Empire of Deception

by Dean Jobb

  “I got deeper in the hole,” Leo explained years later. “You understand how it goes; one false step leads to another, until it is impossible to turn back. You must go on or face exposure.”

  As he looked for new ways to make money, construction of the canal unleashed a rush of land speculation in Panama. Fortifications being erected to protect the Canal Zone from attack, one writer noted, “made the whole country seem safe for American capital.” An array of projects were in the works—sugar refineries, coffee plantations, farming colonies, sawmills to cut exotic woods for export. American lumbermen were startled to discover that the inhabitants were using mahogany logs worth thousands of dollars for dugout canoes and makeshift bridges over streams.

  Even the Bayano region was in the news—and appeared poised to make real money for investors. At the beginning of 1909, the New York–based Bayano River Lumber Company floated a $500,000 bond issue to finance its operations. A year later, newspapers across the United States reported the purchase of a hundred thousand acres along the river with “vast supplies of timber.” The buyers, a group of wealthy Los Angeles businessmen, planned to build a sawmill and plant sugarcane to produce rum. Both companies had snapped up at least some of the land Leo had thought would make him rich.

  Then the idea that had been percolating in his mind since his return from Panama began to take shape. His friend and law partner Daniel Belasco had vouched for Nieto, and that had made the phantom Panamanian timber holdings seem plausible. That “stuck with me,” Leo recalled, and “taught me how easy the suckers can be made to fall, and that the closer they are to you the harder they will fall.” If a huckster like Nieto could do it, Leo could, too—only he would do it better. “I got to thinking about it and decided I could put it over, profiting by Nieto’s mistakes.” And “out of it all grew Bayano—the big idea.”

  Nieto’s major mistake, as Leo saw it, was failing to keep his investors satisfied and under control. Nieto’s eagerness to get his hands on the $10,000 seed money had raised suspicions about what he was up to in Panama. Leo would be patient. Nieto’s scheme had fallen apart because Leo had gone to Panama to see the reputed holdings. He would make his Bayano enterprise a profitable and solid investment—so solid that no one would feel the need to travel south to take a look. And he would cultivate a reputation as a prudent and successful businessman. It was essential that he earn the trust—the absolute, unshakable trust—of everyone who bought into his Bayano dream. David Nieto had been fly by night; no one would ever have cause to doubt the word of Leo Koretz.

  There was one more thing: the Big Idea would be meticulously planned.

  SS SANTA MARTA EMERGED from a fogbank and eased against a New York pier on April 6, 1911, back from Panama via Jamaica. Fifty-three passengers were onboard, among them a couple from Chicago and their young son. Leo, Mae, and two-and-a-half-year-old Mentor had spent five days in Colón and Panama City. It had been a vacation, a $3,000 escape to the warmth and sun, but there had been another reason for Leo’s return to Panama. He had told Mae a lie about looking after “vast timber interests” for a syndicate. He had ventured off a few times on his own, saying he had to attend to business. Leo had mentioned a man named Espinosa, describing him to Mae as a local banker. The details of the Big Idea, the facts and names he would need to make it believable, were beginning to coalesce in his mind. On this second Panama trip, as Francis Matthews would correctly surmise years later—and far too late—Leo had picked up the “local color” he needed to flesh out his new venture.

  The next step was to put something on paper. Back in Chicago, Leo drafted a report extolling the resources of a Panamanian property ripe for development. Its size? He settled on an impressive five million acres—7,800 square miles of territory, as big as New Jersey. Like Nieto, he placed it on the Bayano River. “This region,” Leo wrote, “besides being capable of production almost beyond the dreams of avarice, is blessed with an avenue of communication and transportation that is nowhere surpassed.” The avenue was the Panama Canal, which would open within a few years and make the region and its resources readily accessible.

  He appended a map and described the property as a paradise of thick forest and lush grassland. “There is scarcely a vegetable grown in the United States that will not grow here and produce to troublesome abundance,” he wrote. Sugarcane, cocoa, bananas, pineapples, limes, cotton, corn, peanuts, yams, coffee—all were growing or would thrive there, along with rice, “the wheat of the tropics.” Arkansas had taught Leo a lot about rice, but how could a Chicago lawyer know so much about the agricultural prospects of the remote Bayano?

