Do You Sincerely Want To Be Rich? (34 page)

    But the German chain letter did not stop there. The amoeba continued to split. Werner, in due course, became a gm under Nedoluha. Schneider became a gm under Kunkler. That made Kunkler, too, a 'Super-gm', and Wallitt became a 'Super-super-gm.'

    And the process went further still. Schneider, too, acquired more than one gm under him, which made Schneider into a Super-gm, Kunkler into a Super-super-gm, Nedoluha into a

    

    

    
¹
This was a maximum figure. Since the commission you paid declined in proportion to the size of your investment, the maximum commission applied only to the smallest investments. On an investment of $1 million, the client paid only 0.5% and the salesman's commission and managers' overrides would be correspondingly smaller. The principle remains the same.

    

    Super-super-super-GM, and Wallitt into a four times blessed Super manager. At the apex, in 1970, as the whole organiza

    tion took off into orbit, several structures existed where there were no less than four Super-GMs above a general manager.

    Long before that, as early as 1967, in fact, the financial incentive for the individual manager to go on building up the structure underneath him had begun to be eroded. A point had been reached - in Germany first, but soon in Canada, in Britain and in other major markets, as well - where, if the returns had not actually begun to diminish, there was less and less reason for managers to help others to rise.

    There

    In March 1969,
¹
the sales company board fixed the override superstructure as follows:

    A gm got 0.25% override.

    Where there was one Super-GM, he got 0.25%.

    Where there were two Super-GMs, they each got 0.25%, making 0.5% in all.

    Where there were three Super-GMs, they got 0.5% divided by

    3, i.e. 1/6% each.

    Where there were four Super-GMs. they got 0.5% divided by

    4, i-e- 0.125%.

    This formalized the taking of an extra 0.5 % from the company and the giving of it to the top echelon of the sales force.

    It is quite easy to rationalize this decision to hand over part of the company's income to its highest paid executives. One of the recipients, for example, told us that he thought of it, not as something taken from the company, but as an investment made by the company in the future development of its own sales organization.

    
¹
The extra 0.5% was taken away from the Super-GMs after the crisis in May 1970.

    And of course, even if IOS had not lived in the legal never-never-land offshore, where there was none to say it nay, it would have been perfectly reasonable for IOS to take a decision to increase executive's compensation at the expense of corporate income. That happens all the time.

    But this case was a little different. It must be remembered that most of the Super-super-managers were members of the board of IOS Ltd, or at least of the sales company, where the decision originated. At the time it was taken, the sales company's board meetings were the real forum of decisions: the IOS Ltd board met swiftly, almost perfunctorily, after the sales company's board had thrashed things out for many hours.

    Some of the Super-GMs - Eli Wallitt, himself, for example -were active in management. Others were less active. All benefited from the extra share of commission.

    What they did, as a group, was to take a decision to pay to certain of the highest paid men in the company money that would otherwise have accrued to the company's profits and to the shareholders. There is no hint that this had happened in the IOS Ltd prospectus. And nothing could more graphically iUustrate the priorities inside the IOS sales management. For all the rhetoric about 'people's capitalism', when it came to the point, the inner circle came first.

    And so the German baUoon swelled and swelled, getting weaker in proportion to its expansion. When it popped, all that was left was the usual shrivelled remnant.

    The managers rushed off to join other funds. The Super-managers went their various ways. And the salesmen marched off in whole companies, like mercenaries following their condottiere when the pay runs out.

    A rump-company remains in Germany, called Orbis-Finanz. But IOS's true monument in Germany is in the Konigsallee in the financial district of Dusseldorf. It is called the Investors Club. It opened in December 1969, at the height of the IOS craze, as a sort of cafe-restaurant, of the kind which is a pleasant institution in Germany. But it offered a most unusual double service to the burgers of Dusseldorf.

    They could order oxtail soup, of course, or steak, or any one of a tempting selection of torte. They could sip Rhine wines such as ig6yer Oppenheimer Krotenbrunner spatlese natur, or give themselves Dutch courage with an 'Investors Drink' cocktail. But at the same time, without stirring from their leather upholstered easy chairs, they could check on electric display panels price movements in 1,600 German, American, British, French, Dutch and Japanese stocks. Each table is equipped with an electronic Stockmaster, such as brokers' offices have, which flashes up the latest price of any particular stock. And a 'Stockmaster hostess' is on hand to punch up the code of ibm or Royal Dutch for you between the pear and cheese.

