When Cowett took over Minitone Electronics in the autumn of 1960 its liabilities were substantially in excess of its assets. Through his partnership with McGowan Cowett took up a large block of shares - 41,333 - paying only a nominal one cent a share, or a total of $413. That sum did little to ease Minitone's debt problem, which included $75,000 owed to the Irving Trust. (Cowett guaranteed the loan.) Nevertheless Cowett and his fellow promoters had great hopes for their battery operated gadgets and had plans to add a pot-scourer, also powered by a battery in the handle, to the range. So they turned to the public and in early 1961 they succeeded in selling 205,003 shares at $3 each, a price which was decided quite arbitrarily.
The prospectus of Minitone conformed with the best principles of blue sky law. It disclosed that if the public took up Minitone's shares at the issuing price, the 'present shareholders will benefit from an increase in the book value of their shares amounting to $1.98 per share, such benefit being at the expense of those who purchase at the offering price.' But when share prices are soaring, nobody cares about book values. The point is that there are more buyers than sellers, and the hunger of the market is for securities to trade.
The shares of the companies that Cowett promoted were not sold on official exchanges, like the New York Stock Exchange. They were sold through friends, including, for instance, a former officer of the Netherlands Navy turned stockbroker, called John Zeeman, and then traded 'over the counter'. Despite the public's subscription of $600,000 to Minitone, the company never solved its financial problems. Its products were too expensive and did not catch on: the pot-scourer, according to Cowett, was the main cause of the fiasco. The assets were sold for what they would fetch.
Cowett had one really original company, which was called Geriatric Services. It was based in Boston, and it operated 35 nursing homes for old people. The promotional theory was that Geriatrics would be admirably situated to profit from the Kennedy Administration's Medicare programme for the aged. This was almost prophetic: seven or eight years later, in the last Sixties boom, nursing home companies were highly fashionable hot stocks.
Cowett, with Zeeman and McGowan started to take an active interest in the affairs of Geriatrics in February 1961 and in August all three were appointed to the board. Cowett had bought 12,500 common shares at $1.64 each, and some preferred shares. The common shares of Geriatrics were offered to the public later that year at $4 each, IIT bought 3,000 shares of Geriatrics.
The Medicare programme made only slow progress through Congress, and by the time it got through, Geriatrics, after a brief attempt at revival by the Roman Catholic Church, had gone into liquidation. Years later, Four Seasons Nursing Homes became a great investment favourite with IOS fund managers. It, too, went bust.
Cowett's other promotions were nearer to the mainstream of market fashion. There was a colour printing firm in Boston called Color Lithography; there was one which produced a device you fixed to your car to warn you automaticaly when it was time to change the oil. Perhaps the most important of them, as far as IIT was concerned, was a firm called Associated Engineers, which operated in Springfield, Cowett's home town, and which became one of his first clients. Although Associated assembled components for Powertron, McGowan never became closely involved in the project. The company never even got as far as a public issue. But the faithful IIT bought 5,000 shares of Associated, which were valued at $15,000 at December 31,1961. They remained forlornly in IIT's list, valued at zero, until 1965, after which they disappeared.
These were not on the whole the kind of companies to make or break the us economy. But in the markets of the Sixties, they could make or break a company promoter. From the autumn of 1960 to the end of 1961, the Dow Jones average rose by more than 30%. But, as Dr Hugi's report noted at the end of 1961, the glamour stocks had already begun to slide.
In the first few months of 1962, the slide continued, and after a little while prices of blue chip securities began to slip as well. In April, the descent accelerated. Then, almost overnight at the end of May, the bottom fell out of the market, and the game -for the time being anyway - was up. In May and June the Dow fell 25 %, and the value of most of Ed Cowett's promotions was obliterated.
Cowett had enjoyed considerable prestige in his circle, a captain of finance only just past thirty. Friends were often sufficiently impressed to take up positions in the shares of Cowett concerns. Ruefully, one such investor recalled the abruptness of the disaster in these terms: 'One moment, my portfolio was up ten times. A couple of weeks later Ed and I were playing darts for them.'
