“Sham Transactions”
These tier trades were considered legal and were practiced by all of the established oil companies. However, the payments that had been transferred back and forth between Marc Rich International and Marc Rich + Co. were a point of contention. Rich’s lawyers emphasize the fact that these payments were “entirely proper” under the tax treaty between the United States and Switzerland. According to his Washington attorney Michael Green, the Swiss tax treaty “was the beginning and the end of the linkage.” Prosecutors Weinberg and Giuliani were of a completely different opinion. The Southern District alleged that Marc Rich International had evaded paying taxes by diverting income taxable in the United States to its Swiss parent company, Marc Rich + Co. AG, which did not pay taxes in the United States. They did not even address the issue of the Swiss tax treaty. The prosecutors viewed the various transactions that constituted these trades and exchanges with a high degree of suspicion. They did not believe that offshore foreign oil transactions, which initiated the later movements of oil, justified the amounts of money that were transferred offshore. The prosecutors referred to such moves as “sham transactions” and “fraudulent deductions” that were covered up by “false and fraudulent invoices.” They believed Rich channeled the illicit profits abroad by means of further such “sham transactions.”26
According to the indictment, Rich and WTM had agreed that these huge profits, which they referred to as the “pot,” would be retained by WTM so that they would not be reflected in MRI’s books. “To further conceal the scheme [Rich and Green] did cause WTM to prepare and mail invoices . . . which falsely indicated that WTM had sold the stripper barrels to the defendant [Marc Rich] International at the high world market price, when in truth and in fact the defendant [Marc Rich] International was paying a far lower price upon WTM’s agreement secretly to kickback to the defendants the huge profits held by WTM for the defendant International in the ‘pot.’ ”27
According to the prosecutors, Marc Rich had sold regulated oil at profits exceeding the permitted maximum level and had evaded reporting the excess profits by secretly funneling them offshore. They accused the Swiss company Marc Rich + Co. of covering up the profits by selling oil to its U.S. subsidiary Marc Rich International at an artificially high rate. When the subsidiary then resold the oil at lower market rates, it incurred a sizable loss in the United States, thus allowing the company to avoid income taxes.28 “Instead of the allowed twenty cents per barrel, Marc Rich made five dollars per barrel,” Weinberg explained. “We found two sets of handwritten ledgers that showed both sides of the phony transactions—shipments that don’t exist. You tell me, that’s legal? Bunch of nonsense!” The prosecutors definitely did not view these transactions as a legal form of tax optimization. To them it was more, much more: organized crime.
Prosecutors Go Nuclear
The law designed to combat organized crime was intentionally named the Racketeer Influenced and Corrupt Organizations Act in order to obtain the acronym RICO, after the ambitious gangster played by Edward G. Robinson in the 1931 film Little Caesar. The act was intended to make it easier to prosecute organized crime figures and strike a devastating blow against their economic structures. Under RICO the defendant’s assets can be seized before the case comes to trial or even before an indictment. It is the heaviest piece of artillery in a federal prosecutor’s arsenal. John W. Dean, former counsel to President Richard Nixon, dubbed RICO “the prosecutor’s equivalent of nuclear weaponry.”29 It is considered to be one of the most controversial statutes in the federal criminal code.30
In Marc Rich’s case, Giuliani used RICO for the first time ever in a case that did not explicitly deal with more archetypal examples of organized crime, such as the Mafia or drug trafficking. After Rich’s indictment, U.S. authorities blocked all of the bank accounts belonging either to Rich personally or to his companies on American soil. These included Rich’s stock interests in Marc Rich + Co. and 20th Century Fox. Shortly after the indictment, the IRS issued a jeopardy assessment of more than 91 million against Marc Rich International. The assets, “subject to forfeiture to the United States,” included everything from bank accounts, securities, and real estate to office equipment, furniture, and fixtures. The list of seized assets amounted to six pages of the indictment.31 Rich’s Fifth Avenue apartment was considered blocked, as were his weekend condominium on Long Island, his interest in Steinhardt Investments (the early hedge fund run by Michael Steinhardt), and the interest in his retirement account. Furthermore, the IRS served levy notices on banks and companies doing business with Rich. These companies were advised that money they received from Rich could be seized. They were also prohibited from paying back any money they might have owed Rich.
“It was phenomenal,” Sandy Weinberg told me with glee. “We tied up all U.S. assets, including 20th Century Fox. We shut ’em down completely. We shut the company down for a year. They couldn’t operate in the U.S. It cost them dearly. I assume it cost them probably a billion dollars.”
Unconditional Surrender
The company’s credit lifeline was practically severed. Many trading houses were trying to reduce their exposure to the company and were cutting their trading limit with Rich. “Our companies were collapsing,” Rich himself summed it up when we talked about the consequences of the freeze. The RICO strategy, with which Giuliani and Weinberg intended to force Rich into capitulation, worked. It pressured him into plea negotiations. “The alternatives were to plead guilty and pay—or to die,” Rich’s Swiss attorney André A. Wicki told me. “RICO was the death sentence against the companies,” said attorney Michael Green. “Giuliani wanted victory at all costs, another feather in his cap. He wanted to polish his image as a crime fighter.” The result was total and unconditional surrender.
