The Match King

by Frank Partnoy

  A.D. Berning thought he was now on a much friendlier basis with Ivar, although he still didn’t see the man very often. In his letters to Ivar, Berning retained a level of formality, addressing Ivar as “My dear Mr Kreuger,”20 but Ivar’s responses and behavior suggested that he was permitting Berning to inch closer to his inner circle. Ivar asked Krister Littorin to remain in New York after International Match’s annual meeting, to spend a few fine summer days with Berning. Berning showed Littorin a copy of the Bawl Street Journal, the farcical newspaper Donald Durant still oversaw. The men had a good laugh over the columns lampooning financial people they knew. Littorin insisted that Berning send Ivar a copy, which he did, noting that “it has some amusing references to some of your friends here.”21 Ivar responded that he found the Bawl Street Journal “very amusing and have read with a great deal of interest.”22

  Berning and Littorin also discussed future business, including the possibility of other monopolies in Europe in addition to Poland. Berning’s future looked bright. Ivar already had agreed that Berning could charge International Match separately for consulting services Berning would perform in addition to his audit, and Berning was preparing to send Ivar a separate bill for “$6,000 covering general consultation work in connection with the International Match Corporation.”23

  Berning introduced Littorin to the Ernst brothers, and they gave him permission to accompany Littorin on an upcoming trip to Germany.24 The Bernings were looking forward to more travel, but unfortunately Mrs Berning became ill.25 That, plus the rush of work at Ernst & Ernst, prevented the Bernings from returning to Europe in 1926. The Ernsts needed every assistant manager at 27 Cedar Street, the firm’s office in New York.

  At the end of the summer, Berning, who had only seen Ivar once that year, wrote that the “continued easy money market has prompted many financings, mergers and reorganizations.”26 All of those deals required accountants, so Berning and his firm were prospering along with everyone else. Berning had less time to devote to International Match, which was just fine with Ivar.

  The next year, International Match sold another block of 450,000 participating preferred shares, this time for 50 dollars per share, the highest price to date. Ivar wrote that the money was “to be used for transactions in Greece, Portugal, Algiers, Norway and Manila.”27 Once again, there were few details and the cash quickly left America. The vast majority of the funds raised, more than $16 million, went directly to Continental Investment Corporation, Ivar’s Liechtenstein subsidiary. This time, a portion of the money - 3 million dollars - migrated to Swedish Match in Stockholm. The rest went to pay dividends and fees.

  While Berning was updating International Match’s reports to reflect this new preferred share issue, he discovered a reference to Garanta, the Dutch company that Karl Lange, the Santa Claus lookalike, had been “auditing.” Berning was surprised to see that Garanta owed International Match 17 million dollars. That was a lot of money. He asked Ivar for some assurances about Garanta. What was it? Did this company make any profits or have any assets? Would it actually be able to repay? Why hadn’t Ivar told him about Garanta?

  Ivar reassured Berning that Garanta’s income during 1925 was 46 million Dutch guilders, and that it owed the equivalent of just 45 million Dutch guilders to International Match.28 Garanta made enough money in one year to repay the entire debt. That was plenty of cushion. Besides, Garanta was just a conduit for sending cash to Ivar’s businesses outside the United States. The debt owed by Garanta was an unimportant detail, a nit. There was no reason for concern.

  What was Berning supposed to do? Should he be suspicious of Ivar, who had brushed aside Berning’s inquiry about Garanta and a 17 million dollar debt as if they were minor issues he had simply overlooked in previous discussions? The Garanta obligation was International Match’s primary asset, and Berning hadn’t even known it existed. That certainly was alarming. But was it so serious that Berning should accuse his most important client of hiding crucial information? Even a hint of accusation would destroy Berning’s improving relationship with Ivar, and that would ruin Berning’s chances of making partner. Ivar had treated him well, and there was at least a chance that Ivar really had simply overlooked Garanta. Wasn’t there?

  Ivar paid his bills on time, and his fees to Ernst & Ernst were rising, particularly now that Berning was giving him tax and consulting advice. Berning was even recommending American companies that Ivar might consider pursuing. 29 He recently had sent Ivar the annual report for the International Telephone and Telegraph Corporation, noting that it “may be interesting to you.”30 Ivar was considering a major transaction with IT&T. Did Berning want to risk losing the fees from such a deal?

