by Dean Jobb
The startled friend did the rest, and soon more people were clamoring for stock. Leo’s theatrics, it was later reported, sold another $1 million worth of shares. But he continued to play hard to get. Isaac Fischel had been among the first investors in Bayano, buying $3,000 in shares in 1911, but he had sold them back to Koretz within a couple of years. When he heard that oil had been found, Fischel was desperate to get back in. After “much persuasion,” he recalled, Leo sold him four shares.
One prominent Chicago banker who had long tried to buy stock cornered him in the midst of the oil frenzy and seized him by the lapels. “Now, look here, Leo,” he begged. “Why not have a heart.” Leo relented. A check for $40,000 soon arrived, but instead of cashing it, Leo showed it to potential investors, swearing them to secrecy. Impressed to learn that someone of the banker’s stature was taking a big stake in Bayano, many of these confidants asked to buy shares as well. After getting mileage out of the check for a couple of weeks, he returned it to the banker. “I’m sorry,” he said in an accompanying note, “but I can’t spare you any Bayano just now.” The banker refused to give up and ultimately bought $100,000 worth of shares.
Bayano’s gushers tossed the lifeline Leo needed to stay afloat. But oil created new problems as well. He had more investors to keep happy and a host of new lies to keep straight. Cash was flowing in, but now he was committed to paying out much more each month in dividends. Many investors were eager to spend their inflated profits, and not even the smooth-talking Leo could persuade everyone to reinvest. Several families used their windfalls to ship sons and daughters east to expensive colleges. Others cashed their dividend checks so that they could enjoy the good life, among them an investor who moved from a modest flat to a luxury hotel suite and had enough money left over to dash around town in a chauffeur-driven car.
And investors were beginning to wonder what the syndicate planned to do with its crude. How was it being stored and transported to market? Would all of it be sold to Standard Oil?
“Questions were asked of me,” Leo recalled, “as to what I was to do with these immense holdings.” His answer? Bayano, he declared, would no longer be merely a producer of oil. The syndicate was going into the petroleum business, and in a big way.
IT WAS A PERFECT time to be selling stock in an oil company—to be selling stock in anything, for that matter. The American economy, after a few postwar sputters, was booming; the “prosperity band-wagon rolled along,” wrote Frederick Lewis Allen, the decade’s finest chronicler, “with the throttle wide open and siren blaring.” Consumer spending jumped $7 billion during 1922 alone, to $63 billion, at a time when Washington’s total tax revenues were a modest $4.3 billion. In 1920 the first commercial radio broadcast ignited a new craze—the first of a decade remembered for its fads and crazes—and created a new industry almost overnight. Americans spent $136 million on radio sets, parts, and accessories in 1923, doubling sales in a year. “There is radio music in the air, every night, everywhere,” noted a San Francisco newspaper inspired to rhyme.
But the driving force of the overheated economy was the automobile. Henry Ford produced his first Model T in 1908, the year General Motors was founded, and by 1915 there were 2.5 million cars and trucks on America’s roads. The number quadrupled to more than 10 million in 1921. The construction of better highways and a switch to building closed cars, which could be driven in comfort year-round, further boosted auto sales.
Leo saw the results every time he ventured out in his maroon Rolls-Royce: Chicago’s streets were jammed with Fords, Chevrolets, and lumbering Studebaker Big Sixes. The “new age of locomotion” had transformed the city into “a wild jungle,” the Daily Tribune complained, and more than seven hundred people died in car or car-pedestrian crashes in 1922. A survey counted two cars for every three families in a typical American city and discovered that poor people were more likely to have a car than a bathtub. Horses were disappearing from the nation’s streets and roads so quickly that in 1923 a paleontologist at the University of California predicted the animals would be extinct in a century or seen only in zoos.
Once there was a car in the driveway and a radio in the parlor, a lot of people had money left over to play the stock market. Stock mania was the defining feature of the decade, an investment frenzy that culminated in the crash of ’29. A sign overlooking New York’s Columbus Circle admonished passersby: YOU SHOULD HAVE $10,000 AT THE AGE OF 30; $25,000 AT THE AGE OF 40; $50,000 AT 50—a tall order in an era when four-fifths of the population made less than $3,000 a year.
