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

by A. Craig Copetas

  The money from the oil trades also caused an infection known as Richophobia, a disease that was spreading faster than a winter flu virus throughout Philipp Brothers. The four major private shareholders of Marc Rich + Co. — Rich, Green, Hacheul, and Alexander Hackel, who was the only member with a valid Swiss work permit — had an obsession with ransacking their former firm for telex operators, receptionists, secretaries, and traders. In New York, former lehrling Hal Beretz (an usher at Rich’s wedding who went on to become president and chief operating officer of Phibro-Salomon and a director at both Philipp Brothers and Salomon Brothers) was secretly offered a $2 million cash incentive just to leave Philipp Brothers and join Rich. Beretz declined. In Buenos Aires Philipp Brothers officials claimed they captured a Marc Rich trader paying bribes for Philipp Brothers’ telexes; in Tokyo they caught a Philipp Brothers trader who was acting as a double agent for Rich, the spy snared by a Philipp Brothers trader who was dating a Marc Rich secretary. “Secretaries and clerks were asked if they had a problem sleeping with their clients,” a former Richco Grain executive explained. “Secretaries and other low-level personnel were always zooming off on business trips they had no reason to go on. The company paid for their jewelry and furs. Anything they wanted.”

  One of Rich’s most successful ploys was to find “lost sons” who were disgruntled over being stationed in faraway places. His gambit was to offer them twice their current salary and a new position wherever they wished to be stationed. The catch was that they had to stay in the place they wanted to leave for six months and establish the local Marc Rich office. Rich’s intelligence on Philipp Brothers seemed uncanny. William May, a member of the Phibro-Salomon board of directors, alleged that Rich’s fifth column electronically bugged the phone system in Philipp Brothers’ New York headquarters and that debugging experts had to be called in to sanitize communications by analyzing voltage drops and sending tracer signals along the wires to locate taps.

  The guerrilla raids were enormously successful; corporate loyalties had a way of losing their durability when cash entered the equation. Rich offered traders three to four times what Jesselson was paying and a piece of the long-term action. Top traders were given upward of $500,000 a year plus bonuses. Nearly a hundred people received stock that had to be cashed in upon leaving the company. Even Rich’s personal secretary, Ida Levitan, a valuable ally in obtaining Philipp Brothers gossip, was given shares in the company, a move that outraged traders who had no connection with Rich’s former bosses. Rich’s senior staff was instructed to “fuck over” Philipp Brothers; Marc Rich secretaries were urged to “date” the competition’s traders. “Anything was possible if it screwed Philipp Brothers,” said a trader who had an opportunity to observe one raiding party. “Rich wanted to get his hands on a Jamaican aluminum trader who had some sort of Philipp Brothers connection. The trader was flown from Kingston to London, driven to his penthouse hotel suite in a Rolls and arrived to find naked hookers prancing around the room. Women, cocaine, cash — it didn’t matter as long as Philipp Brothers was put out of business.” In aluminum the plan worked. By 1977 Rich had become the biggest aluminum trader in the world, snatching bauxite and bodies away from Philipp Brothers.

  No Philipp Brothers employee was immune to Rich’s enticements. Traders were snatched away to form one-man outposts, often located intimidatingly down the hall or across the street from the Philipp Brothers office from which he had been taken. Whenever a Philipp Brothers trader left to join Rich, he brought decisive information on the competition and placed it at Rich’s disposal. Some of Rich’s more successful strafing runs against Jesselson took place in Bolivia, a Philipp Brothers stronghold since the thirties. Whenever a contract came up for renegotiation, Rich traders would inevitably bid a few cents higher than Philipp Brothers. This would go on and on like a broken record, Rich always offering just a few cents more than Philipp Brothers had offered moments before for tin, bismuth, and tungsten. “They were beating our bids for metals by a fraction on every one,” a Philipp Brothers trader lamented angrily. “They knew our bids before we did.”

