Do You Sincerely Want To Be Rich? (36 page)

    3. The Finter Bank was deeply involved. It went to the length of having special stationery printed to handle the volume of IOS and Fund of Funds business it was doing. Indeed, on at least one occasion Beltraminelli wrote to an IOS manager asking him to visit the Finter Bank's offices 'to have the mechanism of the IOS organization explained to you by one of our employees'!

    Understandably, for a long time, Harvey Felberbaum insisted to us that he knew of no illegal selling in Italy after the setting up of Fonditalia. Eventually, however, confronted by the evidence to the contrary, he conceded that illegal sales 'did continue'. He explained that his earlier denials had been motivated by his concern for the sales force, for which he feels a strong sense of responsibility. 'Okay', he said, ‘I was playing games with you, but what would you have done?'

    One prominent lawyer in Rome told us that he was called up so often by IOS salesmen offering to take his money in lire and pay it into dollar funds in Switzerland that he got in the habit of slamming the phone down whenever anyone introduced himself, or - as it often was - herself, as being from IOS. Here is how IOS got round the Italian currency laws.

    When the salesman had found a client, he would ask the client to make out a cheque to the salesman on his ordinary lira account. The salesman cashed this, and asked his bank to make him out what are called 'assegni circolari' for the equivalent amount. The 'assegno circolare' in Italy is rather like a banker's draft for a given amount which can be passed from hand to hand: because it is guaranteed by the bank, it is as good as cash.

    The salesmen were under instruction not to make out these 'assegni circolari' in amounts higher than five million lire (about $8,000) each. Higher denominations had to be registered in a way that could have been traced.

    These banker's cheques were made out by the salesman to imaginary names, such as Giuseppe Verdi, for example, and sent to the Finter Bank through a particular postal box in a village near Chiasso. (Correspondence relative to these transactions went through two other postal boxes, one in Chiasso post office, one in another village.)

    The salesman then telephoned the Finter Bank and told them which client's account was to be credited with the amount that had been mailed to the false name.

    Then came the trickiest stage of the operation, the actual shift from lire into dollars. It was done by means of an ingenious system of reciprocal accounts between the Finter Bank and certain banks, or branches of banks, just across the Italian frontier in Como.

    This is how it was done. The Finter Bank opened accounts with these banks in Italy into which, naturally enough, it was perfectly legal to pay Italian cheques. The banks in question, in their turn, opened numbered accounts with the Finter Bank, which, again, was perfectly legal. Naturally the Italian banks had cheque books to enable them to write cheques on these accounts with the Finter Bank.

    When a banker's cheque for, say, ten million lire arrived from a salesman in the way we described, the Finter Bank would call up the bank in Como and say 'We are crediting you with ten million lire,' and it would send the cheque, made out in the name of Giuseppe Verdi or whoever it might be, to be credited to its account in the Como bank.

    At the same time the Como bank would call up the Finter Bank and say 'We credit you with $16,000,' the dollar equivalent of the client's ten million lire. They would then send a cheque for this amount in dollars to the Finter Bank: it was of course perfectly legal for the bank to transfer dollars in this way.

    The transaction was thus finished with a minimum of risk for all concerned. The Finter Bank now had the dollars to invest in Fund of Funds or IIT according to the instructions from the salesman. It would also handle the return flow of liquidations and 'automatic withdrawal accounts' for the clients, and commissions for the salesmen. Sometimes the larger salesmen had enough dollars in their Finter Bank accounts to carry out the exchange transaction on their own account. But the method we have described was the standard one.

    The system had one refined advantage. On the back of an Italian 'assegno circolare', and indeed of any Italian cheque, it says 'to be circulated only in Italy'. This provided the IOS salesman with a talk-out if he should be stopped and searched at the frontier.

    'I'm taking it back into Italy with me,' he could tell the frontier police. 'And anyway you can't say it's currency, because no one can cash it in Switzerland.'

    How big was Harvey Felberbaum's black operation in Italy? When did it start? And how long did it go on?

    Once again, precise figures could only come from inside IOS itself. We have only been able to glean certain specific indications.

    Records for one individual IOS manager in Italy show that up to the summer of 1969 he had sold in his entire IOS career (all of it after the setting-up of Fonditalia) 32 % Fonditalia and 68 % illegal funds. During the period of illegal sales, $100,000 a month was considered only a respectable sales total for an individual salesman. The number of salesmen involved in illegal selling was given to us as 250-300 by several sources: of these, only a couple of dozen managers were in on the details of the method for changing money through the Finter Bank. The rest passed their business through their managers.

    The lowest estimate any of the managers we talked to gave us for the volume of illegal business was $12 million a month in 0 face value for the whole of Italy during the peak years. One man stated with precision that the volume was $20-30 million a month in illegal sales, of which half was in cash. He added that this made IOS the biggest single illegal exporter of currency out of Italy.

