Maxwell, The Outsider

by Tom Bower

  Maxwell would argue in the years ahead that during those first three weeks of May 1969 while Pergamon's annual report was being discussed and agreed he was the victim of the accountancy profession's lax and outdated habits. His accusers would claim with equal passion that, on the contrary, he exploited those weaknesses to their fullest extent. Both sides, however, agree that those weeks sealed his fate forever.

  The heart of the matter was the size of Pergamon's profits: Maxwell wanted them, as usual, to be as high as possible. To achieve that objective depended upon triangular negotiations and agreements between Pergamon's in-house accountants, the company's auditors Chalmers Impey, and Pergamon's bankers Robert Fleming. With the anticipated sale to Leasco, more depended upon that year's audited profit than previously and there were also more uncertainties to overcome.

  In the course of the previous year, some of Pergamon's trading relationships had significantly shifted. The crux of that new pattern was a group of companies, some privately owned by Maxwell and his family trusts and some based in America. To understand the crisis and the accusations which would dominate Maxwell's life in the aftermath of his negotiations with Steinberg, it is necessary to penetrate this constellation of companies established by Maxwell around the publicly owned company Pergamon.

  On 24 March 1959, Maxwell's original company, Low-Bell, and Maxwell Limited formally changed its name to Maxwell Scientific International (Distribution Services) Ltd - MSI(DS) - and simultaneously changed the objects clause in its memorandum of association, describing its future activities as general finance and investment. MSI(DS) was owned by Maxwell, his wife and Tom Clark. Maxwell was also associated with two other companies which bore very similar names but whose ownership and legal status were substantially different.

  On 1 July 1964, just prior to the public flotation of Pergamon, MSI (1964) Ltd was created as a wholly owned Pergamon subsidiary whose function was to collect Pergamon's debts, a task which had previously been undertaken by MSI(DS).

  The third company with a similar name was Maxwell Scientific International Inc. (MSI Inc.), which was a private company, incorporated and based in New York, and owned by two Liechtenstein based trusts for the benefit of Maxwell's sister, Mrs Brana Natkin, and her children. In law, Maxwell had absolutely no control over MSI Inc. or the Liechtenstein family trusts which owned MSI Inc. The company's main business was the purchase of books and journals from Pergamon in Britain for sale throughout America. MSI Inc. had one noteworthy subsidiary called MSI Publishers Inc. which Maxwell would later claim concentrated exclusively on trading in books rather than journals.

  In addition, there were two other companies privately owned by Maxwell which from time to time featured in Pergamon's normal business. The first was Robert Maxwell & Co. Ltd, known as R.M. & Co., which was originally Lange, Maxwell and Springer. In 1955 the company had changed its name to I.R. Maxwell & Co. and in 1963 had changed it again to its current name. R.M. & Co. was granted the sole distribution rights to all Pergamon's publications in Britain and was the company which Maxwell used to establish his bookshops.

  The second private company was Pergamon Press Incorporated (PPI), which was also founded in New York in 1952 and was owned by the same family trusts as owned MSI Inc. Indeed, both were housed in two premises, the brownstone at 122 East 55th Street which Maxwell had bought with the British Book Center, and Maxwell House in Elmsford, New York State. Both companies were also managed by the same people: Maxwell, Majthenyi, Tom Clark and Laszlo Straka. Since 1958, PPI had enjoyed the exclusive rights to sell Pergamon's journals and reprints in the western hemisphere. PPI became even more important in Pergamon's overall activities just six weeks after Pergamon was established as a public company in Britain in 1964.

  When in August-1964 Maxwell and Macmillan of New York terminated their five-year agreement, PPI had initially bought back Macmillan's stock. Maxwell explained later that he had ended the agreement with Macmillan because, firstly, 'In all the three years that Macmillan purchased books from us, MSI was their biggest customer'; and secondly, the directors of PPI had said that they could earn better profits from the concession: 'They made a good case out to me and I was very happy. . . .' PPI's shareholders at that stage were Majthenyi and R.M. & Co., of which Maxwell was also the principal shareholder. The termination had occurred just six weeks after the publication in London of Pergamon's prospectus for its flotation, but the prospectus did not mention the possibility that the profitable agreement with Macmillan would end prematurely or that Pergamon would sign a new agreement with PPI because, as Maxwell explained, 'I certainly had no knowledge about terminating it.'