On October 10, 1984, in a plea bargain Marc Rich + Co. AG and Marc Rich International pleaded guilty to making false statements as part of a scheme to circumvent profit controls and thus evade 48 million in taxes. The companies agreed to pay a settlement of 150 million and 813,000 in fines and court costs, to forfeit 21 million in contempt fines, and to forgo income tax deductions on the settlement worth up to an additional 40 million. Altogether the settlement was worth more than 200 million. In return the government lifted the yearlong freeze on Rich’s U.S. assets. In order to pay the settlement, Rich had to sell his 50 percent share in 20th Century Fox, for which he received 116 million from Marvin Davis. He also sold an oil refinery in Guam.
One day later, on October 11, 1984, a memorable meeting took place in the federal courthouse at Foley Square. Rich’s lawyer handed a check for 130 million to a lawyer from Chase Manhattan Bank for money owed to fourteen U.S. and European banks. Chase Manhattan’s lawyer simultaneously handed Sandy Weinberg a check for 113,018,306.71. The lawyer from Marc Rich International announced the company would abandon rights to the 36,981,693.29 that the IRS had seized a year earlier. Giuliani immediately held a press conference at which he proudly waved the check in his outstretched hand. Once again he stressed the historic importance of his success. The total settlement of roughly 200 million, Giuliani said, “represents the largest amount of money ever recovered by the United States in a criminal tax-evasion case.” 32
While their companies were back in business, Rich and Green themselves were not included in the settlement. Prosecutor Giuliani repeated what Weinberg had said to Ed Williams more than a year earlier: He would accept no plea bargain from the traders unless it would “expose them to substantial prison terms.” 33 “Rudy wasn’t very secure, you know,” remembers Sandy Weinberg, and it is easy to believe him when he says he would never vote for Giuliani in an election. “He’s so political. He was concerned that he’d be criticized by the New York Times if he did a deal with a fugitive.” All of the charges against Rich and Green remained outstanding for the next seventeen years. Under U.S. law the accused could not be tried in their absence.
What Giuliani failed to mention to reporters at the press c
onference was that he had had a first-class opportunity the previous year to have Marc Rich arrested, and didn’t.
RUDY GIULIANI’S FAILURES
I
t was a rainy summer’s day on June 28, 1983, when Jürg Leutert, the Swiss government’s lawyer, visited the U.S. attorney in his Manhattan office. It was nearly three months before the September press conference when Giuliani would read out the indictment against Marc Rich. Both Rich and Green had fled to Switzerland with their families only a short time ago. It was a very low-key face-to-face meeting, the existence of which has remained unknown until now. Leutert was on an official visit in the name of the Swiss government, which considered the entire Rich affair something of an inopportune embarrassment. In recent years, the United States and Switzerland had fought out several legal disputes involving insider trading, which, as was the case in many other countries, was not illegal in Switzerland at that time. The tone between the two countries had hardened.
Switzerland’s economic ties with the United States were of the utmost importance. In 1983, Swiss participation in the U.S. equity market alone accounted for almost one sixth of all foreign trading and amounted to over 20 billion.1 The United States was Switzerland’s second-largest export market after Germany. The hype surrounding the Rich case was not at all in the interest of the Swiss government, and this led Switzerland to seek out a more pragmatic solution that would allow both countries to save face.
When he walked into the prosecutor’s office on that day in late June 1983, Jürg Leutert was prepared to make Giuliani just such an offer. Leutert first explained that the Swiss government had no interest in defending the interests of an alleged tax criminal. He also made it clear, however, that Switzerland would defend its sovereignty and would never allow foreign law enforcement agencies to operate on Swiss soil in any way or form without the government’s explicit approval. “Swiss companies are subject to Swiss law,” Leutert stated. Leutert then asked Giuliani what he had on Marc Rich. “For the longest time we did not know what the charges against Rich actually were. Was it tax evasion? In that case Swiss law would have prevented us from offering legal assistance. I told Giuliani if it was tax fraud, however, we might be able to help,” Leutert told me during a telephone interview from Brazil, where he served as the Swiss ambassador for several years and now runs a management consultancy firm. Switzerland is unique when it comes to differentiating between tax evasion and tax fraud.2 In Switzerland the intentional failure to report income or assets on a tax return is not considered a crime but a case of tax evasion, which is dealt with using only administrative sanctions. Tax fraud, involving criminal sanctions, takes place when income is fraudulently identified using a falsified document, such as a bank statement, an invoice, or a balance sheet.
