In Phase Three, the unresting sales force began to discover other kinds of expatriates: British traders in Hong Kong and settlers in Kenya, French rubber-planters in Laos and Vietnam, Belgian mining engineers in the Congo, Lebanese shopkeepers in West Africa, overseas Chinese throughout the Far East, Sikh traders in East Africa, German exporters in Mexico, Italian civil engineers in Iran, and merchant seamen of all nationalities, almost everywhere.
Many of these people had access to dollars, or to funds which they were legally entitled to turn into dollars. And anyway, they did not bother too much about the niceties of exchange regulations when an energetic young salesman was explaining to them that if their money went to buy shares on Wall Street it would grow with the magic rise of the Wall Street market.
This phase led the logic of the sales operation off in two directions. Obviously, many of the expatriates went home to their own countries. Thus IOS followed Dutch oilmen back from Africa, and so went into business in Holland: thus the contacts with the overseas British led IOS back to Britain, and thus into the lif e-insurance business in London. It was a tortuous, existential kind of growth.
And in the same way Phase Three led very naturally into another direction. It was a very short step from dealing with prosperous expatriates in Rio, Manila or Mexico City to dealing with the local elite in such cities. There was, of course, never any question of being able to sell to any local citizens other than the elite. In the greater part of Latin America in Black Africa, and in the whole of Asia outside Japan, anyone who can think of investing even $50 a month in a mutual fund is by definition a member of a very small and privileged stratum of society. The
average
income in Brazil, for instance, in the years when IOS was growing with such dazzling speed, was under $250
a
year. In no part of Black Africa or South-East Asia was it above $100 a year between 1960 and 1965.
This was Phase Four, in which IOS found its customers mainly in the 'Third World'. During the 1960s there were rich and frightened people in many parts of the world who mistrusted, or had reason to fear, the political and economic aspirations of their fellow-countrymen. Such people wanted to get their money out. It mattered little to them that in getting it out they might be impoverishing the national economy. This was the basic source of the money that made IOS rich. The IOS sales operation lived for years on the brink of trouble.
February 10, 1966, was Ed Coughlin's birthday.
Coughlin is a large, calm lawyer, who had known Ed Cowett slightly at the Harvard Law School, and had joined IOS four or five months before. That particular day he had flown into Geneva from Munich at the end of the afternoon, with his leg still in plaster from a siding accident. He stopped by his office, intending to stay only a few moments before going out for a quiet celebration dinner.
The dinner had to be postponed. Coughlin had no sooner levered himself behind the desk in his tiny office when Allen Cantor's head appeared round the door, asking him to come along the corridor to Cornfeld's office. As he hobbled in, Cornfeld, Cowett and Cantor struck up: 'Happy Birthday to you, Happy Birthday to you, You're off to
Caracas,
Happy Birthday to you!'
An hour later Coughlin was in a plane, and the next morning he arrived in Caracas, to find the IOS office there in a panic. The Venezuelan authorities had passed a law which seemed to say flatly, 'Thou shaft not sell foreign securities.'
Already the police had raided the offices of another mutual fund organization in the same building. Coughlin decided to take no chances, and closed the office down.
Actually IOS’s legal status in Venezuela was obscure. Other foreign groups continued selling there for some time. What was not in doubt was that the IOS operation there was deeply unpopular with the Venezuelan authorities because it was helping itself to ladlefuls of flight capital.
Because of the large hard-currency revenue it earns from oil, Venezuela - unlike almost all other Latin American countries - permits the export of capital. But after the fall of the dictator Perez Jimenez in 1958, and as a result of a series of economic crises under his two relatively left-wing successors, the moneyed class in Venezuela began to fear for its capital.
More and more IOS salesmen turned to selling to Venezuelans. And more and more, correspondingly, the Venezuelan government began to complain about the way mutual fund salesmen were encouraging capital flight.
