Ivar and Lee Higginson decided to have International Match issue new securities called convertible gold debentures. “Debenture” was just a fancy term for “bond” - debentures were a fixed claim on interest payments by the corporation plus a return of the principal amount on the maturity date, which in this case would be twenty years. Debentures had a limited upside, but were safer than shares. These “gold” debentures were safer still, because they were payable in either dollars or gold, at the holder’s option. If International Match became bankrupt, holders of debentures would be repaid first, before shareholders received any money. These debentures gave investors the right to receive annual interest payments of 6.5 percent from International Match, an attractive rate at the time.
Finally, these debentures were convertible, which meant that they could be converted into shares. If International Match performed well and the value of the shares increased, investors could switch from the debentures to the more valuable shares. The convertible feature made these securities particularly attractive: they had both downside protection and upside potential, the best of both worlds. Ivar and Lee Higginson had designed their first financial mousetrap.
The prospectus for the International Match gold debentures described these new securities as a conservative investment, although it also highlighted the potential upside. The stated purpose of the new issue was broad: “to acquire additional investments and to provide working capital.”30 In other words, investors would give cash to Ivar, and trust him to use it to generate yet more cash. That was a straightforward proposition, even if it required an act of faith.
As investors learned about the gold debentures, Ivar was inundated with requests for meetings and social engagements. Word spread about the now legendary speech he had given at Lee Higg, and businessmen throughout the country wanted an audience with Ivar to connect with him and hear the themes in person. He spent a Sunday at T. L Higginson, Jr’s estate in historic Wenham, a North Shore Massachusetts town where the Higginsons had owned property for nearly three centuries.31 He was invited to the annual dinners of the Fifth Avenue Association at the Waldorf-Astoria,32 and the Council on Foreign Relations at the Ritz-Carlton,33 as well as an event in his honor hosted by Donald Durant at the Racquet & Tennis Club on Park Avenue. When Ivar accepted that invitation, Durant gushed, “I am so glad you are giving me the opportunity to have some of my friends meet you.”34
Ivar received fan mail from the masses as well, a surprising number originating because he had charmed some American man’s wife or daughter on a cruise. Chauncey P. Colwell congratulated Ivar and invited him to lunch should he ever be in Philadelphia; Ivar had met Mrs Colwell on the Berengaria .35 Edward B. Robinette, whose daughter had met Ivar at sea, was so desperate to send Ivar a fruit basket that he guessed which ship Ivar would be taking home to Europe for the holidays. When the guess turned out wrong, Mr Robinette sent Ivar an apology note, on Christmas Eve, just in case there was still any chance for his daughter to see him.36
Ivar’s popularity helped Lee Higginson sell 15 million dollars of International Match gold debentures, at a price of $94.50 for each $100 of principal amount. Investors paid $94.50 in return for the right to receive interest of $6.50 per year for twenty years (6.5 percent of the $100 principal amount). After twenty years, International Match would return the investor’s principal amount of $100. Investors who sold before the twenty-year maturity date might receive more or less than the $94.50 they paid, depending on how International Match was doing. Overall, the deal raised a total of $14,175,000 (94.5 percent of $15 million).
The financial press buzzed with news about Ivar and his newfangled gold debentures. The Wall Street Journal reported on October 26, 1923 that the new International Match issue was “spoken of with great admiration among the bond houses. It is probably the finest piece of bond salesmanship we have seen in years.”37
It was one of the largest securities issues of the year, and certainly the hottest initial public offering. As one analyst later described a different kind of IPO, “it was like touching a match to a bucket of gasoline.”38
Once International Match had the money, Ivar turned to his trusted circle of Anders Jordahl, Krister Littorin, and his brother Torsten. Each of these three men would play a crucial role in his expansion to America.
