Metal Men: Marc Rich and the 10-Billion-Dollar Scam Page 11
Jesselson looked calmly around the room, zeroing in on the two empty chairs. Then his gaze sprayed the table. “I have not,” Jesselson responded with deep hurt in his voice. “Those two … those two …” He paused to catch a breath but ended up sighing deeply, sadly. “Those two,” he repeated, “they will destroy the company.” Nothing more was said.
A few days later, when the European managers were gathered for their yearly photo, Jesselson uttered the names of Rich and Green for the last time. “Before the rumors start, I want to say that Rich and Green asked for bonuses so high they would break our rules and traditions. They have separated. It’s time to close ranks.”
Hubert Hutton recalled that the New York office recoiled in horror when the news reached them by phone. “After a while, though, everyone was glad they left because it became apparent that all Marc and Pinky wanted to do was feather their own beds.”
“Their departure,” said a member of the European management committee, “had a traumatic effect on the company. All the traders were annoyed that they were being paid such small salaries in comparison with the rest of the industry. It was another signal that Jesselson was no longer able to run the show effectively.”
“Many executives felt that Rich was a great loss and privately held the ancient ways of Jesselson to be responsible,” Bollag said. “Jesselson was a brilliant man working out of his age. The board was so scared that they’d lose more traders that the very next year the company started to give all the traders exactly what Rich wanted in the way of compensation.”
The mutiny had been a great success. Philipp Brothers was thrown into a total state of confusion over Rich and Green’s departure, and nobody had any idea what to do. Marc Rich had pinned Ludwig Jesselson the way Lilliputians snared Gulliver. Green began boasting to friends that he had asked for a $1 million bonus, adding more fuel to the New York rumor mill. “There was even talk that Jesselson had a fatal stroke,” a trader remembered. Confusion reigned for weeks. Executives didn’t know what Rich had taken with him or what he wasn’t supposed to take with him or who was to tell clients that Rich was no longer a Philipp Brothers trader. “These were bathroom-key questions and nobody had any answers because we never before had to deal with them,” a Philipp Brothers trader explained in amazement.
Rich, the debonair business machine, and Green, the laid-back Orthodox Jew who wore dirty shirts and sneakers to the office, departed with six top Philipp Brothers traders, files of information on the company’s global network of producers and consumers and, said one trader, “an obsession to grind Philipp Brothers into oblivion at whatever cost.” Financing was furnished through a $2 million loan arranged by Rich’s father via the American-Bolivian Bank and a $1 million cash injection by Jacques Hacheul, a Philipp Brothers trader who had jumped ship, and a promise from Iranian Senator Ali Rezai to help set up a series of no-holds-barred oil deals that would, in part, lead to making Marc Rich the most wanted white-collar fugitive in American history.
“They left here with a desire to build up an organization bigger and more important than Philipp Brothers, and that’s understandable,” a Philipp Brothers director mused. “It was the way he did it that we all grew to loathe,” the man added vindictively. “It was patricide, you know. That’s really it. Marc Rich committed patricide.”
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Part III
Strategic Deals and Dangerous Curves
Chapter 8
“I can’t stand it much longer,” whispered Tom, in short catches between breaths. Huckleberry’s hard pantings were his only reply, and the boys fixed their eyes on the goal of their hopes and bent to their work to win it. They gained steadily on it, and at last, breast to breast, they burst through the open door and fell grateful and exhausted in the sheltering shadows beyond. By and by their pulses slowed down, and Tom whispered: “Huckleberry, what do you reckon’ll come of this?”
— Mark Twain, THE ADVENTURES OF TOM SAWYER
CARTOGRAPHERS have always represented Zug with a diminutive dot on the Swiss map, despite terrain that makes the lakeside town a uniquely attractive location for engaging in corporate battle. Barricaded from the rest of the world with deep forests, treacherous mountains and the most advantageous tax rates in all Switzerland, Canton Zug’s 77,000 residents have made their capital town an uninterrupted hermitage for the wealthy and powerful for nearly six centuries. The result, of course, is gold. Zug is one giant vault, with gold assets equaling 13 ounces for every man, woman, and child — more than ten times the equivalent per capita gold reserves of the United States government.
