Do You Sincerely Want To Be Rich? (12 page)

    

    
In which the learned author of
Blue Sky Law
tries his hand at promoting speculative companies. In which he gets into deep financial trouble, and is helped out by Bernie Cornfeld.

    The IOS salesmen reacted with vigour to the challenge of having their own fund to sell. Customers in many countries were readily attracted by the idea of a mutual fund which would invest their money on stock exchanges around the world, with a big slice of it going into Wall Street. The first year of operations, 1961, was a buoyant time for share prices in a great many countries, and in America particularly. On the New York Exchange, the Dow Jones average touched 741, comfortably above the previous record of 688 in 1959.

    Few of the salesmen, and probably even fewer of the prospects, appreciated the peculiarities of IIT's legal make-up. On the contrary, it seemed an especially appealing package of American expertise, with respectable Swiss and Dutch connections. If you had dollars, or could find dollars, it might have looked like a very fine investment. Certainly, a lot of people thought so, because in the first twelve months the fund grew to $3,400,000.

    But at the end of 1961, Dr Bruno Hugi reported to the fund's investors in these less than ebullient terms:

    'The New York market has been consistently good throughout the year. However, the rise was confined to blue chip stocks of a rather defensive nature. Many of the glamour stocks declined sharply, and frankly, your Fund suffered from such investments. The stocks of the category which we continue to hold have a very fine growth potential and we are not

    disturbed by their drop in price.'

    One of the stocks which presumably had a 'very fine growth potential' was a little company called Minitone Electronics. The International Investment Trust had invested several thousand dollars in this manufacturer of battery operated pencil sharpeners, shavers and carving knives.

    Minitone had first offered its shares for sale in New York in early 1961, when its directors had complied with those strict provisions of American law which require full disclosure of the nature of the investments being offered. 'The Common Stock', they wrote in the Minitone prospectus, 'is speculative. On the basis of the past and present operations of the company, no representation can be made that the company will be able to conduct future operations profitably.'

    Edward M. Cowett was one of the Minitone directors who put his name to that statement. He was also New York legal counsel to Investors Overseas Services, the promoters and controllers of IIT, and had been since 1958. He was, in 1961, a director of IOS, and a frequent traveller from New York to Geneva.

    Minitone, and seven other of the most glamorous of the glamour stocks in which IIT had invested, were listed separately in the report which Dr Hugi sent out for 1961. They were headed 'us Special Situations', and they were very special indeed, for within a few months the companies
    1929, almost anything to do with radio could be sold. In 1958-62 it was anything to do with computers or electronics.

    Early in 1959, McGowan put together a company called Powertron Ultrasonics. The business of Powertron was to develop the commercial potential of inaudible, high-frequency sound waves. It was a small concern and its principal product was a cleaning system consisting of tanks, and a generator which produced ultrasonic waves. To quote the company's own description: 'When the object to be cleaned is placed in a tank containing an appropriate liquid solvent, the activity attributable to the constant and intense sound waves travelling through the liquid causes a rapid and thorough cleaning.'

    Cowett played a relatively limited part in this company. When Powertron was formed, McGowan and his associates took up 150,000 shares for a total payment of $900, or 0.6 of a cent each. Cowett received 3,000 of these shares, acting as nominee for Powertron's attorneys. The company spent its first year developing its products, and building up debts, losing about $100,000 in the process. By the summer of 1960, Powertron was ready to start raising capital from the public, and the prospectus contained all the caveats legaUy necessary. It said:

    'Although ultrasonic cleaning has been extremely successful in a wide variety of industrial and commercial applications, and some objects can be cleaned more thoroughly and more economically with ultrasonic cleaning than with other recognized cleaning techniques, many attempted applications of ultrasound in cleaning have proved wholly unsuccessful.'

    Nevertheless, Powerton shares put on quite a performance. They were issued to the public at $2 each, when Cowett received another 3,100 shares. The investing public were impressed with the idea of ultrasonic cleaning, and the shares took off smartly. From Geneva, IIT bought 2,500 shares, and Powertron sailed on to top $13 per share in March 1961. After that, the glamour began to wear off, and vanished altogether in 1962. Powertron Ultrasonics was eventually bought up by a larger firm, at a price per share which would have shown a profit over the issuing price, but little more. It should be said that Powertron had some real qualities, apart from the unreal ones attributed to it by a feverish market. It continues in business today, as a useful subsidiary. The companies in which Cowett assumed a larger role did not always show such qualities.

    Cowett started his own promotion activities seriously in the autumn of 1960, and he must have been a busy man in those days. For a little while after he left Stroock & Stroock, Cowett was an adviser to the wealthy Farkas family, owners of Alexander's department store, but after a very short stint there, he went back to the law. In May 1961, after brief associations with a couple of firms, he became a partner in Feldman, Kramer, Bam, Nessen and Cowett. The moving spirit was Al Feldman, a real estate lawyer rather older than himself.

    The junior partner brought a fast-growing client with him: Investors Overseas Services of Geneva. Cowett had met Cornfeld while working on the Dreyfus Fund account for Stroock & Stroock. The fund's hottest foreign dealer was a frequent visitor to the Dreyfus office, and he was usually requesting something that required extended negotiation. It did not take the lawyer and the salesman long to see that their abilities were complementary. Cowett brought other clients also: including the little network of companies he was building up. (Bill McGowan also had offices in the same building as the law firm.) Cowett kept rather to himself in a room at the back of the office, and the other partners knew very little about what he was doing.