Whipping Boy

by Allen Kurzweil

  THE COLONEL IN THE BOARDROOM WITH THE FOUNTAIN PEN

  David Glass attempted to alert the Trust about the iffy nature of their assets, but each time he tried, something seemed to get in the way. First it was back-to-back loan conferences with Cesar and his clients. Then it was the alleged disappearance of a cherished object belonging to a Badische executive. That loss, spelled out in an email sent to every employee in the New York offices of Clifford Chance, caught my attention:

  From: David Glass

  To: #NYC: All Staff

  Subject: Missing Pen—Reward

  On Wednesday, July 12, a Montblanc fountain pen belonging to a client of the Firm disappeared from Conference Room 52-J some time between 1 PM and 2:30 PM. The pen has sentimental value to the client, who is offering a reward for its return. Please reply in confidence . . . No questions will be asked and all replies will be kept confidential. Thank you.

  No questions asked? That may have been Glass’s position. It wasn’t mine.

  I had nothing but questions: Was Cesar present at the time and location of the pen’s disappearance? (Yes.) Did Cesar have an appreciation for Montblanc fountain pens stretching back to 1972? (Absolutely.) Was there any proof that the pen in question was Cesar’s? (None at all. In fact, the memo notes the pen belonged “to a client of the Firm”; i.e., a member of the Badische board.) Was it possible that the disappearance was nothing more than a ruse designed to distract Glass from his concerns about the dubious asset letters? (Of course.) And assuming the pen’s alleged disappearance was a ploy, could Cesar have masterminded its execution? (Sure, it’s possible.) Was there any proof to justify that speculation? (No, unfortunately not. But that didn’t stop me from connecting the petty crime to my fountain-pen triumph in the hallway of Belvedere.)

  Glass eventually managed to express his apprehensions about the funding sources. He later recalled telling the colonel that even if, for argument’s sake, the valuation of the Mombessa deed was “entirely valid, one couldn’t assume [it] could be fully collateralized for the loan program.”

  The colonel dismissed his lawyer’s misgivings. Hadn’t a Clifford Chance attorney already detailed how “nonliquid African assets” might be profitably exploited by means of a “securitization transaction”?

  “That doesn’t mean there is $50 billion available today for investment,” Glass remembers countering. He advised the Trust to “proceed with caution.” To that end, he and one of his London-based colleagues redrafted the Badische loan agreements “from scratch.” The new contract, for which Clifford Chance billed Badische £16,000, was radically different from the ones signed by Laurence and Kearns. However, at the insistence of the Trust, two provisions from the original agreement remained: the performance guaranty and the bank letter.

  ULTIMATUM

  In August of 2000, a month after David Glass reviewed its asset tally, Badische decided to launch a $100 million private equity fund based in Luxembourg, a tax haven known for stringent bank secrecy laws. The offering required local legal representation, so Glass, ever obliging, arranged for the colonel and the baron to meet with attorneys at a highly regarded law firm headquartered in the tiny grand duchy.

  The conference did not go well. The self-styled aristocrats put noses out of joint by presenting cartes de visite lacking addresses and phone numbers, a faux pas the colonel compounded when he provided, as a reference, the name of a local criminal.

  The visiting card that gave the lawyers from Luxembourg pause.

  The Luxembourgian lawyers decided they “did not wish to go forward” with Glass’s clients, a snub that raised alarm bells among his colleagues in New York. They asked Glass to reconfirm the legitimacy of the Trust’s financial representations. With that in mind, he invited the baron to lunch in a private club at the top of the MetLife building. The baron tried to neutralize the law firm’s concerns by noting that Prince Robert had ties to the largest chemical company in the world. “The B in BASF stands for Badische,” he confided.

  Glass informed the baron that anecdotal declarations wouldn’t satisfy his bosses. They wanted an independent accounting of the bank’s holdings. Reluctantly, Moncrieffe produced a financial statement for a Badische account managed by Robert Gurland in London. It showed a balance of £1 million. Glass speculated, correctly, that the £1 million represented liquid assets, the money required to run the day-to-day operations of the lending program. But what about the Trust’s investment capital—the billions needed to underwrite the loans promised to Laurence, Kearns, and all the other borrowers? Glass was blunt. He asked the baron: “Is there capital beyond that million pounds?”