It was the Venezuelans' turn to learn a lesson which government after government in the developing countries was learning in these years: that it was one thing to turn a blind eye to the traditional habits of a few very rich families, who had been shipping a proportion of their assets abroad for many years; and quite another to tolerate the activity of whole organizations preaching the necessity of sending your money abroad to anyone affluent enough to listen to them.
In November 1965, the Superintendents of Banks and Insurance in Venezuela announced that they would take joint action to curb the outflow of money into foreign mutual funds. A few days later the National Economic Council formally attacked the sale of such funds on the grounds that they drained away both national savings and national foreign exchange. Even the
Venezuelan Economic Review,
a publication generally friendly to American business in Venezuela, noted at this time that 'capital flight is being encouraged by high-pressure salesmanship of foreign mutual funds… a legitimate complaint exists against certain unethical practices carried out by some sellers.' There is no reason to think that the
Review
was thinking specifically of IOS in this context. But if IOS may not have been the most objectionable mutual fund operation from the point of view of the Venezuelan authorities, it was certainly large. By the end of 1964 there were already 45 IOS salesmen at work in Caracas, and another couple of dozen in and around Maracaibo oilfields. At peak, IOS had brought the best part of $45 million out of Venezuela in cash into its funds; and the face value of clients' commitments to invest in the future was five or six times higher.
Coughlin's trip to Caracas was a picnic compared to some of the expeditions he was to make in the course of the next couple of years. Nevertheless it passed into IOS legend, and became a sort of code. Whenever a manager, anywhere in the world, thought that trouble was coming, off would go a cable to Geneva: 'Happy Birthday.' Poor Coughlin got birthday cables from Bogota, Rio, Manila, Athens and Teheran before the joke wore thin. Somewhere in the world, in those years, there was always an IOS operation in trouble with the authorities.
Sometimes, indeed, as in Korea, where an IOS manager spent some time in jail in 1965 on currency smuggling charges, but managed to get bail and then flee the country, the trouble could not be directly attributed to IOS itself. There was, for example, the salesman who was caught smuggling gold bars and gold watches into Turkey: that, obviously, was done completely without IOS’s knowledge. The strangest claim made upon IOS perhaps, came from a German-Croatian businessman in Central America in relation to a block of stamps issued by the Nazi puppet state of Croatia in 1944; the resulting advertisements, conspicuously placed by the businessman in the newspapers, were an embarrassment to headquarters in Geneva.
It is fair to point out, however, that if IOS as such had no desire to get involved in that kind of deal, it could hardly be surprised if from time to time it did. The whole commission structure was calculated to attract the most aggressive salesmen. Managers in the field were encouraged to drive them on to higher and higher sales volume. It was inevitable that the legal and security departments of IOS should have their hands full of scrapes which the salesmen had been led into by the very acquisitiveness which IOS valued so highly.
Such episodes, can be dismissed as peripheral to the IOS story. They merely suggest that the spirit in which the sales force went about its missionary task was not always as high-minded as one would have gathered by listening to the addresses at a managers' conference.
It is not quite so easy to disassociate IOS from the long series of occasions when sales groups got into trouble for illegal selling, and for currency offences. As a general rule, IOS has naturally taken the public position that wherever either clients or salesmen changed money illegally, or committed any other monetary offence, then they did so contrary to IOS policy, and IOS knew nothing about it. All one can say is that after a few years of 'Happy Birthday' cables, any sales executive who did not realize how heavily IOS depended on illegal currency operations must have been singularly naive. When Bernie Cornfeld bought his first aeroplane, the joke at IOS was that now he was going to start 'Capital Flight Airlines.'
The first serious problem Ed Coughlin was sent off to deal with, even before his birthday trip to Caracas, was in Portugal. Late in 1965 the Ministry of Finance there opened a big investigation, alleging that several IOS managers and salesmen had been involved in illegal money-changing. There were no arrests and no indictments against individuals, though some of the IOS men had their passports taken from them. Finally, some four years later, IOS had to pay a fine of about $175,000.
