by John Brooks
4
And there were other shows playing to paying customers that year Off Wall Street; the further their remove from New York’s financial district, the less they resembled moral drama and the more the repertoire suggested musical comedy or farce.
There was the now-famous Bernie Cornfeld, whose name was just beginning to be recognized by the American public in 1969: Bernie Cornfeld, once a Socialist at Brooklyn College (still another unsuspected hatchery of tycoons) and now king of the offshore fund operators (“offshore” meaning, of course, “beyond the reach of the S.E.C.”); who, back in the late nineteen fifties, had had the inspired idea of uplifting the poor of the whole world, and perhaps getting rich himself, by selling them American mutual-fund shares through something he called the Fund of Funds; who sold so many shares—mostly not to the upliftable poor of the world, it would appear later, but to rich men in poor countries who wanted to evade local currency restrictions—that before the end of 1969 his firm, Investors Overseas Services, had twenty thousand employees and a million customers in over a hundred countries, managed assets of $2.5 billion, and had brought him a personal fortune amounting on paper to $150 million; who had his headquarters on the borderline of France and Switzerland at Ferney-Voltaire (Bernie-Voltaire, the wags called it) and who lived so close to the borderline of legality that his operation was always getting expelled from various countries; who paid large salaries to James Roosevelt and the former vice chairman of the Federal Republic of Germany as investments in respectability; who liked to test new sales applicants with the thought-provoking question, “Do you sincerely want to be rich?”; who, fourteen years after he had started with nothing, had a town house on Lac Leman that Napoleon had built for Josephine, a castle in France with a moat and drawbridge, a pack of Great Danes, a string of racehorses, and squadron of high-powered cars, a Heep of sycophants, a live-in Jewish mother, and wall-to-wall girls.
“Where are the customers’ girls?” John Kenneth Galbraith once asked about I.O.S., during its heyday, adapting the old nineteen-twenties Wall Street joke about the visiting dignitary who, on being shown the yachts belonging to brokers, inquired, “But where are the customers’ yachts?” Sad but true: there were few mini-skirted minions for the customers of I.O.S. Its investment record was mediocre, in part because of lavish overcompensation of its salesmen—at the expense, of course, of the customers. But Cornfeld was only the top of an iceberg. By early 1969, the “offshore” fund arena included about seventy firms, some of them quietly run by outwardly respectable Wall Street houses, with well over $3 billion in the American stock market, all, presumably, for the benefit of underprivileged foreign investors but more palpably for that of a ravenous ratpack of newly overprivileged American entrepreneurs. The biggest such operation, after Cornfeld’s, was Great American Management and Research, or Gramco.
If some farceur with more imagination than restraint had written the story of Gramco as fiction, he would surely have been accused of painting with too broad a brush. Short of a corporation president conducting his enterprise from a baby’s playpen, Gramco’s founder and boss Keith Barish seemed to be the ultimate manifestation of the youth revolution in finance. At eighteen, while a student at the University of Miami, Barish had helped start a bank in Hialeah, of racetrack fame; because he was legally under age, his seat at directors’ meetings had been regularly occupied, on his behalf, by his mother. In 1967, when he was twenty-two and had already amassed a small fortune, he founded Gramco as a mutual fund that would invest chiefly in American real estate, rather than in American stocks. Thus he would bring to his investors the benefits of the apparently endless upward trend in land and property values. The S.E.C. frowned on such funds because of real estate’s inherent lack of liquidity, but no matter; Barish planned to “invent” a new thing called “liquid real estate”; and besides, he proposed to escape the disapproving surveillance of the S.E.C. entirely by setting up his fund in the Bahamas and selling its shares only outside the United States, presumably to non-Americans. And that, briefly, was what he did. Nassau became Gramco’s official domicile, London its operating base, Panama, Curaçao, and the Grand Duchy of Luxembourg its tax shelters, and most of the world ex-U.S.A. its selling territory.
Barish—might not the farceur at least have named him “Bullish”?—took as his partner a dispossessed Cuban just over thirty named Rafael G. Navarro, who had some mutual-fund experience. He took on others, without such experience, to other purpose. One summer, during the administration of John F. Kennedy, Barish as a teen-ager had served as a “summer intern” at the White House and had evidently spent his time well among the authorities he found striding in and around its corridors. To apply the magical Kennedy aura, so powerful in so many distant lands, to the selling of Gramco shares, Barish hired as Gramco officers and directors a group of old New Frontiersmen, among them two former Kennedy ambassadors, two former Kennedy staff assistants, a former Kennedy Undersecretary of Health, Education and Welfare, a former Kennedy Assistant Secretary of Commerce, and—most visibly—the portly, amiable, highly visible former Kennedy press secretary and later U.S. Senator from California, Pierre Salinger.