Today Zug’s reputation is part multinational Hole-in-the-Wall, part Alpine Peyton Place, a secure homestead for thousands of public corporations and private trading firms drawn here with promises of cheap and negotiable tax rates. The town is one huge protection racket, allowing individuals to curtain their affairs behind a Swiss corporation by simply bolting a brass nameplate onto a law office door and opening an account at a bank where discreetly instituted but draconian measures of confidentiality prevail. “We don’t ask what they do,” said cantonal secretary Dieter Delwing, aware that his is a smug system of sheer inventiveness unable to be transferred anywhere else in the world. History and geography have conspired in these mountains since 1870, when Zug’s burghers helped to profitably manage the competing business interests of Bavaria and Baden during the bloody Franco — Prussian War, convincing Zugerlanders to become world specialists in the job of financial camouflage.
The logic behind Switzerland’s legendary secrecy laws — pecunia non olet, or “money has no smell” — permits the country’s heavy dependence on foreign imports to call for unrestricted capital movements across its frontiers. Any attempt by foreign governments to portray Switzerland’s laws as an overcoat for crime are discounted as sheer fantasy by its leaders. But a rising share of foreign business, coupled with fiduciary management of private and institutional foreign funds, has transformed Switzerland from a mere laundryman of refugee dollars into the world’s finest dry cleaner of soiled money. And Zug is the chain’s flagship store.
Although 27,000 people live in the city of Zug proper (the rest are scattered throughout the cantonal villages of Unterägeri, Oberägeri, Menzingen, Steinhausen, Hunenberg, Cham, and Baar), over 120,000 work there, hundreds in the business of sculpting corporations that provide the canton’s citizens with over $200 million in taxes every year. “The canton gives us a tremendous amount of leverage,” enthused Paul Spier, who was a trader with Sasson Metals in Brussels before leaving to specialize in establishing Zug companies for metal traders. “There is nothing negative in Zug. It’s a town with no downside.” Spier has a singular grasp of the financial needs and clandestine nature of the metal business. He was once a clever and daring metal man until he misread a cadmium market while trading at NICA Metals in 1978. Maneuvering to cut loose from his position, he walked boldly into the office of Willi Strothotte, a director at ICC Metals who would later join Marc Rich to head the metals and minerals division, turned his back to the desk, pulled down his pants to expose a bare ass, and exclaimed, “I can’t pay for the cadmium so you better fuck me!” Today Spier answers suspicious questions posed by those who want to set up shop in Zug with total confidence and persuasive charisma, a charming peddler of Zug tax shelters.
“Zug wants anyone with money to be here and they act accordingly,” Spier explained, pointing out that less than 15 percent of Swiss real estate is owned by Swiss citizens. “There are only eighty-four work permits issued in Zug every year, and an ancient law states that ten of those must be given to professional foresters. Shall we say that Zug has many foresters wearing suits these days.”
Legend maintains that the only numbers published in Zug are in the phone book and that there exists one bank for each of the town’s eight thousand corporations. Zug’s burghers do nothing to defuse the myth; the fable remains the town’s most endearing asset, reinforcing the brazen aggressiveness Zug’s leaders u
se in merchandising Swiss secrecy laws to businessmen the world over. “Zug will always give you a cheaper rate,” said a London trader who owns a Zug corporation. “They even invite comparison shopping.” The essence of the Zug benediction concerns “transfer pricing,” a paper shuffle in which material is transferred between a company’s various subsidiaries. This calving, as it’s called, can be done legally; however it’s illegal for a subsidiary based in the United States to pay inflated prices for material it buys from another of its company’s subsidiaries based in Switzerland. The masquerade results in a movement of profits from the United States to Switzerland and the criminal evasion of American taxes.