  The match monopoly in Poland was real, and Ivar’s reputation was unassailable. One only had to open a newspaper or ask any businessman to understand that. Ivar was negotiating match monopolies in Ecuador, Estonia, Greece, Hungary, Latvia, Peru, Portugal, Yugoslavia, and those negotiations also were undeniably real. Ivar met regularly with government leaders, most recently with Raymond Poincaré, the distinguished French statesman who had been prime minister during the early 1920s, and retook the job in 1926. Given these facts - and they were facts - Berning was reluctant to accuse such a reputable man of anything. He told himself Garanta wasn’t important. It couldn’t be.

  Berning had toured Ivar’s apartment, but not his factories. Durant hadn’t even seen the apartment. Indeed, no one from Lee Higginson or Ernst & Ernst had ever inspected Ivar’s business, either to check on the efficiency of his operations, or even to see whether the factories Ivar said he owned actually existed. Instead, they had relied entirely on Ivar’s word, and on a surprisingly thin stack of paper.

  At the beginning of 1927, Durant asked to send someone to visit Ivar’s match factories in Sweden. Previously, Ivar had refused to permit inspections, citing concerns about confidentiality. Some of Ivar’s obsession with trade secrets seemed justified, but at times his stories seemed far fetched, not unlike the conspiracy theories of Jack Morgan. Had Japanese spies really traveled to Jönköping to steal the secrets of Ivar’s Lagerman automatic match-making machine? Had an American engineer really “accidentally” dropped his hat into a tank of chemicals at one of Ivar’s plants to get a sample he could analyze and copy?31 Ivar’s competitors might have been ruthless, but he seemed a bit paranoid.

  Ivar finally agreed to an inspection, but insisted that Durant send a businessman, not an auditor. Ivar was willing to have someone who understood the match industry look at his factories, but he didn’t want that person to ask annoying questions about the intricacies and complexities of Swedish accounting. Ivar, Ernst & Ernst, and Lee Higginson already had agreed that the American audit would be limited in scope. Berning was to rely on Ivar’s audit in Sweden, and he wasn’t to look into, or even question, what Swedish auditors said about Ivar’s subsidiaries and operations in Sweden.

  Ivar didn’t want to pay for the same audit twice, and he especially didn’t want to answer irritating questions about accounting niceties, as the Wisconsin securities regulators had forced him to do a few years earlier. He cabled Berning, “Regarding the International Match Corporation, it has always been understood by Lee Higginson that you based your report on the figures given you by Mr Wendler, who is a Swedish Chartered Accountant, and this method of working has been accepted by Lee Higginson.”32 Ernst & Ernst had agreed to this approach, but no one from the firm had met or spoken with Anton Wendler, even though they had been relying on his written audit statements since 1922.

  Given Ivar’s preference for a businessman over an auditor, Berning and Durant chose to send F. Gordon Blackstone, a consultant Durant knew who had experience in the match industry. Ivar responded that he was busy negotiating with French officials, but would be willing to discuss Blackstone’s visit with Durant’s British associates during an upcoming trip to London. Ivar also wanted a chance to look Blackstone in the eye. He wrote in a letter to Berning that “While it is quite probable that
Mr Blackstone will be ultimately accepted, it is understood that I shall have opportunity to know him and pass judgment on him before it is decided if I find him suitable for the position and if I am prepared to give him any confidential information regarding our business.”33

  The look of this letter was especially curious. Ivar typically dictated his letters and cables, or at least he had since putting on the one-man telegraphing show for the passengers on Berengaria. But he typed this letter to Berning himself. Ivar apparently didn’t even want his trusted assistant, Karin Bökman, to know the Americans were asking sensitive questions and seeking to inspect his businesses. The difference in the appearance of this letter, compared to letters he dictated, was striking. Unlike Miss Bökman’s meticulous typing, some of Ivar’s words were out of line, the “m”s were raised slightly, and there were “I”s in place of “1”s. The letter was dated “February I5th I927.”34 Berning must have thought the letter looked a bit creepy, as if a madman had hunted and pecked each key.

