Do You Sincerely Want To Be Rich? (57 page)
Read Do You Sincerely Want To Be Rich? Online
Authors: Charles Raw,Bruce Page,Godfrey Hodgson
Tags: #Non Fiction
Cornfeld's name was up for re-election with the formal approval of the management. Both he and Sir Eric attended a good many meetings of IOS subsidiaries together in New York before the move to Toronto, and there was an outward show of something like amity. Cornfeld thought that if he forebore from precipitating a proxy battle, then he would be allowed to keep his seat on the board. He therefore decided not to go to the Toronto meeting, where his presence would be bound to have an unpredictable, perhaps divisive, effect. In this decision, for once, his tactical sense led him astray. For, whatever truce there may have been in New York, in Toronto Sir Eric decided that Cornfeld should be removed - and that there was a quick and effective way of doing the job.
When the counting of votes began in Toronto, around 6 pm, the meeting adjourned, and Sir Eric gave a press conference. It was a girl reporter who asked the question which was on everybody's mind. 'Why is there a reluctance in this company to talk about Bernard Cornfeld?' she asked. 'It's almost as if everyone hopes he'll crawl into the woodwork and disappear.'
Sir Eric looked perplexed and tactful, like an undertaker coping with some sad duty. 'All of us recognize,' he said, 'that the events of the past few months represent a considerable personal tragedy for Mr Cornfeld. I think we respect the personal tragedy that is involved in all this for him.' Nobody guessed that Sir Eric, as he spoke, already knew that management votes had been cast to throw Cornfeld off the IOS board.
Long before, it had been provided that the board of IOS should be elected in two groups, or 'slates'. This was not Sir Eric's doing: it was something cunningly devised before the public offer to keep Cornfeld, and the men who were then his friends, in power, and to ensure that new investors buying shares in IOS should not actually obtain voting control of the company. The mechanism depended upon the special meaning that IOS attached to the term 'preferred shares'.
Normally, 'preferred shares' are fixed-interest securities, which have
less
voting rights than a company's common shares, or equities - which bear the greater risk, as they have no fixed return. In IOS, however, the preferred shares have
greater
voting rights than the common shares.
less
voting rights than a company's common shares, or equities - which bear the greater risk, as they have no fixed return. In IOS, however, the preferred shares have
greater
voting rights than the common shares.
When IOS went public, it created a block of new shares to raise $52 million through the Drexel underwriting. These were common shares. At the same time, the existing IOS shareholders put up slices of their holdings - mostly 10% - for sale in the form of common shares. The shares that they kept were called 'preferred shares' and the provision was that a certain number of them would be converted each year into common shares, so as to be saleable. Thus Bernard Cornfeld owned, after selling 10% of his holdings, 7.3 million preferred shares. But the only common shares he held by the time of the Toronto meeting were the 30,000 that he had agreed to keep out of Cowett's buying spree in 1969 and early 1970.
The preferred shares held the right to elect two-thirds of the directors of IOS Ltd. The common shares had only one-third of the board on their separate slate.
In April, before the crisis, Bernard Cornfeld's name had been put on the common stock slate. The reason then was only that his was a name which would mean something to the 25,000 common stockholders, many of them outsiders owning relatively small packets of shares. But the result, in the context of a struggle for power, was that Cornfeld's huge block of preferred shares was no use to him for protecting his position on the board.
Cornfeld did not anticipate that any concerted move would -or even could - be made against him in the scattered ranks of the common stockholders. He had forgotten that there were in existence solid blocks of common shares much bigger than his own 30,000. These were the shares which had been stuffed into The IOS Stock Option Plan, and the ones which had been taken up by the Cowett and King trusts.
In the early hours of Tuesday, June 30, before the stockholders met at the Royal York, a conclave gathered in one of the hotel bedrooms upstairs. It was a meeting of executive directors of IOS, convened at the request of Ed Coughlin, the company secretary. There were 830,000 common shares belonging to The Stock Option Plan Ltd. which were registered and ready to be voted. Sir Eric and his colleagues decided to vote them against Cornfeld. Ed Coughlin, whose signature was necessary to validate the necessary proxy documents, insisted that the directors should meet and pass a resolution giving him formal instructions - and the directors did so, there and then.
