In the New Year, a brief respite was found. The Beta loan was placed with two European offshoots of American banks, Wells Fargo, and Western American. The agreement, however, was conditional: Wells Fargo and Western American declared that the Beta funding would only be continued upon receipt of a compensating deposit of $5 million from IOS Ltd itself.
This was, in financial circles, a moment of no little panic. In New York, the Dow Jones was under 700, and falling like a stone. And at IOS it now emerged that, in the blunt words of an IOS accountant, 'there was nothing left in the pot'. Just over five months earlier, in its public offering, IOS had raised $52 million from the investing public. Suddenly, only one question was being asked around 119 Rue de Lausanne. Where the hell had all the money gone?
The people who 'sincerely wanted to be rich'… become rich! A tally of millionaires and multi-millionaires. Joel Mallin and the 'life-time system of tax deferral'. Ed Cowett buys some shares, and the money runs out at last.
On October 15, 1969, a young woman in a mini-cab arrived at the City of London offices of the Bank of New York and handed over to a small crowd of visiting bankers certificates for 5,600,000 common shares of IOS. The bankers had actually been expecting a rather more high-powered deputation, but they paid over $52,400,826 to the IOS treasury in exchange. It was almost certainly the largest single sum which ever belonged to IOS and constituted the stake in the last great IOS business game.
The statement may seem an odd one, but it must be remembered that the two thousand million dollars in IOS funds belonged to other people. The safeguards over the investment of that money were pliable - but it remained true that the power of that cash could only be used by the IOS men themselves through the adroit use of leverage. The $52 million from the share issue was subject to no such restrictions: the previous chapter began to indicate the spirit in which IOS approached the task of spending it.
The investors were promised, in the prospectus, that money raised would be used 'to develop and expand the Company's activities, primarily in the banking and insurance areas'. If that promise was made seriously it was rapidly abandoned. Apart from tax avoidance schemes and the like, more than $8 million of the money raised went almost immediately into the pockets of Cornfeld, Cowett, Cantor and the rest of the selling shareholders.
Drexel Harriman Ripley and the other distinguished underwriting banks were disposing only of new IOS shares. They did not want anything to do with the selling off of existing shares by members of IOS - the long awaited 'cashing-in'. J. H. Crang, the Toronto brokers, sold 1,450,000 of the existing shares to the Canadian public, and IOS's own Investors Overseas Bank was lined up to sell off 3,942,000 to some 25,000 employees, salesmen friends and customers of the firm
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It was Cornfeld's claim that at the public issue one hundred members of IOS would become millionaires - and this claim, at least, was no exaggeration. Our own inquiries into the 'cashing in' traced 87 millionaires, and because of the confusing nature of the records available, we probably missed a few. Of course, not all of them remained millionaires for very long: those who did were, on the whole, the ones who made the most thoroughgoing use of the right to sell shares, which had so long been denied to them. Cornfeld himself, who had always been able to sell, disposed of just 10% of his holding, which netted him $7.8 million cash, bringing his total proceeds from sales of IOS shares to some $14 million over nine years. (That, at least, is his own account.) After this sale, he was left with holdings worth around $90 million on paper.
Amongst the high command of IOS, there was some agonizing over the question of the exact proportion of his or her shares that each shareholder should be entitled to have freed from restriction in order to sell. It was necessary to put up a reasonable number of shares in order to make the offer worthwhile. But at the same time, if too many were offered, it would spoil the price. Indeed, to float off the entire IOS shareholding as it existed in 1969 would have required, at $10 per share, about half a billion dollars: a demand which would have utterly exhausted the international investment market.
The other tricky point was that the sales of existing shares, via Crang's and the Investors Overseas Bank, would have to be made at whatever price Drexel and the other underwriters settled for the new shares. There was great reluctance among
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See Chapter 18 A Very Long Way Offshore. In the end, iob sold 3,950,000 shares. Where the extra 8,000 came from is just one of the little arithmetical mysteries of the issue.
the big shareholders to sell any more of their own shares than they had to at prices fixed by people they regarded as a crew of mean spirited bankers. They thought that the share price was going to boom: their idea was to get a market established, and then they would be able to sell when the prices were far above the issue level.