To get there, and to get there as quickly as possible, more people than ever invaded the traditional preserve of the wealthy and put money into stocks. Million-share trading days on the New York Stock Exchange became common. Investors borrowed to buy shares and used them as collateral to buy more, or bought stock on margin from brokers, paying as little as 10 percent down. People were growing accustomed to buying cars and radios and other goods on credit, so why not stocks? As long as values rose, a lot of people made money. Even the gangster Al Capone, who made his money with threats and guns, was impressed: “It’s a racket,” he said. “Those stock market guys are crooked.”
The stock market was not the only get-rich game to play. Investors put their money into Florida real estate, new inventions, mines, and a host of other risky ventures—anything that looked promising. Door-to-door salesmen and storefront operations known as bucket shops peddled stock in phony or dubious enterprises to gullible investors. The ease with which Charles Ponzi roped in the suckers with his bizarre postal-reply coupons scam said much about the investment-mad times.
One investment stood out above the others: oil. The automobile was a godsend for America’s petroleum industry, which had watched nervously as electricity displaced its main product, illuminating oils such as kerosene. The engines puttering under the hoods of all those cars and trucks needed fuel, and gasoline, once considered a useless by-product of crude-oil refining, was in high demand. More than any other product, gasoline made Standard Oil’s founder, John D. Rockefeller, the wealthiest man in the world.
An antitrust ruling had splintered Standard Oil into more than thirty companies in 1911—about the time gasoline sales eclipsed those of kerosene—but it remained one of the most powerful corporations on the planet. The largest of the stand-alone companies, Standard Oil of New Jersey, was the second-largest corporation in America in terms of assets, revenues, and profits, and three others—the Indiana, New York, and California divisions—would soon crack the top ten. It was little wonder that the mere mention of the company’s name worked magic on Leo’s investors.
By the 1920s, largely owing to the insatiable thirst for gasoline, US demand for oil reached almost a half-billion barrels a day, more than double the figure for 1914. The per-barrel price tripled. Even though the discovery of new oil fields in Texas, Oklahoma, and California brought more crude onstream, new reserves were needed. “America is running through her stores of domestic oil,” a British magazine warned in 1919, “and is obliged to look abroad for future reserves.” The discovery of new oil reserves in Venezuela at the end of 1922 eased fears of shortages—and, if there were any skeptics left in Chicago, made Leo’s Panamanian oil fields seem that much more plausible.
Shares in Standard Oil and competitors such as Texas Corporation, Shell, Gulf, and Sinclair soared in value. Stock mania became oil-stock mania, and oil promoters—some legitimate, most not—were everywhere. The discovery of oil near Los Angeles in 1920 triggered a speculative boom in land and exploration leases that one journalist claimed turned Southern California “stark, staring, oil mad.” Investors toured the fields, listened to the promoters’ hype, and purchased a stake in a property or an exploratory well, often a one one-thousandth interest of little value, if any.
Not even Washington was immune to oil mania. Warren Harding, elected president in 1920 on a promise to return the country to “normalcy” after the disruption of war, oversaw an administration Frederick Lewis
Allen blasted as responsible “for more concentrated robbery and rascality than any other in the whole history of the Federal Government.” The biggest scandal was the secret transfer to private oil companies of US Navy oil reserves—including a field at Teapot Dome, Wyoming, which gave the scandal its name—in return for kickbacks to the secretary of the interior, Albert Fall.
Chicagoans—the in-crowd that knew Leo Koretz, at least—were in the grip of their own version of the stock-buying, oil-investing craze: Bayano mania.
10
THE CONFIDENCE MAN
CON MEN NEED a battery of traits to win their victims’ trust and lighten their wallets. Leo Koretz had them all.
“They must, first of all, be good actors,” able to play whatever role was required to pull off the scam, a career swindler explained to the criminologist Edwin Sutherland in the 1930s. Leo, acting the part of a savvy financier who hobnobbed with a mysterious syndicate of millionaires, delivered a magnificent performance. A winning personality, confidence, shrewdness, and the ability to think fast and improvise, this swindler added, were also essential. Con men “live a chameleon existence,” adapting to the people and situations they encounter, noted Frank Abagnale, a master forger who impersonated a doctor, a lawyer, and an airline pilot before using his skills to battle fraud. His list of essential qualities included an eye for detail, a photographic memory, and “icy self-control.”
