canada. Neither country had much interest in regulating a nonresident concern which conducted its business elsewhere.

As Hutchison remarks, “The IOS mutual funds in very short order had become [by 1969] the largest pool of unregulated investment dollars in the world.” Many of the investment dollars were in fact illegally accumulated. In 1966 the Brazilian revenue service charged IOS with illegally exporting some $100 million out of the country in cash—as was the case, and not merely in Brazil. IOS rapidly became a bolt hole for international capital in flight. Indeed IOS executives always calculated that no matter what happened in the way of redemptions, around $200 million would always remain securely in place, since the original investors could not risk having their money identified as the proceeds of crime.

Despite the astounding success of the basic concept IOS was vulnerable to attack for reasons complementary to those accounting for its growth. Since it had to submit to scarcely any of the usual regulatory procedures, IOS financial controls were almost nonexistent. Investors’ funds were riotously mismanaged, filched, and squandered. Furthermore IOS lacked regulatory protection, so it was vulnerable to the attentions of an operator like Vesco.

By 1970 the managers of IOS found themselves in desperate trouble. In the first place the speculative euphoria of the middle to late 1960s was rapidly dissipating, and with it the mystique of mutual fund operations. Redemptions on invested funds were pouring into IOS headquarters from all over the world. The price of IOS stock, first offered to the public in 1969, was plunging through its initial price of ten dollars. This was a source of especial horror to all aboard the IOS money-tanker, since their dream had been to cash in their huge paper holdings in the company through a public offering, and thus all become millionaires. Inspection of the company accounts in April, 1970, showed that the cash position of the IOS group of companies (as distinct from cash in the funds managed by IOS) was dire. There was in fact insufficient money available to meet the following month’s payroll and trade creditors’ notes.

The panic-stricken leaders of IOS searched for help in every quarter. A number of US banks and financial institutions were willing to participate in a salvage operation on certain conditions. They were frightened off by the SEC. European consortia—notably a Rothschild-led group—were also prepared to assume control. But IOS management, with the exception of Cornfeld, found their terms too harsh. Particularly unattractive was a valuation of IOS shares at one dollar each.

Vesco, along with Norman LeBlanc, undertook a three-month examination of IOS books and decided that if you knew where to look, the concern was rich in plunderable assets. He then formally approached the IOS board with an offer to lend the concern $5 million to tide it over the immediate crisis. He hinted that his offer was backed by the Bank of America and the Prudential Insurance Company, and that the Bank of America was prepared to follow up this initial involvement with much more extensive participation. In fact neither the Bank of America nor the Prudential Insurance Company had expressed the slightest interest in IOS. Vesco had taken the precaution of announcing that the Bank of America’s concern for discretion was so great that it would probably deny any interest outright, if anyone at IOS made inquiries.

Vesco then had his own firm, ICC, lend IOS $5 million. This sum was itself borrowed. In a further sleight of hand he made IOS put up collateral for that loan by maintaining the equivalent of $5 million in the very Bahamas bank from which he had borrowed the $5 million which he lent IOS. (The IOS collateral was in the form of four million five-year warrants to buy IOS common stock at discount prices.)

This was Vesco’s greatest coup as a financial operator and one that launched him into a stratosphere of financial swindling. In fact, as Hutchison recounts it, IOS probably had more cash in hand at the time of Vesco’s loan than ICC did. But the panicky directors, most of them without much financial experience, simply did not know where to find it. Vesco managed to convince the board to lend itself the money while conceding the first stages of ultimate control of IOS to him. For in return for his $5 million Vesco exacted concessions from the board which gave him the run of IOS headquarters and ample time and space to extend his bridgehead. The person who most clearly perceived Vesco’s stratagems was Cornfeld. But by that time he had lost control of his company and the board was in no mood to heed his warnings.

Vesco rapidly consolidated his position, finally buying out Cornfeld’s own shares in IOS (secretly using IOS funds to do so). He then readied himself for the second stage of his operation, which was to squirrel off the money in the various IOS investment funds into companies directly under his own control. Gradually over the next two years huge portions of the IOS funds sank more and more deeply into the fathomless ooze surrounding international dirty money. Vesco himself scoured the world for attractive and secure repositories for the huge supplies of cash which he and LeBlanc were rapidly picking off the skeleton of IOS. Resistance gradually stiffened against such overt acts of plunder. Vesco himself was briefly arrested in Geneva, and correctly charged with having illegally removed securities from a bank outside normal hours of business. The timely intervention of Attorney General John Mitchell, through the local ambassador and a trusty CIA agent, ensured his rapid release and Vesco never revisited Switzerland.

