Metal Men: Marc Rich and the $10 Billion Scam
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by A. Craig Copetas
Description: [An E-Reads Publication] Nonfiction: How did Marc Rich make over 10 billion dollars and pay so little in taxes? Journalist A. Craig Copetas has infiltrated the inner circle of the commodities market and Rich's associates to show not only how Rich pulled off the scam, becoming one of America's most wanted criminals, but also how other traders have used the same model to evade taxes as well. Currently the center of yet another great controversy, Rich was wanted for evading almost 90 million dollars in taxes and if caught, would have to potentially serve a jail term of over 300 years. METAL MEN is the story of international intrigue spanning the globe from the inside of the White House to the Kremlin. Copetas has written a brilliantly researched work that exposes the inner workings of one of country's largest scams.
eBook Publisher: E-Reads, 1985
eBookwise Release Date: March 2001
10 Reader Ratings:
Available eBook Formats: OEBFF Format (IMP) [324 KB]
Reading time: 198-278 min.
"A fast-paced story of business, politics, crime and how the three easily become one." -Peter Gianotti, Newsday
"The greed and corruption...are the stuff of high drama!" -Diana Fong, N.Y. Times Book Review
"Mr. Copetas has done an outstanding research job in assembling his lurid saga...The story itself is astonishing--and appalling." -John Train, Wall Street Journal
Marc Rich had it all.
A commodity trader with a Midas touch, Mr. Rich from the late 1970s until the present ran a multibillion-dollar empire that stretched from Russian nickel mines through Malaysian tin deposits and into trading rooms in London, Hong Kong and New York. He owned a fleet of oil tankers, counted Henry Kissinger and Placido Domingo as his friends, and married the heiress to the Florsheim shoe fortune. He had a $9.5 million home along Spain's Costa Brava and maintained equally lavish residences in Switzerland and Israel. Mr. Rich purchased Picassos and grain silos, scooped up Hollywood studio 20th Century-Fox at one point and helped bankroll everything from the Jamaican Olympic team to the Rhodes prep school in Manhattan. Although his personal wealth is a closely guarded secret, Mr. Rich is routinely estimated to have a net worth in excess of $1 billion. At the same time, his friend and colleagues joked, those who compile lists of the world's richest men have failed to include Mr. Rich because they have been unable to calculate an algorithm from which to accurately gauge the true value of his wealth.
But despite his wealth and power, there was one thing Mr. Rich could not do for the past 17 years: set foot on U.S. soil. For Mr. Rich, until Bill Clinton granted him a presidential pardon, was the most wanted white-collar fugitive in American history.
This was a man who fled to a safe haven in Switzerland just before being indicted in 1983 on more than 50 counts of wire fraud, racketeering, trading with Iran despite a trade embargo and evading more than $48 million in U.S. income taxes. Today, he is free to return to America, his past record forever cleansed of legal stain by the pardon Mr. Clinton issued in his last day as president.
The pardon has drawn sharp criticism. Former U.S. Justice Department officials have characterized it as "outrageous" and "disgusting." New York Mayor Rudolph Giuliani, who was a federal prosecutor at the time Mr. Rich fled, said he was "shocked" by the pardon and has called for a congressional investigation into the matter. On Capital Hill in Washington, the House Government Reform Committee is now preparing a formal request for documents related to the pardon--the first step in possible congressional hearings on the matter.
Sandy Weinberg, the U.S. prosecutor who spent years investigating the exploits of Mr. Rich's empire, is dumbfounded. "It's astonishing," he says "The act of trading with the enemy is so egregious in itself, and indicative of the kind of attitide Rich and Green and his companies had in relation to being good citizens of the U.S.," Mr. Weinberg adds. What Clinton did is incomprehensible. It demeans the whole system."
Many aspects of the pardon remain muddy. Why, for instance, would Mr. Clinton intercede on the behalf of Mr. Rich? But one thing seems clear: According to a seminal Supreme Court ruling, acceptance of a pardon generally implies a concession of guilt. Thus, Mr. Clinton has granted a pardon to a man who is tacitly acknowledging, among other things, that--as the 1983 indictment put it--he "traded with the enemy," a crime classified as "a treasonable offense." In the past, Mr. Rich has steadfastly maintained that his innocence.
