Investors Overseas Services

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IOS Ltd. share

Investors Overseas Services Limited , or IOS for short , was a major offshore financial group in the 1960s that traded in equity funds, real estate and insurance and went bankrupt around 1970 in a sensational global manner .

Preliminary remark

The history of the IOS is extraordinarily complex. Due to the systematic concealment of deposited sums of money and donors and the not always traceable use of funds in an almost impenetrable structure of dozens of subsidiaries , banks , insurance companies and investment funds , located in the most diverse tax havens , the events and cash flows could never be completely reconstructed. The clarification of all events and the subsequent liquidation of the IOS and its subsidiaries and investment funds was made even more difficult by the actions of the last major shareholder , Robert Vesco.

The amounts of money related to 1969/70 have to be multiplied by about six times in order to reflect the current magnitude adjusted for inflation (as of 2006). The US- $ / Deutsche Mark exchange rate stood at around 1 US dollar = 4 German marks in 1969/1970.

The beginnings (1956–1959)

In the first few years, the IOS consisted of Bernard Cornfeld and a few employees he gradually recruited for the door-to-door sale of American equity funds . The American Cornfeld came to Paris from New York in early 1956 . There he noticed that there was an attractive target group for the sale of equity funds in Europe : the around 800,000 US soldiers stationed after the end of World War II . At the same time, it registered large numbers of US civilians living abroad looking for employment. He first recruited his employees from this group. At the beginning, von Cornfeld sold shares in Walter Benedick's IPC fund, where Cornfeld had learned the basics of selling equity funds and, above all, the structure and functioning of a structured sales organization from 1952 until he moved to Paris .

Thereafter, shares in the Dreyfuss Fund were sold after Cornfeld had received the exclusive distribution rights for Europe. The Dreyfuss Fund enjoyed great popularity in the late 1950s / early 1960s due to spectacular increases in value.

In 1958, the IOS came into conflict with the French authorities who suspected an illegal sale of American fund certificates to French citizens. As a result of this conflict, Cornfeld and his colleagues moved to Geneva in autumn 1958 . Cornfeld quickly noticed that he could earn considerably more money if he not only sold fund shares but also ran his own fund management company. He therefore decided to structure IOS as a fund management company with its own funds. The knowledge he needed was provided by a man who quickly rose to become the second man in the IOS and who was to be the brains behind the amazing expansion of society in the 1960s: Edward M. Cowett. Cowett had come to IOS in late 1959. As a trained lawyer who specialized in securities laws and worked for some time as an advisor to the Dreyfuss funds, he had the knowledge necessary to organize the company's growth. The number three of the IOS was Allen Cantor, who controlled the sales apparatus with the representatives.

Promotion and first fund of funds (1960–1964)

On 9. April 1960 , the IOS was first formally registered as IOS Ltd. based in Panama . The choice of the place of business in the various tax havens should run like a red thread through the further history of the IOS. In addition to the tax advantages exist in these offshore - business seats if at all only rudimentary provisions for accounting and to create a balance . There was also often a lack of laws for the independent control of a company and protective provisions in favor of capital investors. At the beginning of 1960, Cornfeld and Cowett developed an important tool to bind the steadily growing number of representatives closely to society, the stock option plan. Under this plan, the representatives acquired shares in the company according to a complicated formula (depending on rank and sales success) in the hope of turning them into cash when the IOS went public.

On January 5, 1961, the first IOS-owned fund was launched in Luxembourg , the IIT (International Investment Trust). The value of the IIT fell from its issue price of $ 5 by October 1962 to $ 3.53. In later sales prospectuses of the IIT the loss in value was disguised by assuming the low of the IIT of October 1962 as the starting value in value comparison calculations. The IIT became popular from 1967 to 1969 and by the end of 1969 was to be the IOS's largest fund with over $ 700 million in assets. At that time, more than half of IIT's assets belonged to German investors.

In the fall of 1962, Cornfeld and Cowett developed the idea of ​​a fund that would generate even higher fees for the fund management company. This fund should only invest in other funds. When it was registered in Ontario (Canada), the Fund of Funds (FOF) was born, the first fund of funds in investment history. In the following years, a considerable amount of investment money was misappropriated in this fund contrary to the investment regulations and exposed to high risks in futures transactions , real estate and in the development of raw materials. At the beginning of 1967 Cornfeld and Cowett had an idea to further increase the income of the IOS. The funds of the Fund of Funds were no longer invested in third-party funds, but in so-called private owner funds established by the IOS with only one partner, the IOS. Due to the various fees, up to 20 percent of the customer deposits were withheld before the investment. This heavy burden, even by the standards of the day, made an above-average success of these funds unlikely. By the end of 1964, the FOF was already managing $ 100 million. In 1969 he was to temporarily manage $ 800 million from more than 188,000 investors.

