‘I want my company back,' he said. And a few days later, he said: 'I want to emphasize that this is not a proxy fight.' It was not a fight, he meant, because he had already won it. He claimed that he already had enough votes to control the company.
Sir Eric was now playing a dangerous three-cornered game. Vesco had money, but objected to Cornfeld. Cornfeld described Vesco as a 'small-timer' and an 'interloper' in his milder moments. Sir Eric did not think that Cornfeld could really force his way back in. (Many proxies had been promised to both sides.) But while Bernie stormed and trumpeted, the company was bleeding to death. And the worse the financial situation, the more people would be tempted to throw support to Cornfeld in a final gesture of desperation and hope. After the IOS board, on August 7, formally rejected the feasibility of the Cinema City project, Sir Eric decided that he must try somehow to bring Vesco and Cornfeld together in compromise. Summoning all his diplomatic skills, he occupied the rest of the month in meetings designed to bring this about.
While this intricate battle raged, what was happening to the customers' money - to the investments of the people who had been told that IOS had beaten 'the money problem of the twentieth century'? At the beginning of August, one of the present authors ran into an acquaintance, an English veteran of the sales force, outside 119 Rue de Lausanne. The salesman explained that he had just cashed in his personal holding of the Fund of Funds. As, unlike an outside investor, he had never had to pay a sales load, and as the net asset value per share of the Fund of Funds, still inflated by the absurd Arctic gambit, stood at $18.47 Per share, our friend had made some very nice gains, and was looking understandably pleased. Then he frowned, unhappily.
‘I wish I had been able to advise some of my old clients to sell too,' he said. But there was no way to do so: they were mostly in remote parts of South East Asia.
It was, as it happened, really too bad about the clients. A few days later, the directors of the Fund of Funds announced that three-fifths of the supposed assets of the fund were to be removed, and placed in a new corporation. This would not have an open-end structure, so there would be no more redemptions over three-fifths of what had once been the world's fastest growing mutual fund.
It was the inevitable result of the gross speculations which had been made with the Fund over the previous two or three years. The indefatigable Allan Conwill, who had been on the Fund of Funds board while most of the punting took place, came forward to explain the move.
'Redemptions have not ceased,' he said. 'They will go on at a lower figure.' Lower was right: Funds of Funds shares, which had been worth $18.47 the day before, were reduced on the instant to $7.44 each. The great majority of the customers had paid more than twice that for them. Many of them, persuaded that they were buying 'long-term capital growth', had paid three times as much.
Meanwhile, Sir Eric's delicate negotiations had borne fruit. He had persuaded Vesco and Cornfeld, for the moment at least, that they must make some concessions to each other. Seventeen days after the collapse of the Fund of Funds, a terse press release came from 119 Rue de Lausanne:
'At a special meeting on September 3 1970, the Board of Directors of IOS Ltd approved a loan agreement with a subsidiary of International Controls Corp., ICE Investments Limited, providing financing of up to $15 million to IOS Ltd. The directors also elected Bernard Cornfeld to the board.'
So IOS had been rescued. It is time to ask whether it deserved to survive.
Chapter Twenty-three The Customers' Yachts
In which we find that the
IOS
sales force remained conspiratorial. Allen Cantor discourses upon Truth, Responsibility and the Little People. In which we examine the actual, as against the supposed, performance of the
IOS
funds, and figure out what happened to the customers' money.
In the summer of 1970, when a lot of people were leaving IOS, we talked to a young woman who was about to leave, and who had been on the clerical staff of the company for long enough to feel the atmosphere changing in the latter years.
'You know,' she said, 'once it used to be Bernie's great big
happy family. Then they all grew up and became millionaires, and it all turned nasty.'
Again and again, the IOS veterans we interviewed while preparing this book would say to us: make sure you put in the good things, as well as the problems. Looking back, they wanted us to see what fun it had all been in the beginning - when it was just a crowd of bright young Americans, exploring Europe, and earning enough money, for the first time in their lives, not to have to worry about it.