Swindlers—the best ones, at least—tend to be well-read and knowledgeable on a wide range of subjects, allowing them to appear to be the smartest person in the room regardless of the topic being discussed. Leo’s library shelves—crammed with everything from atlases and history books to Izaak Walton’s seventeenth-century ode to fishing, The Compleat Angler—did double duty, impressing Bayano investors while providing the curriculum for his self-taught course in Swindling 101. David Maurer, who produced a definitive study of swindlers and their methods that became fodder for one of Hollywood’s best-loved caper flicks, The Sting, found that the best ones possessed a keen sense of human nature. They knew how to read people and how to ingratiate themselves with their victims. A good con man, Maurer concluded, “must be able to make anyone like him, confide in him, trust him.” Another of Sutherland’s informants agreed, asserting that a swindler “must have something loveable about him.” Everyone liked the generous, wisecracking, charming Leo, who always seemed to know the right thing to say. Luc Sante, a writer who has chronicled New York City’s underworld, suggested that the best con men possessed skills and qualities that “would have propelled them to the top of any profession.” Leo, whose ambition and self-confidence knew no bounds, could have been a top-flight lawyer, a business leader, or perhaps a powerful politician. He chose, instead, to become a master of promoting phony stocks.
THE TERM CONFIDENCE MAN was first used in 1849, when an enterprising New Yorker named William Thompson walked up to strangers on the street with a proposition: did they have the “confidence” in him, he asked, to entrust him with their watches overnight? Those who complied lost their timepieces and some of their faith in their fellow man. Eight years later, the term was in such common usage that Herman Melville published a novel about riverboat swindlers under the title The Confidence-Man: His Masquerade.
One scholar has discerned something quintessentially American about the con man, who reinvents himself to each new victim in the same way that America’s early settlers reinvented themselves in a new land. The confidence man, argued Gary Lindberg, “is a covert cultural hero,” an ingenious and enterprising figure who exposes the gap between “our stated ethics and our tolerated practices.” America was built on dreams and promises, and dreams and promises are what a con man sells. One nineteenth-century commentator suggested that con men were a necessary evil, a species that survived and thrived only because people were inherently trustful. “It is a good thing, and speaks well for human nature, that … men can be swindled.”
Chicago’s Joseph Weil, one of America’s most famous con men and a contemporary of Leo’s, began taking advantage of people’s trusting nature as a young man at the turn of the century, selling fake elixirs at medicine shows and imitation gold watches door-to-door. His nickname, the Yellow Kid, came from a popular comic-strip character of the time. He became an early master of “the wire,” the delayed-race-results swindle popularized in The Sting. When that con became too well known, he posed as a mining engineer or financier and led his victims to believe he had the inside track on the stock market. Weil’s props, like Leo’s, were finely engraved share certificates, wads of cash, a millionaire’s wardrobe, and a plausible-sounding story. Weil claimed there was one more weapon in any con man’s arsenal: his victims’ greed. “They wanted something for nothing,” he explained. “I gave them nothing for something.”
The Yellow Kid once offered Ben Hecht, one of the best Chicago journalists of the day, a few words of advice that Bayano investors would soon wish they had overheard. “Nobody,” Weil said, “would ever be eager to share any good fortune with me. If I should ever meet any such philanthropic soul, I must know him at once as a crook.”
In 1899, a few years before Leo began forging fake mortgages and selling worthless shares in rice farms as the opening acts to his Bayano main feature, a bookkeeper named William Franklin Miller had caused a stir in New York by offering to pay investors 10 percent interest. Not 10 percent a year—10 percent every week, more than quintupling their investment within a year. 520 Percent Miller, as he became known, claimed he would reap immense profits by playing the stock market. Even though Miller never invested a dime, there were plenty of believers, and he took in an average of $80,000 a week over the course of eleven months, paying enough back as interest to keep the scam afloat. He fled to Montreal with an estimated $2 million but returned to face charges and was sentenced to ten years in prison.