In 1963, IOS founded Investors Bank in Luxembourg, its first own bank. In 1964 the Overseas Development Bank in Geneva was acquired and the company entered the real estate and insurance business.

Success and first difficulties (1965–1968)

Major projects were carried out through the IOS real estate company Indevco, headed by Martin Seligson since 1964. In 1970 the Playamar hotel and apartment complex on the Costa del Sol between Málaga and Marbella was completed. From 1968 onwards, Indevco also managed the real estate fund of the Fund of Funds. With Investors Bank and the insurance business headed by Richard Hammermann, IOS participated in issuing business and in the insurance industry. In England , the IOS was successful with the so-called “Dover Plan”, a unit-linked life insurance . IOS commodity investments were directed through the commodity fund of the Fund of Funds of John M. King , who financed his King Resources ventures with FOF money.

The IOS initially relied primarily on US military personnel as customers. This was followed by civilian Americans living abroad and wealthy overseas business people. Soon the IOS was doing business in all countries with wealthy residents who wanted to transfer their money abroad contrary to the tax laws and foreign exchange regulations of their home countries. It was largely this money, illegally moved abroad by the IOS, that contributed significantly to the growth of the IOS until mid-1967. According to estimates, from the approximately 700 million dollars invested with the IOS up to 1967 to 400 million dollars had migrated illegally, mainly from South America and the Middle East, to the IOS accounts.

In 1965 and 1966, these lucrative markets for the IOS were almost completely lost. Due to the continued violations of tax and foreign exchange regulations, the IOS branches in Brazil , Colombia and other countries were closed, and some employees only escaped arrest.

Another conflict paved for the IOS since 1965 with the US Securities and Exchange Commission SEC at. In November 1965, the agency demanded the disclosure of all documents relating to IOS 'US customers. The IOS refused to comply with this request. After a legal defeat, the IOS reached a settlement with the SEC in May 1967 , which prohibited the IOS from any activity in the USA. This agreement was subsequently circumvented by the IOS in that the IOS orders were processed through a London company.

The IOS also ran into difficulties at its headquarters in Switzerland . After the Swiss Bankers Association complained about aggressive behavior and a lack of clarification on the part of customers and the Swiss Federal Council had established the illegal employment of IOS employees in Switzerland and the illegal designation of the IOS as a Swiss company, the IOS had to commit itself in autumn 1968 to a to relocate a large part of their administrative apparatus from Geneva . The IOS decided on the French village of Ferney-Voltaire , only three kilometers from Geneva Airport , and built a large administrative complex there in a short time.

In order to influence political decisions and to improve the image of society to the outside world, the IOS tried more and more to engage diplomats, politicians and celebrities from 1966 onwards. The IOS Development company was founded specifically for this purpose. Cornfeld achieved great success in 1966 with the engagement of Franklin D. Roosevelt's eldest son , James Roosevelt . In England, the IOS hired the former director general of the GATT , Sir Eric Wyndham White . In Germany, Ludwig Erhard's desired engagement failed , but in September 1967, Erich Mende , the former Vice Chancellor and chairman of the FDP, was won. With Victor-Emanuel Preusker another former Minister employees of IOS was. Preusker took over the management of the IOS-owned Orbis bank in Munich . The celebrities had little influence in the IOS. In the countries, the general managers determined the course of the IOS, while in Geneva Cornfeld, Cowett and Cantor made the decisions.

Since IOS had lost its customers in South America and the Middle East, new sales markets had to be opened up. The IOS was particularly successful in Italy and Germany. In Italy, the Fonditalia fund, launched on September 26, 1967, quickly attracted large sums of investment capital (almost $ 200 million). In Italy as well, as in other countries, the IOS continued its practice of illegally transferring funds abroad in addition to its official activities; the illegal transfer is said to have reached at least the level of legal payments.