Anders Jordahl would continue to head Ivar’s American operations and, perhaps more importantly, would arrange Ivar’s social life during his time in New York. Krister Littorin would be Ivar’s right-hand man, based in Stockholm, and also would become president of Swedish Match. Torsten Kreuger, Ivar’s younger brother, would play the role of ambassador. As children, Ivar and Torsten had constructed elaborate imaginary schemes, and Ivar had always promised Torsten that some day he would engineer a real-life plan for both of them. Finally, Ivar was in a position to do it.
Although in 1923 Torsten was still in his thirties, he easily could pose as a distinguished businessman twenty years older. He was balding, well dressed, and even better mannered. When Ivar invited him to take a motorboat to Finland to discuss their plans for International Match, Torsten showed up in a grey three-piece suit with a starched tab collar and a black tie.39 That level of formality would be crucial in Torsten’s new position as Ivar’s emissary.
Ivar updated Torsten about his recent success with the Americans. Ivar stressed the importance of securing a deal with at least one foreign government quickly, to lend some credibility to his grand plan of trading loans for match monopolies. Lee Higginson had raised millions of dollars based on an idea. If Ivar didn’t convince American investors he actually could obtain match monopolies for loans, as he had promised, the first International Match debenture issue would be his last. Unlike Charles Ponzi, the small-time operator in postal reply coupons, Ivar would need to show real results before he would be able to raise any more money.
Ivar charged Torsten to find a government loan. His first stop would be Poland, which Ivar thought held the greatest promise of a deal. Ivar had been working with government officials there for several years, and already had some of Poland’s match business. He arranged for Torsten’s introduction to the finance minister and his staff.
Ivar would be available to assist Torsten with negotiations. But first Ivar needed to answer a pressing question. With one speech, Ivar had reeled in Lee Higginson, one of the biggest fish in the sea of American investment. International Match now held millions of dollars of cash, which would be at his disposal if he actually could close a foreign government loan.
There was one problem, though. That cash was sitting in an American bank. The fish was in a barrel, but it was the wrong country’s barrel. That predicament was the reason for Ivar’s important question. It was simple, but outrageous. Even asking it would have alarmed his new investors.
The question was this: How could Ivar get the millions of dollars Lee Higginson had just raised for International Match out of the United States?
4
TROUBLE AT HOME
Ivar put the handful of people he trusted into two categories. First was his circle of Torsten, Krister Littorin, and Anders Jordahl. Ivar knew these three men better than anyone. The only other person who came close to this group was Ivar’s personal secretary, Karin Bökman, an attractive red-haired woman who spent more time with Ivar than even his three closest friends. These people trusted Ivar for what one might call the right reasons: they had come to love and respect him, and to believe in his mission and ambition. They were a major part of his life, and he was a major part of theirs.
But there was another type of person Ivar felt he could trust even more. By 1922, Ivar secretly had hired a handful of men with no previous connection to him or his companies. These men trusted Ivar for all the wrong reasons: because he had saved them from prison or bribed them or paid them five times what they deserved. Ivar could ask these men to do things he would never ask of friends. Sometimes Ivar needed a person he could trust for reasons more dependable than human love or respect, someo
ne he could rely on as a master relies on a well-trained attack dog. Then, if one of Ivar’s schemes unraveled, he could lay the blame on an out-of-control animal.
Getting International Match’s money out of America required help from someone in the second category. Ivar wanted to hire someone new, unknowing, and anonymous, so he did what he typically would do when he needed to find an absolutely reliable new man: he placed an advertisement in the New York newspapers.
Ivar didn’t tell his friends about the want ad, and he didn’t use his name or the name of one of his companies. He interviewed applicants on his own, and went with his instincts. Ivar usually could tell whether a man would work out simply by staring him in the eye.
This time, one of the men who answered the ad had the given name Ernst August, the same name as Ivar’s father. That caught Ivar’s attention right away. Was it coincidence or fate? How ironic would it be if, after forty years, someone named Ernst August would come to play an influential and positive role in Ivar’s life. His father, who still toiled away at a dead-end middle management job in one of Ivar’s match factories, certainly had not.
