Without a territory, and overrides, Ellenport must earn all the money himself. He set off again, in pursuit of his grail. He had worked out that in any capital where there was an American embassy, he could sell enough programmes to live for one month, by going through the diplomats, and the people with aid and the ancillary agencies. (Every time you sent a contract off to Geneva, you got an advance at once against the commission due from the sale.)
Once, briefly, Geneva gave him a territory. But it was the Indian sub-continent, stony ground for a salesman seeking money. He tried Australia, but found that Harvey Felberbaum had been through before him.
He heard there were American scientists at McMurdo Sound in the Antarctic. But when he tried to get on the supply ship at Christchurch, New Zealand, the us Navy turned him brutally away. He went to Fiji, and to American Samoa. He made a small strike among the storekeepers in Pago-Pago. He went to Honolulu, San Francisco, and back to New York, where he found Bernie and Ed Cowett.
Presumably thoughts of American operations were beginning to stir in their minds, because when Bernie said, 'Why don't you go down to Jamaica?' Cowett added, 'Why don't you try Huntsville, Alabama?' So Lou went to Jamaica, and to Huntsville, and Washington, and back to New York.
And then he went round again. Tripoli, Cairo, Khartoum. Addis Ababa. Alexandria. Back to Geneva.
He remembers asking himself what he was doing in a potato field outside Kabul, Afghanistan, at ten o'clock at night. The answer - trying to sell mutual funds - sounded improbable, even to himself.
Dacca. Chittagong. Cox's Bazaar. Karachi. Lahore. He was thrown out of a construction camp at a big dam-site. He moved on to Rawalpindi, Peshawar, Kabul and Kandahar.
In Zanzibar, he found five Americans building 'something secret', and they asked him to come back after they had thought over his proposition. 'Who do you think I am?' Ellenport asked them. 'The Good Humour ice-cream man?'
He went up to Kismayu, in Somalia, on the back of an old truck. Cries of 'Simba! Simba!' wakened him as an old lioness walked across the road. He left the African mainland for a detour to Mahe, in the Seychelles Islands. Thence to Mombasa and Nairobi, and briefly back to Geneva.
From Geneva to Monterrey, Mexico City and Acapulco, then back to Africa. In Bangui, when he explained his purpose, the American consul said 'Mutual funds? You must be crazy. You'll have to sell them to the gorillas around here.' But Lou sold one programme to the consul himself, and one to each of the assistants.
More place names, more prospects, more spiels, more hotels, more airports. Kinshasa and Brazzaville in the Congo, Douala and Yaounde in the Cameroons. Then north to Diisseldorf, Nuremburg and Berlin. East again to Delhi, Bombay, Cochin. In Karachi, the big black birds on the lawn outside the hotel window seemed to be croaking: 'Schmuck! Schmuck! Schmuck!'
That August, he reached the end of the road. It happened in Kuwait on the Persian Gulf, a place where only 'mad dogs and mutual fund salesmen go out in the midday sun.' At last, it looked as though Lou had hit it rich again. Business was beautiful: there were oilmen everywhere, and he had almost paid off his share options. Then suddenly, a cable came from Geneva: 'Get out within twenty-four hours,' it said, 'or you're terminated.' 'Termination' is IOS-ese for the removal of membership in IOS, and this was the only real sanction there was in the organization. What lay behind this was that by selling in Kuwait, Ellenport was trespassing on the territory of the General Manager in Beirut. Nobody who had set up his own territory wanted itinerants trespassing. And by now, most of the world had been fenced up into IOS territories.
Ellenport had no alternative but to go back to Geneva and take an office job with IOS. 'By this time,' he said. ‘I realized I had missed the gold ring.' His contemporaries, the Landaus and Shaprows, Ben Heirs and Howie Dressmans, had come home earlier from the road, and handled their baronial relations with Bernie more fortunately. They had built up sales organizations which guaranteed them income from the efforts of other men, and they were halfway through the process of turning themselves from salesmen into financiers.