In 1983 there were basically two legal instruments available to foreign prosecutors asking for Swiss help: an extradition treaty signed in 1900 and the new Swiss Federal Act on International Mutual Assistance in Criminal Matters (IMAC), which had come into effect on January 1. Leutert provided Giuliani with a detailed explanation of how he should proceed. IMAC allowed the exchange of information, documents, details from witness interrogations, and the confiscation of assets in the case of tax fraud. Even more interesting, according to the 1900 agreement extradition was possible for persons charged with “counterfeiting or forgery of public or private documents; the fraudulent use of counterfeited or forged instruments . . . [; or] obtaining money or other property by false pretences.” This was almost the exact wording that Giluliani would later use in the indictment against Rich.3
A Mysterious Lapse
“Within the framework of this agreement, a telephone call would have been enough,” recounted Leutert. “The Americans only needed to tell us that they had a huge case of fraud or forgery on their hands, involving a certain Marc Rich living in Switzerland. They only needed to ask us: Could you please arrest him pending receipt of an extradition request? It all would have happened fairly quickly after that, and Swiss police would have taken Marc Rich into provisional custody. This was exactly the course of action that I presented to Giuliani. It was a very good conversation lasting two hours—very open, very friendly, and very cooperative. Giuliani told me that it was indeed a case of fraud and that he could use the information I had given him, but nothing happened. Giuliani’s reasons for failing to use the agreement remain a mystery for me to this day.”
Under the terms of IMAC, Giuliani could have written a letter of request asking the Swiss government to hand over business documents belonging to Marc Rich + Co., as IMAC takes precedence over Swiss bank secrecy provisions. The established channels of mutual assistance, Leutert reminded Giuliani, had proven extremely successful. Of the 250 requests that the U.S. government had sent to Switzerland over the previous six years, the Swiss government had granted 248, and the Alpine nation had never rejected a single U.S. extradition request.
Viewed objectively, this would have been a course of action that would have allowed prosecutors to arrest Rich and gain access to his covert business activities. Giuliani knew this, of course, and at the September 1983 press conference where he read aloud from the bill of indictment, he announced that U.S. authorities would file a request for extradition. In fact, the U.S. attorney later chose a different strategy—a strategy that was much more likely to get the case in the headlines. Giuliani did not file a letter of request but instead chose to let the case escalate. He wanted to prove that he was tough on white-collar criminals by making an example of Rich. He wanted to play hardball.
The affair soon erupted into the worst diplomatic conflict of all time between Switzerland and the United States, culminating in an open diplomatic clash, and it poisoned relations between the two countries for years to come. Even the conservative Neue Zürcher Zeitung, a rather staid Swiss daily, expressed its confusion over Giuliani’s mistakes: “The reason behind the United States’ decision not to request [Swiss] legal assistance at the very beginning of the affair, as is usually the case in such instances and given that such assistance can normally be administered without difficulty, largely remains a mystery even to local [American] observers.”4 The internationally respected weekly Die Weltwoche, which is usually rather pro-American in tone, commented, “It is not entirely clear why the United States is balking at the due process of law. It is possible that the New York prosecutor Giuliani is seeking the loudest possible fanfare for his dream trial that involves ‘the biggest tax fraud in the history of the United States.’ ”5
The Stubborn Swiss
The U.S. Department of Justice finally applied for Swiss legal assistance in the case in July 1984, a year after the conversation between Giuliani and Leutert and ten months after the indictment was issued. A short time later the United States demanded Rich’s extradition. However, the daily fines of 50,000 were not withdrawn despite Swiss protests. The Swiss authorities reacted with stubbornness. Although they had promised a speedy handling of the request “in as little as three weeks,” they refused to extradite Rich and held back from delivering the requested documents. The Swiss Office for Police Matters issued an official explanation stating that it denied the requests because under Swiss law Rich’s actions “qualified as fiscal violations” and violations of “provisions concerning currency, trade policy and economic policy.”6
This was only half true, however. The Swiss government had long ceased to be concerned with this one particular case against Rich. Now the authorities were more concerned with issues of Swiss sovereignty, which they believed was being abused by U.S. actions. “Legal assistance and sanctions issued by a foreign government are mutually exclusive,” stated the Swiss government clearly.7 A confidential paper issued by the Swiss embassy in Washington on July 13, 1984, warned that the “unilateral acts of coercion carried out by U.S. authorities on Swiss soil” should not be rewarded with legal assistance. The Swiss thus made their promise of legal assistance dependent on American respect for Swiss sovereignty.
A senior to
p Swiss official involved in the case told me, “Whoever wants Swiss cooperation cannot simultaneously ignore Swiss law by employing compulsory measures. A year earlier we would have regarded an arrest request with great favor.” Jürg Leutert, for his part, remembers a walk he took with Minister of Justice Kurt Furgler at the beginning of the affair, during which the minister told him point-blank, “So just give the Americans what they want.” That is exactly what Rich’s lawyers had feared most, as they were well aware that the Swiss government was anxious to maintain good relations with the United States. “The extradition request was the worst,” André Wicki told me. “At least we could avoid Marc Rich and Pincus Green being arrested pending extradition.”
What would have happened if Giuliani had already made an extradition request in 1983? Statements made by Swiss diplomats and Rich’s lawyer make it clear that Rich would have at the very least been taken into provisional custody pending extradition. Whether the charges would have been sufficient to allow for extradition remains open for debate. However, the whole story—and Rich’s willingness to cooperate—would certainly have taken a much different course. In the event, Giuliani, the canny attorney who always knew what was best for his own career, let this unique opportunity to have Rich arrested slip through his fingers.
American Legal Isolationism
The King of Oil: The Secret Lives of Marc Rich Page 14