  To erase such doubt, he peppered the 150-page report with offhand remarks to create the impression that he had seen it for himself. The climate was “hot only in the direct rays of the sun,” he noted, “but I have not found it sultry.” Pineapples grown in the area “are large, sweet, and have a fine flavor,” he assured readers, who would assume he had tasted them himself. “The quantity and profusion of the vegetation,” he observed at another point in the report, “is such that no one, not having seen it and cut his way through it, can form an adequate idea of it.” Perhaps not, but readers could picture Leo hacking his way through the jungle in his quest to unlock the secrets of the Bayano.

  The report zeroed in on the most promising of the property’s varied resources. There were hundreds of rubber and cocoa trees. Areas planted in sugarcane, Leo predicted, would yield about five tons of sugar per acre. Cattle would thrive. The property possessed so many resources, he cautioned, that “there is a real danger in the temptation to develop too many of them.” One resource stood out: timber of “every grade of hardness,” from lightweight balsa to dense, durable lignum vitae. While the up-front costs of planting sugarcane and introducing cattle were high, cutting and exporting timber would bring “immediate and large returns, with comparatively limited expenditures.” Construction of the canal was creating a market for lumber and railroad ties at the syndicate’s doorstep. The timber was easily accessible and could be floated to the river during the rainy season via tributaries that crossed the syndicate’s land.

  Leo had done his homework, and if all this failed to satisfy the skeptics, he brazenly lifted a page straight from Nieto’s scam. “I anticipate no trouble in disposing of the tie timber,” he stated in the report’s conclusion, “and in fact have received assurances from various railroads that they will buy all the ties which we can or care to sell to them annually.”

  The report was part fact, part embellishment, part pure imagination. Leo had gleaned enough information about the region during his Panama sojourns to make the venture sound plausible. Finding a name for the corporation that controlled this valuable, resource-rich property was the easy part, and the Bayano River Syndicate was born.

  7

  THE SYNDICATE

  HENRY KLEIN KNEW a good deal when he saw one, and that’s how he became a major player in the liquor industry in the Midwest. He bought out Chicago’s bankrupt Liquor Dealers’ Supply Company around 1910 and built it into a major wholesaler and distributor. By 1914 he had an extensive network of customers in six states and sold whiskey under the popular Century and Century Club labels. Bespectacled, thin faced, and big eared, Klein was upwardly mobile, too, having married well and joined Chicago’s Standard Club, the Jewish community’s leading social and benevolent organization. Klein’s wife, Bertha, was one of the daughters of Philip Stein, a community leader and the first Jew elected to the bench in Illinois. Judge Stein was also wealthy, worth more than $1 million when he died in 1922.

  But one of Klein’s most astute moves—or so he thought—was teaming up with Leo Koretz. They had met around 1905, and although Klein was six years older, they shared a common heritage: Klein’s parents were Bohemian Jews from Písek, not far from Rokycany. In their early business ventures, Klein and Leo went fifty-fifty to buy mortgages and other secured debt, no doubt including some of the fake ones Leo was selling to stay afloat. Klein found him ea
sy to deal with and admired his head for business. Leo, he recalled, “met all obligations promptly.” Klein never suspected, not for a single moment, that his partner was a liar and a thief.

  Just before the outbreak of the First World War, they split the cost of buying about a thousand acres of rice land in Arkansas. In an era when the typical Chicago business turned an annual profit of 5 percent, Klein and other investors in Leo’s Arkansas farms were earning double that, 10 percent. Klein never saw the deeds or mortgages for the Arkansas property. Leo handed over personal promissory notes as security for Klein’s investments, saying he had stashed the original documents in his office for safekeeping. Klein never saw the books of the Arkansas farm corporations, either. Leo said they were in the hands of a Chicago auditing firm. These explanations were good enough for Klein. “I always made money in his ventures,” he noted. “I believed in that man absolutely.”

