Do You Sincerely Want To Be Rich? (40 page)

issues managed by others were bad enough. But the ones that IOS found for themselves were something else again.

    In December 1968 Morton A. Sterling, brother of Barry Sterling of 10s, bought 5,000 shares in a conglomerate called Unexcelled Inc. They were bought for cash at $34 each. Half of the holding passed to the estate of his wife Marion, who died in January 1969: the shares were then held by Morton Sterling, Barry Sterling and Burt Kleiner, who were trustees under Marion Sterling's will. (Bruce Rozet, chairman of another conglomerate, Commonwealth United Corporation, also bought a block of 5,000 Unexcelled shares at the same time.)

    On February 7, 1969, Unexcelled formed a subsidiary,

    Unexcelled International nv in Curacao, and on March 5 it

    entered into an agreement with the Investors Bank of Luxem
bourg. Barry Sterling, as president of IOS Financial Holdings, was in charge of the Investors Bank, having prepared for an investment banking career by working as an attorney in Los Angeles, and being treasurer of the Democratic Party of California under Governor Pat Brown. The Investors Bank agreed to manage the private sale of $10 million worth of guaranteed debentures of Unexcelled International nv, carrying an interest rate of 7%. The Fund of Funds bought $3,037,000 of the $10 million, placed in two transactions, one on May 13 and the other on June 18, 1969.

    Even before these bond placements, the IOS funds showed enthusiasm for considerable blocks of Unexcelled shares: it was the kind of outfit IOS liked. The Company had once been related to Mary Carter Paint, before Mary Carter transformed itself into Resorts International. In 1968, Unexcelled also experienced transformation. It came under new management, and it was intended to combine three principal interests: the operation of discount stores, the sale and leasing of machinery for meat processing and packing, and the conversion and operation of aircraft for outsize air cargoes. 'The story on Unexcelled' said an ex-IOS fund manager, 'was that it was going to be Burt Kleiner's own conglomerate, and Burt was going to really show what he could do.'

    It was the aircraft division which caused the most Unexcelled problems. The aircraft, bulging converted Stratocruisers, were called Guppies: there was a Pregnant Guppy, a Super Guppy, and even a Mini Guppy. The Guppies had been working for the National Aeronautics and Space Administration, carting pieces of rocketry about since 1963. But after several promising years, cutbacks in the space budget sharply reduced the traffic in this rather specialized cargo. In January 1970, Unexcelled reappraised the economics of its air cargo business, and decided to write off $13 million in aircraft costs, thus reporting a heavy loss for 1969.

    Then in May the Mini Guppy crashed while being tested, and was totally wrecked. Although the plane was insured, there was by this time little left of the Kleiner charisma. In September the debentures of Unexcelled International nv became virtually worthless, when the company ceased meeting interest payments on them. That was a specimen of IOS's private placement technique.

    The three concerns for which IOS handled public Eurodollar issues were: King Resources Corporation, which was done with the help of John King's brokers, Dempsey Tegeler, (another broking firm which succumbed in the cold winds of 1970) Bruce Rozet's Commonwealth United Corporation, done with the help of Guinness Mahon, of London, and Banque Rothschild of Paris; and Giffen Industries, which was handled by the same team.

    The issue IOS did for King was quite small, and it was only part of the complex set of links between the empires of Bernard Cornfeld and John King.
¹
But its special quality was that it made nonsense of IOS's stated position on investment banking, which was that decisions to underwrite came after the fund managers had decided that particular companies looked like good investments. 'The participation of Investors Bank in under-writings,' said IOS 'is frequently preceded by a determination of the Company's Investment Management Division that particular securities… are desired for… Company managed fund.'
²

    Investors Bank and Dempsey Tegeler underwrote the issue of $15 million in bonds for King Resources, IIT acquired a block of these bonds with a face value of $8 million - but the fund paid a premium price, $9,724,000, for them. It was bad enough that the fund customers' money should be spent on securities that IOS was floating to its own profit: but at least IOS might have put the funds in at the issuing price. If, in this case, there was any prior decision by the IIT management that King Resources was a good investment, it must have been accompanied by another decision to hold off while the price of the bonds went up, enabling someone else to make a profit of $1.7 million, the difference between the issue and premium prices. (Not that it was a good investment: two years later, it was hard to sell those King bonds for even a tenth of their face value.)