“Economics have never been my strong point,” Salinger once confessed disarmingly, but no matter; Salinger was made titular head of the Gramco sales organization, which came to comprise some six hundred salesmen in fifty countries, and by May 1969 had brought in investments in Gramco of more than $100 million, a figure that would be doubled before the end of that year. The money was invested in such U.S. real-estate ventures as the Americana Fairfax Apartments outside Washington, the Clermont Towers in New York City, Harbor House in Chicago, the LTV Tower in Dallas, and a shopping center in Oklahoma City. Meanwhile, those within the Gramco organization with more of a penchant for economics were ensuring that Gramco itself got its share of the proceeds. To begin with, the firm charged fund customers the usual stiff mutual-fund sales commissions and management fees; but in Gramco’s case the beginning was only the beginning. Running a real-estate fund gave the managers a golden opportunity to do what the managers of a stock fund legally could not, that is, to serve as their own brokers in their transactions and collect commissions accordingly. Moreover, the fact that real estate could be bought largely on credit, as stocks could not, made it possible for them to take in remarkably high commissions in relation to the amount of money invested. Gramco collected—from its customers, of course—a 5 percent commission on the full price of each transaction; since it bought on mortgages that on occasion amounted to three-quarters of the purchase price, it was sometimes able to pocket for its own account $1 million for every $5 million of its customers’ money that it put into real-estate ventures. In the first three and a half years of Gramco’s operation, its management took out of the fund for its own profits $43 million, or 17 percent of all the money the customers had entrusted to it. The firm’s accountants, meanwhile, were doing their bit to make Gramco’s books look simultaneously bearish to the income-tax authorities and wildly bullish to potential investors. Taking advantage of liberal U.S. depreciation guidelines for real estate, the accountants would report on their U.S. tax returns that the properties Gramco had bought were dropping in value. At the same time, reporting to shareholders and potential shareholders abroad on the fund’s asset value, they would record, on the same properties and at the same time, substantial increases in value. What was going down in Oklahoma City and Chicago, the accountants seemed to be saying, was simultaneously rising and shining in Nassau, Panama, and the Grand Duchy of Luxembourg.
In May 1969, Gramco followed the crowd and went public: a million shares were issued, priced at $10 each. Again, everybody was rich, except, by some oversight, the far-flung investors who had put their trust in the Kennedy aura and a good bit of their money, inadvertently, into the pockets of former Kennedy men. Surely the old New Frontiersmen were finding exciting new frontiers indeed, on a new trail blazed by the stripling they had first taken a liking to that summer at the
White House.
Then there was the Off-Wall Street comedy-farce to end them all, the show that had everything—deal-makers, fund managers, gambling stocks, purchased respectability, chicken-wired conglomerates, offshore operations, letter stock, Bernie Cornfeld. Perhaps appropriately, its scene was laid chiefly in Los Angeles; the action took place in 1968 and 1969. The plot may be summarized as follows:
Delbert William Coleman, born in Cleveland, a Harvard graduate whose Who’s Who entry conscientiously stipulated that he was a member of the Harvard Alumni Association, was a playboy plunger who in 1956 had taken over the J.P. Seeburg Corporation, a Chicago jukebox manufacturing concern. Among those he counted as his friends was Sidney R. Korshak, sixty-three, a self-made Chicago millionaire lawyer with the reputation, deserved or not, of having been an adviser to members of the Capone gang; by 1968, however, Korshak had attained a kind of ornate respectability, with plush law offices and an apartment in Chicago, a high-priced spread in Bel Air, California, a suite at the Carlyle in New York, and a certain reputation as a philanthropist. Knowing Coleman as a man on the lookout for fast business action, Korshak brought him to Los Angeles and introduced him to Albert Parvin, who at the age of seventy was ready to retire as boss of Parvin-Dohrmann, the company he had founded. Parvin-Dohrmann owned hotels and gambling casinos in Las Vegas, and had some major stockholders with suspicious credentials; but anyone who on those accounts consigned it to the demimonde of American business could be reminded, and frequently was, that for a time the president of Albert Parvin’s private foundation had been William O. Douglas, Associate Justice of the U.S. Supreme Court, who had accepted a salary of $12,000 a year for his efforts. Exactly how Justice Douglas had been persuaded to take the position was, and remains, unclear.
