Do You Sincerely Want To Be Rich? (23 page)

    To Bernie and Ed, the sec men appeared merely as footling

    bureaucrats, interfering with the scope and grandeur of designs

    they could not even understand. In Cowett's streak of

    quiet intellectual arrogance added to this effect: it is manifestly important to Cowett to demonstrate that his business and legal intelligence cannot be surpassed. And in Cornfeld's case, there was his remarkable capacity for turning his emotions to serve his interests. To judge by his savage public attacks on the sec, and his even more bitter private remarks, Cornfeld managed to convince himself, as soon as the sec tried to thwart him, that they were not merely wrong, but wicked.

    Cornfeld was capable of making remarkable public misrepresentations of the sec attitudes. For instance, at the end of 1966 the Commission published its report,
Public Policy Implications of Investment Company Growth.
Cornfeld said publicly that the report was 'extraordinary' and 'dangerous' and he suggested privately that people went to work for the sec because they couldn't get decent jobs anywhere else.

    But both Cowett and Cornfeld realized at some level that it was absurdly dangerous to let their differences with the sec turn into a feud. As Cornfeld remarked: 'They may be schmucks but they are the government'. In the event, their more rational impulses were swept aside. Shortly after the sec filed its charges against IOS in February 1966, and while the formal legal proceedings were grinding through the Puerto Rican courts, IOS and sec staff started negotiations to see if an agreed settlement might be possible. It was during these negotiations that the proceedings descended into something very near to personal abuse, and a bitter all-day hearing that culminated with a sharp exchange between Ed Cowett and Manny Cohen. After that, Cowett took no further direct part, and the other IOS lawyers were left to gradually sort things out.

    Despite his remarks about the quality of people who work for the government, Cornfeld hired three former sec staffers. There was Allan Conwill, who had been sec General Counsel, and then Director of the Division of Corporate Regulation until 1964 when he became a partner in the New York law firm of Willkie, Farr, Gallagher, Walton and Fitzgibbon. Conwill became IOS’s main attorney, and a director of the Fund of Funds, whose prospectus the sec had found so profoundly wanting. Then there was Milton D. Cohen, who had been on the sec staff many years before, and returned to work on the Commission's Special Study of Securities Markets. And IOS’s associate general counsel was David Silver, hired from the sec in the summer of 1965.

    Silver objected to the way in which Cowett was handling the case, and resigned from IOS in the summer of 1965. The principal credit for smoothing things out in the end, and getting a settlement, should probably go to Robert Haft. But it took a long time.

    The Offer of Settlement submitted by the IOS lawyers was finally accepted by the sec on May 23, 1967. The terms were on the face of it humiliating. In exchange for the sec's agreement not to proceed with its charges and to allow IOS to withdraw its broker/dealer registrations, IOS agreed to wind up or sell off all its us operations, (that meant reselling ipc and a life insurance company recently acquired, and liquidating the proprietary funds), to stop selling to us citizens whether in the us or abroad and to offer those who had bought charge-free redemptions. In addition the Fund of Funds was not to buy or hold more than 3% of any us mutual fund, while none of the funds were to take a controlling interest in any us company.

    In 1967, IOS was being swept out of country after country round the world. To be turned out of America was almost the final blow. That IOS was quickly to turn the rejection to advantage and even to use it as a springboard from which to bound to new heights did not mean that Cornfeld could forgive the sec. Yet his later outbursts should be considered against the fact that a number of the sec staff men once ranged against him subsequently chose to join the mutual fund business.

    Looking back today, some people at the sec feel privately that they should have made the settlement harsher, or perhaps not have settled at all. They particularly dislike any suggestion that they looked after us investors, but did not bother about other investors.

    But even in 1967, it was easy to underestimate the sheer persistence and flexibility of the offshore monster that Cornfeld and Cowett had created. If the sec thought that it had heard the last of IOS when the settlement was made, that was a mistake. As the speculative fever of the later Sixties intensified, the Commission's staff found themselves tangling, or at least shadow boxing, with the old opponent on several occasions.

    The man who enjoys the reputation for being the most dedicated pursuer of IOS at the sec, Allan Mostoff, was still there in early 1971, as associate director of the Division of Corporate Regulation. (He had once to give a talk to a professional audience immediately after Cornfeld: 'Mr Cornfeld is a hard man to follow,' he started, 'I've been following him for years.') Mostoff is terse when questioned on IOS: he was recently asked to comment before a committee of the House of Representatives on Cornfeld's statement, in that same speech to the
Institutional Investor's
conference, that the sec was mainly responsible for the unhealthy state of the American securities market. He answered: 'It is impossible to comment on such a statement because it is obviously without basis.'

    

    

    

    
In which
IOS
nearly gets thrown out of Switzerland, the vital base. There is some sparring with the Swiss Bankers Association. Bernie makes a tactical, but precipitate, withdrawal.

    On February 28, 1967, a deputy called Raymond Deonna tabled in the Swiss parliament what is technically known there as a
'petite question'.