  Four months later, on 2 December 1964, Pergamon in Britain bought PPI from Maxwell's family trusts in exchange for 276,154 Pergamon shares. The new public shareholders of Pergamon were told about the arrangements in a circular on 18 January 1965. On Pergamon's behalf, Maxwell wrote that he was convinced that an agreement with PPI would be more efficient and more profitable. Then, as another stage of this convoluted series of agreements, on the very same day that Pergamon bought PPI, two further contracts were signed. First, MSI Inc. agreed with PPI to purchase the complete inventory of Pergamon books which PPI had just bought from Macmillan. Secondly, by another agreement signed on that same day, PPI agreed to distribute the same books in the western hemisphere on MSI Inc.'s behalf.

  There are two interpretations of that series of agreements. Maxwell's critics claim that the agreement between MSI Inc. and PPI was an important manoeuvre to maintain Pergamon's high profits. If PPI, as a new Pergamon subsidiary, had just taken Macmillan's unsold stock and put it into a warehouse, the original sales to Macmillan could no longer have been counted as profits in Pergamon's accounts. By selling the Macmillan stock to the 'independent' company, MSI Inc., Pergamon's profits were unaffected. Maxwell claimed that MSI Inc. possessed the 'marketing ability' to sell the books while PPI had 'no machinery, no ability and no experience and no know-how in this area'. His justification seemed to contradict Pergamon's circular of January 1969, in which he had praised PPI's organisation as having the capacity to 'effectively . . . handle the sales'. Significantly, exactly the same people were managing all these companies and none of these details was fully revealed by Pergamon in Britain during the take-over battles of 1968.

  In a Pergamon circular sent by Maxwell in May 1968, he had stated that 'no director had any interest in any asset acquired or disposed of by Pergamon since October 1967'. The following year, the Take-over Panel would accept that the statement was legally true, but others were unhappy because the transactions were conducted by the Maxwell family trusts. Significantly, throughout this year, no one would ever actually read the legal documents which established the trusts or speak to the trustees who administered them. Consequently, there was no possibility of independently scrutinising Maxwell's claim that he had absolutely no control over the trusts or of checking who were the beneficiaries. Nor apparently was Maxwell ever asked to prove his claims.

  On 15 August 1968, Pergamon floated PPI as a public company on the New York Stock Exchange. Thirty per cent of its shares were offered for sale. At the time, the flotation seemed a prudent step to establish a firm American base for Pergamon in the future. The £400,000 which was raised was used to improve warehouse facilities and to reduce PPI's debt to Pergamon in Britain. Legally, PPI’s relationship with MSI Inc. remained unaffected, yet within one year these otherwise unsensational arrangements exploded the Pergamon empire.

  In Britain, the whole pattern of the agreements between Pergamon and the private companies was described in quite general and unrevealing terms by Maxwell before he began the serious negotiations with Leasco. Interested British shareholders and the City would have been hard pressed to glean from Pergamon's annual reports or circulars that PPI, prior to 1964, was a privately owned Maxwell company which had earned approximately $450,000 in each of the previous two years as commission from Pergamon for its sales and services to Macmillan. Shareholders also di
d not know about the intimate commercial relationship which developed between PPI and MSI Inc. after the break with Macmillan. They were not told that Majthenyi was the managing director of Maxwell's privately owned American company and of the subsidiary of the British public company. Nor were they told that the private and public companies snared common offices, warehouses and personnel for which MSI Inc. paid $600 per month.

  Overall, most investors in Britain would have been unaware that Maxwell, in managing the public company of Pergamon, faced a potential conflict of interests. If there was a responsibility for publicising those details, it rested not only on Maxwell but more importantly, as he later pointed out, on his advisers - the lawyers, bankers, accountants and brokers who joined together every year to formulate Pergamon's annual report and upon whose professionalism and independence the public depended.