Ernst August Hoffman’s application fit the job description perfectly: he was a Swiss-American with some experience as a secretary and a few months working in a New York bank.1 He spoke several languages. He was educated, but not too educated; smart, but not too smart. Ivar arranged a meeting, and was pleased to see that Ernst August didn’t flinch at his stare. Ivar instinctively felt he could trust the young man, and he hired him on the spot.
At first, Hoffman didn’t do much as Ivar’s employee except collect and cash paychecks. Ivar gave him a few tasks, to test his trustworthiness. Ivar said it wasn’t necessary for Hoffman to do more. He should just wait patiently. Ivar had something big planned.
Finally, when Ivar felt the time was right, he sent his new hire to Zürich to study the Swiss financial and tax laws. He told Hoffman of a plan to reduce International Match’s taxes, and said it should be kept absolutely secret. Under no circumstances was he to mention Ivar’s name or any of Ivar’s companies to anyone.
By late 1923, it was getting difficult to track Ivar’s multinational network of interlocking subsidiaries, most of which were linked in some way to Kreuger & Toll and Swedish Match. Now, Ivar had added International Match, a company that was half owned by Swedish Match. Ivar’s interests were becoming a many-legged spider, with financial pedipalps extending into an increasing number of businesses and countries.
It was straightforward for Ivar to add an appendage to this network, and he did so frequently. Forming a new company was as easy as filling out a piece of paper. Then, Ivar simply transferred capital from one of his existing companies to the new company - also just a matter of paper instructions. To staff a new company’s board of directors or management, Ivar picked one or more of his anonymous men. He had plenty of choices. The structure and personnel didn’t matter anyway. It always was clear that Ivar remained in charge.
When Ivar decided to set up a new Swiss company, to be called Continental Investment Corporation, he told just one person: Ernst August Hoffman. The two men met in London, where Ivar told Hoffman what he needed to know about the plans. As Hoffman’s research had confirmed, Switzerland was still a banking and tax haven. If a businessman wanted to keep his dealings secret, forming a Swiss company was a good place to start.
The two men boarded a train for Zürich, and Ivar showered Hoffman with praise. He needed a man he could trust, who could keep secrets, and who was good with numbers. Hoffman was off to a superb beginning. When Ivar said he had decided to appoint him as the sole director of Continental, the young man was stunned, but honored. When Hoffman asked, “How much capital will the new concern have?” Ivar simply pointed to a small hand bag he had carried onto the train.2
When they arrived for their scheduled meeting in Zürich, Ivar removed the contents of the hand bag: 1 million Swiss francs in cash, 9 million in checks, and a single sheet of paper. Ivar showed Ernst August the paper, a guarantee from the Swedish Match Company in the amount of 50 million Swiss francs. Ivar signed it. That guarantee was the bulk of Continental’s initial capital.
With the stroke of a pen, Ivar had put in place the next step of his plan: he had formed a Swiss company with 60 million Swiss francs of capital. More money would be coming. Swedish Match owned Continental’s shares, and Ivar would control Continental through its single board member, chief executive, secretary, and accountant, Ernst August Hoffman.
When Ivar returned to Stockholm, he met with his brother Torsten, who described a recent trip to the Duchy of Liechtenstein. Torsten also had been looking for a secretive domicile for a subsidiary, a company that would hold some of Ivar’s Berlin real estate. Torsten thought Liechtenstein was ideal: the laws were loose and he could negotiate a tax arrangement directly with the country’s finance minister in its capital Vaduz. Ivar was elated by this news. Ivar said he had “always liked droll little countries with droll little laws.”3
Although Swiss taxes were low, Ivar was forever open to a better deal. Armed with Torsten’s insights about Vaduz, he secretly sent Ernst August to reincorporate Continental Investment Corporation in Liechtenstein. Now, Continental would be doubly hidden - no one could trace a trail from Zürich to Vaduz. The finance minister of Liechtenstein agreed to fix Continental’s taxes at 60,000 Swiss francs for the first two years and 30,000 thereafter, regardless of how much money the company made. The arrangement was perfect. International Match’s earnings would have been subject to tax in America. If Ivar could shift those earnings to Continental he could virtually eliminate any tax. In addition, Ivar met with all thirteen members of Liechtenstein’s parliament, and persuaded them to sign a ten-year agreement to apply only minimal regulation and oversight to Continental, which would remain controlled by Swedish Match and Ivar, and managed by Ernst August Hoffman.