If you leaf through the early editions of the IOS Bulletin, it is easy to see what they mean. In 1959 and 1960, the Bulletin was just four mimeograph sheets. Each issue listed the salesmen who had 'made the bonus list' the month before. But most of the bulletin was taken up with friendly gossip about the members of the family.
Allen Cantor and his wife are looking after the dogs of several
of their friends. John Curran has had a 'small but lucky' evening
in the casino at Divonne. Harvey Felberbaum has been sick,
but is better now. The Gangels have a new baby. The Himeses
have been visiting Jack's parents in Miami.
It was a comfort to read, if you were feeling lonely in a hotel bedroom somewhere like Djakarta or Maracaibo.
In 1960, it was news if someone spent $3,000 buying a car, and became 'the proud owner' of an mg, or a 'new, red TR3'. Ed Cowett, 'peripatetic IOS attorney', bought a Sunbeam Alpine in the summer of 1960. Ten years later, Cowett went to the office in a $20,000 Maserati. mgs were secretaries' cars.
Like the cars, the IOS Bulletin got bigger and shinier over the years. Instead of four mimeograph pages, the March 1970 Bulletin - the last before the crisis-was forty glossy pages, printed in colour. The artwork was sumptuous. Some of the best photographers in New York were hired to do the pictures. And the innocent, unpretentious note had vanished altogether.
The 'IOS-ers', as they called themselves, had always believed in blowing their own trumpet. But in March 1970, with the whole edifice tottering horribly, the music of self-praise blared out fortissimo. The brass predominated.
'This,' trumpeted Allen Cantor, 'is the year of Total Financial Service, a theme which epitomises fourteen years of historic corporate growth… In that brief time, IOS has evolved into one of the world's leading financial institutions - a global force in the fields of investments, insurance, banking and real estate.'
Just what was Total Financial Service? When the slogan was first proposed, the same question occurred to Eric Wyndham White. 'Tell me one thing, Allen,' he
asked Cantor, 'you call your salesmen financial
advisers.
Does that mean that sometimes a salesman could advise a prospect
not
to buy?'
Cantor's answer was prompt, but Jesuitical. No, a salesman could never advise a client not to buy. The salesman's role was not to give advice, but to help the client to put his money in the hands of someone who could make the right decisions. It would be unreasonable, he said, to ask that every salesman should be a competent financial adviser.
In public, of course, that was exactly what they were called. But truthfully, the only Total Financial Service that the salesmen were qualified or expected to perform was to extract from the prospect the largest sum of money that he could possibly be persuaded to hand over to IOS. The salesmen might take it fast or slow; in cash, or in monthly payments. They might take it for mutual fund shares, insurance policies, or flats in Southern Spain. What mattered to the sales organization, of which Cantor was the boss, was that they should continue to take it, whether the transactions were legal, or illegal - 'sensitive', as he preferred to call it.
That same March 1970 issue of the
IOS Bulletin
announced a forthcoming event, which became, as it happened, one of the most revealing incidents in the IOS story. It was the 'Millionaires Conference' to be held between May 22 and 25 in 'Hyde Park's elegant Grosvenor House, one of London's greatest hotels'. A 'millionaire', in this special IOS sense, meant any salesman whose personal sales volume for the previous year equalled or exceeded one million dollars. There were 97 millionaires listed by name as having been invited to a round of cocktail parties, dinner dances, and sessions on sales technique. But by the time May 22 came round, the world had turned upside down. The crisis had struck IOS, the shares of the company had collapsed, and Bernard Cornfeld, who was slated to give the 'keynote address' in London, had been deposed from the chairmanship of the company he created.
Cornfeld was uncertain of the reception he would receive from the master salesmen. But he spoke, and although there were hostile murmurs when he rose, at the end he received a rapturous, standing ovation. 'In the first three weeks of this month of May,' he said, 'under the worst possible conditions - a falling market, a hostile press, a massive rumour campaign against us - we managed to write more than $100 million in business… We are still a company that does the impossible.' After the meeting, he spent anhour signing autographs.
