Big Financial Fraud of the 1970s
Robert Vesco is well known as a fugitive capitalist who scandalously robbed a mutual fund known as Investors Overseas Services (IOS) off $224 million leading to the collapse of the “fund of funds” in the 1970s (“Robert Vesco,” 2008). Analyzing the life of the man who attracted the attention of the media during the early 1970s and late 1980s and later in 2008 upon his reported demise reveals that the scandals around Vesco were caused by the financial crimes, which Securities Exchange Commission (SEC) investigated. Vesco had organized a scheme to make the Public Health Ministry in Cuba believe in a miracle drug that he claimed cured many diseases. He has also committed other crimes including bribery and drug trafficking, which were investigated, but he has never appeared to answer the accusations. According to Herzog (2003), Vesco was still leaving in Cuba, and there were reports that he was under a house arrest. However, by the end of his days in 2008, Vesco died without appearing in any of the U.S. courts to answer the lawsuits against him. This paper investigates the details of the scenarios concerning each crime, for which Robert Vesco has been accused, and the reasons for his never answering any of them in the United States or Cuba.
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Robert (Bob) Vesco was born in the family of an auto assembly worker who lived in Chrysler. He did not graduate from high school but impregnated his high-school girlfriend and married her with a promise of a better life in the future (Struach & Foster, 2012). This better life would begin with a small body shop that he ran in the neighborhood. Vesco lacked table manners and was a man identified with his blue-collar attire. However, some of these identifiers would soon change as Vesco crafted his plans for venturing into the corporate world with many life-size ambitions.
Vesco acquired a job with Reynolds Aluminium and successfully made his way into the field of ethics when he designed an automobile grill that was essentially one-piece aluminum (Struach & Foster, 2012, p. 494). This product of his skills allowed him to advance in the field because the grill replaced a previous multi-paneled grill that cost consumers three times less in repairs compared to Vesco’s. He was actually promoted because of this breakthrough and sent to the company’s headquarters in New York. However, Vesco’s ambitions were bigger than his promotion and corporate success admired by his family of three children.
In 1959, Vesco left Reynolds to pursue an independent life in order to be a master of his own affairs. He started to work with a company that had a dormant aluminum press: the company managed the press, and Vesco searched for the market for the company’s products. He gave his business a name, Aluminum Services Incorporated, and established its headquarters at one of the outfit corners owned by the press (Struach & Foster, 2012, p. 497). Henceforth, Vesco focused on making more acquisitions in order to build a corporate empire of his own. Following this ambitious plan, he landed another deal with Captive Seal. Captive Seal was a struggling enterprise that had 20 minimum-wage employees. However, the most important aspect for Vesco in terms of Captive Seal was the patent for gasket used in airplanes that this enterprise-owned. At the time, Vesco started to search for an investor to finance Captive Seal, and once it began to expand, he would then sell it to a larger corporation and make fortunes from the sale. This search eventually resulted in Vesco meeting Malcolm McAlpin who introduced him to the stock exchange market where the story would begin to take a new direction (Struach & Foster, 2012).
McAlpin was a graduate of Princeton. He worked as a broker on the Wall Street. While the two facts seem odd in terms of education and character, McAlpin successfully launched Captive Seal and Vesco got introduced to Cryogenics, Inc., which was listed in stocks exchange apparently with no assets of its own (Struach & Foster, 2012, p. 496). Thus, it was a great idea for Vesco to merge the two companies, Captive Seal and Cryogenics, Inc., and then be in a position to sell the shares in Captive Seal without necessarily listing the company with Securities Exchange Commission (SEC). At the time, he raised a substantial amount of resources that made it possible for him to acquire another two airplane parts companies.
Later, Vesco began to cooperate with IOS. The company and the criminal are the two major parties involved in the crime. Vesco was in dire need of about $2 million to pay off debt accumulated by his companies and decided to use the organization to solve own problems. IOS would help raise funds because, first, Vesco knew an insider of IOS called Ed Cowett (Struach & Foster, 2012). Second, IOS was struggling to improve its position under the leadership of Cornfeld, with whom Vesco never had good relations due to Cornfeld’s reference to Vesco’s pig table manners (Struach & Foster, 2012, p. 501). However, under those difficult conditions, the criminal met with the board and presented a rescue plan.
Vesco’s rescue plan was well crafted to confuse the incompetent IOS board. According to Struach & Foster (2012), Vesco was offering $5 million loans under the condition that he would take control of the operations of the company and revitalize it in just a year. According to Herzog (2003), a third of the stock owned by IOS and 3.5 million would be lost by the company due to Vesco’s failing to fulfill his promises. Though the deal was absurd, the incompetent board accepted the contract terms, which were also never documented anywhere. Vesco presented a falsified and undocumented partnership to the board claiming that he had strong backing from both Bank of America and Prudential Insurance Company. However, it was Vesco who actually needed financial help from IOS and not IOS from him.