Possibly, it had once seemed a brilliant idea for IIT to invest
its customers' money in Minitone, Associated Engineers,
Geriatric Services and the other promotions of IOS’s brilliant
young lawyer - even if the sec would not have approved.
Cowett told us that Dr Hugi was under no compulsion to include
4
his promotions in the IIT portfolio and he claimed that there were promotions of his that the fund did not buy. He acknowledged that Dr Hugi might have thought himself under pressure.
Dr Hugi told us that he had played no part in the decision to acquire Cowett's 'babies', as he called them, for the IIT portfolio, and that he even resisted their inclusion, for it started a trend towards speculation which he opposed. It was indeed one of the reasons that led to his resignation as president of IIT.
But Cowett's trouble only began with the break. Nobody could be blamed for getting caught up in the gorgeous optimism of 1959-61. Plenty of investors and operators - like, indeed, McGowan and Zeeman - came through somewhat sadder and wiser, but without damaging their integrity. Cowett's real problem appears to have been a refusal to acknowledge that the end had come.
Each of the partners in Cowett's law firm had his own speciality, and they did not work closely together. Cowett especially was a 'free spirit', as he described himself, and did not always see eye to eye with his partners. Cowett's lone promotion activities began to concern them. The resulting tensions came to a head in the early summer of 1962.
The first thing however that worried the partners was not so much Cowett's promotion activities but the state of the firm's business with IOS. A certain amount of work was being done on the account within the firm, but the fees were not making a particularly generous contribution to the firm's expenses. Cowett's own style of living was however pretty good for a young lawyer. He was a director of IOS and was travelling frequently to Geneva. He had also recently taken a big apartment on Seventy-second Street and Madison Avenue, close to Central Park, one of the most expensive districts if New York. Cowett's partners, knowing how much he was getting out of the firm, wondered how he could afford this style of living. The partners asked Cowett to meet them, and they questioned him closely about the IOS account. Coolly and sensibly - the only sign of any nervousness was a slight tremor in the hand holding his cigarette - he calmed their worries, and persuaded them again that IOS was an investment for the future.
The worries were not altogether eliminated: the partners wondered uneasily whether Cowett might be getting paid separately by IOS.
Cowett today admits that he was spending a lot of money in those days. ‘I was living at the rate of $60,000 a year - and $60,000 was worth a lot more then - and I was taking $40,000 out of the law firm.' Cowett says however that all legal fees from IOS and his other clients went into the law firm; he reckons he was contributing more than 20 per cent, i.e. more than his share, to the income of the firm. Everything went to the firm, he says, except for his stock interests; and it was these that enabled him to live beyond his income: he used them as collateral for bank loans.
At much the same time however Bill McGowan also became worried. He discovered that Cowett had borrowed large sums from their joint partnership and he began to get calls from stockbrokers, asking him veiled questions about what Cowett was doing. McGowan and Feldman got together, and asked Cowett what was going on. Once again Ed was cool and assured. 'No problem,' he told them: it was one of his favourite phrases.
Cowett then disappeared again to Geneva. It was at this point that Cowett's law partners made the discovery that shook them most of all. They found that Cowett had drawn a cheque on the firm's bank account without telling them. The amount was not particularly large - some $30,000 or so - but it came close to cleaning out the account. Cowett, as a partner of the firm, had access to the account, but his partners were particularly upset because Cowett had not told them he was going to take the money. It was only by chance that one of the other partners had not subsequently and unwittingly bounced a cheque on the firm's account. One of them now called Cowett in Geneva and said that as far as they were concerned he could stay in Switzerland.
But Cowett did not stay in Geneva. While he was still away it became increasingly clear to Cowett's close associates that he had piled up debts in buying back the shares of his company promotions.