Rightly or wrongly, Ellenport feels that it was whim or accident that decided whether you got the 'override' rights that made you into a master financier, or whether you were left whirling around the world like the Flying Dutchman.
The curious thing is that even though Ellenport had missed the 'golden ring', IOS was reluctant to release him. With the lightning growth of the company, his original investment had now grown to be worth something more than $200,000. A friend lent him the money to pay off the last of what he owed, and Ellenport announced that he wanted to sell out his shares and retire.
There was a short, unpleasant row, in which the company said that his shares in IOS were going to be frozen, so that he couldn't sell them. In the end, he was given his money - and was terminated the same day.
It is safe to say that in the early years very few of Cornfeld's salesmen realized that they were taking part in the foundation of a financial empire. Robert Marx, who hunted through Venezuela and Brazil for four years - often trekking deep into the jungle-said: 'We were all very happy with the commissions we were earning, and we lived it up. But Bernie was always off making bigger deals.'
It was the essence of Cornfeld's achievement that he took confused young men and hberated in them the conviction that, after all, what they really wanted was to be rich. Having done that, he sent them out to comb the world for money. Many years later, an IOS 'workshop session' decided that 'motivation' means 'getting people to want to do what you want them to do'. It is a manipulator's definition.
One day, when IOS was riding high, Lou Ellenport met a younger man, still with IOS, who asked solicitously after his financial well-being. Ellenport was able to say that, thanks to some successful investments, he was worth over a quarter of a million dollars.
'But is that enough,' the young man asked sympathetically, 'for people like us?'
'I tell you,' says Ellenport, 'they were selling a dream, and to the salesmen most of all.'
Chapter Five
Early Travels in the Offshore World
In which we explain the capital structure of a dream, and the way that Bernie and Ed kept the salesmen loyal to
IOS.
The birth of the first
IOS
fund, and the Trust which was not a trust.
Salesmen of any sort are creatures of fickle ambition. They are always liable to be seduced by offers from rival outfits, especially if those offers come baited with another half-per-cent commission. And the team Bernie Cornfeld had assembled was a particularly fractious one. Yet Lou Ellenport, and many others, ploughed their lonely and competitive furrow with an enduring loyalty. To insulate such men, for nearly a decade, against most of the wiles of the competition was a considerable feat of business.
It was done, naturally, with the lure of wealth - more precisely, a system of lures, designed with all the legal, financial and personal subtlety of Ed Cowett and Bernie Cornfeld.
Many details played their part in this system: the salesmen, for instance, were always called Associates, which conferred a sense of membership in a professional elite. Then there was Cornfeld's custom of decorating every salesman who did $1,000,000 of business with a gold wrist-watch from Patek Phillippe. And Bernie's own life style with its display of chateaux, limousines and women was intended to be a goal for the ambitions of his associates, as well as a pleasure for himself. As he once said, in his own splendidly arrogant whisper: ‘I suppose a salesman might find it easier to identify with me, as a symbol of success, than with mousy Jacob Rothschild, fiddling with his pencil.'
But there were motivations built into the system which amounted to more than glamour and gold watches. The essence of it was the quasifeudal transaction in which each Associate personally became a part of the capital of Investors Overseas Services, and then agreed, as it were, to buy himself back. This was the IOS Stock Option Plan, which arranged the distribution of shares in IOS itself, as distinct from shares in the mutual funds which IOS was selling. The scheme was dressed up as a land of capitalist socialism, and Cornfeld orated a good deal about IOS being a company which was owned by the people who worked for it. Analysis of the corporate structure shows that the truth was rather the other way about.
Cornfeld and Cowett drew up the first outlines of the Stock Option Plan as early as February 1960, together with a bonus plan to accommodate executives who were not salesmen. The earliest recorded financial document produced by IOS was a prospectus, dated February 20, in which Cornfeld first offered certain of his colleagues shares in his company. He sold them some 12,000 of his original 56,700: each manager could subscribe for 200 shares at $7.5 each and three directors, Gladis Solomon, Lester Hayes and Victor Herbert, could each buy 2,500 additional shares at $10. The bashful Lovett was awarded 100 shares as a bonus.