Vesco needed $2 million to pay the debts for his conglomerate companies. From the deal with IOS, he needed another $5 million to fund the takeover (Struach & Foster, 2012, p. 501). Vesco embarked on a fraudulent plan to acquire these funds. First, he convinced Ed Cowett to leave all IOS money in a bank in Bahama. Once it was done, Vesco proceeded to ask the bank to loan him the money, which he used to fund the takeover of IOS. Thus, IOS actually funded its own takeover. A month after this takeover happened, Vesco began paying debts and loans of his companies using IOS money, which almost allowed him to gain total control of the enterprise. He went across the world seeking investment ventures in the sea-going yacht business as well as in the “Big Bird” Boeing 707. Vesco began living a lavish life and reportedly spent much on the entourage with the likes of President Nixon’s nephew, Richard Nixon.
A year after the events had begun unfolding, SEC launched an investigation into the matters concerning Vesco and his companies. The investigations were based on the financial fraud and looting supposedly committed by Vesco and his conglomerate companies, a scandal that became so entwined that it received a specific name in the end, the Watergate scandal. Meanwhile, when Vesco realized the agitation his looting caused was all over, he fled the U.S. and went to Costa Rica, and later to other unknown places. At one time, he was sent jailed in Switzerland, though it lasted briefly as he found a way out of the country and went into hiding again after being bailed out of jail. The reason for Vesco being detained was yet another fraud case whereby he allegedly used another person’s shares to vote in the proxy fight that had emerged after he took over IOS. According to Herzog (2003), it was the responsibility of the SEC to investigate where Vesco had stolen $224 million from IOS.
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Surely, Vesco tried to influence the process of investigating. Once he understood that he was in trouble, he decided to seek support relying on his White House connection. What he did was a generous contribution of $200,000 to Committee to Reelect the President (CREEP), which led the reelection campaign of President Nixon (Struach & Foster, 2012). It was revealed that this kind of contribution was illegal and that it involved, other than what it was meant for, burglary and espionage. According to Struach and Foster (2012), the $200,000 was SEC’s money and thus was an attempt to make the White House influence the investigation and direct attention from Vesco or even cease the entire investigation. This scheme never worked, and the investigation was completed leading to the later resignation of the President when the news was made public.
Impact of the Fraudulent Actions and Outcomes of the Investigation
It appears that the financial crimes committed by Robert Vesco have been complicated to such an extent that Washing Post called him a multinational financial crime master in 1995. Vesco committed his crimes in a way that he always outsmarted the law enforcement authorities and made complex cover-ups; thus, before his activities eventually came to light, the damage had been already done, and Vesco would have escaped prosecution. Vesco was a master of multinational financial crime who made it difficult for the investigators to trace the stolen money and assets. He transferred the money from company to company and from country to country, until it could not be found (Herzog, 2003, p. 153).
The impact of the crimes was immense. In the original complaint filed by SEC in 1972, Vesco allegedly left with $224 million, most of which was in cash. It became the biggest financial fraud reported by the SEC at the time, and the amount is equal to about $1 billion today. Moreover, the 1982 court order wanted Vesco to pay $339 million stolen from the investors in IOS, and this amount was to be paid with a 10.4% interest rate per year. This sum would amount to slightly over $1.6 million today (Herzog, 2003, p. 159). Another important outcome of the investigations is associated with how IOS operated, which charged the investors twice in both commissions and fees compared to other mutual funds because IOS was a “fund of funds.” It used its customers’ invested funds in investing in other mutual funds that were owned by IOS itself. This is probably why the company had been spotted as the best money machine by Vesco to help him pay his debts and elevate his financial situation. Such people as Cornfeld, who was a part of IOS, paid two sets of commissions. First, they paid a commission when they invested in the other mutual funds, and then once again when they reinvested the same funds in the fund’s IOS owned (“Robert Vesco,” 2008).
Apart from the above-mentioned complex operation that resulted in extraordinary commissions for IOS and its owners, the investigators faced another challenge. IOS was located in Canada with its headquarters in Geneva and was run from the offices located in France, from which it sold shares across entire Europe. This complex network-enabled IOS is otherwise not allowed to sell shares in the U. S. to actually do this despite the legal and regulatory restrictions. Thus, IOS and Vesco used American soldiers who were in Europe in the 1960s by positioning IOS as an offshore investment fund that was immune to the tracking of Internal Revenue Service (IRS) (Struach & Foster, 2012). Therefore, it was almost impossible to charge Vesco and his accomplices with any tax evasion irregularities. When Vesco was finally charged with fraud and double-dipping, the accusations were based on his active role, which began after the takeover when he used IOS’s funds to buy expensive stocks of other corporations and later transferred the stocks into a third company (“Robert Vesco,” 2008). In the end, the original asset had been moved until it no longer existed, thus leaving IOS a shell without a single asset to trade.
To conclude, none of the missing assets or money from IOS have ever been recovered or found anywhere. Most of the funds were traced to some banks in Panama, but the officials reported that none could be found. Vesco himself never appeared in any court and was never seen in the United States after he had been served by SEC with a subpoena in 1972. He had been a patient in Havana, in a military hospital where medics described his ailment as a serious stomach condition. American officials had sought Vesco’s extradition from Cuba to the United States following many discussions. However, Vesco eventually died in Cuba in 2008 after the Cuban government refused to deport him to the U.S.