Metal Men: Marc Rich and the 10-Billion-Dollar Scam

by A. Craig Copetas

  After six months in London, Rich and Green moved to the twenty-fourth floor of the Bankers’ Trust Building on New York’s Park Avenue, and Sir Felix transferred London operations into more modern offices situated on Wigmore Street in the West End. The new London office was an odd place for a trading house since it was in the middle of an area renowned for expensive abortion clinics, fashion showrooms, and surgical supply merchants who decorated their windows with syringes, scalpels, and prosthetic devices. “You’d walk out the door at Wigmore Street into the most macabre scene in London,” a Rich trader laughed. “Everybody we dealt with worked in the City and they used to hate coming to visit us. It made them uneasy.”

  The New York office was like a sky fortress, a far cry from what had been a lone trader managing American deals out of a spare office provided by Rich’s father from the day his son left Philipp Brothers. The latest security systems were installed and each employee issued a special computerized pass with which to unlock doors. All traders were instructed to deposit telexes in an outgoing box for daily collection by a mail-room attendant whose job it was to ensure they went through the state-of-the-art paper shredders. At the Zug office, shredded telexes were shrink-wrapped in plastic and sold as scrap. Rich’s transglobal network was coming together. The frontispiece was New York, the new home of Marc Rich International, the American subsidiary under the protection of Marc Rich + Co. AG, the Swiss parent.

  Many of the early deals were carefully hedged back-to-back trades where buyers had already been contracted to take delivery. The trades maintained cash flow and laid a solid foundation for the growth of the company. But they were trades inimical to Rich’s temperament: Rich was El Matador, the man who disdainfully viewed caution as a frivolous disease that nourished only in frightened environments. And nothing ever frightened Marc Rich. “Think big was the unspoken rule at Marc Rich,” said one of his young traders.

  To generate the cash needed to operate on a truly ambitious scale, Rich turned to Pinky Green, instructing him to use Ali Rezai — “one shrewd peasant,” Rich would say — to develop schemes of securing long-term contracts for Persian oil above and beyond the normal market channels. For the next three years, Green made monthly trips to Tehran, where he toadied up to any factotum with lines to Shah Mohammad Reza Pahlavi. Through Ali Rezai he made contact with Reza Fallah, head of the Iranian National Oil Company, and contracts were signed to provide Rich with a 200,000-barrel-a-day supply of Iranian crude at the height of the oil crisis. “I’ve never seen Pinky as happy as he was the day he walked out of that meeting,” a Rich trader said. Again through his relationship with the Rezai family, Green was introduced to Abolfath Maui, an Iranian superagent and hustler on the Tehran scene who also happened to be the Shah’s cousin. Green, Rich, and Maui developed barter deals for Iranian oil, including one grand scheme in which Rich would receive oil against money he would invest to help finance a German firm’s construction of an Iranian nuclear power plant. And, beyond his own personal greed, the Shah needed all the cash he could lay his hands on to help finance the lofty dreams of the Peacock Throne.

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  Chapter 9

  “Every moment is a risk.”

  — Jack Swigert,

  APOLLO 13 ASTRONAUT

  SHAH MOHAMMAD REZA PAHLAVI was a great man for a private trader such as Rich to do business with, despite the fact that the Western trading community never considered the Shah’s regime reliable or stable. Rich liked the Shah because he grew most cooperative whenever the time came to raise the price of oil on the world market. When Rich began doing business with Iran in 1974, the country had the capacity to pump nearly 7 million barrels of oil a day. Such figures looked good on the surface and served the Shah well in becoming a powerful force in the Gulf region until he was toppled by Ayatollah Ruhollah Khomeini in 1979. But from the moment Pinky Green first arrived in Tehran, Rich and his senior oil staff knew that the Shah owed $3 billion in foreign debt as early as 1975 and, more important to Rich, Iran’s debt was rising much faster than its income, prompting the Shah to jump into the Eurodollar market for dollar loans. Ironically, despite his vast oil wealth, the Shah was cash-short, a trading situation devilishly structured for what one of Rich’s Middle Eastern oil traders called “funny business.”

