'If you took a look at the profits for the first half of 1969,'
said an IOS accountant who worked on the prospectus, 'the
alarm bells were ringing all over the place.' Maybe they were:
but you had to know where to look. And even if you did wonder whether IOS might not be losing momentum, there was a note on page 8 which might fairly be called a reassuring caveat. It was expected, said the note, that net income would decline in the third quarter of 1969. But the experience of previous years showed that IOS's last quarter was usually the best.
Just as the early history of IIT was eliminated, and the cost of the sales force covered up, so the prospectus minimized the evidence of IOS's injudicious investment banking operations. The Crang prospectus did not even mention Commonwealth United Corporation, and the Drexel edition dealt with it in a footnote. This (repeated in the final iob edition) merely said that Commonwealth had become 'illiquid', and that IOS had caused Investment Properties International to lend it $4.5 million from fund money.
But before the completion of the prospectus, the IOS banks lent another $3.5 million to Commonwealth - a corporation which, since June 1969 had been unable to raise credit anywhere else. These advances put IOS Ltd itself at risk in the affairs of the sickly conglomerate. But there was no way purchasers of IOS shares could know that. (Eventually, IOS had to take over the ipi loan, advance still more money, and establish a $7 million reserve against Commonwealth commitments.)
Cowett, subsequently, claimed that the Commonwealth loans were left out of the prospectus because IOS regarded them as 'normal banking transactions'. Yet Commonwealth have since admitted that the only reason they agreed to IOS's abnormal terms
1
was that no one else would handle the transaction.
Possibly the most basic requirement in a prospectus is a description of the share capital of the company being offered. Yet the different editions of the IOS prospectus did not even agree on that. The Crang version makes a simple arithmetical error in one section, which overstates by 100,000 the number of shares being put up by selling shareholders. As to the total share capital of IOS, the best calculation one could make, on the documents available at September 24, was that the total number of IOS shares outstanding was not much less than 48 million, and not much more than 49 million. Thus, an investor could not even compute precisely the size of his equity.
1
See Chapter 17 The Master Financers.
This was the prospectus which Drexel, Harriman, Ripley together with Shearman and Sterling set out to make fully equivalent to one written under sec regulation. Apart from other omissions, it told the investors remarkably little about what the company was going to do with their money. There was just an airy reference to making time deposits, and to expansion in 'banking and insurance areas'.
Having completed the prospectus, the banks haggled with Cowett over the price at which the IOS shares should be launched. Great interest was being expressed in the offer, and in London it was reported that the investment-dollar premium was forced up by the eagerness of would-be investors. In Geneva the rights to IOS shares 'when issued' changed hands for as much as $28 per share.
The directors of IOS were euphoric. Many of them thought that Cowett should ask the underwriters to set the launching price at $15, even $20 per share. Their attitude was that they weren't going to give IOS shares away to a lot of bankers at knockdown prices: if the underwriters didn't like it, then let them drop out, and IOS would sell the shares themselves. With some difficulty Cowett, who was the realist on this occasion, got the board's authority to settle for $10. Even this left the underwriters unhappy. Guinness Mahon thought the price should be $7, and Drexel, Smith Barney and Banque Rothschild thought $8. Late in August, there was a long and difficult meeting in Geneva, and Cowett managed to get the underwriters to come up to $9.50. Complaining bitterly, the IOS board accepted the price. Bernie was telephoned in Paris, and he too assented, rather reluctantly.
The underwriters were already dispersing towards their homes, and towards the Swiss mountains, when late in the afternoon Cornfeld called Ed Cowett again from Paris. He wanted to talk to the underwriters himself.
With some difficulty, Cowett reassembled them, and Bernie flew to Geneva to make the new pitch. 'He talked to them about the mystique of th
e company,' recalled Cowett, 'and he talked to them about the mystique of ten dollars. And goddam it, he convinced them. Of course, within half an hour, they were unconvinced again - but they had done the deal.' It was the conceptual salesman's greatest achievement, and so he closed the deal for a single sale with a face volume of $110 million.
Of that money, roughly half went to the selling shareholders, and the influx to the IOS corporate treasury through sales of new shares was $52,400,826 after deductions. If ever a company needed to raise new capital, it was IOS, for in the day that the proceeds came in, the effective cash position of the IOS parent company was $1 million.
The respite for the treasury was short-lived. Ed Cowett disposed of the new cash with remarkable rapidity, in a series of intricate schemes. In order to understand the inner beauty of most of them, it is necessary to be acquainted with John M. King.
Chapter Nineteen John M. King: The Power of Natural Gas
In which we introduce Ambassador John M.
King, and describe an industry built upon tax avoidance. Together with their new chum, our heroes get mixed up in the Middle East crisis, hunting oil in Arab waters. Ed Cowett discovers the Arctic:
nopis
and other strange animals appear. Handley Page Aircraft becomes a casualty.
The
IOS issue was a hot one. Investors were disposed to believe Ed Cowett when he said that the public offer was inspired essentially by a desire to demonstrate the maturity of IOS, not by a wish to cash in. 'We don't need the money, that's for sure,' he said. Wise financial heads were inclined to accept that the offshore problem child had grown up, and could make a serious contribution to the workings of international capitalism. The feeling induced by the public offer was admirably summed up by a writer in the Financial Post of Toronto, the city in which, formally, the Fund of Funds had its home, IOS, said the Financial Post, was becoming 'increasingly conscious of its public image, and is perhaps becoming a bit more conservative. At the same time, the Financial "Establishment" is becoming a bit more daring and innovative - and the two might meet soon in the centre.' Journalistic appreciations of IOS, in most parts of the world, were moving rapidly from the guarded to the fulsome: a conviction was spreading, in the words of The Observer, that 'the world needs IOS'.