Then, after Venezuela, came Colombia, in July 1966. That was a much less good-natured affair, IOS had been running a thriving operation there which, as in Venezuela, gradually expanded after 1962 from selling to expatriates to selling to Colombians.
Sales increased sharply in 1965, which was a bad year for the Colombian economy. The authorities later said they knew of cases where IOS salesmen went to potential clients and told them that the companies they had their money in were in danger of liquidation, in order to persuade them to switch their money into the Fund of Funds.
In November 1965 the government passed Decreto 2970, setting certain restrictions on mutual fund selling. The press began an excited campaign, almost certainly with official encouragement, denouncing the harm mutual funds salesmen were doing to the economy. Then, on July 11, the IOS managers took space in four Bogota newspapers to say that they would go on selling. It was only then that four IOS men, three foreigners and one Colombian, were thrown into jail.
The local press has estimated that IOS had taken $217 million out of Colombia. That may well have been an accurate figure for the face value of programmes sold: an IOS official in Geneva told us that the peak total actually taken out of Colombia by IOS salesmen was close to $40 million,
Ed Coughlin arrived to find the IOS men being kept in appalling conditions: one of them had been thrown down a flight of stairs in jail. Another had to be taken to hospital, from which he only escaped after three months under armed guard. It was the end for IOS in Colombia: in November 1966 the government passed a law formally forbidding all export of capital.
But Colombia was only a dress-rehearsal for what was to come in Brazil.
At 6.30 in the morning on November 10,1966 Mario Venturini, the top IOS salesman in Brazil, was woken by knocking on the door of his luxurious apartment in the Rua Bela Cintra in Sao Paulo. As he made his way sleepily to the door, he assumed it was yet another salesman with yet another problem. It was the police. They gave him time to dress, and to talk to his wife (who then hastily called up as many of the other salesmen as she could find) and took him in for four days' interrogation.
At precisely the same moment, the same thing was happening in some of the more expensive apartments in every major city in the country. In Rio, the police pulled in an Austrian, Baron von Buchenrode; an Englishman, Jack Hunter; and a Swede, Erik Sigrist; respectively the front-office man, office-manager, and insurance manager of IOS there.
In Belo Horizonte, they arrested Peter Kosovitz and Jacob Tzur, who they said incidentally had been an Israeli intelligence officer before he joined IOS.
More than a thousand miles to the north-east, in Pernambuco, the wife of the IOS manager there, an American ex-paratrooper called Norman Gershon, pulled a gun on the police when they came for her husband. And in Bahia the wife of the local IOS man, Marc Siegel, is said to have gone one further. According to the police, she marched down to their barracks and forced her way at gunpoint into the room where her husband was being questioned. (Those who know Brazil say that it is typical of that chivalrous, if excitable country, that when one of these two ladies eventually appeared in court she was eloquently commended by the judge for her courage and marital loyalty.)
The IOS sweep had been carefully planned for months by the police, the army and the dops - the secret police - and it was a total success. The previous night the two top IOS men in Brazil had been picked up at the airport in Recife. They were John Jessen, originally Danish, and Fred Borlin, German/Swiss. They were held in a steamy lock-up in Recife for 48 hours, and then flown down to Rio.
By that time the police had arrested several dozen salesmen, and impounded masses of papers to add to the detailed dossier they had been building up for months by intercepting IOS’s communications.
Ed Coughlin, inevitably, flew in a few hours after the catastrophe, summoned by a 'happy birthday' cable. He was more than disconcerted, when he bought his first newspaper in Rio, to see his own arrival reported under a large headline. He was even more surprised, later, when he saw a mug-shot of the recently departed general manager in Brazil, George Tregea, under the headline: 'O Cerebro' - The Brain.
Subsequently, Coughlin had some difficulty persuading Cornfeld that it would
not
be a good idea to send Tregea back to 'work things out'. It was a recurrent IOS belief that there was a deal for every situation, and that if a government was closing IOS down, it must be because some competitor had fixed them. There was one great telephone conversation on this theme.