Maxwell, The Outsider

by Tom Bower

  The Americans could not hide their disdain for the Colonel Blimp who lived in a huge, depressing house in Tonbridge where they had to wait until precisely twelve noon before they were offered a drink. 'The house was so cold', recalled Steinberg, 'that we had to go outside to warm up.' Steinberg commuted regularly to London to persuade d'Avigdor-Goldsmid to break Maxwell's grip over Pergamon while Stevens shuttled across the Atlantic, sometimes three times weekly, to report on the problems which d'Avigdor-Goldsmid's stubbornness was causing. Their personal dislike of d'Avigdor-Goldsmid mirrored their contempt for the decayed British financial system but their undisguised irritation reinforced the chairman's obstinate refusal to manage Pergamon as they wished.

  Maxwell in contrast had by the autumn charmed Sir Henry into believing that the two could work quite well together. Consequently d'Avigdor-Goldsmid had become unwilling, on Pergamon's behalf and at Steinberg's behest, to pursue Maxwell aggressively in the courts. In June 1970, Maxwell knew that he was safe in refusing outright to call the statutory PPI annual meeting in New York because d'Avigdor-Goldsmid would not enforce Pergamon's rights. Effectively, nine months after his humiliation at the Connaught Rooms, he still retained control of PPI and, negatively, of Pergamon.

  In August, the Price Waterhouse report was finally published. The accountants explained that they had adopted 'material changes' in preparing the 1968 accounts and accordingly had reduced the pre-tax profits from £2.1 million to £140,000, which did not take into account ILSC's accumulated losses of £2.1 million.

  The report confirmed, in Leasco's view, that it was the innocent victim. Maxwell robustly argued that it proved the whimsy of accountants and absolved him from any blame. 'I note', he wrote in a circular, 'that hindsight has been employed,' and blamed the new board for causing all the losses. The transactions with his family companies which had amounted to £2.5 million had, he claimed, 'been fully disclosed and have been beneficial to your company'. But he did not explain why those same transactions had all been cancelled just prior to his removal from the board. ^Shareholders', he continued, 'need not be perturbed. The suggested scaling down of profits is well within the margins when reporting accountants apply different accounting principles.'

  Price Waterhouse had also prepared Pergamon's accounts for the first nine months of 1969. In the heyday of the negotiations with Leasco, Maxwell had forecast that Pergamon's profits would be £2.5 million. In New York in August 1969, he had agreed that they should be revised downwards to £2 million. Price Waterhouse, however, calculated that Pergamon had actually made a profit of just £29,000 which was turned into a gigantic loss of nearly £2 million if the ILSC's losses and the revocation of MSI Inc.'s contract were also taken into account. It was an indictment, not least of the accountancy profession. Their report contained no outright blame for the discrepancies but Chalmers Impey were replaced by Cooper Brothers as the company's auditors.

  Pergamon's annual report published in September 1970 reflected the gloom. 'Ghastly' was the epithet which d'Avigdor-Goldsmid voiced to journalists. All the board's efforts, he said, 'were concentrated on keeping [the] Company going'. His admission was not an understatement. Investigation of Pergamon's files was continually revealing more unforeseen and costly anomalies. There was, for example, the European Printing Corporation (EPC), a firm of specialist printers in Dublin. EPC had been bought by Maxwell from Lord Thomson in 1967 and had never earned a profit. By 1970, EPC's total losses amounted to the substantial sum of £214,000. Pergamon's new managers were perplexed because EPC was owned by R.M. & Co. but Maxwell insisted that Pergamon had agreed to underwrite its massive debts. In pursuit of that money, Maxwell had written to d'Avigdor-Goldsmid on 23 June 1970 claiming that there existed a binding obligation upon Pergamon to buy EPC from R.M. & Co. which would cause R.M. & Co. to bear 'neither profit nor loss'. A search through the Pergamon files revealed unsatisfactory evidence of that liability, but in his annual report d'Avigdor-Goldsmid conceded that Pergamon would bear those losses.

  D'Avigdor-Goldsmid also reported that Maxwell's continued control over PPI was proving costly. The British company was not receiving any funds from America, and Maxwell had actually sold two subsidiaries of PPI without any consultation. D'Avigdor-Goldsmid's summary was doom-laden. The threat of litigation, he said, 'hangs over the company like the mushroom cloud at Hiroshima'.