Seventeen years is a long time. Mr. Rich, who has always declined to be interviewed by me, has been lying low most of that time, quietly running his trading kingdom out of a residence called "Villa Rosa" on the shores of Lake Lucerne in Switzerland. He has stayed out of the public eye, and many people have forgotten why he has been on the lam all this time. This is his story
The son of a poor Jewish scrap-metal trader in Antwerp, Belgium, Mr. Rich was born as Marc Reich on Dec. 18, 1934. Hitler was in power across the border and Germany was rearming. Shortly before the blitzkrieg rolled across Belgium in May 1940, the Reich family emigrated to the U.S. They made their home in Kansas City, where they opened a costume-jewelry shop and changed the family name to Rich. The new surname became something of a self-fulfilling prophecy.
Mr. Rich would wind up speaking five languages--German, Spanish and Hebrew as well as English and his native French. But school records indicate he was a mediocre student at best. After his family moved to New York in 1950, he attended New York University but he soon dropped out and, in 1954, sought work at Philipp Brothers, an Uptown commodity broker that eventually became part of Salomon Brothers. During the job interview, legendary metal trader Ludwig "Jes" Jesselson tested Mr. Rich to see if he could calculate sums quickly and without the aid of a pencil. He performed so phenomenally that Mr. Jesselson hired him on the spot. So began an odyssey that would take Mr. Rich from a nervous young $60-a-week commodity trader, or lehrling, to a titan in the commodity world.
"Rich had the best memory of anyone at the company," recalled one Philipp Brothers trader, Herbert Hutton, who worked with Mr. Rich during those years. "He had the nature of a true gambler and never stumbled on anything in his life. Every risk he took was calculated."
Mr. Rich's first big deal was in mercury. Quicksilver had been in high demand during the 1950-53 Korean War, sending governments around the world scrambling to purchase and warehouse the material for use in future military conflicts. Mr. Rich managed to acquire the rights to most of the production of the world's two biggest producers, allowing Philipp Brothers to buy low and sell high. Impressed, Mr. Jesselson put Mr. Rich on the fast track and began referring to him as his son.
In 1958, Mr. Jesselson dispatched Mr. Rich to Cuba to begin dealing with the collapse of the Batista government and make friends within the new Castro regime. Undeterred by the political upheaval, Mr. Rich cut a deal that allowed Philipp Brothers to keep shipping nickel and copper off the island. "Marc always saw Cuba as a place where the rules didn't apply," said Bill Spier, a trader who worked with Mr. Rich during the Cuban crisis. "He came back to New York with what he learned."
From Havana, Mr. Rich moved on to South America, hopscotching around the continent from a Philipp Brothers' office in La Paz, Bolivia. During one of his many trips back to headquarters in New York each year, he met Denise Joy Eisenberg, the heir to the Florsheim fortune. They were married in 1966, but there was no question of settling down.
In 1967, Phillip Brothers transferred Mr. Rich to Madrid along with a fellow trader, Pincus "Pinky" Green, an orthodox Jew whose dirty shirts and sneakers contrasted with Mr. Rich's elegant suits and trademark flashy neckties. Together, they developed a system that allowed Philipp Brothers to bypass the major oil companies, the "Seven Sisters" who then controlled the world's oil supplies. They had invented spot oil trading.
A string of hugely profitable oil deals followed, but when Messrs. Rich and Green demanded a $1 million bonus apiece, Mr. Jesselson refused. That sparked what Philipp Brothers executives would later call "the mutiny." In November 1973, Messrs. Rich and Green walked away from Philipp Brothers and started Marc Rich AG, the Swiss trading company that would become the cornerstone of Mr. Rich's empire.
The company that was financed through a $2 million loan arranged by Rich's father through a Bolivian bank and a $1 million cash injection by Jacques Hacheul, a Philipp Brothers trader who had joined them in the mutiny. But the startup also hinged on something that would later haunt Mr. Rich: a promise from Iranian Senator Ali Rezai to help set up a series of oil deals in his country.
With offices in London and Zug, Switzerland--and armed with client lists from Philipp Brothers--Mr. Rich quickly turned his company into a feared rival in the rough-and-tumble business of trading oils, grains, metals and other commodities. Philipp Brothers never recovered from the blow.