    It is clear that this business had started as early as 1965, and we were told by the two IOS directors in Geneva that it was still going on in September 1970. We have documents to prove that it was going on before February 1967: that new Fund of Funds accounts were opened well after the establishment of Fonditalia; and that the Finter Bank was still servicing illegal accounts at least as late as January 1970.

    What the Italian story shows is that the IOS sales organization did not change its spots after the shift in emphasis from the under-developed countries back to Europe.

    It cannot be argued that, after Brazil, the IOS management in Geneva did not know that illegal selling was still going on. Apart from the fact that two directors told us that they knew about the illegal selling in Italy, there was a general discussion of the whole question at a meeting of the sales company board as late as March 12, 1970. The directors heard a report from the Sensitive Areas Committee, which dealt with illegal selling in the Philippines, Bolivia, Peru, Singapore, and elsewhere. 'Sensitive areas' had been the euphemism for black operations since the days of Ed Coughlin's first birthday cables. Did the board reiterate a firm opposition to illegality? It did nothing of the kind. There was a general discussion of an 'early warning system' through contacts with 'highly placed people' in each country. The committee recommended that sensitive areas should not be closed down, but that controls and security should be tightened. Allen Cantor moved that this policy should be adopted, and the motion was unanimously passed. The sales company was thus formally committed to permitting illegal sales to continue.

was the Palazzo Orsini. But the Paris office was perhaps the most impressive of all-the house where Frederic Chopin died in 1849, In the Place Vendome, a few strides from the Rue de Rivoli and the Tuileries and just opposite the original Ritz Hotel. The only thing is that you had to be quite sharp-eyed to notice that the Paris headquarters of IOS had anything to do with IOS at all.

    'Banque Rothschild, Division des Programmes d’Investissement', is what it says most prominently on the brass plaques outside the entrance to 11 Place Vendome. Underneath is the discreet annotation: 'Assistance Technique IOS.' In France, Bernie Cornfeld, scourge of the Establishment, hid behind the skirts of the most established financial dowager of them all.

    This policy has certainly paid off in terms of sales, though not yet in terms of profits. France was the last major market in Western Europe which IOS had never been allowed to penetrate.
¹
It was able to do so in the end only by suppressing its own name

    
¹
Belgium is the most important market IOS was never able to penetrate: in Spain and Portugal as we have seen it did so only temporarily.

    

    and to a great extent its own personality in a 50-50 joint venture with the Paris House of Rothschild.

    It was a shrewd move. Two of the safer generalizations about the French are that they by no means share the Germans' predisposition to admire all things American, but that they do have a deep faith in the financial acumen of the Rothschilds.

    The Rothschild link enabled IOS to get permission to sell in France. It helped the salesmen to get their foot into French doors. And it prevented sales in France from being damaged by the IOS crisis to nearly the same extent as they were in countries where IOS was clearly identified.

    Rothschild-Expansion did not come into existence until the summer of 1969. The sales force did not take to the road until October. Within three months the IOS-trained salesmen doubled the net asset value of the fund from $6.4 million to $12.7 million. And the volume of sales continued to flourish through the spring in spite of all the news from Geneva. In April, Rothschild-Expansion salesmen sold some $25 million face value, and by the end of 1970 the net asset value stood at $69 million.

    The salesmen themselves were in no doubt of the reason. 'In France,' said a branch manager, Jacques van ler Berghe in the autumn of 1970, 'we have had a different situation than in IOS generally, because the public was not directly affected by the IOS crisis. Much of the public does not connect IOS with Rothschild-Expansion.'

    Nevertheless, however much it may have suited both IOS and Rothschild to pretend that IOS wasn't IOS, the origins of the highly respectable operation in France can be directly traced back to a typical rambunctious IOS hot money, capital flight operation in an under-developed country. In the Philippines, as it happens, of all places.

    Rothschild-Expansion owes its existence chiefly to two men. One of them is Paul Vincent, the young managing director of the Banque Rothschild. Vincent has been very much the spearhead of the Paris Rothschilds' determination to modernize their gigantic business. One of the principal directions in which the barons Guy, Alain and Yves de Rothschild and M. Vincent have decided as a matter of policy to move the bank into what might be called the consumer end of banking. To this end, the bank has, for example, opened several new branches for the first time in its history. It has created an enormous new complex of modern offices in the Rue Lafitte, which seem to symbolize a desire to leave behind the image of conservatism and secrecy which is traditional with private banks on the continent of Europe.

    

    What had been impossible for IOS, however, was easy for the Rothschilds. They decided to go in with IOS in January 1969. They asked formally for official authorization in May. And they got it in July. Specifically, the arrangement was for IOS and Rothschild to split profits and losses equally, both on the sales side, and on the management of the funds. It was also proposed to buy the Paris affiliate of the Swiss-Israel Trade Bank for 45 million francs (about $10 million) as the IOS bank in France.