  The first check on any possible irregularities was Pergamon's independent auditors, Chalmers Impey, who were at the time Britain's foremost accountancy experts for the publishing industry. Chalmers Impey understood better than others how to value the various stocks of books and how to assess the profits of an industry whose terms of trade include the unpredictable 'sale or return' agreements. The partner who had been responsible for Pergamon's accounts for nearly fifteen years was John Briggs, a sullen man who much admired Maxwell. Briggs suffered two major disabilities - a paralysing stutter and alcoholism. While his speech impediment was instantly recognisable, he successfully concealed his drinking. The relationship between the very articulate Maxwell and the handicapped Briggs was very relevant to the intense discussions which began at the beginning of 1969 about Pergamon's profits for the previous year.

  As early as February 1966, Briggs had written to Pergamon's directors expressing concern about the possible conflict of interests: Tn our view it is undesirable that there should be a trading relationship between a public company and another company which, while not a subsidiary, is subject to any measure of common control, so as to leave room for the suggestion that the profits of the public company might be inflated or deflated as a result of such relationship.' The advice had no effect.

  The preparation of Pergamon's 1968 accounts had started in earnest soon after the Christmas holidays. At Headington Hall, three people were directly involved: Edward Garside, the chief accountant, Peter Bennett, the company secretary and financial director, and Tom Clark, an accountant who was also Pergamon's deputy chairman. Garside had been appointed in April 1968 after Chalmers Impey had complained that Bennett was unable to cope with the enormous workload. Like all new arrivals in the stable block adjacent to the Hall, he would be struck by the revelation that although Bennett was employed by Pergamon he also managed Maxwell's private companies' accounts from the same office. Instead of different accountants located in separate offices handling the potentially conflicting responsibilities, the cash books, wages and invoices for all Maxwell's interests passed across the same desk. Yet under the system of compartmentalisation, only Maxwell really understood the affairs of each of the public and private companies, and that caused further complications.

  Chalmers Impey were auditors for Pergamon but not for the private companies. Until 1969, they had accepted without question the terms of any transaction which Pergamon directors stated had been settled with Maxwell's private companies although, as a complicating factor, Pergamon's financial year ended on 31 December while the private companies' financial year ended on 30 June. Briggs's subordinate who personally did all the leg-work to audit Pergamon accounts was Anthony Payne, an accountant with nineteen years' experience. Payne would later describe the reconciliation of Pergamon's accounts with those of the private companies as 'basically impossible', because all the accounts were chaotic.

  As he prepared the accounts in consultation with Maxwell and Clark, Bennett endeavoured to meet Maxwell's prevailing commandment - profits were to be maximised to meet Maxwell's publicly announced forecast of over £2 million. There was absolutely nothing illegal or even unethical in that practice, especially since the Companies Act of 1967, by opening new loopholes, had left excessive discretion to the accountants.

  At some stage during late 1968, Bennett was told by Maxwell that MSI Inc. and R.M. & Co. had placed orders with Pergamon for two sales of back-issue journals which were worth £708,000. Bennett was also told that in anticipation of a further 'firm' order from MSI Inc., other old journals which were also stored in Pergamon's warehouse in Olney should be recorded as profits to Pergamon. The back issues, which in previous years had been valued by Pergamon itself as nil, were written up as a £266,416 profit. Altogether, the new orders from the private companies added a total of £974,000 (of which approximately £700,000 was profit) to Pergamon's income. Effectively, one-third of Pergamon's total profits in 1968 would be derived from those two sales. Without them, Pergamon's profits would have been approximately £1.4 million, which was £100,000 less than the profits in 1967. Bennett, who claimed that he could never discover the exact terms of credit between Pergamon and MSI Inc., accepted the orders at face value. He insisted that he never saw a written invoice and had acted on Maxwell's oral assurance.

