Do You Sincerely Want To Be Rich? (46 page)
Read Do You Sincerely Want To Be Rich? Online
Authors: Charles Raw,Bruce Page,Godfrey Hodgson
Tags: #Non Fiction
The corporate structure that King assembled contained some of the most incestuous inter-company relationships which have ever been attempted, and it was the complexity of the relationships that caused people to be puzzled about just what King Resources did. The companies that King formed to manage the new set of drilling funds were not subsidiaries of King Resources Company, but were all owned by John King personally. These private companies managed the funds, but they contracted most of the oil exploration work - geological surveys, drilling, pipeline laying and so on - to King Resources, which in turn often passed on the contracts to independent concerns.
An investor's money was subject to many charges in its progress through the corporate layers. Indeed the prospectuses had to warn the customers that once John King had taken his cut, they might not get their money back.
'It's simple,' said King. 'You put $100,000 into an oil well and you can expect to make 30 % a year if it hits - but you might have to spend a lot more to get that oil. We'll sell you the property, drill the well for you, manage the production, do all the work. If we strike oil, you will make the 30 %, but we may make as high as 60%.' (Was this the 'use of money factor'?).
King succeeded in making this package attractive, at least while there was a lot of money around, through two important innovations which he built into the old concept of the drilling fund. Previously, these had been thought of as suitable only for the very wealthy. King said that it 'annoyed the hell' out of him that 'only rich people could invest in oil drilling', and with populist fervour he set out to create tax shelters for the common man. His customers in the end were not exactly dirt common -
1
The theory is that income from oil arises from an asset which is being depleted and that the investor should be entitled to recover his capital. The idea is to encourage reinvestment.
doctors were probably the largest professional group amongst them - but King was prepared to aim for lower-paid people.
First, he introduced an instalment plan, which allowed people to invest in one of his funds for as little as $150 down and $50 a month. More important, he took a leaf from the mutual fund book. In old-style drilling funds, an investor would have to wait till the drilling partnership had run its term before he could get any money back. King promised to arrange for the repurchase of his customers' shares on demand. This innovation was the equivalent of the mutual funds feature of redemption of shares on demand. In the case of King's funds, the level of repurchase price the investors received was to be determined by the 'market value' of the fund's drilling operations at that time.
Repurchasing brought a new dimension to drilling funds. An investor in oil gets tax relief on the 'intangible' cost of drilling a well: locating and preparing the site, transporting the rig, and so on. This can amount to three-quarters of total drilling expenses, so that a man putting $10,000 into the operation could deduct $7,500 from his taxable income. Assuming he were paying tax at 70%, that means he would enjoy total tax relief of 70% of $7,500, which is $5,250. Therefore, the real cost of his $10,000 stake in the funds' drilling enterprises is only $4,750 ($10,000, minus $5,250).
Suppose this is a King drilling fund, and after eighteen months the investor asks to take his money out. King may say that the 'market value' of the drilling enterprise has slipped to only 90% of the original investment - i.e. some oil has been found, but not enough to make such profits as would recoup all the money put up. But even at that 'market value' the investor gets out 90% of what he put up, so he gets $9,000 out in hard cash. And as the real cost of his investment was only $4,750, he has made a profit in eighteen months of $4,250, which is nice going. This explains the attraction which John King's operation had for people in high tax brackets. On top of it was the added advantage that any income derived from oil gets a 'depletion allowance' which means that no tax is levied on 22% of it.
1
1
Nevertheless, people found it difficult to grasp the idea that a major corporation could be built around tax avoidance. Those
1
The theory is that income from oil arises from an asset which is being depleted and that the investor should be entitled to recover his capital. The idea is to encourage reinvestment.
who did grasp it occasionally overlooked the point that some oil had to be found - or anyway, the 'market value' of the drilling enterprises had to be maintained - if the investors were to come out on top.
King ran two main drilling funds: Imperial-American, which was supposed to drill mainly in proven territory, and Royal Resources, which was a 'wildcat' fund. Each of them had an intricate inner structure: the investor did not become a shareholder in the whole fund, as in the mutual fund system. Instead, a King drilling fund was designed as a series of 'partnerships' with a new partnership being formed within the fund every quarter. Each investor was given an interest in the first partnership to be formed after his joining the fund.