    Giffen Industries, a Miami based conglomerate, raised $20 million through the Investors Bank in February 1969, a quarter of the issue being taken up by the Fund of Funds. Giffen had

    
¹
See Chapter 19 John M. King: The Power of Natural Gas. * In the prospectus of IOS Ltd itself, dealt with at length in Chapter 18 A Very Long Way Offshore.

    

    been backed by Allen & Co in early 1968, after which it embarked upon a series of purchases that made it a prize example of diversification, or if you like of 'synergy' (which Fortune magazine once unkindly called 'the two-plus-two-equals-five effect'). Giffen was in carpets, carpet installation materials, resilient floor coverings, plastic laminates, metal mouldings, aluminium extrusions, soft-sided luggage, electronic and electrical components, precision gears, carpet seaming tape, sink rims, boats, snowmobiles, casual lawn furniture and gypsum roofs and roof decks. Its synergy evaporated when the books of a floor-covering firm it had agreed to buy turned out to be not quite what they seemed, whereupon the Giffen common stock, which had reached $68 in 1968, fell to about $8. By the end of 1970, the bonds that IOS floated for Giffen were worth about a fifth of their face value.

    But at least the King and Giffen bonds retained some value. That was not the case with IOS's biggest investment banking deal, Commonwealth United.

    In the same summer when Ling and Bluhdorn were looking for money in Europe, A. Bruce Rozet, a small, roundish, cheerful man, was staying in the South of France. From there, he arranged to meet Barry Sterling - who ran the IOS banks from Paris - so that they could discuss Commonwealth United's plans to set up a European film business in London. The meeting was prevented by the Paris student riots of 1968, but they met a little later in Geneva.

    The Sterling family were part of the early history of Commonwealth United. Before his days as a Los Angeles attorney with Hindin, Sterling, McKittrick and Powsner, Barry Sterhng had been general counsel of an oil firm called Sunset International Petroleum, in which other members of his family were large investors. In 1966, Sunset was merged with a finance company called Atlas Credit, and the incipient conglomerate which resulted was named Sunasco. It was extremely unsuccessful, and rapidly built up huge debts, so the companies had to be disentangled again. 'In hard terms,' said a former executive, 'Sunset had a negative value of $25 million. It was a question of putting together something worth zero.'

    The solution was to sell off Sunset International Petroleum, less a part of its real estate assets, which were retained by Sunasco. Sunasco was then sold to Commonwealth United, which was itself the result of a merger between a film company and an insurance agency, and which had the important advantage of a quotation for its common stock on the American Stock Exchange. The deal left

turnover at the time that Commonwealth United took it over was close on $100 million a year - more than double Commonwealth's. Coleman and Nicastro sold their Seeburg shares to Commonwealth for $12 million cash, plus warrants entitling them to purchase Commonwealth shares. Kleiner got a finder's fee of $400,000 plus some warrants, for making the introduction. Commonwealth shares were thought to be a coming investment by many people, including IOS and its investment advisers: by June 1968 IIT had invested $1.3 million in Commonwealth shares, and by the end of 1968 the Fund of Funds held an $8 million position in Commonwealth, which was Fred Alger's second biggest investment after Resorts International. On the FOF side, of course, Alger knew Delbert Coleman (and indeed held Seeburg shares in his funds). Since early 1968, IIT had also been well informed about the great promise of Commonwealth, because a New York broker who was a friend of Henry Buhl's joined the Commonwealth board.

    Rozet's trip to Europe in 1968 led to an agreement that IOS would raise $30 million for Commonwealth United through a Eurobond issue in January 1969. The Investors Bank shared $750,000 of fees and discounts on this issue with Banque Rothschild and Guinness Mahon - but even before the securities were floated, Commonwealth was running into trouble. In December 1968, shortly after Commonwealth had acquired Seeburg, one of Seeburg's main banks said that in view of the merger it would not renew the line of credit it was extending to Seeburg. So, whatever plans had originally been made for the Eurobond money, $19.5 million had to go to pay off the Seeburg bank.

    This setback did not inhibit Rozet from launching a series of ambitious bids to maintain Commonwealth's momentum. Towards the end of January, Commonwealth came out in the open with its bid for Warner Brothers, which it was proposed to acquire by an exchange of shares. Also in January, Commonwealth spent $3 million on the securities of the large construction firm George A. Fuller Corporation. This deal was a classic example of leverage: while the partners of Kleiner, Bell bought 80% of Fuller's common stock for 1.75 million, Commonwealth bought fixed-interest stock - the whole of Fuller's 5|% cumulative preferred shares.
¹
Then in late February, Rozet signed a

    

    
¹
An irony of this deal was that at the time, the most absurd of all the offshore fundsmen, Jerome D. Hoffman (whose career is described in Chapter 17 A Very Long Way Offshore), was trying to persuade Fuller to cooperate with him in running a new fund. Through the Commonwealth deal, IOS almost picked up Hoffman for free.