    The man who set up the sales operation was Alain Berrier; it was he who came from the Philippines. Outwardly, Berrier can show all the badges of membership in the French technocratic elite. Tall and thin, he is a graduate of the Polytechnique in Paris and the Harvard Business School. And he has the tidy mind and precise speech which these two institutions stamp on their pupils.

    But Berrier has an attractively unorthodox side to him. After graduating from Harvard he went round the world, doing odd jobs and playing the guitar to pay his way. In February 1965, he found himself in Japan, broke, and saw an IOS advertisement in the paper. He signed up as a salesman, and worked with the foreign business community in Japan for nine months.

    He is an ambitious young man and when he saw that he could never hope to rise to be a gm in Japan, it was agreed that he should move on and try his luck in the Philippines.

    When he arrived there, there was a small IOS sales force at work, doing $500-700,000 worth of business a month, according to Harold Becker, who was then the manager. They were selling mainly to the American military market at Clark Air Force Base (one of the main rear bases for the Vietnam war). Becker made it plain to Berrier in their first conversation that in his opinion it wasn't even worth trying to sell to Filipinos. It was not clearly illegal to do so at that time. But most of the IOS salesmen were only in the Philippines on two-month tourist visas.

    Shortly after Berrier arrived, Becker had to leave, because his wife was caught overstaying a visa. A typical IOS row developed over the succession, with Bernie Cornfeld and Allen Cantor called in by the rival factions.

    Berrier had already discovered that his American colleagues were wrong: you could sell to Filipinos. ‘I refuted their hypothesis,' was his way of putting it. In the end he solved the hierarchical dispute in a way which is not recommended at the Harvard Business School. He simply drove a truck down to the IOS office in the middle of the night - it was during a typhoon - and removed all his papers. In practice, from then on, the military market went its way, and Berrier and his group sold to the Filipinos.

    Over the next eight months, sales went up from $600,000 a month to $2.8 million a month. The more Berrier and his men sold, the more the Central Bank, worried about the flight capital involved, tightened up the currency controls. And the more the bank turned the screw, the more business boomed.

    Finally, early in 1968, the Central Bank put out a last circular which made the whole operation indisputably illegal. ‘I decided to play a last throw,' Berrier said. He pointed out to us himself that it was a considerable gamble, since not only was his operation illegal because of exchange control: he too had only a tourist visa, and he was paying no income tax.

    He went to the Central Bank, and explained to the director of foreign exchange there that because of the front-end load, if all the Filipinos who had taken out systematic programmes were prevented from keeping them going, then they would lose money on their investments. He succeeded in persuading the official to give him permission to continue to take in monthly payments on all programme's initiated before the date of the meeting.

    'It was a bluff,' Berrier admitted to us. He simply made an arrangement with the IOS computer at Nyon for all programmes sold in the Philippines to be ante-dated to earlier months. And went on selling.

    It had always been Berrier's ambition to get back to France and set up an IOS operation there. It so happened that Henry Carnegie, one of the lawyers who had been taken on by James Roosevelt's IOS Development Company, came out to Manila. Carnegie was the man charged with examining the possibility of getting into France. Berrier urged on Carnegie his own conviction that the only way to get into France was to do it with Frenchmen. With the Rothschilds as partners, and with a wholly French sales force
¹
, Berrier argued, the French government's opposition would melt away.

    And so it proved. The operation was enormously successful for Berrier. By May 1970 he was listed by Allen Cantor as one of fewer than a dozen IOS men who would be affected if no-one was allowed to earn more than $100,000 a year. It has been satisfactorily successful for the Rothschilds too, and they are happy at the way it has turned out. But the connection between the highly respectable sales operation they run together today and the piratical capital flight phase of IOS's history is plain and direct.

    Understandably, the Americans who ran IOS, being used to something close to uniformity in the law governing mutual funds

    
¹
Of the fifteen original managers, fourteen were French, and one Swiss I This contrasts sharply with the dominance of the American managers in Germany.

    as between the fifty states, found the diversity of the legal situations in Europe both puzzling and irritating. Holland and Belgium are a case in point.

    In Belgium the law forbade any mutual fund, foreign or domestic, to sell its shares unless both the fund itself and its promotional literature had been approved by the Belgian banking commission. No offshore fund ever won that approval -though Fortune magazine found that no less than 23 funds followed up a coupon sent from a Brussels address in answer to their advertisements in an international newspaper.

    IOS made repeated attempts to change the banking commission's mind. But the Belgians would not budge. They had sent to the sec in Washington for all the material it could give them on mutual funds in general and IOS in particular, and having studied this material, they could not be persuaded to allow IOS to sell in Belgium.