The strong growth of the IOS from 1967 to 1969 was financed to a significant extent by German investors. In the years from 1963 to 1967, when the IOS was not yet known to the general public in Germany, well-paid self-employed people and entrepreneurs had invested mostly large one-off sums mainly in the Fund of Funds , the rapidly growing team of IOS representatives sold 1968 and 1969 many savings plan programs with monthly payments also to small savers. These initially bought shares in the IIT and the investment fund offered since March 20, 1968 via the Orbis Bank (this managed almost $ 100 million in mid-1970). The two last IOS fund foundations were also successful sales in Germany. The venture fund collected around 90 million dollars by the end of April 1969, the Investment Property International around 100 million. At the beginning of 1970 there were almost 10,000 IOS representatives in Germany (out of an estimated 16,000 worldwide), over 200 IOS agencies and around 300,000 investors: Almost half of the IOS profits were made in Germany in 1969. The particularly great success in Germany was due to the fact that small investors were neglected by the banks for a long time and were therefore particularly receptive to IOS advertising, which worked with the term “Peoples Capitalism”. Furthermore, there were hardly any regulations on investor protection until the end of 1969. In addition, the influence of Erich Mende as the top representative of the IOS in Germany should not be underestimated. Through his tireless advertising work with hundreds of appearances, 5,000 representatives and 200,000 investors came to IOS in his time. Like other countries, Germany was divided into regional spheres of influence called general managers. In each of these regions, the typical pyramid shape of structured sales was formed . Many of these general managers, such as Werner Kunkler, Eli Wallit, Ossi Neduloa and others, succeeded in just a few years in earning large sums of money from the commissions they received: In 1969 alone, they each received over a million dollars.

The crisis (1969-1970)

In 1969 the IOS was at the height of its success. It controlled approximately $ 2.5 billion in investment funds, making it one of the largest fund management companies in the world. The number of investors worldwide was estimated at over a million. Bernard Cornfeld was the keynote speaker on several occasions at the Institutional Investors Conference, an exclusive event for institutional investors in New York.

At the end of 1968 IOS successfully acquired part of the shares in its subsidiary IOS Management Ltd. listed on the stock exchange (the company that managed IOS's major funds such as the IIT and the Fund of Funds). Therefore, in 1969 shares in the parent company IOS Ltd. be placed on the stock exchange. This plan was rated positively by many IOS employees, because it gave them the opportunity to cash in the IOS shares they had acquired through the stock option plan at any time on the stock exchange. According to the stock option plan, employees could redeem the first ten percent of their stock options after ten years, and then another ten percent in each subsequent year. At the time of the IPO , the IOS had around 2,200 internal shareholders , in 1961 there were only 34.

In October 1969, eleven million shares were offered for public purchase for $ 10 per share. Half of this came from the holdings of the existing shareholders and the other half from a capital increase . After the IPO, Cornfeld only held 16 percent of the IOS shares. The company, whose headquarters had recently been relocated from Panama to the Canadian province of Ontario , received more than 50 million dollars from the IPO. The share price developed well at first, hovering between $ 13 and $ 17 until the beginning of the IOS crisis in March 1970. Since the IOS leadership had encouraged them to do so, many employees from the lower and middle levels of the company acquired many shares in the first few months, often with borrowed money, which was to be fatal for many in the subsequent fall in the IOS share price.

The IOS was overtaken by various undesirable developments in the phase of apparently complete success. Bernard Cornfeld had almost completely withdrawn from the management of the company since 1968. He spent most of his time with his newspaper-filling life as a jet-setter with beautiful women, expensive hobbies (fashion companies / film projects) and his own castles. The fortunes of the company were effectively led by Edward Cowett from mid-1968. Cowett was instrumental in ensuring that a substantial amount of the Fund of Funds (totaling $ 217 million) was used by John M. King for projects at King Resources' oil exploration company. IOS also acquired an unprofitable fund company with the Canadian Channing Group and lost several million dollars through investments in the conglomerate Commonwealth United. Furthermore, the rapidly growing distribution apparatus devoured an ever larger part of the money raised. In addition, there was the lack of internal cost management , so in addition to sales, the administrative apparatus was expanded further. A large number of loans were granted to leading employees, secured only with IOS shares. It also found that Edward Cowett had used nearly $ 25 million from the IOS to prop up IOS stock after the IPO.