  Maxwell, whose omnipresence also hovered like a cloud, was ebullient despite the unqualified censure of his company. Price Waterhouse, he felt, had been determined to paint the worst picture. Accounting, he commented cryptically, 'is not the exact science which some of us thought it was'. He blamed Price Waterhouse for denigrating the 'substantial' profits which he claimed Pergamon earned from its trade with his private companies and attacked their 'tortuous' compilation of unrecoverable debts which he could have collected. 'In all things and at all times,' he concluded, ‘I have acted in good faith and tried to serve both sides with fairness and equity.' Maxwell's stout defence of himself and Chalmers Impey was par for the course, but the principles of accountancy in Britain and in the profession's textbooks were quietly and substantially overhauled to prevent similar mistakes.

  The delivery of the Price Waterhouse report set a two-month deadline for Leasco to publish details of its bid for the remaining 62 per cent of the shares. In New York, there was little enthusiasm for any further connection with Britain. Pergamon was plagued by uncertainties and owed more than £3 million, including £2.3 million to the National Westminster Bank. There seemed little reason to bid for a near-bankrupt company. Leasco had written down its $22 million investment to just one dollar in a rescue package which included writing off $44 million of its debts. But Rothschilds, who now valued Pergamon at just £3.6 million, urged their clients to make a bid of 3s 6d per share. The bankers feared that their reputation would suffer if Leasco withdrew, but sentiment and status were at a discount in the equation. On 3 November, Leasco announced that 'we do not wish to shoulder the burden of owning Pergamon', and both Schwartz and Stevens resigned from the board. Maxwell was jubilant. Keeping PPI had paid rich dividends and he was now poised for his comeback. 'I could hardly have dealt the cards better myself,' he told the Daily Telegraph after he returned from a negotiating session with d'Avigdor-Goldsmid. But speculation of a bid soon petered out. There were doubts whether he possessed enough money and whether the institutions approved of his conduct regarding PPI. But there was already a hint of victory.

  During that winter, Maxwell executed another masterstroke. After winning the sympathy of d'Avigdor-Goldsmid, he also secured the allegiance of Leasco's appointee, Felix Kalinski, who abruptly deserted his patrons. Steinberg was incensed but powerless. The balance now depended upon a newcomer to the board, Sir Walter Courts, a former governor of Uganda and later an assistant vice-chancellor for administration at Warwick University. 'We were all fed up with the arguing,' recalls Coutts, 'but I was particularly antagonistic towards Maxwell.' That would change, as Maxwell continued to exercise his charm, albeit from a distance. He took a six-month Kennedy fellowship at Harvard University to study a favourite theme: how to encourage industry to apply the results of scientific research and how governments could shape industry through their purchasing power. The fellowship was financed by an anonymous fund which the University was reluctant to reveal. From afar Maxwell watched as Pergamon's fortunes stumbled and sank. Then he seized his opportunity.

  In April 1971, d'Avigdor-Goldsmid was receptive to Maxwell's appeal that their differences should be buried. Pergamon's losses in 1970 had risen to £2.3 million (due mainly to reducing the valuation of the stock of journals and books) and the value of its assets had been reduced by a further £1.2 million to £6.1 million. D'Avigdor-Goldsmid was exhausted by the fight and he was convinced that the company needed calm and its founder's expertise if it were to survive. Unanimously Pergamon's directors, including Kalinski, agreed to forgive and forget everything. Effectively, all the disputes about the loans and all the litigation
between Pergamon and Maxwell's private companies were to be dropped; MSI Inc. was to pay $1.5 million to Pergamon for all the rights in the back issues; and PPI was to be placed again under British control. In return, d'Avigdor-Goldsmid supported Maxwell's re-election to the board as a non-executive director. As a gesture of goodwill, Pergamon also granted Maxwell a lease on the Hall until 1999 for an annual rent of £1,100 exclusive of overheads. In return, Maxwell offered d'Avigdor-Goldsmid some PPI shares for his personal ownership. After remonstration from Coutts, who complained that it was inappropriate, d'Avigdor-Goldsmid tore up the offer. 'D'Avigdor-Goldsmid's conduct was sometimes difficult to understand,' says Coutts. The DTI inspectors concluded that Maxwell had negotiated a very favourable settlement.