Korshak’s introduction worked like a charm. Parvin-Dohrmann as a stock speculation brought an instant gleam to Coleman’s eye, partly because Howard Hughes’s recent investments in Nevada had given Las Vegas’s name investment pizazz, partly because the investing public was clearly in a gambling mood, and what better way to gamble in stocks than by buying stocks in gambling casinos? Burt Kleiner—the mod Los Angeles stockbroker and Pop-art collector who had put together deals for just about all of the farthest-out conglomerates, and the man at whose brokerage office on Wilshire Boulevard, called “Wall Street West,” customers in 1968 and 1969 often sat watching the tape and actually chanting, “Go, go, go!”—was called in to find a customer for Coleman’s Seeburg stock so that he could then buy into Parvin-Dohrmann. No problem. Kleiner persuaded Commonwealth United, a small West Coast conglomerate that was an old customer of his, to take Coleman’s interest in Seeburg for $9.8 million, thus giving Coleman some spending money. Coleman promptly used it to buy 300,000 shares of Parvin-Dohrmann—a controlling interest—at $35 per share. Kleiner’s firm, Kleiner, Bell and Company, took a broker’s fee of $768,805 for arranging the deal. Albert Parvin went to Africa on safari. And Coleman prepared triumphantly to wheel and deal with his new vehicle, Parvin-Dohrmann.
His first move was, with Korshak’s help, to sell privately 143,200 of his 300,000 Parvin-Dohrmann shares—they were traded on the Amex—to a group of organizations and individuals including Burt Kleiner (5,000 shares), Cornfeld’s I.O.S. (81,000), two owners of the Atlanta Braves baseball team, and Jill St. John, the actress. He gave them a bargain price ($35 a share, his own cost) in exchange for a letter agreement not to resell their shares, and thus keep them conveniently (for Coleman) off the market. Next, he took the $5 million obtained from these sales and plowed most of it back into strategic purchases of Parvin-Dohrmann. Aimless activity for its own sake? By no means; Coleman’s purpose, or so the S.E.C. would later charge, was standard old-fashioned manipulation, designed artifically to attract attention to Parvin-Dohrmann stock and thus create public buying interest. Meanwhile, Coleman wined and dined mutual-fund managers at Parvin-Dohrmann’s hotels and casinos in Las Vegas; some of the managers responded to this hospitality by buying the stock for their portfolios. To further confuse the investing public, Coleman arranged to have his mother make purchases of Parvin stock on the Amex while he himself was selling a comparable number of shares off it. Parvin-Dohrmann came to look to the uninitiated like the hottest stock of the moment, as it appeared on the most-actively-traded list day after day at ever-rising prices. To focus the spotlight of glamour still more sharply on its company name, Parvin-Dohrmann contrived, through Korshak’s ubiquitous contacts with West Coast characters, to buy for $15 million the Stardust Hotel-Casino on the famous Vegas Strip. (Korshak got a $500,000 fee on that one.) Dazzled, the public took the bait and gobbled up Parvin-Dohrmann stock. By January 10, 1969, the price was up to $68.50, and a few weeks later to 110.
What Coleman and his companions seem to have done was to have pulled off, in the Wall Street era of federal regulation and presumably general enlightenment, a classic stock manipulation remarkably similar in a technical sense to those of the unenlightened nineteen twenties—and given it to an up-to-the-minute flavor by involving gambling casinos, kicky conglomerates, a Pop-art-collecting broker-dealer, and even a Hollywood star. Moreover, everyone seemed to be making money by the potful. Apparently one could now beat the games at Vegas without even going there!
But then one day a computer at the Amex started acting peculiar. The Amex computer was programmed to give off warning signals when there was unorthodox and suspicious movement in any listed stock; and in this case, it really worked. It began giving out frantic warning signals on Parvin-Dohrmann. The Amex started an investigation, and as a result, on March 26, decided to suspend trading in the stock temporarily. The next day, the company disclosed the previously secret deal with the buyers of the 143,200 shares, causing eyebrows to shoot up on Wall Street and Off Wall Street alike. On April 14, 1969, the Nevada Gaming Control delivered Parvin-Dohrmann another blow by decreeing that the company could not operate casinos in Las Vegas any longer unless Cornfeld’s I.O.S. got rid of its 81,000 shares. (Coleman would complain later that I.O.S. not only got rid of the shares, but did so at a fat profit.)