This early prospectus was remarkably sketchy. For one thing it did not offer any explanation of how the money raised was to be used. For another, nowhere did it tell these first subscribers where the company in which they were buying shares had its legal home. It was indeed not until over a month later, on April 9, that IOS Ltd (sa) was formed in Panama: it was on this foundation that Cornfeld and Cowett erected the most imposing offshore edifice yet seen. Cowett and Cornfeld were masters in this field some years before newspapers began using the word 'offshore' to denote financial institutions which escape governmental control through geographical selectivity. Occasionally, offshore operators have found some useful feature in the corporation law of a major nation, such as the provisions for non-resident corporations in the Canadian province of Ontario. But in the offshore world, we are dealing for the most part, in a mixture of picturesque European principalities and sun-bleached tropical outposts: the Bahamas, Bermuda, the Netherlands Antilles (Curacao), Panama, Liberia, the Grand Duchy of Luxembourg, the Principality of Liechtenstein, Monaco and occasionally Andorra, San Marino or the Virgin Islands, British and American, IOS and its rivals set much store by their modernism. But the environment in which they operate was lashed up out of the juridical anomalies left over by the Holy Roman Empire, and the colonial systems of Spain, the Netherlands, and Great Britain.
'Offshoreness' is not quite the same thing as corporate internationalism. Companies like General Motors, Shell or Philips conduct relations, for better or worse,
with
national governments. They may well take advantage when they can of oddities in the international legal system. But when they do so, it is an incidental activity. Offshore concerns
avoid
them. The essence of offshoreness lies in turning an enormous number of loopholes into a viable, but unregulated corporate structure. For instance, most countries with a developed life insurance market place boring restrictions on people who want to set up life insurance companies. But Luxembourg is very liberal in this matter and a Luxembourg life insurance company sounds tolerably respectable. Unfortunately, Luxembourg companies do have to publish accounts: if you don't care for that, collect the revenues through a Liechtenstein
'Anstalt',
an easily organized entity, which has no obligation to keep books or publish names of directors. If you are an American, and dislike us tax, secrete your money in a Bahama trust. Nassau is only 25 flying minutes from Miami, and it is one remnant of the British Empire where they don't allow Uncle Sam to get above himself. In 1969, they tossed out a couple of Federal revenue investigators for having the sauce to operate in the colony without work permits.
Discussion of the offshore world usually revolves around matters of tax avoidance or evasion. But taxation is only one of the many kinds of regulation which modern governments impose upon the acquisitive spirit.
The popularity of offshore institutions has grown with the growth of 'onshore' regulations of all kinds. There were many spurs to the growth of offshore business in the Sixties. There was a tightening of exchange controls, due to balance of payments crises in America, France and Britain. The outflow of dollars created pools of effectively free currency. Capital gains taxes, and the threat of wealth taxes drove money to seek refuge in out of the way places.
The offshore status of IOS was not an accident, an additional refinement grafted onto a viable structure. It was of the essence of Cornfeld's and Cowett's conceptions that their operation should be as far as possible untaxed, unregulated and uncontrolled.
The regulations upon investment corporations do not exist simply because of kindly governmental concern for investors. They are there because every Western government believes that uncontrolled financial speculation is a danger to the stability of the State. Ultimately, what IOS did was to get around virtually every control designed to prevent speculation getting out of hand.
Originally, Investors Overseas Services was just a label for Cornfeld's highly successful syndicate selling the Dreyfus Fund out of Paris. With the acquisition of Ed Cowett's advice, and two years after the move to Geneva, the business was simply transferred into the hands of the Panama corporation, IOS Ltd (sa). Panama, which charges almost no company tax on non-resident corporations, and requires very little financial information from them was then a popular 'brass-plate' address for us companies.
At the outset, Cornfeld owned all the shares of the Panama company. This was the key to the next nine years of development.