But despite the partnership structure, all the investors' money was 'commingled' into one large pool.
When an Imperial-American investor 'demanded repurchase', what happened formally was that his partnership interest would be sold on to a new partnership. The reality of this was that money coming into the pool from new investors was used to pay off the old investors. And the most alarming feature of the system - if its long-term stability were to be considered -was the method of fixing the level of payouts. The 'market value' of the underlying drilling enterprises, which set the level of 'redemptions' (or, in other words, the price which new partnerships paid for old partnerships) was determined by appraisals from independent oil experts. King, however, reserved the right to 'adjust' the appraisals.
An article in the Denver Rocky Mountain News analysed the nature of the adjustments made. It dealt with eight quarterly partnerships of Imperial-American, from the third quarter of 1967 to the second quarter of 1969. King was quoting on these partnerships an average repurchase value of 80% on face amount invested - which would require the 'market value' of the underlying oil ventures to be about $52 million altogether. But the independent appraisers, a firm called Lewis Engineering, had valued the lot at just $7 million. King Resources made no comment upon this remarkable 'adjustment'. It was difficult to escape the conclusion that only a flow of new money was making repurchases possible.
The article dealt only with the more conservative of the two funds, Imperial-American. Similar analysis of Royal Resources, the 'wildcat' fund, shows even less real return on money. From the last quarter of 1967 to the third quarter of 1969 inclusive, investors put $20 million into Royal Resources. All this money was expended for a return of only $2 million - most of which accrued to one lucky partnership. And out of that $2millionhad to come royalties, taxes, operating expenses and a 'net operating profits interest' for King.
The effect of such unkind revelations on King Resources was not unlike the effect of the Los Angeles Times article on Commonwealth United's profits. There was a good deal of running for the windows. King resigned from the chairmanship of King Resources, and the whole concern was able to stagger on only because the creditors feared they would lose even more by forcing liquidation. But the article in the Rocky Mountain News did not appear until July 1970. By that time, King and his companies had made some enormous profits on the flow of money through the funds. 'It is probable,' said Dun's Magazine, 'that no man, including Henry Ford or John D. Rockefeller, ever made a fortune faster than John King.'
The first way John King made money out of the funds was by causing them to make interest-free loans out of their cash pool to King's companies. (At one stage, he borrowed $500,000 of the money personally, though he did pay 6%.) For some time, the money borrowed from the customers was used to pay commissions of the outside brokers who sold the fund shares in the first place: an interesting system, which was abandoned after a year or so.
King's personally owned management companies made money from the funds in two further ways. First, they took 25 % of the 'net operating profits' on fund operations. Most people think of a profit as what remains after all costs are deducted from income: King's definition of his own profit left out so many costs that it looked more like a straight royalty on all income. Secondly, King's companies trimmed 5 % off all net cash receipts from any successful drilling operations before the cash was reinvested in new ones.
But the real leverage effect was achieved through the sales that King Resources Company made to the drilling funds. The funds, which had reached $100 million by the end of 1969, and were swelling rapidly, purchased many of their oil and gas properties, their geological surveys and technical services, from King Resources Company. There was a blatant conflict of interests in this arrangement. Its effect upon the sales, the earnings, and in turn the share price of King Resources, was dramatic.
In 1968, King Resources had an income of nearly $38 million from the sale of goods and services to funds managed by King. These were not only his own funds: he had another customer, none other than the Natural Resources account of the Fund of Funds itself. In 1969, $64 million came from such sales, and in this year FOF became a more important customer than the King funds. King's private companies also earned juicy commissions for selling the oil exploration skills of King Resources: more than $3 million in 1969.
King Resources made much more money out of selling these services than from actually producing oil and gas. In 1969 when the company received $110 million from selling its properties and abilities, it only brought in $6 million from the exploitation of oil and gas resources.