In May, the S.E.C. finally stepped in. Coleman, desperate, got Korshak to assign a fixer named Nathan Voloshen to arrange him an interview with S.E.C. Chairman Hamer Budge. Voloshen came through, and the interview took place (Voloshen apparently got $50,000 for arranging it), but it was hardly a success from Coleman’s point of view, since he failed to persuade Budge to call off his dogs. So Coleman and Korshak hastily began trying to find somebody on whom to unload their Parvin-Dohrmann stock at $140 or $150 a share. They finally hit upon Denny’s Restaurants, a Los Angeles coffee-and-doughnuts chain with expansive notions. Denny’s was eager for the deal—the very rumors of the merger sent the stock of both Parvin and Denny’s skyrocketing. But Denny’s didn’t like the aura of shady influence that by now pervaded Parvin-Dohrmann, mainly because one of its largest stockholders was a sometime target of various Justice Department antimob investigations. On October 13, 1969, the Denny’s merger fell through, and the bottom fell out of Parvin stock. On October 16, the S.E.C. filed a suit charging Coleman, Korshak, and a long list of their associates with having manipulated Parvin stock in violation of the securities laws. Most of them signed consent decrees.
By the spring of 1970, the party was over. Coleman had turned his Parvin stock over to a voting trust and resigned from the management. The stock had sunk to $12.50 a share, so he, and all of his friends and backers, had sharp losses. Korshak poignantly complained to a newspaper reporter that all he had left after taxes on the half-million fee in the Stardust deal was a mere $68,000. Commonwealth United’s stock price was down 97 percent to seventy cents a share. The cry of “go, go, go” was heard no more on sunny days on Wilshire Boulevard, because Kleiner, Bell, with the S.E.C. nipping at its heels about multiple securities violations, had prudently retired from the brokerage business. All the guys and dolls, from Korshak to Jill St. John, were sadder and wiser, but warm with nostalgic memories of the thrills they had had
in the days before the electronic cop at the Amex put the arm on them.
5
Finally—to round out this inventory of the various symptoms of dementia that afflicted the 1968-1969 stock market—there were the hot new issues, the “shooters,” that shot up on their first day of trading from 10 to 20 or from 5 to 14, and later went to 75 or 100, oblivious of the fact that the companies they represented were often neither sound nor profitable: the garbage stocks that everyone could make money on just so long as, and no longer than, everyone could contrive to hold his nose and avert his eyes and imagine that the garbage was actually nourishing and palatable.
If one fact is glaringly clear in stock-market history, it is that a new-issues craze is always the last stage of a dangerous boom—a warning of impending disaster almost as infallible as Cheyne-Stokes breathing is a warning of impending death. But not so inexorable; if heads could be cooler and memories longer, investors both large and small, professional and amateur, might ward off danger by reading the signs, eschewing the new issues, and lightening their commitments generally. But investors, like other human beings, tragically repeat their mistakes; when the danger signs are plain, the lure of easy money blanks their memories and dissipates their calm. In 1929 the shooters were jerrybuilt investment trusts like Alleghany, Shenandoah, and United Corporation. In 1961 they were tiny scientific companies put together by little clutches of glittery-eyed young Ph.D.’s, their company names ending in “—onics.” In 1968-1969, what a promoter needed to launch a new stock, apart from a persuasive tongue and a resourceful accountant, was to have a “story”—an easily grasped concept, preferably related to some current national fad or preoccupation, that sounded as if it would lead to profits. Such stories, like most stories, were best told quickly and concisely, and best of all within the name of the company itself. Were the new government Medicare and Medicaid programs pouring millions into the care of elderly persons? A cunning investor could presumably get a piece of that action by buying stocks called Four Seasons Nursing Centers or United Convalescent Homes. Were people’s recreational expenditures soaring? Hardly coincidentally, there turned out to be a stock called International Leisure. Was concern about the environment a popular passion of the moment? Why, look here—a stock called Responsive Environments! Was weight watching in the wind? One might grow rich while growing thin, perhaps, with Weight Watchers International. Finally, it may be assumed that there were some investors who, so far as company names were concerned, didn’t want to be bothered with the suggestion of any particular product or service, and just wanted a stock whose name made it sound like a winner. For them, there was Performance Systems, Inc., not to mention Bonanza International.