As a result of these undesirable developments, IOS found itself in a liquidity crisis at the end of 1969, despite the funds from the IPO and high profits from ongoing business. In early March 1970, IOS CFO Melvin Lechner informed IOS management that instead of the expected profit of $ 0.50 per share, only $ 0.21 per share could be reported (and this profit was also embellished by a dubious book profit from the appreciation of oil drilling rights in the Arctic from a joint venture with John M. King ). The IOS was already operating at a loss in the second half of 1969, and the IOS had to confirm further losses for the current 1970 financial year.

After the company's financial situation became public, IOS shares came under heavy pressure from the beginning of April and temporarily fell below the two-dollar mark by June 1970. Many investors and employees with loan-financed commitments lost a lot of money through the forced sale of their shares when the value of the shares was no longer sufficient to secure the loans. Cornfeld, who had lost control of the company when the IOS went public, was unable to maintain his positions in the company's management despite intensive efforts. At the beginning of May 1970 he was ousted at a meeting of the Board of Directors and on June 30, 1970, he was not re-elected to the Board of Directors at the general meeting. Edward Cowett also had to leave the company. Allen Cantor was replaced as Head of Sales by Harvey Felberbaum in June 1970, who had built up the IOS organization in Italy. Erich Mende left the IOS in early July 1970. Another employee who left the IOS in 1970 to found the MSC shipping company was Gianluigi Aponte .

The new leadership of IOS under White immediately tried to attract financially strong investors. In this situation it was a disadvantage that the IOS had never sought particularly good relations with the traditional banks. There was not much interest in a society in crisis, from which representatives ran away in droves and which suffered from high returns. The number of employees fell by half by the end of 1970, as did the number of representatives, and the funds under management fell to 1.4 billion dollars due to exchange losses and share returns. The IOS posted a loss of $ 25 million in the first half of 1970.

In the end, there was an offer of one US dollar per share by the Rothschild bank in Paris, which was rejected as too low by the board of directors of the IOS because the long-standing business partner of the IOS, John M. King, had offered four dollars per share . King could not keep his financial promises, so that the IOS finally accepted the offer of support from a new prospect, Robert Vesco, main shareholder and chairman of the conglomerate International Control Corporation (ICC) that he had built. On September 3, 1970, the IOS entered into a loan agreement with Vesco's company.

The downfall (from 1971)

After Vesco joined IOS, he consolidated his position by purchasing Bernard Cornfeld's stake in January 1971. On January 16, 1971, Cornfeld sold the remaining shares to an unknown company called Linkink for $ 0.80 each. Cornfeld believed they were international investors. In reality, Vesco had founded the Linkink mailbox company only for the purpose of acquiring the Cornfeld shares. Right from the start, Vesco was faced with the problem that he could not freely use the IOS funds that were still available, because the settlement with the SEC still forbade the IOS from any activity in the USA and thus also from collaborating with Robert’s ICC Vesco. Gradually, Vesco filled high positions at the IOS with its own employees, with the aim of ultimately being able to use the IOS funds via mailbox companies. He developed the plan to set up an offshore company under the name ABC, and then channel the IOS funds into this new company via mailbox companies and banks in the Bahamas . As a result, the remaining fund monies would have been withdrawn from the investors' access. The money movements initiated by Vesco did not go unnoticed, and so at the end of 1972 there was an SEC indictment against Robert Vesco and six other people of embezzling $ 224 million from the IOS. Other reports put it as high as $ 500 million, which is unlikely given that the IOS funds were under $ 480 million as early as September 1971. The SEC later reduced the specific allegations to $ 100 million. Even of this, however, only a small part of the accused was effectively withheld, since a large part of the funds was secured in the bankruptcy proceedings of the IOS and other companies. The largest single case of abuse was a $ 60 million transfer of the Fund of Funds to a bank in the Bahamas, of which, according to the insolvency administrator, the whereabouts of almost $ 20 million could no longer be clarified. Vesco evaded the process by fleeing to Costa Rica . He lived in Costa Rica, the Bahamas and Antigua until 1982 , when he finally made it to Cuba .

In 1973 the IOS had to file for bankruptcy. The implementation of the bankruptcy of the IOS and its funds was not yet fully completed in early 2006 either. Even in the case of the Fund of Funds, however, it was possible to reach 95% of the registered investors and to pay them liquidation funds, clear evidence against the myth that IOS investors had lost everything. The sharp decline in deposits up to the end of 1972 also shows that many investors returned their fund units when the fund units were still being bought and sold regularly. In the case of the Fund of Funds, which was hardest hit by losses, many German investors had exchanged their units for IIT or Investorsfonds units in 1969, since the sale of the Fund of Funds in Germany was illegal from November 1, 1969 and the previous investors in the FOF were too were subject to a higher tax on their shares.