Still, even if it was not rich in real oil, John King's operation, just like IOS, was rich in distinguished names and noble rhetoric. The private empire which was organized under the Colorado Corporation had four main arms: 1, the oil drilling funds; 2, a real estate division called General American; 3, a group of companies under the title of Regency Management, designed to arrange the leasing-out of oil well completion equipment (pumps, storage-tanks, pipeline gear and the like) not to mention aircraft and many other things; and 4, the Denver Corporation, which was responsible for selling the funds, the real estate and the leasing contracts.
The Denver Corporation was headed by Dr Edward Annis, ex-president of the American Medical Association, and the man who led the battle against John F. Kennedy's Medicare programme. Together with Hal Azine, the scriptwriter who helped him in the Medicare campaign, Dr Annis prepared drilling fund propaganda to be beamed especially at doctors, whose average income topped $32,000 in the US in 1969, but who tended to 'lack adequate knowledge of investments', as King publicity noted. The astronaut Frank Borman served on the King Resources Company board, and another astronaut, Walter Schirra, headed one of the Regency leasing companies. Like Richard V. Allen, a former foreign policy adviser in the Nixon White House, Schirra was hired to devote himself to King's international aspirations. Captain Schirra said that 'one of John's basic philosophies that drew me into this complex is that whenever you develop something in a country, you pump monies and know-how back in… bootstrap a country as I would say it.' He said that he and King had often talked about something called 'the high protein concept of feeding the world'. Helping undernourished nations, said Captain Schirra, was high risk business. But it was also 'humane, compassionate and exciting… That's what it's all about. The people here. The ideas. Every once in a while Ed Annis and I meet in the corridor. I say, "What the hell are you doing here, Doctor?" and he'll say, "What the hell
axe you
doing here, Astronaut?" '
axe you
doing here, Astronaut?" '
In early summer, 1967, John King sent a couple of men to Europe to look at the chances of selling drilling funds there to Americans, who still pay US taxes when abroad, and they duly visited IOS in Geneva. But as IOS was about to agree with the
sec
not to sell anything to American citizens anywhere, there was nothing to be done.
sec
not to sell anything to American citizens anywhere, there was nothing to be done.
The next contact came in December 1967, when Ed Cowett was in New York and got a message saying that King would like to meet him. The introduction was made by Myer Feldman, the Washington lawyer who had been a background brain in the Kennedy presidential campaign of 1960, and had then spent three years in the White House as the President's deputy special counsel. His acute mind was one of the first to spot the possibilities of the fund idea.
‘I organized one of the first art funds,' he told us, 'one of the first real estate funds, and one of the first shipping funds. Natural resources had more potential than any of them.' Feldman was already a director of some of the King drilling funds, and he knew Cowett. 'One of my dubious claims to distinction,' he says wryly, 'was to introduce Edward M. Cowett and John M. King.'
Superficially, the two men seemed to have little in common. Ed Cowett fives in a mansion overlooking the lake of Geneva, drives a Maserati and relaxes over the backgammon board. John King's style is a specially stretched black Lincoln with a sunshine roof fixed so that he can shoot out of it, and a million dollar ranch house at the foot of the Rockies. But Feldman's introduction brought about a true meeting of minds.
King's first suggestion was that he might buy Investors Planning Corporation, the American subsidiary that IOS had bought from the Benedicks, but which it was necessary to sell under the terms of the
sec
settlement. The deal fell through, and it is hardly likely that the
sec
would have approved.
sec
settlement. The deal fell through, and it is hardly likely that the
sec
would have approved.
But the attraction of the two firms for each other was quite powerful enough to survive this setback. The more money King could 'manage', the more profits he could make. And IOS was anxious to invest money in situations where spectacular 'performance' might be created.
Other books
Till Dawn Tames the Night by Meagan McKinney
Somewhere Out There by Amy Hatvany
Dead Awakenings by Rebekah R. Ganiere
The Fairest of Them All by Leanne Banks
Snow by Ronald Malfi
A Time to Dance/A Time to Embrace by Karen Kingsbury
The Warmest December by Bernice L. McFadden
Scandalous by Missy Johnson
Dead Magic by A.J. Maguire
Intergalactic Wizard Scout Chronicles 1: Wizard Defiant by Rodney Hartman