  The draft accounts which Bennett therefore sent to Briggs and Payne at Chalmers Impey in March 1969 contained those profits. On the negative side, Bennett had also made two provisions. First, the dividend due from ILSC would be only half the amount expected (£180,000 instead of £350,000) and, disappointingly, could not be counted as profits; therefore there was no dividend from ILSC. Secondly, PPI's profits were lower than expected. In total, however, Pergamon's profits would be over £2 million, a new record which met Maxwell's public forecast.

  Payne, a big, bluff Londoner, read the accounts and began his audit. In the normal course of his work, he would expect substantial horse-trading with every client, which would be governed by the law, the interpretation of the 1967 Companies Act by other accountants (which he could copy), and by his professional principles. It was the interpretation of the law which some in the accountancy profession in retrospect criticised at Chalmers Impey. Maxwell, however, was entitled to rely upon the agreement of his accountants and auditors.

  By the end of March, Payne had approved the bulk of the accounts. His only concerns were three items: first, a payment of $800,000 from MSI Inc. to Pergamon; secondly, the sale by Pergamon for £100,000 of the Spanish translation rights of its books; and thirdly, MSI Inc.'s order for back issues which Pergamon had recorded as £266,416 profits.

  Solving the $800,000 payment proved relatively easy - it had been erroneously entered by a clerk as a credit to Pergamon. It was the opposite. Payne corrected the mistake, so reducing Pergamon's profits, only to be surprised at Maxwell's reaction: Maxwell stated that it had been on his authority that MSI Inc. had been debited with that large amount. Relations between the two did not improve further when Payne requested proof of the sale of the translation rights.

  On 21 October 1968, Maxwell had written to Payne to say that he had agreed to establish a joint publishing company with Spanish and Argentinian partners which would be legally watertight 'before the end of the year'. Maxwell estimated that the agreement would produce revenue 'in excess of £100,000' but he was advised to allow only £100,000 to be part of the official profits forecast which at the time was being compiled for the News of the World bid. In March 1969, Payne wanted to see the formal agreement with proof of the £100,000 profits which Pergamon had earned the previous year. Payne also told the Pergamon accountants that he wanted to see the evidence of the MSI Inc. purchase worth £266,416.

  By the end of the month, the written evidence for neither had been provided and suddenly the Pergamon board meeting which would approve the audited accounts for submission to the Stock Exchange was brought forward by two weeks, to 2 April. Payne immediately reported to Briggs that two outstanding obstacles stood in the way of approval of the accounts. Briggs consulted Maxwell, who promised immediate action to meet his self-imposed deadline.

  On 31 March a
telex arrived from Dr Edward Gray, MSI Inc.'s president in New York, which confirmed the profitable MSI Inc. order. But the telex ended with a puzzling sentence: 'Our purchases as always in the past are subject to right of exchange if issues still in stock or reprint on a royalty basis if issues no longer available.' Payne did not understand what Gray meant and Bennett would also later claim ignorance. Nevertheless the order seemed 'firm' (although the interpretation would be later disputed). On the following day, two more telexes arrived. The first was also from Gray stating that MSI Inc. had assumed responsibility for the Spanish translation rights' contract, and the second was a confirmatory telex from MSI Inc.'s auditors. Any qualms Payne might have felt about the fate of the Spanish and Argentinian partners disappeared in the frantic rush to complete the accounts for the vital board meeting which was scheduled for 2 p.m. the following day.

  During the night, Payne and Briggs discussed how the accounts should reflect the new value placed on the back issues of journals which were reserved for MSI Inc. One possibility was for a formal 'Note', an explanation that would be included with the published accounts, but whether Briggs supported that course before 2 April is unknown; it seems unlikely. Briggs supported Maxwell's interpretation of how MSI Inc.'s order made the previously 'valueless' journals valuable since he was satisfied by Maxwell's assurances that Pergamon had received a 'firm' order. Payne struggled to complete the work and drove at breakneck speed from Oxford to Fitzroy Square - 'I've never driven so fast in my life,' he recalled - to arrive at what would be 'the shortest board meeting I have ever attended'.