But Mr. Rich's phenomenal success also drew the attention of U.S. government regulators, especially after the oil crisis erupted in 1973. As the Arab oil embargo drove crude prices through the roof and fanned inflation, the U.S. government sought to stabilize the market with legislation that created three classifications of American oil--old, new and stripper. Under this complex system, "old" oil--oil being produced in U.S. wells at or below the 1972 production level--would sell at around $6 a barrel. Oil from "new" wells--those opened since 1973 or producing in excess of their 1972 levels--went for around $10 a barrel. "Stripper" oil--or crude from small wells pumping an average of less than 10 barrels a day--went for whatever the market would bear.
The opportunity for arbitrage was clear. Before long, some traders were buying old or new oil for as little as $6 a barrel, illegally reclassifying it as stripper oil and selling it for anywhere from $25 to $40 a barrel. Between 1973 and 1981, the maneuver, known as "flipping" or "daisy-chaining," added up to at least 400 million $6 barrels being sold at stripper oil prices, according to the U.S. Department of Energy. Government auditors figured out that a new breed of trader was also discounting foreign crude to the major U.S. oil companies in return for old oil, which the traders would market as stripper oil to be sold at the highest possible price.
Along the way, the number of oil resellers in America exploded. Before the Arab oil embargo, there were only 12 oil resellers in the U.S. By 1978, 500 companies were in the business. One of those firms was West Texas Marketing, an Abilene reseller whose owners were later found guilty of buying and selling daisy-chained crude to all comers. One of those buyers was Mr. Rich, who in 1979 first visited WTM owners David Ratliff and John Troland. Despite his considerable experience in the oil market overseas, Mr. Rich had just been introduced to the U.S. petroleum business through a joint venture with Denver oilman Marvin Davis, who at the time was Mr. Rich's partner in the purchase of 20th Century-Fox.
The meeting sparked an idea, according to the evidence contained in the1983 indictment. Marc Rich AG could run its own daisy-chain operation through WTM. But WTM needed outside financing to operate on the level Mr. Rich was suggesting. So Mr. Rich arranged for WTM to receive substantial loans from the French bank Cie. Financiere de Paris et des Pays-Bas, or Paribas. At the same time, Mr. Rich arranged for Arco to sell 18 million barrels of old Alaskan crude to a shell company called Listo Petroleum, a Houston-based outfit tended by Clyde Meltzer. Those $6 barrels of oil were flipped more than 16 times through as many separate offshore companies specifically created for that purpose.
The next step in the daisy chain was for Marc Rich AG to resell the relabeled oil back to Listo or WTM at the current market price. Listo and WTM then sold the oil to one of Mr. Rich's secret Panamanian companies at a loss. The amount of the loss was recaptured when the company in Panama sold the undervalued oil at the full market price to an outsider in what would be the final transaction in the daisy chain, according to Mr. Weinberg, the former federal prosecutor.
The profits on deals like this--i.e. the amount "lost" and "recaptured"--were deposited in offshore accounts owned by offshore corporations controlled by the principal links in the daisy-chain sequence. While the oil never physically moved anywhere, the money always clustered outside the U.S. That made it, Mr. Rich and his lawyers LATER ARGUED, immune from taxation by the Internal Revenue Service.
By 1980, WTM was generating over $2 billion a year on daisy-chained oil. Their average daily volume was 300,000 barrels. Marc Rich International was responsible for 10% of WTM's sales and Mr. Rich wanted more. But the WTM daisy chain fell apart in March 1981, when attorneys from the U.S. Justice Department, investigating 47 separate cases of oil flipping worth nearly $80 million, caught Messrs. Troland and Ratliff illegally recertifying domestic crude oil unrelated to the company's involvement with Mr. Rich. Both men were convicted that month of violating Department of Energy regulations and sentenced to 14 months each in a federal prison camp in Big Spring, Texas.
From behind bars, Messrs. Troland and Ratliff began looking for a deal that might lead to a government pardon, according to prosecutors. In May 1981, Messrs. Troland and Ratliff were questioned by Sandy Weinberg, a 30-year-old federal prosecutor from the Southern District Court of New York. Mr. Weinberg asked the two men if WTM had ever helped another daisy-chainer avoid paying taxes by handling money for them. They fingered Messrs. Rich and Green. "It was the first time I had ever heard the name Marc Rich," Mr. Weinberg said.
