Authors: William D. Cohan
In June 1987, Goldman underwrote and syndicated a £105 million loan, secured by a group of Maxwell’s real-estate assets, including
Maxwell House, the value of which was appraised at double its value seven months earlier. Back in April 1986, Maxwell announced that it was his intention to transform
Pergamon Press, a scientific-journal and reference-book publisher that he started in 1951—and would rename
Maxwell Communications Corporation—into a global communications and information company with revenues of £3 billion to £5 billion by the end of the 1980s. This was to be no mean feat considering that the company’s revenue at the end of December 1985 was £265 million. By September 1986, Goldman had started helping Maxwell expand his empire through a series of block trades that helped Maxwell acquire
Philip Hill Investment Trust plc, which had £331 million of investment assets. “It was the start of a significant relationship,” according to the DTI report. “It was an important and profitable piece of business for Goldman Sachs.” Some at Goldman, including a few partners in London, questioned the wisdom of doing business with Maxwell, but any concerns were quickly jettisoned in favor of the moneymaking opportunity.
Of course, had Goldman—and
Eric Sheinberg, Maxwell’s banker at Goldman in London—given serious consideration to a 1971 DTI report about Maxwell’s duplicitous nature, the firm might have stayed away from Maxwell completely and avoided the scandal. The DTI’s earlier report arose after a deal between Maxwell and
Saul Steinberg, the flamboyant New York corporate raider, went sour. According to
Roger Cohen, in the
New York Times,
Maxwell was “
a Czech-born Jewish immigrant who had changed his name three times and survived humiliation by Britain’s clubby City establishment [and] he was incorrigibly suspicious of others.”
In June 1969, Steinberg’s Leasco agreed to buy Pergamon from Maxwell. But Steinberg quickly came to believe Maxwell had deceived him about the value and substance of Pergamon. The DTI’s report seemed to back Steinberg. The agency found Maxwell’s “apparent fixation as to his own abilities causes him to ignore the views of others if these are not compatible” and that his shareholders’ reports betrayed “a reckless and unjustified optimism” that sometimes led him “to state what he must have known to be untrue.” He was found to have inflated the revenue at his encyclopedia business and sold scientific journals to his other private companies to make revenue at Pergamon look higher. “He sold a lot of scientific journals to related private companies and inserted them as profit,” Ronald Leach, an accountant who was one of the DTI’s investigators on the matter, told the
Times
. “It’s an old accountancy trick, but not one to be recommended.” The report concluded: “We regret having to conclude that, notwithstanding Mr. Maxwell’s acknowledged abilities
and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company.” Maxwell was soon ousted from Pergamon.
When
Eric Sheinberg heard about the DTI’s 1971 report on Maxwell, he gave little weight to it, since he knew
Saul Steinberg and found him unsavory. Plus there was money to be made from Maxwell. Sheinberg had learned about risk from Gus Levy, who had taught him “
never worry about how much money you are going to make on a trade … focus instead on how much you are going to lose if you make a mistake.” Sheinberg told the DTI team investigating Maxwell again after his death that Maxwell “was thought to be enormously wealthy and apparently dealt with virtually every major UK financial institution.” Sheinberg said he thought Maxwell “was controversial.” He had heard of the 1971 DTI report about him but “from his knowledge of the other party to the dispute”—Steinberg—“that had given rise to the [report], he was inclined to think that [Maxwell] would have behaved the better.” But Owen Stable, a judge and the other author of the 1971 DTI report, told the
Times
in December 1991 that Maxwell simply repeated his bad behavior. “
What has happened now amounts to a repeat performance,” he said. “I thought back then that he was one of the biggest crooks I’d ever met. He invented deals between his private and public companies. He was incapable of distinguishing between other people’s money and his own.”
After the DTI report, Maxwell seemed determined to restore his tarnished reputation. In 1974, he bought back Pergamon from
Leasco, where it had performed poorly without him. In two years’ time, he had restored Pergamon to profitability and then used it as an acquisition vehicle. In 1981, he bought the money-losing
British Printing Corporation and made it profitable by busting unions and slashing staff. In 1984, he bought the
Daily Mirror,
fulfilling a lifelong ambition to own a newspaper. The paper was losing money, but he made it profitable by again destroying the union and brutal cost cutting. Soon thereafter, he made the bold prediction that his private company would have billions in revenue “and profits to match.” In 1988, for $3.3 billion, he bought
Macmillan Inc., a New York book publisher, and Official Airline Guide, using billions of dollars in debt to do so. By the beginning of the 1990s, Maxwell was still short of his goal—his revenue was just shy of $1 billion—but he had divested his printing business as well as Pergamon, his original business, for $446 million.