By this time, Wyndham White and his colleagues also controlled the shares from the King and Cowett trusts; on May 29 Cowett, acting for King and for himself, had sold all 600,000 of them to a small fund run by Dean Milosis, a former Fund of Funds manager. Milosis, who paid $1.4 million for the shares at $2.35 apiece, gave the proxies to a nominee of the IOS management.
With the addition of the Stock Option shares, the defeat of the unsuspecting Cornfeld was now certain. But Wyndham White and his colleagues wanted to make quite certain - and chey also wanted to have Cornfeld's preferred shares working for them on the other slate.
At 8.30 am Bernard Cornfeld, in New York, got a phone call from Toronto. He was asked whether he would give the proxies on his own preferred shares to the management. And Cornfeld actually did so. A messenger was sent flying from New York to Toronto with the necessary documents, and it was their arrival that Harvey Felberbaum was reporting when he whispered: 'We've just got Bernie's votes.'
It was after midnight when the counting finished in Toronto, and most of the twenty people left in the room were reporters. There was astonishment when Sir Eric announced, poker-faced, that Bernard Cornfeld had not been re-elected. One person present who reacted as if it was a 'personal tragedy'; Gladis Solomon, veteran of the innocent days in the Boulevard Flandrin. She was moved to the verge of tears.
Redemptions, by the beginning of August, had slackened to around $2 million a day, and it was clear that the funds were not going to melt away entirely. (Almost certainly there is a
'sump' of black money at the bottom of the Fund of Funds and IIT which will never be reclaimed.) But unfortunately the international bankers did not rush forward with help. Several things had happened during the time that had been required to dispose of Cornfeld, and one was that the international financial community was beginning to feel that the worst was over in the stock markets. Those who had been inspired, or partly inspired, by a feeling that IOS must be rescued for the sake of capitalism - and that had certainly been a component of the Rothschilds' approach - no longer felt the same urgency.
The point was also being grasped that, huge as the IOS funds were, they might not be particularly profitable, at least to anyone who proposed to handle them along orthodox lines. This was hammered home all too clearly by the report of IOS Lrd for the first six months of 1970. For the half-year, IOS made a $25 million
loss.
Sales revenue had collapsed, so that even though it was being run down, the sales operation contributed vast losses. There were no performance fees, and management fees were cut by the shrinkage of the funds. Large provisions were necessary for losses expected on deals like Commonwealth United and the Canadian Channing purchase. Most of the people who had shown interest in May decided that it was just too difficult to tell how many bodies might be stuffed under the carpet at IOS. The prospect of the 'first class institutional support' that Sir Eric longed for was as far away as ever.
loss.
Sales revenue had collapsed, so that even though it was being run down, the sales operation contributed vast losses. There were no performance fees, and management fees were cut by the shrinkage of the funds. Large provisions were necessary for losses expected on deals like Commonwealth United and the Canadian Channing purchase. Most of the people who had shown interest in May decided that it was just too difficult to tell how many bodies might be stuffed under the carpet at IOS. The prospect of the 'first class institutional support' that Sir Eric longed for was as far away as ever.
Robert Vesco, the rescuer who at last
appeared, certainly had his admirers. (‘I want you to know,' said Warren White, who had been Bernie Cornfeld's assistant, 'that within a very few minutes of meeting Robert Vesco, I knew I was in the presence of one of the greatest financial geniuses of the twentieth century.') But even so, he could hardly be described as 'first class institutional support.' Like C. Henry Buhl, Vesco came from Detroit, but his background was rather different. He had started work at fifteen in an automobile repair shop, and he had to study engineering at the university in the evenings. Before he was twenty, he had designed the first aluminium grille for Oldsmobile - but within a very few years, he had abandoned the production side of engineering, and set himself up as a kind of freelance financial finder and adviser. He showed quite clearly that he was a man with an instinctive feel for financial leverage, and in 1970 he treated IOS itself as an interesting example.
By this time Vesco was 34, and had put together a group of small electronic and engineering concerns under the bold label of International Controls Corporation of New Jersey. The process of building International Controls was marked by aggressive takeover bids, followed on two occasions by bitter lawsuits.