In an attempt to assess the seriousness of the financial trouble that was brewing, McGowan and Feldman, acting independently of the other law partners, again got together at Cowett's office. They examined his desk and finally opened a deep bottom drawer which was heaped full of brokers' slips confirming share purchase orders, many of which were unopened. They immediately telephoned Cowett in Geneva and told him to come home at once.
McGowan and Feldman met Cowett at the airport and drove him straight to his new apartment, still barely furnished. Cowett coolly tried to rationalize his position and said he was getting some help from Cornfeld. But there was really no alternative except to face the fact that his financial affairs were in chaos. He owed substantial sums to the International Credit Bank in Geneva, to the Irving Trust and to stockbrokers. He had also guaranteed many of the loans of his companies (Cowett asked us ruefully if we knew the definition of a guarantor: 'A fool with a fountain pen'). Cowett also owed a small sum - §15,000 to $20,000 - to IOS itself. Then there was the question of the money he had used from the law firm and from his partnership with McGowan.
Cowett's debts totalled at least $800,000. 'That was the low point,' he told us. Some idea of the amount of money he had run through in just a few months is given by the fact that Cowett estimated his net worth at the end of 1961 at more than one million dollars.
McGowan had now brought in John Zeeman and they decided that they could not handle the situation on their own; they determined to call in Wilbur Cowett. Ed Cowett, too, felt he had to turn to his brother. Wilbur, although naturally anxious to save the family name, was not sympathetic of his brother's difficulties. Ed had expected more willing co-operation and relations between the two were not happy. Other close associates take the view that much of the trouble was due to the fact that Ed found it almost impossible to admit that he needed help, and that it was especially difficult for him to admit that he needed help from the elder brother whose achievements he had tried to rival.
Cowett's real saviour was Cornfeld. He did not put up much money - only $20,000 or so according to Cowett - but he helped Cowett gain the breathing space he needed to sort out his affairs. Cowett himself raised some $100,000 by selling IOS shares he had bought earlier from Cornfeld. The main buyer was John Templeton, a New York investment adviser close to IOS.
Further bitterness was aroused in the sorting out of Cowett's tangled affairs with his associates like McGowan and Zeeman. They felt additionally injured when Cowett appointed a lawyer to handle the matter, so that they had to deal with him at one remove. (The lawyer was Robert Haft of Stamer and Haft, who became important legal advisers to IOS.) At the end of the day there were still some disputed sums outstanding and both McGowan and Zeeman came out of the episode substantially worse off.
Cowett effectively ceased to be a working partner of the law firm from the moment the other partners called him up in Geneva. But it took some months to wind up the association formally, as Cowett's participation in the firm's financial position had to be ascertained. As for the $30,000 cheque, Cowett says he drew this money in the first place because he realized that his partners wanted to break up the partnership and that he felt this was his share. Nevertheless the money was paid back and Cornfeld says it was he who paid it back. Cowett however still maintains he was owed money by the firm.
Cowett more or less disappeared from the New York scene in the summer of 1962 and did not finally make Geneva his base until late 1963. In between he travelled a great deal between the two cities and also spent some time in the Bahamas. He also took two long trips to South America.
Although the salesmen in their scattered corners of the world never knew the full story, they were bitter at the slump in IIT's value. (The shares dropped from $4.8 to $3.65 in the first six months of 1962.) Gradually, however, rumours filtered through: it was considered that the most discreet thing to do was for Cowett to resign. This did not happen until the middle of 1963. Cowett did not rejoin the board until 1965: so the publicity material we referred to at the beginning of the chapter was inaccurate in stating that Cowett joined IOS as a director in 1963.
On May 29, 1962, Dr Hugi was replaced as president of IIT by a youthful and socially eminent stockbroker named Christian Henry Buhl iii, who had been working for brokers McDonnell and Co. in New York but felt he had grown out of it. (Buhl's family own a large piece of General Motors.) The first thing he did was to appoint John Templeton as IIT's principal investment adviser. (Dr Hugi continued to be associated with IIT until later that year.)