The general financial climate was ambivalent. The Dow-Jones index, having declined most of 1969, was wallowing.
But people looked forward to an upturn in 1970: surely this was the bottom of the cycle? IOS appeared to be busying itself respectably with ways of protecting investors against the sluggishness of the stock market. And then on the very last day of the year, IOS displayed a sudden flash of the Old Adam. It was inspired by Ed and Bernie's fatal fascination with the schemes of John McCandish King, the resident djinn of Denver, Colorado.
People used to find it very difficult to understand just what type of business John King's companies were in. Even in a basically laudatory article, a baffled newspaper in Denver had to admit that the city's fastest moving businessman tended to use 'a lot of words to reveal very little'. In reply to a puzzled shareholder, King once said the King Resources Company was 'a technological service company, oriented towards development and management of natural resources, with superior human resources to do the job. We are a body shop. We create ideas and cause those ideas to be well financed - then we go out and do the work.'
C. Henry Buhl III of Investors Overseas Services was among those who found this sort of language difficult to penetrate. In November 1969, when IOS was investing large sums of money with King Resources, Buhl went out to Denver and spent three days talking with King's executives. Buhl admits to having been convinced by some very unfortunate propositions during his time with IOS, but when he left Denver for Los Angeles, he told the King men: 'You know, I don't understand this company.'
No sooner had Buhl reached Los Angeles than he received a call from John King himself. 'Henry,' said King, ‘I don't think you understand my company.'
'You're damn right I don't,' said Buhl. 'I'll fly out and explain,' said King.
John King was en route somewhere in one of his private jets, and he arranged to touch down at Burbank airport. Buhl spent two hours on the rush-hour freeways getting to Burbank, where they sat together in the back of a car while King delivered a two hour lecture. It must have been a curious scene. Henry Buhl is a slight, worried-looking man whose only concession to flamboyance in his business dress is a tiny chbiii monogram on his shirt. John King stands six foot four and 230 pounds: he affects cowboy boots, hats with a 'k' on the side, and is reputed to own 3,000 pairs of cufflinks. He has a big, dome-like head, piercing blue eyes and a booming voice.
'He kept talking about the "use-of-money factor",' Buhl recalled. 'He said King Resources didn't have any projects that were paying less than 60% a year. I said, "John, I never heard of any investment that always paid 60% a year," and he said "You know what I mean, we cut off the least profitable ones." When King got out of the car, I still didn't understand his damned company.'
King did make at least one very clear financial statement, apropos of his connections with Investors Overseas Services. 'I'm very hot for international monies,' he said. 'It is so much easier to do business with these people…'
John McCandish King was born in Illinois in 1927, the same year that Bernard Cornfeld was born in Istanbul. King suffered from asthma and other illnesses during his youth, which meant that his education was upset, and he did not graduate from any of the three universities he attended. He left his last one, Northwestern, not from illness, but because he wished to further political ambitions.
King was a Democrat until he was 18, when he switched to the Republican party, and at 23 he was elected to the Illinois House of Representatives.
At the end of his first two-year term, the young legislator found that he had about $1,500 left over from his pay. He sank it all in a wildcat oil weU.
As a number of his customers were to discover later, the chances of hitting oil with any well drilled in the US are one in four, but only one in eleven
hits oil in commercial quantities. The chances of a wildcat striking are one in thirty, but King's first wildcat, drilled on a friend's farm in Oklahoma, did strike oil. 'I've always been lucky,' he said. ‘I get into difficult situations, but I always manage to come up smelling like a rose.'
The success of that Oklahoma wildcat decided the direction of John King's career. In 1955, King went into partnership with a man called Ben Stevenson in Chicago and formed the King-Stevenson Oil & Gas Co.
But John King did not become an oil man in the same sense as, say, Paul Getty. Nor did the companies he organized do the same kind of things as Standard Oil or Shell. In that sense, John King was not really an oil man at all. He was in the fund business, only his funds were drilling funds, not mutual funds. While Cornf eld owed his power and prosperity to the outflow of dollars beyond the United States, King owed his to features of the taxation system inside the United States. King's business consisted primarily not of exploiting oilfields, but of exploiting the taxation advantages available to those who look for oilfields.
Despite Congressional attacks which have progressively whittled away at those advantages ('inept laws and historic emotionalism,' said John King) it remains official policy to allow people to claim tax relief upon money invested in the search for oil, and upon any income arising from oil discovered. The potential of this system as a tax 'shelter' was widely exploited for the first time in the Fifties. Highly paid film stars, sportsmen and other folk in need of tax relief could not go out and drill their own wells. But there was nothing to stop them getting together in partnerships, pooling their money into a fund, and then hiring a manager to handle the drilling. It was then natural for the managers to turn into promoters, actively selling pieces of such partnerships. Fees increased, and since the manager tended to have little or none of his own money at stake, it often became questionable whether he cared whether his wells struck oil or not. Some wells were thought to exist only on tax returns. Others had to do service for more than one partnership, so that it would have been an embarrassment to strike oil, because accounts would have to be produced. There is said to have been some trade in 'dry holes' to meet such difficulties.
Abuses of this sort came to a head in the late Fifties, when a couple of drilling funds collapsed and a cloud settled over the whole business. It suffered a further blow in 1964, when the maximum tax rate was cut, eliminating some of the demand.
At the end of the Fifties, John King moved from Chicago to Denver. The King-Stevenson partnership broke up, and in January 1961 he started up a new concern, King Resources, which took over the oil and gas properties of the old firm. For the first six years of its life King Resources made little mark on the business scene. Then in 1966 John King started up with a new kind of drilling fund, and within three years,
Forbes
magazine reckoned that $300 million would be 'a low guess' for King's personal wealth. As to the amount of money his companies controlled, 'nobody other than King would dare put a figure on the total