At about the same time, another legal issue boiled up out of the Mideast. From 1974 on, Mr. Rich's companies purchased Iranian oil, often in barter deals for weapons and other goods. This became illegal for American citizens under a law passed during the Iranian hostage crisis, but the deals continued. When later questioned about the deals, Mr. Rich's people in Switzerland argued that the ban didn't apply to Marc Rich AG because it was a Swiss company.
In early 1982, a federal grand jury issued subpoenas to 18 executives working in New York for Marc Rich International, the U.S. unit of Marc Rich AG. Also served with subpoenas were senior executives at Arco. By the time the grand jury had concluded its investigation, Mr. Weinberg had called 50 people to testify on Mr. Rich, including executives from Mobil Corp., Exxon Corp. and Royal Dutch Shell. Though working out of his grandly appointed New York office in the Piaget Building on Fifth Avenue at the time, Mr. Rich was unmoved. He kept conducting daily business and flatly refused to comply with the grand jury's request to turn over documents being held in Zug and some documents thought to be in his New York office. Mr. Rich's team of 20 lawyers, who included powerful Washington attorney Edward Bennett Williams and former Chicago Seven attorney Michael Tiger, argued that Marc Rich AG, as a Swiss company, was immune from a U.S. court order. On the London Metal Exchange, some traders took to calling Messrs. Rich and Green "the Zug Two."
In September 1982, the federal court issued a contempt of court citation ordering Mr. Rich to deliver documents or start paying a fine of $50,000 each business day until they were delivered. Mr. Rich's lawyers asked the U.S. Supreme Court to throw out the fine, but on June 29, 1983 the justices ordered Mr. Rich to start paying. The fine would ultimately total $19 million, but no matter: One of Mr. Rich's traders later described that sum as "Saturday night boogie money for Marc."
On that same day, Mr. Rich sold Marc Rich International to a new company called Clarendon Ltd., a firm with the same employees, address and board of directors as Marc Rich International. Clarendon's bank credit was personally guaranteed by Mr. Rich. The shuffle was meant to convince the court that Marc Rich International no longer existed. The judge didn't buy it.
Then things got really interesting. On Tuesday night, Aug. 9, 1983, agents from the Internal Revenue Service, acting on a tip, radioed the air-traffic controllers at John F. Kennedy Airport and ordered them to keep Zurich-bound SwissAir flight No. 11 from taking off. The agents boarded the Boeing 747 and detained a female paralegal attempting to leave the country with two steamer trunks full of the documents that Mr. Rich had promised to deliver to prosecutors. The following morning, U.S. marshals staked out Mr. Rich's offices in the Piaget Building to keep track of the movements of all Marc Rich executives and secretaries.
Throughout these developments, Messrs. Rich and Green maintained their innocence of all charges. They also found an ally in Swiss government authorities, who viewed the legal actions as an economic threat to their country. That same morning, Switzerland's ambassador to the U.S., Anton Hegner, personally delivered an official note of protest to the U.S. State Department over what his country considered to be heavy-handed methods the prosecution was using against Mr. Rich. Although Mr. Rich was not a Swiss citizen, the chief prosecutor of Zug canton said Mr. Rich was "being held hostage" and accused the U.S. court of conducting "economic intelligence gathering." Zug canton's finance director, Georg Stucky, complained that the U.S. government was "blackmailing" Mr. Rich, and the Swiss government sent two of its lawyers, Joseph Gittentag and Juerg Leutert, to represent the country's interests in the case.
"The future of the Swiss system is on trial here," Mr. Leutert said at the time. "We do not want to lose Marc Rich and others like him. It would ruin Switzerland." Added Zug Mayor Othmar Kamer, "we have six large tax contributors who influence our budget and Marc Rich is one of them."
Then the Soviet Union, Mr. Rich's single biggest client, weighed in. "Open Blackmail," read a page-one headline in state-controlled Izvestia on Aug. 15, 1983. "This action by the Reagan Administration against Rich," said the article, "is an open threat, an attempt to interfere into the internal affairs of Western European countries through the threat of economic sanctions." What had begun as an investigation into daisy-chaining had turned into a full-blown international incident.