    But the greatest wonder of the Investors Club is neither gastronomic nor electronic. It lies in the fact that it belongs to the Deutsche Bank, the largest of the three great banks which have dominated financial fife in Germany since World War II.

    Before the advent of Bernie Cornfeld, Eli Wallitt and Ossi Neduloha, one would no more have expected the sober and reticent men who direct the Deutsche Bank to serve cake and cocktails to their customers than to run through the streets handing out one hundred mark notes at street corners.

    The German banks in general were wary of IOS from the start. And IOS men, up to and including Cornfeld himself, were never slow to attribute the banks' attitude to mere competitive jealousy.

    In April 1970 Cornfeld gave an interview to the Sunday paper Welt am Sonntag in which he flatly accused the German banks of having helped to bring on the IOS crisis by selling IOS shares, and even selling them short. Other IOS spokesman repeated the accusation.

    The banks' answer was indignant denial. They were able to show that they could not in fact have done what Cornfeld accused them of. 'The insinuation is so absurd as to be self-condemnatory,' sniffed the Commerzbank. The Deutsche Bank was even shorter. 'Abwegig!' said an official spokesman ('Incorrect!').

    It is probably not even true that the banks lost much business to IOS. Very few clients of the Deutsche Bank, for example, liquidated their holdings with the bank in order to invest in IOS.

    But one senior Deutsche Bank official admitted that in 1968 and 1969 he and his colleagues got thoroughly irritated by the number of customers who complained that the bank was not doing as much for them as IOS would do. The aggressive methods of IOS shook German banking to the roots. Even Establishment bankers are prepared to agree that this may have been to the good.

    That is why the Investors Club, owned by the Deutsche Bank, is a monument to IOS. It may be a long time before the small savers of Germany recover their confidence in the magic of the stock market. It will be longer still before the German banks forget their small clients.

    At its zenith, the IOS operation in Germany seemed to have taken as its motto the noble sentence from Schiller's Ode to Joy: 'Seid umschlungen, millionen!'('We embrace you, oh ye millions!') But there were those, even within IOS, who were never taken in. They included the president of the Company. 'Have you ever heard my personal formulation for the German operation?' Ed Cowett asked us. ‘I always used to say that it was built on

Nowhere in the world was the double strategy which IOS adopted to cope with the crisis of 1966-67 apparently more triumphantly successful than in Italy. That strategy was based on two principles: national funds, and respectability. The setting-up of national funds - where governments would allow them - enabled IOS to counter the main objection to its sales operations. They made it possible to argue that some, at least, of the clients' money would not be lost to the national economy. And as a prerequisite and a protection for the national funds, IOS, under James Roosevelt's leadership, pulled out all the stops to build up the best possible relations with governments, central banks, the press and anyone else who might be able to lend a spot of elbow grease to the mahogany and leather patina of solidity that IOS needed to acquire. Both parts of the strategy succeeded brilliantly in Italy.

    The IOS national fund in Italy-called Fonditalia - was incorporated in Luxembourg on September 26,1967. IOS began selling it early the next year. By January 27, 1970, two years later, James Roosevelt, in his capacity as president of Fonditalia, was able to give the investors a glowing report in his second year-end letter. Fonditalia was associated with blue chip banks: the Istituto Bancario San Paolo of Turin, as its depository for

    cash in Italy, and the Banque Rothschild as custodian and  banker. It now had 30,000 investors, and no less than $183.5 million under management. The net asset value of their fund, over a period of time in which the Dow Jones industrial average in New York had virtually stood still, had gone up by no less than 21.5%.

    To succeed in business in Italy, more even than anywhere else, you must fare bella figura: put on an impressive front, IOS's front in Italy was not merely impressive, it was refulgent. Physically, Fideuram, the Fonditalia sales company, inhabited some of the most expensive looking offices in Rome: marble floored and air-conditioned, they had been modernized out of the Renaissance splendour of the Palazzo Orsini. The Palazzo had been carved in the sixteenth century from the towering ruins of the Theatre of Marcellus, built by Julius Caesar himself in the very heart of the city, between the Capitol and the River Tiber.