In the end, a rule was agreed that everyone inside IOS who had held their shares for more than ten years must sell at least 10%, and no more than 50%. The rest could sell up to 10 % of their holding.
The general pattern was that big shareholders who had retired, and were no longer active in the company, sold very large blocks, and often the full 50%. Those who were still involved stuck mostly to 10%. This was not simply because they were involved in the boom mentality generated in the IOS boardroom in the latter Sixties. Another reason was that most of them were beneficiaries of Joel Mallin's 'lifetime system of tax deferral'.
Joel Mallin is a New York lawyer who sports pink shirts, wide plaited-silk ties and heavy jewellery. He did a good deal of commuting to and from Geneva as the moment of offering approached. He designed a mechanism to vanquish capital gains tax as thoroughly as IOS's other arrangements had been designed to vanquish income tax. The first step was to erect a large batch of foreign, discretionary trusts in the Bahamas, using IOS banks, and the faithful icb, as trustee. Then each big shareholder became a beneficiary under one of these trusts. 'It was a sort of tax avoidance supermarket,' said
one beneficiary. ('We didn't bother with guys who had less than 10,000 shares,' said Mallin. As the flotation of IOS was accompanied by an eight-for-one series of stock splits, that meant they did not bother with anyone who had less than 80,000 shares in the new set-up: in other words, they didn't bother with anyone who was worth less than $800,000.)
The next step was for the shareholder to transfer his shares at a relatively low price to the trust, and the trust would sell 10% in the public issue. Out of the proceeds, the trust would pay the shareholder for his shares, in instalments sale spread over five
years. The trust would not, of course, be subject to US capital gains tax, and although the instalments would have to be reported, they would be spread over a considerable period. The theory then was that the trust would sell another 10% each year, again with payments to the original shareholder to be made in instalments over five years.
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'This was deferral of tax, rather than avoidance,' said Mallin. 'True,' he added, smiling finely, 'in this case it might be lifetime deferral - coupled with absence of liability to estate duty.'
Combining these advantages with the attractions of an orderly - and, as they hoped, rising - market, men like Harvey Felberbaum and Roy Kirkdorffer elected to take 10% of their shares out of restriction in 1969, with another 10% to come in 1970. For this reason the biggest cash sums in the offering, after Cornfeld's own, were mostly taken by men who had been away from 119 Rue de Lausanne for some time. Lester Hayes, the onetime ballroom dancing champion, a veteran of the Boulevard Flandrin days, sold half his shares, and received $3.5 million cash. John Templeton, an American fund manager who put up some much-needed capital for IOS in 1962, received $2 million, and so did John Curran, the old rewrite man from the Herald Tribune. Eli Wallitt received $1.5 million - but he sold more than 10%, not because he was about to retire from the IOS board, but because he was financing the purchase of a lakeside mansion in Geneva.
Just behind him came an almost equally wealthy group: George Landau, now chief administrator; Don Q. Shaprow, overseer of Africa; Gladis Solomon, head of the IOS Foundation; and Richard Hammerman, the insurance expert. Each of these received $1.2 million for selling one-tenth of their shares. This left each of them with another $10.8 million of saleable shares at $10 per share.
There were 490 shareholders who put up shares for the 'cashing-in', raising altogether some $52 million from the market roughly the same sum as was raised by the new shares. Very
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Whether the US Inland Revenue Service would have accepted this ingenious scheme was a matter eagerly debated by the shareholders and their legal advisers. In the end the question became academic: the fall in the price of IOS shares solved most people's capital gains problems for them.
much the richest of these pickings went to Bernie and his grand old veterans: indeed, just fifteen people, all of whom took $i million apiece or more, accounted for $26 million of the cash between them. The list of sellers that IOS sent to J. H. Crang in Toronto reads like a wonderful, golden version of all those early sales bonus lists. George Tregea, the man who left Brazil so hurriedly, took $1 million cash. Ben Heirs, who started his training alongside George Landau in Geneva, almost exactly ten years before the public offering, sold shares to the tune of a little over $1 million: that, after underwriting discounts, brought him $988,000.