The liquidation of the Fund of Funds was officially completed on January 16, 2006. Investors were paid $ 15.75 per share ($ 162.6 million). IIT investors received $ 7.50 per share up until 1986, and venture fund investors $ 9 per share. The liquidation of Investment Properties International was officially ended in December 1999. A total of $ 172 million ($ 16.49 per share) was paid out to investors.

The investors in the Investors Fund were not affected by the IOS bankruptcy. This was continued by Orbis Bank until 1975. After Orbis Bank went bankrupt in 1975, it was acquired by MK-Kapitalanlagegesellschaft and continued under the name MK-Investors-Fonds (with 45,000 registered customers). On June 30, 2005 the MK-Investors-Fonds was closed.

Funds from the IOS liquidation are still waiting for the claimants on accounts held by trustees . In the case of the IPI (Investment Property International), according to information from PricewaterhouseCoopers, this is 7 million dollars (as of February 2006). According to Deloitte & Touche , about $ 4.4 million can still be claimed from the liquidation of the Fund of Funds . At the beginning of 2006, expensive materials were offered for sale on websites with dubious reliability, with which the interested party can allegedly assert their claims.

Post Comment

Most IOS funds performed below average. Due to risky investment strategies and high fees , hardly any fund was able to meet the expectations placed on it. IOS's largest fund at the end of 1969, the IIT, managed to generate just $ 4 million in profit for investors from 1960 to 1969. In the same period, the IOS collected $ 11 million in fees from the IIT. The value of a venture fund sold with great success in Germany in March 1969, including fees, appreciation and price losses, fell by almost 40 percent by mid-1970. Fund-of-funds investors were particularly hard hit at the end of August 1970. Three fifths of the fund's assets were transferred to a new company. In return, investors received a share in this new company, Natural Resources Property Corp, which represented the FOF's former commodity fund. The value of a FOF share fell from $ 18.44 to $ 7.44 - a loss of 75 percent compared to the issue price in 1963 .

The economist John Kenneth Galbraith writes about the way the company works: “The IOS was above all a huge sales apparatus in which securities sellers recruited other sellers and thus received a commission from their sales. Those recruited in this way recruited other sellers, from whom they then received commissions. In Germany, the pyramid was six stories high at the end, and only a fraction of the actual investment went into the securities they were intended to buy. Everything else went into those commissions. It would be difficult to think of a financially unsuitable company for investors. "

Bernard Cornfeld was unable to return to finance. He died impoverished on March 27, 1995 as a result of a brain hemorrhage in London.

Edward M. Cowett died of heart failure in 1974 at the age of 43.

Allen Cantor lived well-off in Switzerland until 1988.

In 1986, after having suffered several strokes, John M. King lived as a small businessman in the USA.

Robert Vesco was sentenced to 13 years in prison in 1996 in Cuba for trafficking a supposed miracle drug called "TX". He died on November 23, 2007.

Many top German managers at IOS managed to make a new start at other financial companies, often later as heads of their own financial service providers . This includes:

After a very successful IPO (1998), Tecis was taken over in 2002 by Carsten Maschmeyer, who was trained at OVB Vermögensberatung, through his company AWD Allgemeine Wirtschaftsdienst , Hanover.

literature

  • Charles Raw, Bruce Page, Godfrey Hodgson: Do you sincerely want to be rich? . Broadway Books, New York 2005, ISBN 0-7679-2006-6
  • Bert Cantor: The Bernie Cornfeld Story . Lyle Stuart, New York 1970
  • Manfred Birkholz, Wolf Saller: IOS. Vertical takeoff and crash of an idea for success . Econ, Düsseldorf and Vienna 1970
  • Arthur Herzog: Vesco . Writers Club Press, New York 2003, ISBN 0595272096
  • Giorgio Pellizzi: Bernie, the billion dollar pinball machine . Rotbuch-Verlag, Berlin 1974

Web links

Individual evidence

  1. ↑ red: Luxury and Enjoyment: Wealth de Luxe in Bilanz , November 29, 2005
  2. ↑ John Kenneth Galbraith: A Brief History of Speculation. Frankfurt / Main, Eichborn Verlag, 2010 ISBN 978-3-8218-6511-9 p. 100f.