  For his part, Jesselson arranged meetings with Philipp Brothers suppliers, attempting to persuade them not to deal with Rich. Meetings with mine owners and producers in South America, Africa, and the Far East were futile; Rich’s adventurous repartee was just too good. The more remote a production area was, the more Rich people seemed to show up in an effort to secure it for what many traders perceived as a fearsome rebellion against the time-honored traditions of Ludwig Jesselson’s way of business. “Rich shocked the hell out of Philipp Brothers,” said a Philipp Brothers banker at Samuel Montagu, a London bank with a long history of extending credit to the company. “Until Rich came along, Jes had created his own safe little world with no competition. It was comfortable, protective, and extremely profitable. The psychological effect Rich had on Philipp Brothers was devastating.”

  The arrival of a Rich emissary to marshal material openly angered Jesselson but delighted producers accustomed to bear markets who could now juggle competing bids to make even more money. Jesselson’s anger stretched beyond the trading room and into the family kitchen, where those who did business with Philipp Brothers found their knuckles being rapped once Jesselson discovered they were also horse-trading with Rich. After he heard that Rich had become a client of Ropner Insurance, a London firm with a long history of taking huge risks to insure Philipp Brothers cargo, Jesselson, out of pure spite, say traders, changed insurance companies. “We wanted to do business with Rich,” said a former bullion trader for Philipp Brothers in London. “Jes wouldn’t allow it. There were no memos sent around saying ‘Stay away from Rich’; it was understood. And it wasn’t good business for us to keep away from Rich. We could have made money off Rich. The only thing you had to watch out for was that Pinky returned all your fingers after shaking on a deal.”

  Emerging like a thunderclap on the world market, and harboring a visceral desire to intimidate Philipp Brothers wherever possible, Rich growled whenever anyone insinuated that he hired people to learn what went on inside Philipp Brothers. “They are crazy,” he would sneer, adding quickly, “Jesselson just can’t admit that some of his people might think that I’m a better boss to work for.” Like clumps of weeds, Rich offices sprouted up without warning throughout the world. By the turn of the decade, Rich commanded forty offices in thirty countries, brandishing over a thousand people to seize control of large caches of strategic commodities essential for manufacturing goods as disparate as breakfast cereal and jet fighters.

  The total net worth of the company was $1.5 billion, two-thirds of it resulting from the long-term oil contracts Rich liked to conclude with a firm and dry handshake. Rich traders estimate that by 1980 sales were in the $12 billion range, the profits channeled through an international hydra of some forty-eight secret companies peppered throughout the Netherlands Antilles, the Cayman and Bahamanian islands, Liberia, Liechtenstein, and Panama — all linked ultimately to Marc Rich + Co. AG, the Swiss parent. But Rich’s favorite financial haven was garreted two flights above a greasy spoon on London’s Tudor Street, the British home to the consulate of the Republic of Panama.

  Paint peeled from the walls of the office, and the stench of burned bacon and oil-fried eggs hung heavy, but this foul-smelling place represented a cathedral in the Marc Rich empire, the place where he sent companies to be cured of the affiliation known as taxation. Sitting behind an old wooden desk, underneath a tattered map of the Republic of Panama, is a lynx-eyed secretary with the ability to help an international trader extinguish his tax burden by creating a Sociedad Anónima. “May I please have information outlining the formation, operation, and taxation of corporations under the laws of the Republic of Panama?” one needs to ask.

  Smiling pertly, she will hand the trader a thirteen-page document and say: “You can choose your own name to be incorporated, or I can provide you with a selection of titles already incorporated in Panama. When you make your decisi
on please return with $1,650.”

  Only cash is accepted.

  Rich traders indicated that Marc and Pinky washed money through numerous Sociedades Anónimas, many of them with nonsense names like Highmans Consultants, and Rescor Incorporated. Using a Panamanian corporation in his portfolio, Rich could conduct legal business transactions in any country, have a small percentage of his profits declared as taxable income (to avoid government scrutiny), and pay the rest to the Panamanian corporation, whose real owners are sacred secrets under the laws of Panama. The corporate money can then be dripped into any number of foreign banks whose bylaws also ensure secrecy. Directors of a Panamanian corporation are, quite often, other corporations — some even Panamanian — created for the sole purpose of providing another blanket of protection against the chill of scrutiny. Panamanian corporate law is particularly helpful to a trader whose operations extend outside the Central American nation and into several different countries. A Sociedad Anónima is never required to file financial reports or tax returns and may maintain its books in any manner it desires in any part of the world. This permits a procedure generally known as laundering, and for Marc Rich — an expert at sidestepping the politics of nations by acting as a maverick middleman between producers and consumers — it was quite the bargain at $1,650 plus a $50 annual franchise tax.

