Do You Sincerely Want To Be Rich? (41 page)

were Burt Kleiner and his fellow principals in Kleiner, Bell & Co, Commonwealth's own brokers. What was more, although nearly three million had been taken as profits, Kleiner and his friends had only paid over $541,000 cash - the rest was in promissory notes. (The brokers' reason for buying the land, apparently, was that it would help with their 'personal tax planning'.)

    The news that a large chunk of Commonwealth's profits had been jacked up in this fashion cast no little doubt upon the whole concern. 'Thanks to the L A Times, everybody ran for the windows,' Rozet is reported to have said ruefully.

    The Los Angeles mutual fund and the Chicago bank backed out, taking their $20 million with them. Dart Industries called off the whole Rexall deal - while hanging on to $4 million of the original deposit. Commonwealth's quoted price halved before the American Stock Exchange suspended trading on July 22. It then halved again in over-the-counter deals, falling to $4 before the sec barred all trading. One good thing happened: the Fund of Fund's $10 million was returned, with the collapse of the Rexall deal (Commonwealth forfeiting the $250,000 commitment fee to odb Bahamas).

    Rozet held a series of frantic meetings in July. He flew from Los Angeles to Washington to see the sec, then on to a board meeting in New York, then straight on to meet Cornfeld and Cowett in Geneva. All sorts of rescue plans were discussed: Rozet reckoned he needed another $12 million for Commonwealth, but offered to resign. The incipient collapse of Rozet's conglomerate must have been a serious embarrassment for Cornfeld and Cowett, who were now proposing to float off IOS's own shares.
¹
They could not afford an obvious disaster in their investment banking division, and to hold Commonwealth together, they produced $4.5 million immediately. Again, it was a loan from the customer's money, in this case from the new IOS fund, Investment Properties International, which was still flush with cash from its launch. It was also agreed that the faithful Howard Stamer should be put in charge, with other IOS nominees. The ipi loan was made on July 31 and Howard Stamer took up his duties on August 1.

    But the ipi loan was not enough, and the IOS banks themselves had to advance another $3.5 million even before the IOS prospectus was finalized. By October 27, 1969, Commonwealth's debts to IOS companies - excluding the funds - ran to some $9.5 million, at which point IOS tried unsuccessfully to back out. Yet more management changes were introduced as Commonwealth lurched into 1970, arguing with the sec over the rewards that IOS and its friends wanted for the help they had given Commonwealth, IOS had originally negotiated for options on 300,000 Commonwealth shares at $2 each, which meant that if Commonwealth could only stay at $4 when trading resumed, IOS had a clear $600,000 profit. Complaints from the sec got this reduced to options on 200,000 shares, or alternatively, a payment of $100,000. Howard Stamer and Robert Haft were originally to have got options on 75,000 shares each at $2 per share. This was moderated to 50,000 each at $6.

    Stamer was paid at the annual rate of $65,000 for his stint in charge of the company from August 1 to October 27, and the fee to Stamer and Haft's law firm was $150,000.

    The IOS fund customers were not so lucky: the funds still held $19 million face value of the $40 million of convertible paper that had been floated off in early 1969. A little over a year later, as Commonwealth slumped back to the humdrum business of trading real estate, backing movies and making juke-boxes, the

    
¹
The IOS flotation is described fully in Chapter 17 A Very Long Way Offshore.

    

    whole value of the investment was written down to zero in the books of the IOS funds.

    Far from being abashed at this grotesque fiasco, Ed Cowett spent a good deal of time in 1969 devising yet more daring ways to employ the leverage of the customers' money. The half-yearly report of the Fund of Funds on June 30, 1969, recorded without a word of explanation, that in May FOF Proprietary had advanced $50,468,750 to 'the Kensington Organization nv' in exchange for a convertible note.

    The Kensington Organization nv was the Curacao offshoot of a New York company put together by some former partners in the brokers Burnham & Co. It was intended to buy working control of other companies, reorganize them and then sell them off, at a profit. It was supposed to be a 'kind of conglomerate in reverse' which would scour the whole world for companies whose quoted share price was below the true value of their assets, and naturally Cowett could not resist an idea like that. The men behind the Kensington Organization were not too happy about being tied up with IOS, but they needed the money, so while the Fund of Funds lent $50 million, it was arranged that the Investors Overseas Bank should hold some 900,000 shares of Kensington common stock at only 54 cents per share.

    The whole scheme was built, of course, around the power of the customers' money, but it was engineered so that most of the advantages would accrue to IOS. First, IOS got its shares at 54 cents each: although the Fund of Funds' loan was convertible into stock, the conversion could not be made at less than $12 per share. And then the capital of Kensington Organization was so designed that the cheaper shares would have special growth potential not available to the more expensive shares. Fortunately, the Kensington Organization failed to raise another $50 million dollars which it needed, and so the whole deal had to be unwound.

    It was, however, characteristic Cowett. Where Cowett, in the great years of IOS's power, went in for grand mechanisms of the Kensington sort, Cornfeld often preferred a miniaturist's effect - such as he displayed in the deals spun round a little company called eon Corporation.

    eon had been formed by a dedicated medical researcher, Dr

    Nicholas Anton. Using the principle of the Geiger counter, Anton had devised a sophisticated machine for detecting cancer, using isotopes to measure the growth of the tumour. Anton's company ran into difficulties, and he received some fresh backing from a family called Srybnik. One of the Srybniks in turn became acquainted with the dress designer Oleg Cassini, and then with Cornfeld himself.