  “We spent a lot of money in Iran paying for introductions,” a senior Rich oil trader explained. “The question is, really, what constituted a bribe. We gave vacations to government officials with lousy salaries both in Iran and in countries such as Angola and Nigeria. We helped their families with cash and took care of their business expenses. This was considered a matter of good business and convenience.” But the arrogance of Rich’s cash opened oil pipelines that had been closed to others. Iranian crude was sold to Israel, Royal Dutch Shell, and Elf, the French oil corporation. Rich installed Gerard Demanget, a Frenchman, as his oilman in Tehran. The appointment was on the surface a curious choice, since Demanget had previously represented the French automotive company Citroën in Iran and knew absolutely nothing about trading oil or metal. “He was a public relations man and Marc hired him because he knew whom we needed to pay off to get into Iranian oil,” a former Rich executive said candidly. “Gerard was our front man and he grew very rich.”

  Rich’s Iranian oil deals were extremely sweet and allowed him to glide above the oil apocalypse of the 1970s, particularly during 1976 and 1977, when oil imported to the United States hit its peak, constituting nearly half the petroleum consumed by the American public. If the going rate for a barrel of OPEC oil was $20, then Rich would purchase it for $15 and then sell it at whatever the spot market would bear, a figure that changed daily, sometimes hourly, and was always significantly higher than the OPEC price. And although OPEC was a powerful cartel that maintained a series of quotas and price structures that looked good on paper, the day-to-day business of oil was conducted in a vacuum in which none of the major oil companies knew exactly how much oil flowed onto the world market. “It was good business for us since we didn’t have to put up the cash until the oil was sold,” a Rich oil trader explained. “Money paid on the side always helps close a deal, but Marc had a way of convincing people that they should sell only to him. The man could lie through his teeth and people would believe him. Then Pinky would crawl into their hearts, and we had them. They were fantastic to watch.”

  The Iranians were happy to wait until Rich had sold their oil on the spot market or through independent deals with the majors before collecting their money, especially since he made meticulous provisions for kickbacks from the overprice sales to be placed secretly into foreign accounts. “The Iranians, the Nigerians, anyone who did oil business with us liked to keep a portion of their share in the West,” said a Rich oil trader who claims to have deposited $125,000 in cash into the coded Swiss account of Reza Fallah, head of the Iranian National Oil Company, in return for “services rendered” on securing a shipment of Iranian crude destined for Spain in 1977. “The Iranians were corrupt as hell and paying them off has been the only way to do business there for five thousand years. To go into places like Iran and do honest business is naive. I’d figure 15 percent of your net in payoffs for every deal made. You got the business, and that’s what you’re there for.”

  Rich became so big in oil that he seemed to appear like a Saudi sheik wherever there was an oil deal to be made, often to the embarrassment of the American oil companies. Big oil, which was used to purchasing crude directly from the producing nations, squirmed when dealing with Rich. He had become a prickly thorn they could not remove because of the nationalization of foreign wells: When Exxon wanted access to oil in Marxist-controlled Angola in the late seventies, executives set up a meeting with the country’s oil agents. Expecting to receive a politburo of Angolan officials representing the Malonga oil installations in the northern province of Cabinda, senior Exxon oil men — loath to deal with the former Portuguese colony since its embrace of communism after the Portuguese departed under a hail o
f gunfire in 1975 — were visibly stunned when the communist representative who walked into the conference room turned out to be Pinky Green, greeting Exxon executives with a hearty “How ya doin’?”

  One of the tools Rich used to hammerlock Third World oil supplies was a flashy multimedia show depicting the history of the petroleum business from the day Colonel Edwin Drake sank the first well in western Pennsylvania. “The concept was to convince these leaders that they could grow richer if they dealt with us,” a Rich oil trader said. “The show was quite effective. When we showed it in Angola, the country’s leaders brought their wives, families, and all the relatives. The film was a night on the town for these people.”

  While oil prices continued to surge, Rich lined up contracts that supplied two to three hundred thousand barrels of Nigerian oil a day to be resold on the spot market at premiums spiraling as high as $14 a barrel. And when Iran started cutting off supplies to the Western companies, the oil firms became desperate. “We had to scramble because we lost two hundred thousand barrels a day overnight,” Martin Volandt, Arco’s senior vice president for crude supply, said in an interview. “We tried to buy Nigerian, but we were unsuccessful.” Arco, like many of the other oil giants, was forced to go to Rich, who had a contract with Nigeria and middlemanned the crude to Arco at a fat premium.