The cost of setting up an uncrackable Zug shell is minimal. All that’s required is a 3 percent stamp duty on share capital, a canton registration fee of $300, a notary public stamp costing $500, and various transfer fees totaling some $3,000. The company has a choice of either headquartering in Zug or paying an independent front man approximately $25,000 a year for a maximum of 150 hours’ worth of office work to help certify that the company is a Swiss entity; the shellmen will send and receive telexes, mail letters, and sign contracts on Swiss soil, secretarial functions that could cost the phantom owner millions of dollars in taxes if carried out in the country where a deal originated. Boards of directors are composed of cantonal officials, and over the years have included Zug’s police chief and chief prosecutor. Zug banks will gladly leverage operating capital against share capital — an officer from the Union Bank of Switzerland suggested that it’s best for a metal-trading company to start with $1 million, to which they would seed another $2 million in subordinate loans.
Zug is a paradise for privateers, a Dodge City where the wanted ride limos instead of palominos, shoot with telexes not Winchesters. And the law mandates provisions for dealing with potential Wyatt Earps: Local police have the right to arrest anybody whom they suspect to be involved in activities prejudicial to the Swiss economy and hold that person without formal charge for two weeks. “There are no individuals in Zug,” said a trader for Fernacom, a Zug-based metal-trading firm, “only private shareholders.” The town’s most famous shareholder would come to be Marc Rich, who came here with the Philipp Brothers blasphemers in the winter of 1974 seeking to create an empire sheltered and safe from the probes of the outside world.
Rich’s first move was to register Marc Rich + Co. AG, a trading firm empowered to transact business anywhere in the world under the protection of Swiss secrecy laws. Headquarters was his cramped apartment in Baar, a small but wealthy village on the outskirts of Zug where Rich would spend his evenings calculating the various ways of destroying Ludwig Jesselson, as the cold Swiss sun set on his competitors’ European offices a few miles to the west. Rumors of what Jesselson would do in retaliation drifted through the canton thicker than snow. Talk of wild revenge and destruction filled the air. “Philipp Brothers was not a place you could leave delicately,” Hubert Hutton mused, reflecting back on the tense atmosphere that engulfed the trading community in the days following Rich’s departure. “The competition was always scared of Philipp Brothers. They’d believe that Jesselson would sneak into their telex rooms at night disguised as a cleaning lady if somebody said it with a straight face. These are the kinds of stories that traders want to believe whether or not they are true.”
The most evident truth rolling through Zug was Marc Rich’s ability to trade, even with a limited bankroll. He was a superb organizer of people and tactician in the relentless use of a private corporation as a wedge against the ethical restraints imposed by the public sector. If the conquest of Jesselson was his ultimate goal, as many traders from both firms were led constantly to believe, then everyone knew that Jesselson would never surrender Philipp Brothers; it could be taken only by heavy siege. The order of battle was for Rich to swarm the marketplace, igniting volatile markets for oil and metal. Rich’s presence as a wild card would put pressure on others scrambling for the same material, fomenting an emotional market situation where a private trader could move easier and profit quicker than one chained to a public corporation. “Marc has the qualities that distinguish the average trader from the brilliant trader,” said a broker who competed against him. “When he trades a commodity, he knows its differentials, its qualifications, where it’s needed and where it can be gotten. He does that by knowing what’s happening around the world and by having an enormous network of people.”
The network was small at first and totally dependent on milking deals from Philipp Brothers. The five traders who left the company with Rich were all prima donnas, breakers of the Philipp Brothers mold, and accustomed to intriguing business away from the competition. The challenge Rich offered invigorated them like a blast of salt air. Although there was little money to pay salaries, Rich whetted their pirate senses with assurances that they would share in the booty; they followed him with the loyalty of sea dogs, secure in the knowledge that their master would treat them well when it was time to be fed.