Gradually his frontiers were forced back, finally to the confining bounds of the Bahamas and Costa Rica. In both countries immense bribes helped to ensure his immunity against extradition. Nor were the Nixon and Ford administrations overeager to extradite a man who might talk about his payments to Republican politicians. Vesco’s characteristic forethought on this matter included his acquisition of such useful employees as “Don-Don” Nixon, Richard Nixon’s nephew.^*

Hutchison leaves Vesco and his accomplices marooned in their tiny haven. At present they remain there, although in 1974 one of Vesco’s henchmen gloomily confided that “I can see it all now. It’s going to end in a small candle-lit room on a mountain top in Haiti with the principal partners sitting round a table, knives drawn, dividing up what’s left.”

So brisk an account of Vesco’s career as a swindler naturally omits some of the more baroque elements of his enterprise and indeed many of the allegations that will naturally encumber a man charged with stealing $200 million worth of hot money—namely that he has been involved with the underworld, in the drug traffic, in any amount of international criminal activities. One can safely assume that large amounts of the cash Vesco has remaining to him must be invested in suspect enterprises. But then there are large amounts of cash all over the world invested in suspect enterprises.

A greater problem is to set the terms in which one should consider Vesco’s adventures. The normal tendency is to isolate such pirates as Vesco and term them bad apples in the international capitalist barrel. It is always nice to have a few such bad apples around, since it reflects a certain health on the part of the bad apples’ companions.

Vesco’s final acts of plunder were somewhat excessive by business standards. But his method of using “leverage”—financing growth by piling up debt—in order to build up a bogus conglomerate empire in the late 1960s was entirely conventional. Indeed he was not, as we have seen, alone in his assault on the ailing carcass of IOS in 1970. The other “respectable” banking consortia trying to find themselves a piece of the action were not doing so out of consideration for the investors in IOS mutual funds, though perhaps with eyes on long-term reputations they would not have been quite so rapacious in their dismemberment of the corpse. In 1971 Vesco was still hiring reputable investment banking talent to endorse entirely bogus revaluations of assets; he was still using reputable accounting firms to give astonishing endorsements of his operations according to Generally Accepted Accounting Practices. Above all Vesco represented, in a particularly brutal form, the final excesses of two aspects of the bull market boom of the late 1960s—namely the conglomerate craze and offshore mutual fund operations.

There are new games in town now. The new options market offers future Vescos dazzling opportunities for financial jiggery-pokery on a low margin of initial investment. Indeed Vesco, lounging about in his Costa Rican retreat, may be irked at the possibility that his status as Number One bad apple appears to be under siege by the Italian financier Michele Sindona. He is charged with saddling his Banca Privata Italiana—and subsequently the Italian state—with losses of over $500 million, with being involved in deals which led to the collapse of the Franklin National Bank, in which he was a controlling stockholder, and most piquantly with losing the Vatican large sums as well. Investigators are saying that it will take over ten years to sift through the ashes of the Sindona empire, which extended into almost every offshore haven and financial center in the world.

But now that recession has arrived, there may possibly be less interest in such colorful appendages to capitalist enterprise as Vesco and even, on a larger scale, Sindona than in the frailty of the main struts in the enterprise itself—the large corporations and the large banks. While no other US bank has yet enjoyed misfortune similar to the Franklin National, it should be remembered that there are banks larger than Franklin National which account for up to 80 percent of their income by foreign exchange dealings and by investment overseas. No bank boosting its earnings by, let us say, betting against the dollar or by heavy loans to such countries as Thailand and Peru can be said to be in a state of startling health. Or, to take another disaster zone, if one estimates losses in the market value of Real Estate Investment Trusts in this country over the last year at $2 billion, and then ponders the institutions behind these REITs, the significance of Vesco starts to dwindle.

Swindles and financial frauds are best regarded as parodies of conventional business procedures. In the swindle, greed outstrips discretion. In conventional business, discretion tempers greed. Victims of a swindle want to believe what they are forthrightly told by the swindler. Cornfeld’s salesmen told millions of people IOS would look after their money. Vesco told Cornfeld’s fellow board members that he would do the same for them. Of course, in the world of offshore financial operations it is always extremely dangerous to believe anyone, but it would be glib to conclude with any antithesis between a financial jungle out yonder, infested with sharks of Vesco’s stripe, and a homely terrain of financial probity and fair dealing within the borders of the United States or indeed of any other advanced capitalist country. So long as prosperous times are with us nobody pays keen attention to institutionalized and sanctioned forms of theft, any more than they complain over-loudly about the embezzling practices of insurance companies, or the price-fixing operations of big corporations, or of boondoggles by defense contractors.

In a recession things start to look different. There is $3 trillion worth of debt sloshing around the US economy. As the effects of reverse-leverage take hold and the loans start to get called, then the patina peels off institutions more publicly respected than IOS. In the months ahead it may become clearer that you don’t necessarily have to squat in Costa Rica to be identified as a thief.