MONEY, The IOS drama
NICHOLAS DAVENPORT
In a lifetime spent in the financial world I have never known an affair so bizarre and so outrageous as the rise and fall of los (Investors Overseas Services). The three authors of the book Do You Sincerely Want to be Rich? seem to think that it was an inter- national swindle but while we must agree that it was not a respectable financial situa- tion in the eyes of the Establishment the history as disclosed in this book does not support the idea that there wasany organised conspiracy to defraud or even deceive. The authors frankly admit that the book could not have been published `but for the shrewd and patient counsel of our legal advisers' and the conviction of Mr Harold Evans, the editor of the Sunday Times. We must be grateful to Charles Raw, Bruce Page and Godfrey Hodgson, for the hard slog they put into the complicated work of unravelling the scandal but I wish they had avoided their lapses into American journalese with chapter headings like 'Reminiscences of the Court of the Emperor Cornfeld in which Cornfeld gives some views of sexual codes'. It made this astonishing man appear so con- ventional.
No capitalist system in a free society can work efficiently unless there is an efficient financial machine which draws savings from the people and converts them into invest- ment through the stock market. We have a very efficient one in the City and the Stock Exchange Council has so tightened up its rules that it is now very difficult for a crook to abuse the facilities. (There are of course still ways open to the ingenious sharepusher but they are narrowing.) Until recent years, that is, when the unit trust movement got
going after 1951, the gathering-up of savings had been left to the life and pension fund departments of the old established fuddy- duddy life insurance companies, some going back over a hundred years. They were allowed by law to solicit business at the doorstep but in practice they left it to their branch offices to follow up their conven- tional and discrete advertising. The genius of Bernard Cornfeld lay in discovering how easy it was to gather in the savings of unsophisticated and not affluent people by appealing to their cupidity and exploiting the techniques of the unit trust.
What he did was to train a sales force in the psychology of enticement at the doorstep. A soft-spoken 'financial counsellor' would explain to the householder what a mutual fund or unit trust was and how the value of their units had risen over a period through the expert investment of their funds. Of course, a period was chosen which showed on the graph that the fund had been appreciating in market value at the rate of not less than 10 per cent per annum. By the law of compound interest this would double the value of your holding in slightly over seven years. The instant appeal of the los was that it had its own mutual fund invested entirely in the mutual funds of other financial houses. It was superbly called The Fund of Funds. As an enticement for the greedy it was irresistible.
The money poured in from the doorsteps to the Swiss headquarters of the los until by the end of the 'sixties the funds amounted to close on $2,500 million.. Bernard Cornfeld proudly declared: `We're in the business of literally converting the proletariat- to the leisured class painlessly: it's revolutionary and goddam exciting.' It certainly was for him and his managers who became millionaires. He is reputed to have made $100 million.
Of course, if an investment portfolio could be relied upon to appreciate at the rate of 10 per cent per -annum compound the managers could get away with murder in the comparatively small matter of their charges. This is what the tos managers did and this is why Bernard Cornfeld could promise to make his top managers millionaires, Accord- ing to the authors of this book the managers took half of the first thirteen payments on a normal ten-year savings programme and the total charge, including an `administrative service fee', came to 12 per cent. If a life insurance cover was added, guaranteeing to complete the investor's programme in the event of death or disablement, the total charge mounted to 18 per cent. Most of this management charge was skimmed off before the client's money actually got to work in the `booming' stock markets, assuming that the markets went on booming, which they would not do, and even then the tos management went on taking large bites at the fund. First, there was the management fee, levied monthly, in instalments of one twenty-fourth of 1 per cent of the net assets of the fund. Then at the end of each quarter of each year the tos management shared with its portfolio advisers 10 per cent of all gains made in the value of the fund investments whether those gains were on actual sales or merely increases in book values. Finally, the tos and its advisers collected 10 per cent of all the income produced from fund investments after deduction of certain run- ning expenses.
I have no doubt that the imposition of these gross charges drove the managers on to make the increasingly speculative invest- ments, especially when the stock markets stopped booming as they did in 1969-70. According to the three authors $60 million from the Fund of Funds was invested in King Resources, a company gambling in the exploitation of natural resources round the world. When oil was struck in the arctic wastes of north Alaska some $11 million of los money went into Alaskan oil rights. By the manipulation of a few sales to associated companies it was alleged that this £11 million gamble had appreciated to $156 million within a few months. Ten per cent of this paper gain was immediately appropriated by the ios management company. Other speculative investments followed which were more outrageous than the Arctic gamble.
When the Fund of Funds was first sold on the doorsteps of England the subscribers usually took out a life cover which entitled the tos management to remit the monthly payments as reinsurance premiums to their subsidiary International Life Insurance of Luxembourg, which promptly invested the money in dollar mutual funds. This enabled the los to escape paying the investment dollar premium until the Bank of England found out and stopped the leak, which caused the [Li to set up a sterling Fund of Funds.
This was typical of the tos ingenuity in evading local investment laws through the organisation of offshore funds. Even so it got into trouble with the authorities in
France, Switzerland, Portugal, Colombia, Brazil and the United States. The sec.
having investigated the los set-up, refused to allow it to sell its securities to any American anywhere in the world.
The lessons of this amazing story are plainly written. Itinerant salesmen should not be allowed to sell complicated life-and- investment policies at the doorstep. The advertising or prospectuses of these com- plicated policies should conform to strict rules laid down by the appropriate govern- ment department so that unsophisticated subscribers should not be misled. The seduc- tion of savers in our financial garden is, I would suggest, best left to official serpents,
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