  When the response he received proved unsatisfactory, Glass presented a four-point ultimatum. To continue to retain the services of Clifford Chance, Badische would have to deliver: a verified list of all loan transactions; two years of financials; indemnification of the attorneys doing work for Badische; and a list of the Trust’s banking relationships.

  Two days later, the name of Clifford Chance disappeared from the contact page of the Badische website. All ties between the law firm and the Trust were severed.

  “INCONVENIENCE” AND “MISUNDERSTANDINGS”

  David Glass and his colleagues weren’t the only attorneys bamboozled by Badische. Documents in the milk crates indicate that the Trust also misled law firms in Zurich, Hong Kong, Vienna, London, Panama City, and Monte Carlo. The volume of the paperwork the various attorneys generated suggests it takes almost as many lawyers to start a fake bank as it does a real one. For the fraud to succeed, dummy companies had to be incorporated. Bogus prospectuses had to be generated. Phantom partnerships had to be formed and dissolved. Websites had to be purged of actionable language. (There’s a fine line between eliciting loans, which is legal, and soliciting loans, which is not.) Funding agreements for nonexistent mutual funds had to be written and revised. Default memos had to be composed and delivered when—not if—potential borrowers failed to meet their time-bound obligations.

  David Glass later testified that he had no sense of the scale or scope of the fraud he had helped Badische pull off. He acknowledged he had been “snookered,” but could not differentiate all the chiselers from those who were chiseled.

  I wasn’t entirely clear about that myself.

  The bankers were obviously ne’er-do-wells. But what about the duke who claimed to be married to the archduchess of Austria? Or the retired UN ambassador who drafted the asset tally on behalf of the Trust’s finance committee? Or the Merrill Lynch financial consultant who witnessed the signing of the special deed from the Kingdom of Mombessa? Were they dupes or deceivers? Fools or felons?

  And what about my guy? Would the managing director of an august London bank knowingly broker deals with small-time con men? To quote my Belvedere housemaster: Not bloody likely!

  Cesar never testified during the trial, and his lawyer called no witnesses on his behalf. Yet his voice did surface, if only briefly, after the jury reached its verdict. This is what Cesar told Federal Judge Shira Scheindlin moments before she pronounced sentence:

  THE DEFENDANT: Your Honor, respected members of the government, thank you for allowing me to share my thoughts and feelings about the situation with the Badische group.

  I very much regret all the inconvenience and suffering that has occurred due to my actions and inactions. I hope and trust that all the people, whether I knew them or not, that were harmed and did lose time and money can be compensated for their losses and are able to recover from any misunderstandings.

  I feel naïve and incompetent about not being able to discern the real aspects from the illegitimate parts of the transaction. I did not do my duties as a broker and assist clients with overseas company formation work intending to harm or hurt anyone. I still believe that the transaction was a viable one, that some of the key people I was introduced to—the VPs of the banks, different advisers to the lenders, the Knights of Malta, the clients and their own attorneys—were all impressive, real, professional,
and credible.

  I must say that I myself have been suffering mentally, emotionally, and financially since this all started two and a half years ago. However, I have been trying to find meaning in all of this, to learn more about myself and how to be less trusting and more discerning. My various volunteer work, therapies, and spiritual study has been helping me to find a deeper meaning in life, to use this as a positive learning experience, while allowing me to have the strength to continue helping my mother and my sister with their challenges.

  I hope and pray that everyone that has suffered can forgive me and find peace. I only beg for your understanding with what I knew at the time and for your forgiveness.

  Thank you very much for your time.