  Ultimately, the inspection was a non-event. Ivar met Blackstone, and approved him. Blackstone reported that the match factories did in fact exist, and were marvelously efficient. He noted that Ivar was widely known and respected in Sweden, and that no one there would question his word. There is no record of what Blackstone and Ivar did in Sweden, although something must have led the men to trust each other. In any event, Blackstone’s glowing report satisfied Donald Durant, at least temporarily.

  Ivar decided he needed to be more forthcoming to Berning about his Swedish accountants, or at least to appear to be so. He didn’t want to risk losing Berning’s loyalty, so he invited Berning to come to Sweden to meet Anton Wendler and get a better sense of the Swedish audit process. Berning booked a cabin on Berengaria, but Ivar asked him to take a different ship, Homeric, and to meet him first at his flat in Pariser Platz, Berlin.35

  Meeting in Berlin was mostly for show, and to give Berning a trip to another country in Europe (albeit without his wife). Ivar showed Berning his apartment and the swanky neighborhood, including the Brandenburger Tor, the nearby embassies, and the famous Hotel Adlon. Ivar wanted Berning to see how the German locals were thrilled and proud to have him living nearby. A Berlin paper reported that Ivar’s phone at Pariser Platz would start ringing within moments if the caretaker so much as opened the windows or turned on the lights.36

  In Berlin, Ivar told Berning a secret. He understood Berning’s suspicions, and he confided that, indeed, the financial statements for International Match were in error. There were mistakes. But not for the reasons Berning might have imagined. Instead, the financial statements were wrong because they massively understated Ivar’s profits. Ivar told Berning he was involved in politically sensitive deals with numerous governments, many of which would generate substantial profits, and these dealings simply could not be disclosed to anyone. Ivar said Berning should draw comfort from the safety net of secret deals that were not even mentioned in his corporate accounts. The International Match financial statements weren’t supposed to accurately reflect the value of Ivar’s enterprises. They were merely a floor, a minimum amount that only hinted at the much higher, true value.

  For example, Ivar showed Berning a copy of what he called the “Spanish contract,” which appeared to be signed by Miguel Primo de Rivera, the Spanish ruler who had taken over from King Alfonso in a recent coup. Ivar suggested that he had met with King Alfonso in 1923, and he said Primo de Rivera secretly had agreed to honor the terms of a loan-for-monopoly deal between Ivar and the king. Unfortunately, Primo de Rivera had abandoned his pre-coup promise to rule for only ninety days, and instead suspended Spain’s constitution, established martial law, and imposed a system of strict censorship. But Ivar assured Berning that, even given this turmoil, Spain secretly continued to pay interest on the loan. There was no way for Berning, or anyone, to confirm or deny Ivar’s assertions about such a secret deal. Berning understandably would have been reluctant to travel to Spain to try to verify Primo de Rivera’s signature.

  Ivar also showed Berning a certificate of deposit showing that the Nederlandish Bank held 400 million francs of French government bonds for the account of Continental Investment Company, Ivar’s Lichtenstein subsidiary. When Berning said he hadn’t heard of the Nederlandish Bank, Ivar explained that it existed “in order to keep certain transactions secret from Swedish and foreign bankers.”37 Ivar had hired Sven Huldt, an unemployed match jobber, to keep track of this bank’s deposits. Included among the receipts Huldt periodically sent Ivar were not only entries for the French government bonds, but also items showing that Continental’s account with the Nederlandish Bank included proceeds from secret match monopolies and a Spanish contract worth 144 million Swiss francs.38

  Ivar’s explanations about these secret assets made some sense. Why else would he have been so casual about financial issues, including important matters such as quarterly dividends? He had to avoid accurate disclosure, to preserve the secrecy of his match monopoly negotiations. The inaccuracy of his financial statements was a boon, not a worry. It reflected the fact that Ivar had secured many secret deals, and therefore additional secret cash flows.