Continental wouldn’t do anything; its primary role would be to help Ivar secretly transfer funds from America to himself without requiring any direct exchange of cash between International Match and Swedish Match. Once he sent money to Vaduz, it entered a black hole. American auditors might monitor checks and wires from International Match, but they could not see any evidence of Continental’s transactions. Indeed, they wouldn’t even know Continental existed. To the extent Ivar or any of his henchmen needed money for bribes or other clandestine activities, they could avoid the scrutiny of American auditors by going through Continental rather than International Match.
By the time Continental was incorporated, Ivar effectively controlled International Match. Swedish Match held half of International Match’s shares, and Ivar’s Swedish bank syndicate, led by one of his admirers, Oscar Rydbeck, controlled the other half. American investors owned debentures, not shares, which meant they did not have a vote. International Match’s board of directors, and its investment bankers, agreed to everything Ivar asked. Lee Higginson already was more focused on International Match’s next deal than on the details of what was happening within the company.
Ivar knew the offshore scheme was bold, and even with Ernst August and Continental in place he was nervous about getting caught. Just days before the gold debenture issue was finalized, Ivar wondered whether wiring money right away was too risky. He informed Oscar Rydbeck that “it may be inadvisable to remove money from America too quickly.”4
When International Match closed its debenture issue in November 1923, and investors paid the company about 14.2 million dollars of cash, it essentially was up to Ivar alone to decide what to do with the money. Of that amount, about 2 million dollars was marked to pay interest and other fees International Match owed, including a substantial fee to Lee Higginson.5 That left just over 12 million dollars - $12,244,792, to be precise.
As the head of International Match, Ivar debited that amount from the company’s cash and replaced it with a credit to Continental Investment Corporation in the same amount. Suddenly, International Match’s primary asset was an IOU from C
ontinental instead of cash. Then, without the Americans seeming to care or even notice, Ivar wired $12,244,792 - all of the remaining proceeds from the International Match gold debenture issue, one of the largest American securities issues in years - to Continental’s account in Vaduz.
Ivar was no Charles Ponzi. He wasn’t going to abscond with the money. He just wanted the flexibility to use the funds as he pleased, and to buy time if things didn’t go as planned. In a bad year, he could fudge the numbers and pay dividends out of Continental’s assets. In a good year, he could understate earnings and save for a rainy day by hiding the extra income at Continental. Although Ivar needed US investors to fund his loan-for-monopoly plan, he didn’t want to become a slave to them. Continental was the vehicle for Ivar to move his finances offshore, where Americans wouldn’t see them. It would keep Ivar free.
Ivar had memorized every detail of his actual profits and losses, so he knew what the legitimate amounts were - he simply chose not to share that information with anyone else. He certainly knew his companies would need to generate greater profits to cover the huge dividends his shareholders were expecting. Those cash obligations were real, and it didn’t matter whether the money came from New York or Vaduz. To meet those obligations, Ivar would need to raise more cash. To do that, he needed to persuade investors that his plans were a good bet. And to do that, Ivar needed to acquire some match monopolies in Europe.
Donald Durant and his partners had no idea how desperately Ivar needed the money Lee Higginson had just raised for International Match. Although Ivar’s businesses seemed to be thriving, he had promised too much to his early investors. He had borrowed tens of millions of dollars from Sweden’s leading banks, and both Kreuger & Toll and Swedish Match were paying double-digit dividends. The companies’ profits alone did not always cover these obligations. Without new money every year or so, more cash was going out than coming in.
The Match King Page 7