  D'Avigdor-Goldsmid, who flew to New York to finalise the deal with the American board of PPI, was honest about his capitulation. Schwartz was outraged: It was astonishing that Harry surrendered his only leverage against Maxwell.' Both Schwartz and Steinberg flew to Britain to persuade the pension funds to block Maxwell's formal election to the board at the annual meeting in July. Their arguments were greeted with the same stony looks which had glared at Maxwell when he had pleaded to the institutions in the Connaught Rooms 18 months earlier. Maxwell was on the verge of a victorious return. Just one final blemish needed to be cleared: his writs alleging defamation against the Sunday Times.

  No publicity had been so permanently wounding to Maxwell as the Insight profiles. On the eve of his return to the board, Maxwell needed to prove publicly that the Sunday Times had retracted its allegations. To wait for a trial in court was unsatisfactory since it would not start for at least three years and would be both expensive and unpleasant. There were, he believed, more efficacious methods. On 2 January 1970, he had met Roy Thomson to propose that the Canadian become a partner in Maxwell's future bid for the outstanding Pergamon shares. Thomson had rejected the idea but Maxwell took the opportunity to discuss the possibility of settling the libel writs, although the newspaper's proprietor had a reputation for not interfering with his editorial staff. What Thomson told Maxwell is uncertain but Thomson did ask his lawyers to 'examine the idea from all angles, although I am not urging any kind of climb-down by the Sunday Times9. Two weeks later, Maxwell wrote to Thomson's son Kenneth, suggesting that since his father had agreed to a settlement it was surprising that the Sunday Times lawyers had not yet submitted their proposals. Was there, he wondered, 'some slip-up'? The executives of the Thomson organisation were puzzled. Their firm understanding was that the initiative had been taken by Maxwell and that his solicitors would send their proposals. No, said Maxwell, Lord Thomson had personally said that he would initiate the apology. On reference back, Kenneth Thomson denied Maxwell's interpretation. There was again stalemate, although the official announcement that ILSC (which had been sold by d'Avigdor-Goldsmid to BPC in February 1970) had lost £3 million was gratifying confirmation for the Insight team that their initial allegations seemed well founded and that they would be totally vindicated in court. But, unknown to them, by July their editor Harold Evans was prepared to compromise. In return for Maxwell withdrawing the writs, he was ready to publish a long 'question and answer' interview in which Maxwell would be permitted a free hand to make his case. Evans, it seems, had lost both belief and interest in the investigation. For the next nine months, Maxwell insisted that he wanted the article also to contain an official withdrawal and an apology, but that was refused. Nothing changed until on 1 December, Maxwell telephoned Evans and urged a settlement 'because I want to get my company back. Let's settle it. No money, no crawling.' Evans recorded in a minute that Maxwell, 'went on for some time about how important it was for him to get an early settlement and couldn't I as a reasonable man work something out, etc'

  Evans suggested again an interview to put the record straight but by the beginning of February their agreement was stumbling on Maxwell's insistence that the Sunday Times make a contribution to his costs. 'He wants £5,000,' minuted the Sunday Times lawyer, James Evans, 'as the sine qua non of settlement.' Both the lawyer and the editor rejected the condition because they feared the interpretation which Maxwell might publicly place upon any payment. On the eve of his return to the Pergamon board Maxwell compromised, because timing had become important.

  At the end of April 1971, the journalists Hodgson and Page were both on holiday. Unknown to them, on 2 May, their newspaper published an interview with Maxwell. The headline was bold: 'The Week Robert Maxwell Bounced Back'. The introduction explained that Maxwell, who had just rejoined the Pergamon board, had withdrawn his writs and in return the newspaper 'has offered this remarkably resilient businessman the opportunity to express his point of view and describe his plans for Pergamon in the future'.