Deals were quickly sealed for chrome and copper, both metals that Jesselson had considered himself to be an absolute monarch of since the fall of the Third Reich. Rich’s traders were offered huge incentive bonuses if they outwitted Philipp Brothers for material; they wandered the ports of the world like apostles, purchasing loads of lead, tin, zinc, sugar, and rice. Senator Ali Rezai, however, was Rich’s trump card. The two men closeted themselves in Tehran in early 1974 and worked out an agreement in which Marc Rich + Co. would purchase nearly half of the chrome dug out of Rezai mines in Faryab and Esfandaghe. Rezai was ecstatic. “Ali said it was the best thing that ever happened to him because he could now play Rich and Philipp Brothers off against each other,” said one of Rich’s metal men. Rich traders claim that one of the earliest scams was to purchase huge amounts of copper and then place the material off-warrant, a paper shuffle that warehoused the metal but failed to list it as registered stock on the world market. Off-warranting gave the impression that the market was short, sparking an instantaneous buying spree among dealers who needed to supply copper immediately and allowing Rich to sell his copper at a premium well above the market price set twice daily by the London Metal Exchange.
“Rich went into Chile in 1974 and bought five thousand tons of copper concentrates,” recalled Fred Schwartz, the tough and outspoken president of Redco Resources, a metal-trading firm. “He just went in there and did it, you know. It didn’t matter a bit that he had a built-in loss of $500,000. He did the same thing with manganese in Brazil.Z”
“The guy wanted to make a name for himself in the industry, and it really takes a guy with brass balls and foresight to say, ‘I don’t mind losing a half a million dollars,’ ” said Schwartz, who made his mark as a metal man under gunfire, contract salvaging war scrap off the South Vietnamese coast for the United States Army. “Rich didn’t mind blowing what money he had because he knew he’d get a lot more out of it in the long run. He needed to scare the competition, and losing a half a million dollars calmly can start a lot of fucking fear in this business.”
Rich’s business days began no later than 6:30 A.M. and dragged on until he fell asleep. The telephone became an integral part of his anatomy, and on the rare occasion that one was not glued to his hand, his traders would joke that Rich’s wife had had it surgically removed while he slept.
Rich transferred his physical operations into a tiny three-room London flat on Great St. James Street at the end of 1974. Rich and Green sat opposite one another, constantly hollering what deals they were making back and forth across the apartment, causing the rickety walls and floorboards to shake and moan whenever the cries of “Hey, Pinky!” “What, Marc?!” rumbled through the place like blasts from a firehouse claxon. The London office was a madhouse scene and a good deal of fun for the traders who sometimes slept there overnight lest they miss an important telex from somewhere in the world that Rich — who read every telex going in and out of the office — might quiz them on the next morning. The uproar during normal wo
rking hours was tremendous, and visitors to the place had no idea how anything could be accomplished. Contracts and telexes were piled all over the flat and phone lines snaked around the room like Vietcong trip wires.
“We were four floors up, and there was no elevator to get us there,” a trader who worked there described fondly. “It was so small that everybody had to stand up to make room whenever somebody came into the office. A few of us even had to conduct business from the couch in Marc’s office, and he would have a terrible time throwing us out whenever he wanted to have a private meeting.”
Rich’s presence in London added prestige to the company. The City was the financial supermarket for international traders, providing easy access to brokers on the London Metal Exchange and to the big banks who used London as their center for foreign lending operations (Citibank, for example, orchestrates $13 billion worth of loans from its London office). London was also the home of Philipp Brothers’ first foreign office, a fact that did not escape Rich in his decision to become a major force on the London metal scene. The office was managed by Felix Posen, a former Philipp Brothers trader who was given the nickname “Sir Felix” because of his grand manner. Posen was an American in passport only. He bought a huge, detached mansion in the Sussex countryside and stocked it with the finest European art money could buy. He entertained there grandly and was always donating corporate money to help out the various royal drives to rebuild parts of London. “It was the old Philipp Brothers system,” a Rich trader said. “Headquarter your European operations in Zug to manage all transactions taking place outside the United States, base most of your day-to-day traders working foreign deals in London, and keep the brain trust in New York.”