  “There was over $800 million in pure cash floating around the companies at the time,” said a former Rich shareholder who maintained that Rich would relieve boredom by “starting up” another Panamanian company. “The interest alone on our accounts at Bankers Trust, Chemical, and Paris-Bas was paying for salaries and overhead. There was so much money that we had bankers lined up in our hallways asking to borrow our money.”

  “There is always a way to make money on a deal if you are in total and absolute control,” Marc Rich would lecture his traders. “Always have total control and you will survive and you will make money … anyone can sell a dollar for 99 cents.” Within eight short years Rich’s mineral rites had exorcised most of his demons. It was a liturgy of total power, executing a global commodity colossus that sold more oil than Kuwait, more copper than Chile, more grain than the Dakotas, and enough aluminum to wrap the British Isles in foil. The deals were Byzantine in complexity, and the details were known to him only. Rich’s world became a bewildering prism; he could refract and displace billions upon billions of dollars through dozens of countries and companies and pockets until they, like light, finally disappeared from view.

  Suddenly the entire trading fraternity was talking about Marc Rich’s disturbingly ingenious assaults on the world marketplace. Rich was drawing attention, and trading tradition dictates that conspicuousness is undesirable, possibly dangerous. But the slightest reference to any Rich involvement in a negotiation uncharacteristically exhausted, frustrated, befuddled, and dazzled the traders, especially the younger ones. Doing business with Marc Rich was laced with exotic mystery, implacable suspense, and huge profit. What was true? What wasn’t? No one but Marc and Pinky could ever separate the fact from the fiction. The hustle was clever, empathetic, and perfect to run against men who subsist chiefly on rumors. The skinny was clear: Marc Rich was on his way to becoming a cartel and, grumbled the executives at Philipp Brothers, he was doing it at the expense of his alma mater and the delicate instability of the metal-trading community.

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  Chapter 10

  “An oil camp’s no kindergarten. There’s no room in this world for people who don’t look out for themselves. What do we care about people? All that matters is oil.”

  — B. Traven, THE WHITE ROSE

  A RUSTY FENCE was all the protection between the factory compound and the pedestal-mounted .50 caliber machine gun Tony Garcia had bolted to the floorboard of his jeep. The ground was still damp from the spring rain, causing terrorized workmen to slide out of control as they scrambled for cover behind bulldozers, automobiles, and reservoirs of ore waiting to be smelted into chrome. No one remembers how many armed men bounded out of Garcia’s two trucks and the cab of the earth scooper, but he deployed them in a phalanx in front of the motorized column.

  Garcia jumped from the jeep and nodded to the man behind the .50 cal. Other than the metallic slap of the breech locking the ammo belt into the World War II relic, related an observer, the assault started in silence, punctuated by slow motion bursts of activity.

  The place was outside the town of Cagayan d’Oro on Mindanao, the southernmost major island of the Philippine archipelago and body to some of the Earth’s richest veins of chrome ore. It was 1981 and Tony Garcia — who supplied the Philipp Brothers upgrading facility with ore harvested from his land — was ready to spray his clients with reprocessed lead. The relationship between Garcia and Philipp Brothers had been free of problems, a winning example of the company lending money to develop a mine in return for marketing rights.

  Like many other Filipinos, Garcia had acres rich in mineral deposits but not a peso to use in digging out his wealth. So Philipp Brothers drew up contracts that gave letters of credit good for an immediate 10 percent of the mine’s estimated production. Garcia used the cash to purchase equipment and as a down payment on the 15 percent of the mine’s net value demanded by the Marcos family, who controlled a piece of whatever was dug out of Philippine soil. Contractual problems had always been solved under the friendliest of terms, prompting workers at Cagayan d’Oro to ask themselves why they were looking down the wrong end of a machine gun.