    

    deal with a big industrial group, Dart Industries by which Commonwealth agreed to buy the Rexall Drug Company, a Dart subsidiary, for $50 or $60 million. The deal was to be closed on June 30, but Commonwealth paid a $5 million deposit immediately.

    The Warner offer was futile, for a lot of companies were in the hunt. Commonwealth withdrew on March 17, when the Warner board gave their support to a rival offer. Rozet was not long discouraged: next day he bought 86,000 shares of Perfect Film and Chemical, whose main business was film processing, but which was branching out into all sorts of other things. Commonwealth paid nearly double the market price for the shares, which cost $7 million and were only a 6% holding. But on the strength of it, Rozet was elected to the Perfect board, where he proposed a full merger of Commonwealth and Perfect.

    Now, it was clear that the $30 million raised in January would not be enough, so in March back went Rozet to Geneva for more, IOS, with the ever obliging help of Banque Rothschild and Guinness Mahon, produced another $10 million for him -this time a short term loan, repayable at the end of the year. As a further fee, IOS picked up 112,500 Commonwealth warrants, then worth about $8 each.

    By May 1969, Rozet could see the crunch coming. The terms of the Rexall deal had been modified and the closing date put off to August 8, but he still needed another $10 million for deposits on June 30, with another $15 million due on July 15. He now did a deal with the Gulf and Western subsidiary, Paramount, under which, in exchange for yet more Commonwealth paper (people still believed in it) he got the rights to the Julie Andrews musical Darling Lili, plus $12 million cash. Kleiner, Bell picked up another $500,000 fee for arranging this deal. (Altogether, during 1968 and 1969 Commonwealth agreed to pay Kleiner, Bell $2,153,500 in underwriting discount, commissions, brokerage and fees. Kleiner, Bell was also to get $150,000 a year as financial consultants for four years from January 1, 1969.)

    The intention in the Darling Lili deal was to use the money to make the Rexall deposits, but $5 million had to go to repay bank loans, and the rest melted away in other directions. Naturally, Rozet turned back to the apparently bottomless bucket in Geneva, and now, when Commonwealth was unable to find cash anywhere else, IOS offered to dip into the customers' money again.

    This was perhaps the most extortionate single deal that IOS ever proposed - a jewel, in its way. It was agreed that Commonwealth could have a loan of $10 million out of the Fund of Funds, the money to become available on June 30. In return, Commonwealth was to give a five-year note, convertible as usual into Commonwealth stock. In addition, the Fund of Funds was to receive 300,000 shares of Commonwealth for free, plus warrants which would enable the Fund to increase yet further its already heavy investment in the dubious future of Mr Rozet's concern. The interest on this loan was, considering the risks involved, modest: Commonwealth was to pay only the going Eurodollar rate of iof %. The FOF customers, therefore, were not to receive any great reward for acting, collectively and unconsciously, as bankers of last resort to the feverish conglomerate.

    The rewards were to go not to the FOF, but to IOS. Fees for arranging the loan were calculated at a staggering $1.35 million, nearly all of it payable to IOS banks. Put bluntly, the weakness of Commonwealth United was to be turned into yet another occasion for enriching IOS itself at the risk and expense of the fund investors. It was, of course, no concern of Rozet's if IOS chose to mistreat its customers - but from his viewpoint the money was desperately expensive, because he would only receive $8.65 million after paying IOS off. Although normally insouciant about the cost of his financing, Rozet reserved the right to withdraw from the loan in the event that he could find something cheaper. In that case, all he agreed to pay was a 'commitment fee' of §250,000, payable to odb, Bahamas.

    At this point, it looked as though Rozet would get away with his balancing act. In addition to his $10 million commitment from the Fund of Funds, he had got informal commitments from a Los Angeles mutual fund, and from a Chicago bank, to put up another $10 million each. This would have enabled him to swing the Rexall deal. Then suddenly the whole crazy structure was knocked sideways by a deadly article in the Los Angeles Times on July 10, analysing the profits of Commonwealth's real estate division, which had contributed a third of the conglomerate's total profits the previous year.

    In December 1968, the real estate division had bought a block of undeveloped land in Hawaii for $1,656,800, which it had managed to resell in