  It was strange to “hear” Cesar’s voice, as set down in pages of the sentencing record. I found it more than a little irritating. Situation, inconvenience, misunderstandings—those aren’t words I would have used to describe a multiyear, multinational, multiplayer, multimillion-dollar, and, while we’re at it, multifarious fraud. His tone reminded me of the dismay Colonel Sherry expressed when Barbara Laurence confronted him: “Haven’t we had a wonderful relationship? I’m really hurt!” Except Cesar wasn’t trying to shoo away a pesky mark. He was standing before a federal judge.

  I later learned that Cesar’s presentencing testimony was excerpted from a much longer six-page letter submitted into evidence. The unredacted statement, though too long to reproduce in toto, warrants generous quotation. Here’s a hefty portion of that written declaration:

  It is my hope that you can realize my deeds were [done] with good intentions. I am truly sorry that the effects have not turned out that way.

  I do not make empty promises. I am a person of my word and follow through on what I do promise. If I am guilty of anything, it is primarily of not checking things out better. If my naiveté prompted me to participate in something less than legitimate and caused other people harm, I am truly sorry.

  I am a trusting person. This is my nature and I will die being this way . . . I relied wholeheartedly on people’s word. In this particular situation, I relied mostly on Prince Robert of Badische & George Moncrieffe (the impressive chairmen), as well as Brian Sherry with whom I worked in order to properly prepare clients for their meetings. I was so impressed and honored by their supremacy that this impaired my judgment and ability to assess them.

  Prince Robert, Dr. Moncrieffe and other advisers . . . like Duke d’Antin . . . were part of [the Knights of Malta] order and I felt I was in the presence of credible, experienced people held in high regard. Even the largest law firm in the world, Clifford Chance, was involved, where we would have meetings with the clients and attorneys. Who am I to question their credibility?

  I still to this day believe that they were all real and that their contacts and interests were bona fide.

  You can imagine my frustration over the past 2 years. Emotionally & psychologically, I almost lost it but have been continually trying to take care of myself with Biofeedback/cognitive therapy and regular prayers. Physically I was in pain, and financially, I already have lost it. I’ve spent a lot of time over the last 2 years in spiritual study. This was further speeded up due to my Achilles tendon tear injury immediately after this whole investigation started.

  I’ve been trying to use this as a positive learning and growing experience. It hasn’t been easy with all the frustrations and let down feelings I have had.

  As a spiritual teacher also taught me, there are no Justified Resentments. Since there are no justified resentments, I accept being here in this position, due to the choices I have made and have no blame towards anyone. The fault may not be entirely mine, however, I have no ill will towards anyone. Why? Because if I think that someone else cause[d] this, then I may have to wait forever for it to be resolve[d] by that someone else!

  I humbly beg for your understanding of me, an appreciation for my actions taken at the time with what I knew and thought to be credible, and insight into my circumstances that brought me here, pleading not guilty, with all my heart and soul.

  I’m no lawyer, but it seems pretty dopey to plead not guilty after you’ve been convicted—unless the appearance of dopiness is a ruse. Cesar’s testimony raised a few questions. Actually, more than a few. Were the feelings expressed in his wishy-washy mea culpa heartfelt or fake? Did he truly consider himself guilty of being an innocent? Did he really imagine himself to be on the receiving end of abuse? Did he perceive his “deeds” to be undertaken with “good intentions”? How could anyone in his right mind serve up a plea so clotted with self-pity, wounded pride, insubstantial introspection, self-justification, and dubious assertion? And equally preposterous, how could so many entrepreneurs put their faith in a self-declared patsy claiming to be the managing director of the Barclay Consulting Group?

  PART VI

  “WHAT LIES WITHIN US”

  There is a saying that we learn most about ourselves from our enemies. This I have truly been trying to do. I have learned how I was manipulated, and in a way, how to manipulate others as well.

  Cesar Viana, Memorandum in Aid of Sentencing

  Many of the clues to the tectonic puzzle lie high up in the face of almost inaccessible precipices.