Allen Cantor, naturally, was also present, and he made it the occasion for one of his great sales sermons. This one was upon the importance of truth, and openness. The truth, he said, was the only weapon which could combat 'the wave of irresponsible rumours concerning our company, which have been spread by certain newspapers and individuals'. With this appeal in mind, and with the intention of restoring confidence in IOS, the gathering at the Grosvenor House passed a special resolution.
'On May 22, 1970 the undersigned group, representing the leading sales associates of Investors Overseas Services (all of whom are stockholders) met in London… We unanimously confirm our belief in the IOS concept of professional financial planning. We support the consolidation efforts of our Company, and will work together in the interests of our clients for the future success of our concepts and beliefs.'
The resolution was an effort, on the part of the men who had each hammered home their million dollars' worth of closes, to assert that there was really nothing shadowy or dubious about IOS - that it was really an orthodox financial concern, with everything open and above board.
There was just one problem with this ringing declaration. It was signed by 'The IOS Millionaires'. And of the 97 names listed as millionaires, true to the clandestine tradition of the sales force, 50 were pseudonyms. For instance, the top salesman of all was listed as 'Luc Sico'. Some time later, when the rhetoric had echoed away, we asked Allen Cantor to tell us about the great Sico. 'Luc Sico?' said the captain of the sales force, 'I've never heard of him.'
'Sico' along with Omar Wilde, John Fumble and others, appeared in the list of 'Asia VII'. That was the codename for Italy, plus Greece and Turkey - Harvey Felberbaum's domain. Harvey Felberbaum, asked later about these performers, said: 'Those? Oh, they were all phoney names.'
'It is essential,' said Allen Cantor at the Grosvenor House, '… to distinguish between what is true, and what is false.' Truth, he asserted, could save IOS. Yet his appeal for truth was addressed to an audience in which the majority were appearing under false identities. Like the word 'millionaire', like the word 'investment', 'truth' had a special meaning in IOS.
The true, in the ordinary sense, is hard to tell from the false throughout the IOS story. And nowhere is it more difficult than on the question of the actual investment performance of the IOS funds - which, in the end, is the heart of the business. Many people in IOS itself accept that the investors who bought shares in IOS Ltd were swindled; that company money was used for private advantage; that there was gross incompetence, that there were, unconscionable charges, ferocious sales techniques, illegal currency transactions, and ridiculous boasting.
But somehow, the myth lives on that the actual funds - the customers' money itself - were largely insulated from all this. It is still believed that the funds did well for their investors. There are two reasons for this. One is that people tend to think that all is well unless they actually see a man putting the money in a black bag, and leaving town on the first plane. The pattern in IOS was much more complex than that: it consisted of a lengthy and elaborate series of transactions, each one defended with a cunning and sophistry which might enable it, in isolation, to pass muster. It is only when something like the whole story can be assembled that the reckless and dishonest reality begins to emerge.
The other reason that people think the funds did well is that the men who ran IOS boasted, with daring persistence, that such was the case. Boasting and propaganda were what they did best. The success of their propaganda is measured by an article which appeared in the
Institutional Investor,
with whose conference in February 1970 we started our story.
In October, 1970, the magazine published an article which asserted that the IOS funds had despite the crisis 'fared remarkably well'. Now, this was shortly after the Fund of Funds, the most famous IOS operation of all, had suspended redemptions upon three-fifths of the assets in the fund - thus renouncing the basic principle upon which an open-end fund is sold, which is its liquidity. At that point, three-fifths of the customers' investments became virtually worthless, and IOS was unable to give any idea when a value might be restored. The closing of redemptions was due chiefly to the grotesque Arctic adventure. Together with the decline of the remaining part of the fund, it meant that the Fund of Funds virtually ceased to exist. Certainly it bore no resemblance to the article that the customers were persuaded in the first place to buy. The fact that immediately afterwards, a sophisticated investment journal could say that the IOS funds 'fared well' is a tribute to the legend that Cornfeld created. The IOS funds were disastrous for virtually everyone except the people who were running IOS. In order to demonstrate this some detailed arithmetic is required - which may be why Bernard Cornfeld preferred large generalities to specific figures-and some of the arithmetic is rather surprising.