  Arco, the seventh-largest American oil company, was Rich’s best customer. Rich had become close to Arco trader Bill Ariano while still at Philipp Brothers and referred to his buddy in telexes as “Crude Bill,” instead of the usual telex code of “Crude Arco.” Rich had first supplied Ariano with Nigerian crude while manager of Philipp Brothers’ Madrid office. Ariano’s son Michael was given a job in the Rich organization. Rich went as far as to name a tanker after Ariano’s wife, Jeanne, inviting the family to Tokyo for the christening ceremony.

  The Billy Jeanne A was the latest addition to the Rich fleet, which already comprised the Devali I (named after Denise Rich and Green’s wife, Valerie) and the Mediterranean Sea. The ships, however, were not in the greatest of shape, and on one occasion the Mediterranean Sea docked at Arco’s Philadelphia terminal in such pathetic condition that inspectors deemed it a fire hazard and made it leave port. Such inconveniences were tolerated because if Marc Rich told an oil company he had oil, he had oil — so much oil that his spot trades to domestic oil companies regularly took first prize in the weekly office pool at the Department of Energy, where workers would guess which American oil giant would pay the highest spot price before the figures were released officially.

  The marriage of the metal men and the oil barons was cozy but one-sided. Throughout the seventies, the oil companies said that they had to charge the consumer higher prices to finance new oil exploration to lessen America’s dependence on OPEC production. Although a great deal of money was invested in exploration, a lion’s share went into the mining, manufacturing, and exploration of minerals — a $10-billion-a-year enterprise in the United States during the late seventies. Exxon had invested $1 billion in the La Disputada copper mine in Chile; Arco shelled out $700 million for Anaconda; AMOCO bought into the Cyprus Minerals Corporation; Penzoil invested heavily in molybdenum and copper; SOHIO assumed a piece of Kennecott Minerals; and Mobil gobbled up a giant’s share of Falconbridge nickel operations.

  It was crystal-clear to Rich that the oil companies were becoming very interested in metals, particularly copper, where American oil companies controlled 40 percent of the domestic copper industry and held major interests in six of the thirteen largest copper mines in America, accounting for 95 percent of domestic production. The oil companies managed their metal-trading operations poorly, the trading mentality being far removed from what the Seven Sisters were accustomed to. And whenever Exxon, Arco, or Royal Dutch Shell had a question on how to handle a metal position that they had no idea what to do with, they called Marc Rich. “It happened all the time,” said a Rich trader once in charge of purchasing oil from Venezuela. “No one in business likes to admit that they don’t know what they’re doing. The oil companies had no business in the metal trade. They were never equipped for it. I was more than happy to advise them, to our advantage.”

  Profits for the first five years of Rich’s operation were huge: $14 million for 1974, $50 million for 1975 and over $200 million for 1976 and 1978. Swiss tax records for 1979–80 indicated a total pretax bonanza of $367 million. And that was only the money for deals through Switzerland. Said former Zug Mayor Walter Hegglin of the Rich money machine: “As long as Marc is doing all right, Zug is doing all right.”

  The profit door was Iran. “That’s how we moved our position so fast,” said one of Rich’s traders. Although much of the operating capital was plowed back into purchasing more oil, millions were earmarked to smother Philipp Brothers’ bids for long-term contracts to control Philippine copper concentrates, Brazilian pig iron, South African ferroalloys, and Jamaican bauxite. Ore and oil were resold as quickly as possible, except in the United States, where the material was warehoused, and a nationwide distribution system created to sell crude to refineries and metal to foundries directly. But it was foreign oil that powered Rich’s industrial juggernaut. By the first quarter of 1976, he had fifteen oil traders buying and selling oil in Sweden, Norway, Russia, East Germany, West Germany, Switzerland, France, Italy, Spain, Israel, England, Malta, Turkey, Rumania, Yugoslavia, Austria, Libya, Algeria, Nigeria, Morocco, Zaire, Gabon, Sudan, Angola, Mozambique, Ethiopia, South Africa, Japan, Singapore, the Philippines, Malaysia, Brunei, Iraq, Iran, Dubai, Saudi Arabia, and all of North and South America.