  Maxwell recounted that Pergamon had suffered without the benefit of his intimate relations with the journals' editors. Concerning his bid for the company, he was quoted as saying that, although he had sufficient personal finance, he would wait until the annual profits were at least £1 million: 'I am not prepared to risk the accusation that I am trying to buy Pergamon back on the cheap.' His immediate task, he said, was to relaunch the company's sales and reinvigorate its one thousand editorial advisers around the world. 'Now I am back,' he said, 'we are out of the period of crisis ... we are a force to be reckoned with.' Besides the ebullience, there was also a dose of contrition. Maxwell conceded the validity of the criticism that Pergamon was 'largely a one-man band . . . and the one man was spread pretty thin'. He also admitted the mistake of selling encyclopaedias, although only partially, with a familiar hint that others were really to blame: 'I.L.S.C. was a real whopper - the one element in Pergamon that I really regret. I trusted people and I was let down. But as chairman I must and do accept full responsibility.'

  The article then permitted Maxwell to 'correct' four allegations which he described as 'of crucial importance, on which I am deeply concerned to set the record straight'. In an answer which must reflect some confusion within the newspaper at the time, Maxwell said this about the relationship between Pergamon and MSI Inc.:

  These [relationships] were investigated in great detail by Price Waterhouse & Co., the leading accountants, and although their report described certain parts of the agreements between Pergamon and MSI Inc. as 'contradictory to some extent' and ambiguous to a degree where their 'precise legal effect is uncertain', it concluded by affirming that 'in all the circumstances we consider that the accounting treatment adopted by the Group accounts at September 30, 1969 is fair'. In the light of this, the business relationships between the Maxwell family companies and Pergamon have continued during the split, and will continue in the future, virtually as before.

  This was an unusual interpretation of the Price Waterhouse report. The accountants in reporting that the treatment of the 1969 accounts was 'fair' were referring to their own treatment, since they, Price Waterhouse, had compiled the 1969 accounts. The accountants were not referring to the trading relationship which Maxwell had cultivated between Pergamon and his own companies. On that issue, they had criticised and substantially changed the 1968 accounts because of the hitherto undisclosed agreements between Pergamon and MSI Inc.

  The article ended with Maxwell buoyantly demanding the restoration of the Stock Exchange quotation since there was by then no chance of new revelations. 'The [DTI] inspectors', he said, 'would have been impelled to take action immediately if they found any evidence of serious offences.' If Maxwell was hoping that the article would aid his rehabilitation, he was not disappointed. It was so effective that the DTI deliberately timed the release of its first report to coincide with his anticipated return to Pergamon's board.

  During the previous ten months, Maxwell had appeared before the inspectors, accompanied by John Silkin and occasionally by Morris Finer. Maxwell and his lawyers claim that the procedure adopted by the inspectors disarmed them completely. Questions would be asked, documents were either requested or proffered, but there were no allegations, criticisms or direc
t accusations. According to one of those at the hearings, 'The inspectors never showed that they believed his critics or disbelieved Maxwell.' The inspectors prided themselves on the fact that they never sprang any surprises upon him but gave clear notice of the areas of questioning. Regularly, he left the sessions content that the inspectors had accepted his explanations: ‘It was terribly chatty and chummy. The worst might be Stable saying, "Oh, come, come, Mr Maxwell," but nothing more.' Stable had after all said in the Court of Appeal that he would recall any individual if he was to be criticised and 'ask them if there is an explanation. I think that natural justice requires that.' In Maxwell's view, Stable's smokescreen was so effective that at one point, which they would quote in the report as an example of the 'casual and unbusinesslike manner' in which ILSC was managed, Maxwell was even seduced to reply, ‘I can see the value of these enquiries.'

  On 4 June 1971, Maxwell was travelling by car with Silkin to the twelfth questioning session when he mentioned rumours that a first, interim report which concentrated exclusively upon ILSC had been completed. Maxwell suggested that Silkin should ask the two inspectors for confirmation. Silkin refused. At the end of the session, Maxwell, to Silkin's fury, asked Stable, ‘I have heard that the report is finished and it is damaging. I'm surprised because I thought that you were bound to requestion me if there was any criticism.' Stable's reply, which was recorded in the official transcript, was to the effect that the report had not yet been submitted and that nothing critical would appear without first 'fairly and squarely' informing Maxwell.