In September 1983, shortly after getting an angry call from the State Department, Mr. Weinberg filed a 51-count indictment (14 additional counts were later added) charging Messrs. Rich and Green with racketeering, mail and wire fraud and tax evasion.
There was more: The indictments also accused the two men of using the U.S. Post Office Express Mail service to send false profit statements--and of devising secret telex codes to transmit the details of deals with the Ayatollah Ruhollah Khomeini during the Iranian hostage crisis. Warrants were issued for their arrest on Sept. 19, 1983, but by then Messrs. Rich and Green had slipped out of the U.S. and were back in Switzerland, where none of the charges are deemed extraditable offenses. Mr. Rich applied for--and was quickly granted--Spanish citizenship. Mr. Green became a Bolivian.
On Oct. 10, 1984, Marc Rich AG, Marc Rich International and Clarendon Ltd. pleaded guilty to 38 counts of tax evasion, $50 million in illegal oil profits in 1980 and 1981, and making false statements to the U.S. government. Together, the three entities were required to pay more than $133 million in fines.
The payment was delivered in Mr. Weinberg's office the next day in one of the more surreal moments of American finance. "Twenty lawyers in a room," recalled former federal prosecutor Martin Auerbach. "Marvin Davis's lawyer hands Rich's lawyer a $116 million check for the purchase of 20th Century-Fox. Rich's lawyer hands Chase Manhattan's lawyer a $130 million check for the money he owed the banks. And Chase Manhattan's lawyer hands Sandy Weinberg a check for $133,081,306.76 in fines and penalties. All anyone could do was gawk."
There was one catch: Messrs. Rich and Green were still fugitives. Although the court case was over for the corporate entities, the two individuals still faced charges of racketeering, fraud, tax evasion and trading with the enemy. "I wanted those boys in jail," Mr. Weinberg said immediately after the settlement. "But they can never come back to the U.S. as free men--never. Those indictments are outstanding--no statute of limitations. But Marc and Pinky will try to come back. You can bet on it."
It was a good bet. For the next 17 years, Messrs. Rich and Green bided their time in Switzerland, beyond the reach of a special team of U.S. marshals and international executives who operated under the code name Otford Project and had been given the task of bringing them back to the U.S. But Mr. Rich has always taken pride in his ability to trade for anything, even the right to return to the U.S. The negotiations began in 1987, when Mr. Rich first expressed a desire to return, providing he had written assurance from the Justice Department that he wouldn't have to spend any time in jail. Mr. Weinberg and his successors laughed at the proposal. "We met with Rich privately in Zurich in 1992," says one former Justice Department official. "Rich didn't look the part of the all powerful Oz. He was sweating and he was scared of spending even one minute behind bars. And that's where we were going to put him, for at least three years."
So why, one might ask, did U.S. government departments continue to do business with Messrs. Rich and Green? In 1985, for example, U.S. Congressional investigators discovered that Mr. Rich's Swiss-based grain operation, Richco, had racked up nearly $100 million in sales through a Department of Agriculture subsidy program designed to help foreign nations purchase American wheat and barley. Then in 1988 and 1989, investigators learned that Clarendon sold nearly $30 million worth of nickel, copper and zinc to the U.S. Mint. Shortly after that, the Interior Department approved a request from the government of the U.S. Virgin Islands that allowed Rich to finance its purchase of a $45 million alumina plant in St. Croix.
Former congressman Dan Glickman, who later served as Secretary of Agriculture in the Clinton Administration, at the time called for hearings into the U.S. doing business with its most-wanted white-collar fugitive. "What I say is for the U.S. to be on the side of the angels," Mr. Glickman said in 1989. "The government currently isn't on that side. Rich is using a corporate identity to shield himself from his corruption. America ought not to do business with him. Absolute negligence and incompetence caused this to happen."
A few years ago, Mr. Rich moved from his palatial residence atop a Zug street called the Kingdom of Heaven to the Villa Rosa in Meggan. From there, he continues to pull the levers of a global trading machine in investment, finance and real-estate companies. At least six of these companies bear his name.
Despite his presidential pardon, Mr. Rich so far has remained in seclusion. Efforts to reach him at his home and his office were unsuccessful. "He's on vacation," says the housekeeper of Villa Rosa.
But stay tuned.