  When Leo mentioned the Bayano Syndicate and its holdings in Panama, Klein was intrigued. The scam that had burned Leo and some of his friends became part of the sales pitch: In the course of exposing David Nieto’s scam, Leo explained, he had been retained to survey the syndicate’s property and prepare the prospectus. In return for his services, he had received $1 million worth of stock in the Bayano enterprise with an option to buy more, at $1,000 a share, and had been named to the board of directors. Contracts to supply timber for railroad ties, he said, would earn shareholders a 10 percent return.

  Leo was tight lipped about the syndicate and the men behind it, but this came as no surprise to Klein—all his friend’s business dealings, he found, were cloaked in secrecy. The Bayano Syndicate was made up of “immensely wealthy men,” Leo told Klein, who relied on him to invest “huge sums of money” on their behalf. Eventually he confided their names: Al Bronson, Gustav Fischer, Al Watson, and the Panamanian connection, a man known only as Mr. A. Espinosa. Klein never met them, even though they often gathered in Chicago to talk business.

  At one point, Klein asked to join one of the meetings. Sorry, Leo told him, the syndicate met in secret and late at night. Besides, he said, Klein—a millionaire and a successful businessman—was not “big enough” to merit a place at the table. Klein should have been insulted, but the explanation only made him more confident that Leo was dealing with the big boys and Bayano was a sound investment. Leo talked about the syndicate’s backers so often that it was as if they would walk through the door at any moment.

  “I’ll consult Mr. Fischer about this,” he told Klein as they discussed one transaction.

  “I’ll have to wire Bronson,” he noted when a decision had to be made.

  “You remember Watson,” he name-dropped on another occasion. “I’ve told you about him.”

  Leo, as it turned out, had told him little about any of them. Klein knew that Fischer was fifty years of age, Watson was sixty, and both were retired businessmen. Other investors picked up tidbits about them over the years. Watson was believed to live in suburban Wilmette or Winnetka, home to many wealthy Chicagoans. Fischer “travelled quite a bit,” one investor was told, and was based in Milwaukee. Francis Matthews, who later bought shares, thought Fischer was a capitalist from New York. Bronson’s background was a mystery, and all that Leo’s confidants knew about Espinosa was that he was rich and lived in Panama. Even Josephine Schroeder, Leo’s personal secretary, was in the dark; she never met or spoke to Watson, Fischer, Bronson, or Espinosa and she never handled correspondence involving any of them.

  Leo made no secret of his own role, though: he rounded out what came to be known as the Big Five, with each man holding an equal stake in the syndicate and its prized lands in Panama.

  AT FIRST, ONLY KLEIN, Matthews, and a few of Leo’s other close friends were told about Bayano. But people soon began to take note of the charming young lawyer who was joining the right clubs and socializing with the right crowd. Leo became a regular at Metzger’s, a downtown restaurant renowned as the place the wealthy lunched. When it was time to pay for a meal or a new suit, he peeled notes from a thick wad of cash. Leo rarely talked business, and that made people curious about how he was making his money; perhaps, with his help, they could make some for themselves. He dropped “a hint here and a hint there,” one man recalled. “He never discussed his affairs much,” added a fellow lawyer, but “somehow or other the word was passed along.”

  Bayano River Syndicate stock certificate issued to Leo’s sister-in-law, Etta Speyer, in 1922.

  And word was that Leo Koretz, the young man who had done well with rice in Arkansas, was making a killing in Panama.

  The Big Idea was in play.

  Leo was determined he would not sell shares in the Bayano River Syndicate—the shares would sell themselves. And the best way to stimulate demand was to restrict supply. He made stock certificates hard to get, which made people all the more desperate to get their hands on them. In the words of one investor, “he utilized to a weirdly elaborate degree the principle that a person will literally fight for something that is most difficult to get.”