    Fideuram moved into the Palazzo Orsini because its legal adviser and subsequent president had his law offices there. This was Awocato Pasquale Chiomenti, who is not only one of the most successful and respected lawyers in Italy, but also a man who is plugged in to the sources of power in the country at half a dozen points. He is, for example, connected through some of his numerous directorships with both Fiat and IRI, the two Great Powers of Italian economic life
¹
. And it was undoubtedly to please his lifelong friend Chiomenti that Professor Guido Carli, Governor of the Bank of Italy, turned up to wish Fonditalia well at a widely publicized reception at the Hotel Excelsior in October 1968.

    But IOS was to receive a mark of signal favour from an even higher power. On December 10, 1969 Bernie Cornfeld was received in audience for 35 minutes by the Pope. This crowning accolade for IOS's new respectability was granted in recognition of the IOS Foundation's role in running Pacem in Terris.

    The meeting, in any event, was greatly enlivened by the

    

    
¹
iri (IstitutoperlaRicostituzionelndustriale) is the major State-owned holding company which controls a large share of the Italian economy. It holds controlling interests in banks, shipping lines, shipyards, telecommunications companies, and, for example, Alfa Romeo. Fiat is by far the next biggest private industrial corporation in Italy, and is in many branches of the engineering industry besides automobiles, of which it is the biggest producer in Europe.

    

    

    presence of Bernie's mother, Mrs Sophie Cornfeld. It had not been Bernie's idea that she should come: but she insisted.

    It soon became plain why she had been so keen to come. In a very forthright way she tackled the Pope about relations between the Church and Israel. The Pope assured her that he was very sympathetic to Israel, but Mrs Cornfeld pressed him, asking whether he saw any hope of improving relations between the Vatican and Tel Aviv. Again, the Holy Father politely insisted that relations were excellent.

    Both Bernie and Mrs Cornfeld were delighted to find that the Pope was not 'austere and cold', as they had expected, but on the contrary 'a warm, charming and very human person,' as Bernie later put it. As they left, it seems the Holy Father turned to Mrs Cornfeld and said: 'Shalom, Shalom.'

    While Bernie Cornfeld, James Roosevelt and Pasquale Chiomenti all did their bit to get Fonditalia under way and to make IOS known in the right places in Italy, the success of the Italian sales operation was almost wholly due to someone else: to Harvey Felberbaum.

    In 1967, according to the IOS prospectus, Italy accounted for only 1% of sales. In 1968, according to the same source, that proportion had reached 10%. By June 1970, according to Edward Cowett, Italy accounted for not more than 6% of the skyrocketing expenses of the sales operation, and only 7% of the salesmen: but it was providing no less than 45% of the cash flow.

    Felberbaum's achievement was recognized on June 8, 1970 when he was named vice-president of the IOS parent company for sales and marketing: successor, in effect, to Allen Cantor, and supreme boss of the worldwide sales operation. Felberbaum received the ultimate seal of respectability when, in October 1970, 51 % of Fonditalia and of the IOS sales company in Italy, Fideuram, were sold for close to $10 million to the Istituto Mobiliare Italiano (imi), a government medium and long term credit institution. Harvey Felberbaum, in fact, emerged from the disasters of spring 1970 as the champion survivor among the paladins of the sales force. Italy, we were told again and again in Geneva, was the one galleon in Corn-feld's armada which could be counted on to ride out the storm because 'Harvey Felberbaum runs a tight ship'. In June 1970, he gave an interview to the IOS Bulletin, the theme of which was that he had built his operation round the word 'control'.

    Harvey Felberbaum ran a tight ship, all right: but not quite in the sense that he was generally supposed to. The real nature of the operation Felberbaum was running was very different from its Renaissance facade.

    Felberbaum himself operated clandestinely to the extent of using a false name over a prolonged period: or rather he used the name of a real person for his own business activity without bothering to ask that person's permission.

    In 1966 Sanche de Gramont, who had been the Rome correspondent of the New York Herald-Tribune until it closed, decided to move to Tangier. He let his apartment in Rome to Felberbaum, who lived there until September 1968. In that month Mrs de Gramont went to Rome to put the apartment back in shape. She was somewhat surprised when she went to Felberbaum's office to be introduced by him to several of his colleagues with the words: 'Meet the real Mrs Sanche de Gramont.'

    Later Mr and Mrs de Gramont learned what this cryptic phrase meant. After Felberbaum moved out of the apartment, mail was forwarded to de Gramont in Tangier. It was addressed to 'Sanche de Gramont', but it was meant for Felberbaum: the fifteen or twenty