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Allen Cantor took $1.1 million. Bob Sutner, another veteran of the early days in Latin America, took out $1 million. Hy Feld, a quiet man who ran the New York office during Bernie's ill-fated attempt to crack the US market, took $1 million. The men who sincerely wanted to be rich were, at long last, rich - and in nearly every case, the cash that they took seemed to be merely an hors d'oeuvre, as it were, for the real feast which was to follow.
Even those who did not take the magic million had some impressive sums to their name. Ambassador Roosevelt received $684,000, and Barry Sterling, the investment banker, $691,600. Roy Kirkdorffer took $489,000 and Harvey Felberbaum took $605,416. As both of them were selling 10% through the trust system, that placed their fortunes at $5.1 million and $6.3 million apiece. (And we have records only of IOS shares: other investments could well have been made out of the override riches.)
It may seem odd, at first glance, that Cowett was only recorded as cashing in for $658,692, placing his fortune at just under $7 million. But Cowett, as we said earlier, was playing the game for its own fascinating sake. He liked being rich - but sincerely, he wanted to wheel and deal.
There were solid rewards too, for lesser characters in the saga. Howard Stamer and Robert Haft, the faithful New York attorneys, made sales worth $389,120 each. Eric Scott, head of Crang's, the brokers, sold a comfortable $136,800 worth. Sameera Abou-Haidar from Beirut got $163,000. Ray Tabet,
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All our figures are for amounts received in cash, after underwriting discounts.
Sameera's boss, took $378,480. C. Henry Buhl III sold $457,000 worth.
Going through the list of selling shareholders, it is possible to count 87 people who sold $100,000 worth or more of shares. Assuming that their sales were in each case 10% of their holdings, then this meant that each of them had a shareholding worth $1 million at the price of $10 dollars.
Bernie Cornfeld was busy assuring everyone who would listen that the shares were fine investments. Secretaries, cleaning ladies and messenger boys at IOS were exhorted to get in and buy while they could. Visiting reporters were offered shares. Much euphoria was generated, but at the end of the formal offer period, the Investors Overseas Bank, which was selling on behalf of existing shareholders, still had an embarrassing block of 834,000 shares on its books. Was the sale to be incomplete, leaving the men who were cashing in to go short of $8 million?
A charitable body came forward to prevent any such distress: none other than the IOS Foundation, promoter of Pacem in Terris. There was a slight problem, in that the Foundation lacked the necessary money. But IOS had just received $52 million for its new shares. So IOS lent the Foundation $8,344,000 to make the purchase and complete Phase One of the cashing-in. Thus $8 million of the money that had been put up on the promise that it would go into the 'development of banking and insurance' actually went to help develop the personal fortunes of the chieftains of IOS and their followers.
Amid all the intricate devices of the latter years, this is the one which shows most clearly that IOS had become, at heart, just a series of deals in the minds of Ed and Bernie. In this series of transactions they finally lost touch with even the fictional legalities of the offshore game.
Taking up 834,000 shares left the IOS Foundation with a huge debt which it could not possibly pay off unless it resold the shares. No problem: Cowett had another useful little Bahamian company called The IOS Stock Option Plan Ltd. He switched the block of shares to this company and decreed that the transfer amounted to a repayment of the loan, which was simply cancelled.
The manoeuvre depended on the protean nature of The IOS Stock Option Plan Ltd. It had been formed to get round a problem which resulted from the shifting of the home of IOS Ltd from Panama to Toronto, Ontario. Ontario securities law prohibits a company from buying its own shares. But in order for the Stock Option Plan to work, IOS had to be able to buy back its own shares at any time. Answer: turn the Plan into a Bahamian company whose voting shares were owned by three private individuals, Cornfeld, Cowett and Cantor, IOS itself only owned non-voting shares and therefore, according to IOS lawyers, it
was not a subsidiary of IOS, and could buy IOS shares. For Cowett's purpose, however, the Stock Option Plan was considered such an integral part of IOS that a loan made by IOS could be cancelled when 'repayment' - in this case the transfer of IOS shares - had been made to The IOS Stock Option Plan Ltd.