    Early in 1969, Cassini was planning to launch his business in a much bigger way on the US fashion market, and he needed a financial vehicle. It was decided that he should use the eon Corporation: in early 1969, people thought it perfectly logical to merge a medical equipment firm with a fashion house.

    In February 1969, Cassini sold 25% of his US business to eon, in exchange for eon shares. In June, IOS's new Venture Fund (International) invested $990,000 in eon through a private placement: Venture received 600,000 unregistered common shares at 40 cents each, and a note for $750,000, which was convertible into common shares at about $3. The market price of eon at the time was around $6.

    Another investor was planning to put some money into eon at this moment - none other than Bernard Cornfeld himself. Cornfeld told us that Howard Stamer had received some eon shares at 40 cents apiece, as a 'finder's fee' for introducing the Venture Fund to eon. Stamer offered some of these to Cornfeld, who was going to buy them for his own private foundation. For some reason or other, the transfer of shares never seems to have taken place, but Cornfeld's interest in eon was fired. He conceived a great plan for the cancer machines to be sold by the IOS sales force, on 30% commissions. Anton was summoned to Geneva, where a company was set up to handle the sales side. There was a ready pool of salesmen available: IOS had just been tossed out of Greece accused of illegal sales operations. Plans flourished further: clinics were to be constructed in which the eon machines would be installed. But then the plans were killed by the master salesmen, who did not think that the associates would like to sell cancer machines, even for 30%. eon's price wavered towards the end of 1969: by September 1970 the whole of the Venture

surpass Arthur Lipper Ill's idea of towing a section of the New York Stock Exchange itself away to the offshore world.

    Mr Lipper thought that if the NYSE stuck to its rules about commissions, the solution might be to arrange for New York-quoted securities to be traded in Beirut, on a new exchange organized for the purpose.

    This thought was put forward towards the end of 1968, when a potent magic was already beginning to attach to the word 'offshore'. But in terms of events, it was 1969 which was the miraculous year of offshoreness. It was the year when, at long last, Bernie and the boys 'cashed in': at the end of 1969 IOS Ltd, nine years after its formation in Panama City, sold off a section of its own shares, as distinct from the shares of the funds it managed. When that happened, as Cornfeld said proudly, one hundred members of the company became millionaires - not in terms of the theoretical 'formula value' of IOS, but in terms at last, of stock exchange prices.

    It was also in 1969 that Keith Barish and Rafael Navarro

    went successfully to the international stock markets with the

    concept of 'liquid real estate' which made their Gramco

    Management company, for a while, the hottest offshore operation of all. During the summer of 1969, for the first and last time, the volume of cash collected by Investors Overseas Services exceeded for one month the volume collected by the entire US domestic mutual fund business.

    Small offshore funds proliferated, and novel financial principles were advanced. Mr Allen J. Lefferdink, for example, said that none of his funds would be examined by outside auditors -'because the appeal of offshore funds is confidentiality'.

    The flavour of the international financial atmosphere in that year is best conveyed by some account of the offshore career of Jerome D. Hoffman, a veteran of the sleazier end of the New York mortgage trade. Hoffman set out, quite frankly, to emulate the success of Investors Overseas Services. And he was IOS's ultimate offshore competitor - the man who carried the offshore technique past the point of reductio ad absurdam.

    On May 16, 1969, Reginald Maudling, deputy leader of the Conservative Party and one of Her Majesty's Privy Councillors, launched in London a new offshore fund to be called the Real Estate Fund of America, or refa. Mr Maudling announced that he was President of the new fund, which would collect money from international investors and put it into real estate in America. The fund would be administered by its executive vice-president, Jerome D. Hoffman. Mr Hoffman said that refa would also enjoy the services of a number of former officials of the US Treasury and State Department, and of M Paul-Henri Spaak, ex-Premier of Belgium. Hoffman described Maudling as 'one of the outstanding financial minds of the world', and it was true that Maudling's Cabinet appointments included spells as Chancellor of the Exchequer and President of the Board of Trade. (On the Tory return to office in 1970 he became Home Secretary.)

    When Mr Maudling said that the Real Estate Fund of America was a 'good and sound investment' it was a view that carried weight.

    A rather different impression of Hoffman-style investment emerged some eighteen months after the launch of refa, and about twelve months after Maudling resigned from it due to the pressure of his political activities. Hoffman decamped abruptly from his London base in November 1970, and arrived in Rome, pursued by ugly questions from the world's press concerning the fate of refa, now supposed to be worth $100 million. In Rome, Mr Hoffman held a hasty conference with some remaining executives, and demolished the last of his carefully cultivated air of financial statesmanship. If things got any worse, said Hoffman, he was 'going to take the money and run'. 'You guys,' he added, 'can look after yourselves.' The Real Estate Fund of America, and Hoffman's International Investment Group, which was supposed to administer it, consisted by then of little more than a couple of baffled telephonists and a series of heavily mortgaged properties in the US.

    Jerome Hoffman is a little man aged about 38, with a restless manner and a high-pitched laugh. This laugh used to punctuate the vague but expansive answers he gave when questioned about his financial activities. 'Don't worry about me,' he would shout