  Leon W. Collet, The Structure of the Alps

  BARCLAYS VS. BARCLAY

  Before I started digging into the mechanics of the fraud, I doubted that a San Francisco branch of Barclays could be large enough to handle the kind of casino financing that Cesar had mentioned when he first spoke to Barbara Laurence. I was mistaken.

  Barclays’ West Coast outpost could have easily underwritten a $6 billion hotel deal. While the Badische loan program was in full swing, Barclays Global Investors, a San Francisco–based subsidiary of the famous London bank, administered assets of $1.4 trillion. It had twenty-five hundred employees and during good years its profits exceeded $1 billion. In 1999, it was one of the largest corporate money managers in the world.

  Now for the but.

  But Barclays Global Investors did not employ Cesar. Cesar was the managing director of Barclay Global Investments, a division of the Barclay Consulting Group. The Barclay that spelled its name without an s employed a staff of one, Cesar, and maintained a checking account with Bank of America that had an average cash balance in the high three figures. And whereas Barclays leased three hundred thousand square feet of prime real estate in San Francisco’s financial district, Barclay, mindful of overhead, made do with a sixty-dollar-a-month “business address service” located a few blocks west of its more profitable eponym. Not to put too fine a point on it, Barclay had as much to do with Barclays as it did with Charles Barkley, basketball’s legendary round mound of rebound.

  Half a mile (and $1.4 trillion) separated Barclay from Barclays.

  LOMPOC AND AIGLON: A COMPARATIVE ANALYSIS

  Even after prosecutors won their case, Cesar insisted he was innocent. “I would never intentionally harm anyone nor would I seek personal gain,” he told the sentencing judge. The Honorable Shira A. Scheindlin wasn’t convinced. Rejecting his plea for reduced jail time, she sentenced Cesar to thirty-seven months, followed by five years of “supervised release.” For good measure, she saddled Cesar with a restitution penalty of $1,222,494—nearly half the advance fees the government lawyers proved at trial had been misappropriated from some of the American victims of the fraud. (Worldwide loss figures will never be known, but the milk crates suggest the Trust pocketed some $4 million in performance guaranties.)

  Still, things could have gone a whole lot worse for Cesar. He landed in a cushy prison camp attached to the US Penitentiary in Lompoc, California. Setting aside the well-publicized criticism of one famous former resident, convicted insider trader Ivan Boesky, who once groused that overcrowding at Lompoc forced him to play doubles on the prison’s sole tennis court, most detainees praise the minimum-security outpost. One Lompoc inmate posted this helpful review on thepamperedprisoner.com:

  It’s a camp, so pre
tty much anything you imagine as a prison, throw it out. This place is literally green grass, eucalyptus trees, and a split-rail fence surrounding it. We had sport fields, weight piles, we watched movies on the weekends, we had TV rooms; it’s a summer camp. It’s the federal version of community service. You work during the day, you have jobs, stay busy, then work’s over, do what you want. You have over 340 guys watched by one or two unarmed guards. The whole thing operates on the honor system.

  While I’d have preferred that Cesar serve time in a more austere, Shawshanky setting, I found myself marveling—more than marveling, deriving a deep sense of pleasure—in the situational irony of my former roommate’s cosseted incarceration. Lompoc provides its residents with mountain vistas, well-tended fields, split-rail fences, window boxes, and cow pastures (the prison maintains an award-winning dairy farm). In short, Cesar had gone from an alpine boarding school regulated like a prison camp to a prison camp run like an alpine boarding school.

  True, the prison camp doesn’t allow residents to ski and hike, but its first-rate baseball diamond and bocce courts offset those prohibitions, as do its professional gym equipment and exercise bikes. (At Aiglon, cinder blocks served as leg weights.) Oh, and there’s one more amenity that the school and our federal prisons have in common—foosball.

  When I uncovered this parallel perk, an image popped into my head of Cesar crouching down low behind the defensemen of a prison foosball table, firing off bank shots and grimacing like a griffin while hustling cigarettes from tax cheats and embezzlers. The recurring visual eventually triggered a crazy idea: Why not fly out to California and challenge my nemesis to the mother of all grudge matches?