As a credit crunch took hold worldwide in the early 1990s, the prices Maxwell had paid for many of his assets—especially Macmillan—
looked excessive and the debt burden loomed heavily. “
When most of my colleagues looked at Maxwell Communications [in 1991], we felt that the profits were overstated, the debt burden was quite likely to lead to downfall, and we’d become increasingly concerned by the way in which it seemed the share price was rigged,”
John Kenny, an analyst at
Barclays de Zoete Wedd, told the
Times
. “I did not see anyone buying the stock, yet on many occasions it was going up.”
Part of the alleged blame for the apparent manipulation of Maxwell’s stock rested with Goldman, according to the DTI report and various newspaper accounts, and two put options that Maxwell and his son had sold Goldman on 45.65 million Maxwell Communications shares, representing 7 percent of the shares outstanding, a huge and atypical option. An August 14, 1990, option gave Goldman the right to sell 15.65 million Maxwell Communications shares on November 30, 1990, for 185 pence each, or about $3.60 at that day’s exchange rate and 15 pence above the prevailing price of Maxwell’s stock. Goldman bought the put to protect the value of the 16.7 million Maxwell shares it already owned and paid a fee to Maxwell for the right to sell shares to him. The option Maxwell granted Goldman expired two days after the end of period during which Maxwell could not buy his company’s shares.
During August, September, and October 1990, Goldman accounted for nearly half the trading in Maxwell Communications stock. Goldman exercised the first option the day it was to expire. Maxwell’s stock was trading at 155 pence. Since Goldman could sell the Maxwell stock back to Maxwell at 185 pence, the firm locked in a substantial profit—said to be around $4.5 million—on those Maxwell shares. “We did nothing illegal or wrong,” a Goldman official told the
Times
in December 1991. According to
The Economist,
in December 1991, “Goldman insists throughout this buying spree it was acting as a conventional market maker. The firm expected to sell the shares to Maxwell, but had no prior agreement to do so. The proof is in the risk it took. At the end of November 1990, Maxwell rebuffed an offer from [Sheinberg] to sell its entire positions,” then about 30 million shares. Goldman took a loss of “several million dollars” as a result when it had to mark its holding to the prevailing market price of 140 pence.
On January 4, Maxwell sold Goldman another put option, this time for 30 million Maxwell Communications shares at 152 pence each, two pence above the prevailing price. On February 15, Goldman exercised the option, selling Maxwell the block of stock at three pence above the market price. Goldman made another windfall. In the spring, Goldman started lending Maxwell money—as much as $75 million—secured by
33 million Maxwell Communications shares and then, after it went public in May 1991, 40 million
Mirror Group shares, about 10 percent of the company. More than three months late, on August 14, Goldman got around to disclosing to the British authorities that it owned around 7.5 percent of Maxwell Communications, which was a part of its collateral for its loans to Maxwell. Goldman said it “made an honest mistake” in not disclosing the position sooner. “Maxwell’s hunger for cash and willingness to sign away the public companies were the first public signs of his mounting panic,”
The Economist
observed.
Indeed, this turned out to be typical Maxwell. He had pledged the stock he owned in his public companies as collateral for loans he had received to finance his acquisition spree and his private companies. He also cadged from his employee pension funds. Some have argued that Maxwell granted the unusually large put options to Goldman at 185 pence as a way to keep the value of the stock high since it was being used as collateral for as much as $4.4 billion in debt. If someone—it turned out to be Maxwell, although no one knew that at the time, except for perhaps Goldman—was willing to pay 185 pence for the stock, it must be worth at least that amount. That is why Kenny, the research analyst, concluded the share price had been manipulated. (The DTI concluded pretty much the same thing, too.)