  Garcia claimed that Philipp Brothers had not paid him for two hundred tons of ore piled on the other side of the fence and that he had come to collect it. Peter Cutfield, Herve Kelecom, and Bambi Castillo, the three Philipp Brothers traders in Manila, had no idea that their client was so upset. “If he only had called,” Kelecom thought bitterly. Garcia, however, was not in the best of moods. Screaming, he informed the guards, some workers, and two apparently mush-witted policemen called hastily to the scene that if the gate was not opened he would come through the fence, shooting anyone attempting to stop him from leaving with his ore. A guard obligingly opened the gate. One of the trucks plowed through the fence anyway; the policemen smiled, hands in pockets. Luckily, not a shot was fired. The chromite was loaded on the trucks and the convoy sped off, Garcia vowing to plant officials that Philipp Brothers had not heard the last of this matter. Still no one had any idea what Garcia was raving about.

  Over the next few weeks, Cutfield began receiving threats against his life, forcing him to send his wife and family out of the country and to spend his nights in a series of hotel rooms, accompanied constantly by bodyguards. “Everyone at the office began sleeping on edge after what happened,” a trader explained. David Tendler, who served as the company’s former Tokyo office manager with expertise in the Far East, was sent to Manila to discover what led to Garcia’s alleged theft of Philipp Brothers’ material at gunpoint. No one had a clue. “The people in New York were madder than hell at Marcos for letting this happen,” said a Philipp Brothers trader in Manila at the time. “We had paid Garcia for the chrome. It was ours. The situation was such that all we could do was stop doing business with him.”

  Tony Garcia stayed in business, the two hundred tons of Cagayan d’Oro chromite finding its way aboard a Marc Rich freighter, according to a Philipp Brothers trader who methodically dogged the ore’s movement off the islands. “It’s impossible ever to know if Rich had anything to do with what happened on Mindanao,” said Herve Kelecom. “Anything and everything was possible with Marc Rich.”

  Though the Mindanao skirmish was downright bizarre (Garcia bargained wisely and remained in the Rich camp), the jungle drama reinforced Rich’s reputation as the enigmatic Action Man. Trading was a matter of style, and Rich held the monopoly on grace under fire. The real beauty of a Rich trade was that Rich, the master dealer, and Green, the master mover, could purchase and ship material without the knowledge of anyone else in the company because all information was supplied on a need-to-know basi
s, a policy that further clouded the full extent of their global trading activities. “Making money was the chemistry of the friendship between Marc and Pinky,” a friend of both men said. “Traders build a myth around themselves to sell their wares. Jesselson had done it, and now Marc and Pinky were doing it. The best traders are myth builders. Marc and Pinky understand that.”

  “This business is about creating situations, and that’s exactly what Rich knows how to do,” advised Trader Robbins, a director of Unicoal, one of the many metal-trading firms Rich did business with over the years. “The deal is what’s really important. You can always find money. But you have nothing unless you have a deal to go along with it.” Rich’s style became the most advantageous element in any trade. The dark eyes, focusing hard and stubborn like shooter marbles, made people worry about what he was going to do next but anxious to be in on the action. His six-foot frame — timid and shy, curved slightly at the neck and with the long arms of a third basemen tough to bunt against — was decked out in the sleekest of expensive suits and garish $50 silk neckties that, traders guffawed, would make a comfortable noose if he hung himself on a deal.

  Rich considered himself too much of an acrobat ever to stumble over a situation of his own making, even in Iran, where the Ayatollah Ruhollah Khomeini had deposed, exiled or murdered the Iranians who made up his oil network. By the beginning of 1980, the Rezais had escaped to New York City, Houston, Los Angeles, and Costa Rica; Fallah flew to the safety of his Swiss bank accounts; Maui fled to London; and the Shah died of cancer in Panama. The Peacock Throne was rubble and Khomeini was exterminating the insiders who greased its corruption like so many flies. The American hostage crisis only added to the twisted theatrics taking place within Tehran’s Western trading community. The greatest liability for a trader now doing business in Tehran was his life. Every trader in town pulled stakes and ran for cover — everybody, that is, except Marc Rich, who took out ads in Metal Bulletin to tell the fraternity that he wasn’t going to be run out of town. “It blew the trading world away,” said John Hughes, a director of LHW Futures in London. “Everyone raised their eyebrows over that because it didn’t seem right, you know. It was a Wild West show for him.”