Vesco's business methods, on his own admission, are uncompromising. They were minutely examined after ice succeeded in gobbling up, against resistance, a much larger company called Electronic Speciality. Vesco began to buy Electronic Speciality shares on the quiet, but somehow the market got to know, and the price rose. At this point, a man from the Wall Street Journal talked to Vesco, and got the idea that ice was not going to bid for control of Electronic Speciality. Publication of such a report would naturally tend to make the price fall back again: indeed, the Wall Street Journal did suggest that ice was not bidding, and indeed the price did fall. Yet on the evening of the day that Vesco spoke to the Wall Street Journal, he informed the ice board that it might well be worthwhile to go ahead with a bid - which was just what icc did two days later. After much litigation, Vesco was cleared of having attempted to mislead the market, and the court did not believe that ice violated the securities laws, although he admits that he did not strive officiously to enlighten the Wall Street Journal's reporter. An appeal judge ascribed the course of events to 'the frailties inevitable in human communication'.
Vesco was helped financially by the Bank of America and later by the Prudential Insurance Company, respectively the biggest bank and biggest insurance company in the world. Nevertheless, by the time he came to help IOS, Vesco's company was still a long way from the big league: 1969 it had total sales of around $100 million, and profits of $4.7 million. In 1968 ice had raised a $25 million Eurodollar loan. It was what he had done with this debt which gave Vesco his admirers inside IOS.
The $25 million had been raised by issuing debentures, convertible into common shares, through Butler's Bank of the
Bahamas. The loan sharply increased International Controls' indebtedness - but in rising markets, that hardly mattered. In the conditions of 1970, Vesco decided that it would be advantageous to restructure his debt, so he offered to the debenture holders a higher rate of interest, plus superior conditions for conversion into common shares, if they would in return wipe off 40% of International Controls' indebtedness. The success of this exchange depended upon the acceptance by the largest single holder of the debenture issue: none other than 'IIT, an International Investment Trust', which held $7 million worth. Vesco was negotiating in Geneva as early as November 1969.
Given the market value of the old debentures in early 1970, there was not much to choose between the two. But acceptance meant realising a hefty loss, IIT was among the first to accept Vesco's new paper.
The success of the conversion offer in reducing International Controls' debt naturally increased his company's financial strength. And equipped with this new strength, Vesco decided to offer a $15 million loan to IOS Ltd, in exchange for warrants to buy IOS shares. Financial genius or not, by the end of July Sir Eric and his board were all too happy to accept his helping hand. There was just one snag. Vesco wanted nothing to do with Cornfeld, and Cornfeld, although riddled through and through at Toronto, was refusing to lie down. He had launched a $25 million lawsuit in New York, claiming that the 'new management' had instituted a 'reign of terror' in IOS; he went about the world denouncing 'Sir Eric Windmill' to any financial journalist who would listen, and he threatened the hard-pressed men in 119 Rue de Lausanne with a new proxy fight, which he swore would result in his recapturing the company. More than once, he made his way into the IOS offices, and subjected old comrades to withering harangues about disloyalty.
Cornfeld was now making few pretensions to financial statesmanship. He was asking for 'irrevocable proxies'. This was the deal he was proposing t
o his old friends, the shareholders: he would give each of them a ten dollar bill, signed by himself. In return, they were to give him 'irrevocable proxies' and an option to purchase their shares for $5 per share by July I, 1971. These efforts were reinforced by appeals from big shareholders like Gladis Solomon, who tended to take the emotional position that as Bernie had created the company anyway, he was at liberty to do as he wished with it. Offensive and counter-offensive were marked more by energy than dignity. One August morning, for instance, John Curran, still a big shareholder, was about to leave Geneva for a holiday in Spain. Bernie's man virtually stormed into his bedroom demanding proxies: Curran only got away from him just in time to get to the airport, where he was tackled again by the other side, whose envoy gave him the management pitch all the way to the passport barrier. The project which Cornfeld devised for his comeback was a return to his old fascination with show business. It was 'Cinema City': the idea was that a new town, with huge movie studios, should be conjured up in the desert somewhere between Los Angeles and Las Vegas. On Sunday August 2, Cornfeld threw a party at the Villa Elma, and tried to explain, in a brief pitch, how the IOS sales force could be remotivated by the prospect of selling plots of land and shares in the development of the Cinema City studios. Hesitantly, someone suggested that movie studios weren't doing much business in 1970. Cornfeld brushed this aside. If the studios were empty, he said, it would be easy enough to make money by showing parties of tourists around them.
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