Beginning in August 1991, Goldman became increasingly skeptical of the financial health of Maxwell’s empire. On August 2, as Maxwell was contemplating spinning off his businesses in the United States—
Macmillan Inc. and Official Airline Guide—and loading them up with some of his debt, Goldman and
Merrill Lynch attempted to sell $75 million in Official Airline Guide preferred stock. But the auction failed to find buyers at acceptable rates and signaled that trouble could be afoot. Maxwell denied there were any financial problems at his company and vowed to try to sell the preferred again on September 20. “It will be successful,” he said. On August 12, Maxwell telephoned Sheinberg and told him he would not make a $35 million loan payment to Goldman due that day. “Mr. Sheinberg told us that this was the first time Robert Maxwell had reneged on a deal and that it represented the end of their business relationship,” according to the DTI report. “From that time on Goldman Sachs’ efforts were directed to obtaining repayment of the loans they had made and settlement of the outstanding transactions.”
When Goldman and Merrill tried again to sell the preferred, it again failed to find buyers. With the knowledge that Maxwell was having trouble getting new financing, in a replay
of Penn Central, Goldman started pressing him to repay its $75 million of loans. On October 22,
Sheinberg met with Maxwell one last time to try to get him to repay the money owed to Goldman, then three months overdue. If Goldman was not repaid immediately, Goldman would sell the Maxwell Communications shares it held as collateral. “If you do that, you’ll kill me,” Maxwell told Sheinberg. When he did not make the agreed-upon payments, Goldman started selling the Maxwell stock it had as collateral. That day, Goldman sold 9 million shares. In response, Maxwell agreed to make a payment on October 29. When he failed to make that payment, Goldman told him it would sell more collateral. Despite a request by Maxwell’s son, Kevin, not to do so, on October 31, Goldman sold another 2.2 million shares. Goldman continued to sell Maxwell shares for the next five days.
On November 4,
Eugene Fife, a London partner, called
Edward George, deputy governor of the
Bank of England, and told him there would be a public announcement that Goldman had been selling the Maxwell Communications shares it held as collateral for the loans Goldman had made to Maxwell. According to George’s notes from the conversation, “Gene Fyfe [
sic
], Chairman of Goldman Sachs, telephoned the Deputy Governor on 4 November to inform him that Goldmans had decided to sell the collateral on two outstanding loans to Robert Maxwell, one for £20 million and one for £30 million. This action had been taken after Goldmans had granted several extensions to the loans. They had now got tired of waiting, particularly given that Maxwell appeared to have sold a number of entities recently, but had not distributed any of the proceeds to Goldmans. The collateral consisted of a block of
Mirror Group stock and a block of Maxwell Communications stock. Goldmans intended to sell the Maxwell Communications stock first and to do it as quietly as possible in the hope that there would be no disruption to the market. Maxwell himself was aware of Goldmans’ intentions.”
On November 5, at 1:05 p.m., Goldman’s message about the sale of the Maxwell Communications stock hit the newswire. Within hours, Maxwell was dead. At the time of Maxwell’s death, Goldman still owned 24 million shares, which quickly became worthless as Maxwell’s scheme unraveled. At the time of Maxwell’s death, he still owed Goldman $62 million. According to the DTI report, Maxwell denied having manipulated the price of Maxwell Communications stock by entering into the put agreements with Goldman. “The suggestion that I distorted the shares in MCC is untrue,” he said. “I did not support the share price with a view to deceiving or distorting the market and such actions as I have taken have not been designed to preserve my personal wealth at the expense of others.”
But the relationship between Maxwell and Goldman was fraught with contradictions and disagreements, including about the nature of the relationship itself. For instance,
Kevin Maxwell, one of his father’s trusted advisers and executives (who was later accused and acquitted of criminal charges in the matter), told the DTI that during 1990 and 1991, his father and Sheinberg spoke daily whether Maxwell was in “London, New York or on the yacht.” His father was “exceptionally vulnerable to any trader who described a strategy that would lead to an increase in the Maxwell Communications Corporation share price” and that “faced with such a strategy Maxwell would always be a purchaser and Mr. Sheinberg exploited that.” Kevin Maxwell said that Sheinberg told his father that Goldman would “mop up shares in the market, enforce physical delivery by short sellers and so cause the price to rise.” The strategy “would get rid of the bears and, in Mr. Sheinberg’s phrase, ‘reduce the liquidity of the stock in the market,’ thus improving the share price. They agreed on this strategy and, if Robert Maxwell heard there was a bear raid on [Maxwell] shares, he would at once telephone Mr. Sheinberg.”