  The minimum oil deal Rich would touch was a hundred thousand tons, and that was rare. The bulk of Rich’s profits came from charging staggering premiums to oil companies short on their production quotas. One of the biggest was in 1978–79, when Rich negotiated two contracts with Arco to supply forty thousand barrels a day. Twenty thousand of those barrels were sold at an $8-a-barrel premium over Nigeria’s official $24-a-barrel price. The remaining twenty thousand barrels were sold to Arco at $5 over the official price. Future contracts between Rich and Ariano would charge premiums and commissions of $3 and $2.50 a barrel. Arco ultimately bought 27 million barrels of Rich’s Nigerian crude, fetching $120 million in commissions and premiums. But it was still a good deal because spot prices for Nigerian oil were marked higher than what Rich was selling his Nigerian oil for. Rich and Green grew giddy over the oil deal profits. Green, recalled a member of his staff, “pranced around the New York office applauding himself after he swapped fourteen Boeing 747s to the Saudis in return for oil that he was going to sell to Israel.” Another trader added: “Marc went everywhere chain-smoking Monte Cristo torpedo Havanas, the fattest and most expensive cigars in the world. He was on top of the heap. It was magic.”

  Magic, like everything else in the trading world, is a negotiable commodity, the cost usually proportional to the level of a producing nation’s corruption. Payoffs to secure material were code-named “chocolates,” and every Third World leader with whom Rich did business seemed to have a sweet tooth. When unseen market forces intervened, more chocolates had to be delivered, as was the case with a shipment of Nigerian crude out of Lagos in 1978. “We told the Nigerians that their oil had been going to Spain, and one day they followed our ship twenty-five miles out of port and saw it hang a left instead of a right,” a Rich trader laughed. “A lot of the Nigerian oil had been sold to South Africa at a huge profit to us, and when the Nigerians found out they canceled the contract. It cost us a million chocolates to get the contract back.”

  The $1 million payoff, allegedly paid to Alhaji Umaru Dikko, Nigeria’s transport minister and the obsequious brother-in-law of then President Alhaji Shehu Shagari, was one of dozens of bribes disguised as surcharges to fix traffic violations and serve as partial down payment on a long-term $12 billion deal that would supply Rich with a hundred thousand barrels of Nigerian oil a day. The Shagari regime personified corruption in the Third World, and Marc Rich was there to help a
dd to the mayhem. “Marc never once reflected on the moral implications of a deal,” one of his senior executives explained. “Doing business with corrupt societies was exactly the same as doing business with anyone else. I don’t know if that’s right or wrong. What I am sure of is that it’s business.”

  Tarn David-West, a former university professor who became the energy minister of Africa’s most populous nation after Shagari was overthrown in a New Year Eve’s coup in 1984, estimated that over 20 percent of Nigeria’s oil revenue from the mid-seventies until 1983 was lost through fraud or smuggling, helping to nurture the country’s $24 billion debt to foreign banks and international loan institutions. And Rich’s trades for oil were not limited to just cash. Rich traders concluded deals that swapped grain for Nigerian crude, but once staples such as rice and wheat reached the Lagos port, Dikko put the food through a circuitous system of payoffs, inflating a 110-pound sack of rice that cost $35 dockside to $267 in the markets, the difference lining the pockets of Dikko and Shagari’s National Party. “What we did was dangerous to a degree,” warned one of Rich’s African oil specialists. “Marc never worked with the countries he did business in. He played off of them and he always knew that he stood to get screwed if he lost the upper hand.”

  Rich always managed to walk a thin and menacing tightrope between the profits of business and the powers of politics, particularly in the South American nation of Ecuador, one of his major suppliers of crude oil outside the OPEC price structures. Ecuador stopped selling oil to Rich in early 1978 after the company failed to come up with $10 million for a disputed oil cargo. But when oil prices went up even further a year later, Rich returned to Ecuador with the $10 million and brewed a new series of contracts that swapped weapons for oil. The deal had all the ingredients for an explosion. At that time Ecuador was involved in a border war with Peru, another country that supplied oil and minerals to Rich. Neither country complained. Ecuador needed guns and Peru needed hard Western currency. Rich supplied them with both.