  “I tried my best to buy some of his stock,” complained the owner of a factory on Chicago’s West Side, but even though he had known Leo since boyhood, “Koretz would not take my money.” Anna Fox, a wealthy woman in Hyde Park, was among those shut out. “I have been trying to figure out some way of letting you have a little stock in the Bayano River tract, but up to date have been unable to do so,” Leo consoled her in a letter. The more he said no, the harder Anna Fox, the factory owner, and other would-be investors pleaded for a sliver of the Bayano pie.

  “I didn’t go out after prospects, they actually begged to be let in on Bayano,” Leo explained later in an interview with the Chicago Daily News. “Many a morning I have found wealthy friends and total strangers waiting to beg that I take and invest their money. Many a day I have put off one or another and advised delay in investing. They camped at the curb outside my home, and at my doorstep.” When Leo did sell stock, it was always with a feigned reluctance that convinced buyers that he had done them a favor. And they paid extra for the privilege. Shares with a face value of $1,000 usually fetched a hefty premium: Arthur Mayer, an insurance broker and a close friend, paid $2,000 per share for three shares, and Samuel Richman, a lawyer who rented office space from Leo, forked over $38,000 for twenty-eight shares.

  Leo was doing more than whipping up enthusiasm and driving up prices. Being selective meant every investor was handpicked. “I’m only letting my real friends in on this,” he would say. Marcy Schoener, the son of a New York tobacco merchant who tried for more than a year to buy Bayano shares, eventually figured out why Leo played so hard to get. “Koretz was a brilliant student of psychology and he often told me that he never had dealings with a man before subjecting him to most searching scrutiny,” Schoener would later explain. Leo’s “ace in the hole,” he continued, “was an attitude of refusing to let strangers into his schemes. … He was afraid they might be the kind who would investigate his projects.” Many who bought stock were professionals and businessmen, people so tight with their money, a source told the Chicago Evening American, they “would not lend you $5 to save your life without good collateral.” It was a testament to Leo’s powers of persuasion that he had them begging to open their wallets.

  Investor by investor, he created an exclusive club of loyal, trusting insiders, each one carefully sized up in advance. At first, Bayano stockholders were drawn from the ranks of Leo’s closest friends and his immediate family. Over time, he expanded the club to include friends of friends, in-laws, and the occasional legal or business colleague such as Samuel Richman. The list of investors included at least a half-dozen members of his synagogue, Emanuel Congregation, and the congregation’s rabbi, Dr. Felix Levy.

  “I never suspected him. Why should I?” remarked Charles Cohn, Arthur Mayer’s partner in the insurance business and a friend of Leo’s since their school days. “I had every confidence in the world.” Cohn invested in the Arkansas properties and graduated
to Bayano stock. John Irrmann, a lawyer and childhood friend who worked in Leo’s law office for a few years, told a similar story. When he convinced Leo to sell him a single Bayano share, “I thought he was doing me a favor,” he recalled. “I regarded him as a friend whom I could trust and to whom I would turn in time of need. And when I did turn to him, as I had occasion several times to do, he never failed me.” Irrmann considered him “the very soul of honor,” and plenty of investors would second the motion. “That is the whole secret of his tremendous operations,” noted a Chicago financier who knew Leo but never got his hands on Bayano shares. “His stockholders were all hand-picked, guaranteed not to wilt, fade or doubt, absolutely trusting friends and relatives. An outsider couldn’t get in.”

  His most loyal investors were his family. Leo’s five brothers held stock. Julius, who sold women’s hats to retail shops and was a couple of years younger than Leo, reaped steady returns of 10 percent a year. “Every time I would get a dividend,” he said, “I would give the money right back to him for reinvestment.” His stake in Bayano and Arkansas farms eventually reached $52,000. Emil, an older brother who ran a property rental business, was doing so well in Bayano stock that he was thinking of retiring at fifty to live off his dividends. “My money was Leo’s any time,” he said. “I turned over every cent I had to him. I thought he could handle it better than I could.” Leo’s father had died of heart failure in 1912, at age sixty-seven, and his mother, Marie, was living off the income from her Bayano investment. Leo gave his wife stock certificates as a gift, and Mae’s stake eventually grew to eleven thousand shares.