    Less than four months before, IOS had been expelled from its biggest single market, Brazil. Less than four months later, it was to be expelled from the United States. But Deonna's little question was the one publicly visible point in a subterranean disturbance which came close to getting IOS expelled from the one country it could not afford to be thrown out of: Switzerland, the home base.

    Taken together, the crises of 1966-67 almost shook IOS down. But they also led directly to what was perhaps Bernie Cornfeld's most virtuoso achievement. He grasped the idea that if you couldn't beat the Establishment, then you must - not join it, but at least come to terms with it. And with every trick of the arts of lobbying and public relations, he succeeded in making his essentially piratical operation look like a passable simulacrum of a sober international financial corporation.

    'Investors Overseas Services' - Deonna's question began -'is making itself much talked about these days.

    'This organization… is resident in Panama, but in all its

    propaganda… only the name of Geneva is mentioned… It

    would seem that in this respect there is an abuse of the name

    of Geneva and of Switzerland.

    'Moreover, by its aggressive policy of soliciting individuals, door-to-door, especially small savers, the company would seem to be in breach of the rules laid down on June 6, 1931, to implement the law of 1930 on commercial travellers. In addition, it seems to be in breach of the regulations governing foreign workers insofar as it has registered some of its agents as students at the university.

    'It is known that the company
Privee, it had entered into a rather unusual arrangement with IOS. It
'lent'
to IOS an inactive subsidiary company called Athold sa, which was then used as the IOS sales company in Switzerland. What had happened was that an IOS salesman called Alvin 'Bud' Schleiffer had persuaded the Banque Privee to let him use it as a cover for his own selling in Switzerland. Schleiffer was so successful that the IOS sales organization pressed him to set up a whole sales group in Switzerland. The Banque Privee didn't at all like the idea of a whole school of Schleiffers using its name, and that was why it lent Schleiffer Athold.

    In 1966, Athold was sold to IOS. The Banque Privee people had discovered, to their horror, that Schleiffer's men were now taking the name of Rothschild in vain to sell their funds.

    On October 21, 1966, IOS, Athold, and the Banque Privet each received a copy of a letter from the all-powerful Swiss Bankers Association, which is not an official body, but the gnomes' union, so to speak.

    The letter was drafted in an exquisitely feline French. Door-to-door selling of investment programmes, it pointed out, was 'not customary' in Switzerland. It might lead unsophisticated clients to have an inaccurate idea of the risks they were taking. Indeed, the bankers murmured apologetically, one might even ask oneself whether it wasn't contrary to the Federal law on commercial travellers of October 4, 1930… 'Wishing above all to avoid any incident or controversy which might lead to an official intervention which would hardly be desirable,' the Association suggested that IOS might wish to reconsider its policy. This elegant missive was recognized at IOS for what it was: a warning shot across the bows. Allen Cantor was despatched to Basel about a month later, taking with him the lawyer, Robert Turr6tini. A compromise was worked out. IOS agreed to phase out direct selling in Switzerland gradually. The bankers, for their part, offered to look favourably on the creation of a new company which would sell exclusively through the banks, who would offer IOS funds to their clients just as they offered any other investments. (Banks in Switzerland, as in Germany, Italy and most other European countries, fulfil the function of stockbrokers for their clients.)

    Once again, IOS proceeded to try to twist the situation to its advantage. Just as they had used the Credit Suisse's name in their publicity, although the Credit Suisse was no more than a depository; and just as the most tenuous connection with the Rothschild name had been instantly exploited; so now even the trouble with the Swiss Bankers Association was made to sound like an endorsement.

    On June 23, the Association had to send round to its members a circular letter putting the record straight:

    'IOS representatives are interpreting the contacts their company has had with the Association to mean that we are backing their commercial activities and would recommend to banks to act as intermediaries for the sale of IOS programmes and certificates.

    'This is absolutely not the case.'

    The Association added that it had approached IOS and invited it not to refer to the Association either in its publicity or in its contracts with banks and clients.

    On August 1, the Swiss government's Federal Banking Commission, wrote to odb saying that analysis of its balance sheet showed that its assets and liabilities were so closely related to IOS and its subsidiaries that the Commission doubted whether odb could be regarded as a bank in the strict sense.

    What worried the Commission, of course, was that virtually the whole of odb's business was with either IOS, its subsidiaries, its officers, or its clients, so that odb was not so much a true bank as a financial service subsidiary of IOS.

    What worried Bernie Cornfeld and the sales executives was the prospect that they might be forbidden to talk about their 'Swiss bank'. For in many 'hot money' markets, one of the chief appeals of IOS to the clients was the idea that their money would be going into a Swiss bank.

    Cornfeld's reaction was characteristic. He appointed to the board of odb a blue-blooded young Swiss lawyer, one of whose relations happened to be president of the Swiss Bankers Association. A professor from a Swiss university was also retained to argue the case with the Commission. The next balance sheet was passed as satisfactorily diversified. And so odb was allowed to go on calling itself a Swiss bank.