Then Charles Ponzi tried his hand at the game. An Italian immigrant, he had served time for forgery and smuggling illegal aliens before he turned up in Boston with a strategy to double investors’ money in just ninety days. His plan was to buy international postal-reply coupons overseas, redeem them in the United States, and profit from fluctuating postwar exchange rates. The supply of coupons was limited, and they could be redeemed only for stamps, not cash, but none of that mattered because Ponzi never purchased a single coupon. Like Miller, he simply used investors’ money to meet the inflated interest payments as they came due. “We all crave easy money,” Ponzi noted. “If we didn’t, no get-rich-quick scheme could be successful.” Ponzi’s was, for a short time at least. During the first seven months of 1920, he raked in more than $8 million from some thirty thousand investors before investigations and press revelations of his checkered past put him out of business. He pleaded guilty to charges of using the mail to defraud and was sentenced to five years in prison. Investors recovered barely a third of their money.
It was the template for the scam the Wall Street investment “wizard” Bernie Madoff used to deliver market-defying returns and rake in billions of dollars from investors before his massive fraud collapsed in 2008. The rob-Peter-to-pay-Paul fraud has become known as a Ponzi scheme, but by the time Ponzi came along, Leo Koretz had been perfecting the formula and duping investors for close to fifteen years. If Ponzi had not been exposed first, the financial press and Wall Street regulators might be cautioning today’s investors to beware of Koretz schemes. As one 1920s newspaper headline concluded, PONZI HAD NOTHING ON LEO KORETZ.
Leo, the Bernie Madoff of the Roaring Twenties, operated his swindle for far longer and with more panache than his predecessor, Miller, or his contemporary, Ponzi. He was a better actor, a more adept liar, a shrewder salesman. The Miller and Ponzi scams collapsed within a year, while Leo kept his alive—and his investors none the wiser—for almost two decades. Their high-profile schemes attracted the attention of the press and the authorities, hastening their downfall. Leo operated in secrecy, promoting Bayano to a tight-knit group of people he could trust to keep their
good fortune—and his dubious claims—under wraps. Miller made his pitch to New Yorkers of modest means, and most of Ponzi’s victims were his fellow Italian immigrants. Leo worked his magic on a tougher audience: businessmen, lawyers, doctors, insurance brokers, and other well-off, well-educated people who should have known better. Ponzi and Miller set up offices to take deposits, developed networks of agents to sell shares, and opened branch offices. Leo worked alone and handled every aspect of his swindle, from printing bogus stock certificates and luring in investors to keeping track of his obligations and cutting dividend checks.
But without a steady stream of new money coming in from new investors, his elaborate charades were doomed to collapse. That was why the Yellow Kid and other career con artists avoided the pay-dividends-from-capital scheme. “After a while,” as one swindler explained to Sutherland, the criminologist, “the whole thing falls down.” Charles Kindleberger, an economist who studied the psychology of financial panics and crashes, warned of the same inherent flaw. “There is never enough money for all … and the inflow of new money must ultimately dry up.”
The Bayano bubble could not last forever. All Leo could do was delay, for as long as possible, the day of reckoning.
11
THE CRIME FIGHTER
THE PAMPHLET FEATURED a photograph of three young, wide-eyed children huddled with their mother. They looked fearful, as if seeking her protection. Above their heads ran a caption: “Four Reasons Why Judge Crowe Is Interested In Safeguarding Women and Children.” The woman was Crowe’s wife, Candida, and the children were the couple’s two sons and daughter. The tough-on-crime judge was campaigning to be the next state’s attorney for Cook County.
Crowe had been elected to the bench as an ally of Mayor Thompson and the Republican boss Fred Lundin and ran for state’s attorney in 1920 on the same ticket. But rival Republican factions put forward their own candidate in the September primaries: David Matchett, a respected judge of the Illinois Appellate Court. Intraparty warfare broke out on voting day, as toughs armed with revolvers and clubs took to the streets to attack and intimidate opponents. One man died in a shootout with police officers guarding the polls, and party workers were roughed up in scuffles. Crowe won the real battle, the one at the ballot box, handily defeating Matchett for the nomination.