  Moreover, Ivar behaved like someone who understated, not overstated, his income. One time, Ivar sent the money for International Match’s dividends to America early, indicating to Berning that “we have so much money over here, you might as well have this now.” Another time, Ivar sent an extra million dollars, and later responded, “Oh, we simply made a mistake. We have so much money here, we just can’t keep track of it.” These were either the acts of a crazed risk taker or a man in such solid financial condition that he really couldn’t be bothered with minor seven-figure details. The latter explanation seemed more plausible: Ivar, and International Match, must have had substantial undisclosed assets.

  Ivar’s newly open approach reinforced Berning’s view that Ivar’s companies were strong. Once Ivar thought Berning seemed more comfortable, he introduced Anton Wendler, his Swedish accountant, who also was in Germany at Ivar’s request. The men discussed Ivar’s use of various subsidiaries such as Garanta and Continental. Wendler was an impressive figure. Like the Ernsts, he and his brother had started their own accounting firm, called Svenska Revisions Aktiebolaget. The firm was small, and the Wendler brothers had just two other partners, but they seemed more than capable of handling a complex audit. Wendler assured Berning that he had voluminous details about Ivar’s various subsidiaries at his offices at 4 Västra Trädgårdsgatan in Stockholm.

  Ivar said they should all to go Stockholm, and he insisted that Berning stay at the Grand Hôtel there, the most luxurious hotel in Scandinavia.39 Ivar knew everyone at the Grand Hôtel, particularly its president, Torsten Segerstråle, who had just refurbished the public areas and created several new guest rooms. Ivar was an investor in the hotel, and he dined regularly in the great dining room, usually by himself.

  Ivar showed Berning into the lobby, and they walked across the English porcelain-tiled floor, through pilasters of black and yellow-veined marble, and up the double staircase to the first floor. Ivar tapped the mahogany rail atop the cast-iron banister, just as he did at home. He then showed Berning the two-story dining room at the southern end of the building, where the Nobel Prize banquet was held before it moved to Stockholm City Hall, one of Ivar’s buildings. Ivar then left Berning to dine alone, under the massive gas candelabra that hung from the 25-foot ceiling.

  After spending the next day at Wendler’s office, Berning was overwhelmed by the mountain of new information and sent a handwritten note to Ivar asking if they could meet to discuss how Berning might filter what he really needed to see. Ivar said he was too busy; Wendler and his stacks of paper would have to do. But there were so many documents that it was impossible for Berning to do more than simply scan through the lists of what was at Wendler’s office. Berning took notes, but Wendler insisted on keeping the originals. There were no carbon copies. Berning would have been happy to stay in Stockholm, a
nd spend a month at the Grand Hôtel. He would need that long to inspect the documents. However, the Ernsts needed him back in New York.

  After Berning returned home, Wendler sent him some additional information about Ivar’s foreign subsidiaries, as he had promised. As Berning scrutinized these new disclosures, he found that some of Wendler’s calculations were incorrect. For example, Berning discovered that one subsidiary had paid about 400,000 dollars of dividends to Continental, but Continental had not recorded those dividends. He quietly corrected this mistake.40 On balance, though, the deluge of paper in Stockholm persuaded Berning that Ivar’s accounting there was reasonable. Perhaps it was even conservative, understating Ivar’s income, as he had suggested.

  At some point, Ivar would need to disclose more information, but Berning was confident Ivar would be willing to do that when it became necessary. Berning discussed his visit to Wendler’s office with Donald Durant and the Ernsts, and together they decided they had enough confidence to support International Match’s application for a listing on the prestigious New York Stock Exchange. Berning began preparing documents for the Exchange.41

  There were two hurdles to overcome before International Match could list on the Exchange. First, Ernst & Ernst needed to prepare and certify quarterly financial statements for International Match. Berning would take care of that. Second, the company needed to establish a source of profits based on something more than one 6 million dollar loan to Poland. That was Ivar’s job. He would have to show that he could secure a marquee deal, one that warranted a listing on the world’s leading exchange.

  Ivar thought he could overcome this hurdle. At the time, he was working on the largest monopoly loan in history, in one of his favorite cities in the world. For the first time in his life, he was close to competing with J. P. Morgan & Co.