Opponents of the new laws argued that Congress should not react to a case as unusual and spectacular as Ivar’s, because it was unlikely to be repeated. George O. May, one of the lead accountants from Price Waterhouse, testified that Ivar was “a quite different phenomenon, to my mind. This is an absolutely unique case, and I think for that reason there is danger in legislating for it because I do not suppose there has been anything to compare with it since the South Sea Bubble.”19
But public sentiment ultimately prevailed over industry lobbyists, and the new Securities Act of 1933 became law in May. It was an amalgam of provisions that had been on the back burner since the world war, but finally drew support after the collapse of Ivar’s companies. The new law was designed to prevent what Senator George Norris had said Ivar’s schemes achieved: “deceit and trickery and debauchery with which men of great wealth are trying to accumulate millions more [from] the contributions of the pennies of the poor.”20 The Securities Act required that companies register securities before selling them. Public companies had to disclose material facts, including many matters that companies such as International Match had not disclosed. Congress also included a key provision directed at uniformity of accounting principles. General Accepted Accounting Principles, or GAAP, arose out of this law.
A year later, Congress passed the Securities Exchange Act, a related law that created the Securities Exchange Commission and gave American shareholders the right to sue companies for fraud. That right - one of the most important and controversial provisions in American law - also had roots in the public reaction to Ivar’s collapse. A major article in the Accounting Review concluded that Ivar’s collapse was “probably the strongest activating force … the dynamic incident that focused attention on the evils possible under the holding-subsidiary form of corporate enterprise.”21
The 1929 crash was not the impetus for the securities laws of 1933 and 1934. Instead, those laws are more accurately described as encapsulating a political reaction to a single bullet and to one man, who was labeled during congressional debates as “the greatest swindler in all history.”22
This reaction was not surprising, given the publicity and public debate about Ivar at the time. The crash had occurred in 1929, four years earlier, but several life spans in political terms. When Congress began to discuss the securities laws, the debate began with Ivar, not the crash. The Committee Report for the Securities Act of 1933 included more than 250 pages on Ivar, and congressional hearing reports also focused on Ivar.
Whatever one thought of the 1930s securities laws, it was undeniable that they were a reaction to Ivar. The United States developed its system of securities regulation in response to the public’s reaction to the collapse of Ivar’s companies. Simply put, without Ivar Kreuger, modern securities regulation and litigation would not exist.
At the five-year anniversary of Ivar’s reported suicide, one commentator reflected that Ivar’s enduring legacy to society was not the loan-for-monopoly concept or off balance sheet financing. It wasn’t the vote-light B Shares or complex derivatives issued by offshore subsidiaries or even landmark buildings such as the Match Palace. Instead, this author noted,from the record of falsehood and betrayal with which Kreuger besmirched the very pillars of finance in the leading countries of the world has come, particularly in the United States, the erection of new safeguards for investors. In our Securities Act are to be found preventives whose origin is to be traced definitely to the Kreuger experiences.23
The legislative debates about Ivar brought closure. During the middle of the Great Depression, most people accepted the simple story that Ivar was a villain who used forgery and financial shenanigans to scam investors out of their hard-earned money. Few people could spare the time or resources to probe further. Fifty-seven factfinding reports from Price Waterhouse,24 and the firm’s 67-volume final report,25 were too voluminous. For most people, Price Waterhouse’s punch line was enough: Ivar’s companies were a “confidence” game, which worked only because Ivar had “autocratic powers,” “unquestioning obedience of officials,” and “complete secrecy.”26 This triple threat - power, obedience, and secrecy - was lethal, and, in Price Waterhouse’s view, Ivar could not have continued to inspire confidence without them. Investors who had purchased securities of Ivar’s companies really didn’t want the details anyway. For them, it was enough to know their investments were worthless.
Lee Higginson got a different kind of closure. In 1932, the partners who reflected on the demise of their firm must have wondered what would have happened if they had followed the conservative advice of their founder, Henry Higginson. What if they had hired a Harvard graduate instead of Donald Durant? What if they had passed over Durant for partnership, and instead promoted yet another blood relative? What if they had been more skeptical of Ivar at first, as Jack Morgan had been? What if they hadn’t entrusted so much of their firm’s capital and reputation to one self-made man?
Unfortunately, the partners would have to ponder these questions at different firms or in different businesses. In the aftermath of the collapse of International Match, Lee Higginson entered liquidation proceedings. The bank’s stakes in Ivar’s securities were worthless. Its liabilities were too great, and Lee Higg’s most important asset - its reputation - was trash. In 1936, the partners sold their remaining claims to the United States bankruptcy trustee for one dollar.27
Thus, the generally accepted account of Ivar Kreuger became a straightforward one. He was an evil man, a slippery schemer who defrauded investors in a massive pyramid scheme, crudely forged some Italian treasury bills, brought down one of America’s leading banks, and then, seeing a dead end, shot himself in the heart.
The truth, as in most big financial stories, is far more complicated.
During the four months between the reports of Ivar’s suicide and Lee Higginson’s liquidation, the firm’s partners insisted, contrary to the investigators’ conclusions, that Ivar’s companies were solvent.28 According to Lee Higginson, Price Waterhouse was wrong. International Match had taken a major financial hit, but it was no Ponzi scheme.
On March 17, Lee Higginson sent a letter to holders of Ivar’s securities, saying, “Upon the announcement of Mr Kreuger’s death, we immediately endeavored to secure information as to the present condition of Kreuger & Toll Company, International Match Corporation and their affiliated companies.” 29 In that letter, and several follow-on statements, Lee Higginson highlighted the valuable assets still held by Kreuger & Toll and International Match: government monopoly concessions and loans; investments in other companies, including Swedish Match, Swedish Pulp, Grängesberg (the iron ore company), L. M. Ericsson, and various real estate and banking companies; and a sprawling trading operation with investments throughout the world.30
The firm publicized Ivar’s most recent annual reports, which, though cursory, included more information than many New York Stock Exchange traded companies. According to Lee Higginson, Kreuger & Toll had a net worth of more than 272 million dollars, five times the value of the Kreuger & Toll securities traded in the market. Indeed, Kreuger & Toll’s most recent annual net earnings were $3 per American Certificate, more than the value of a Certificate in the market.31
Lee Higg’s partners admitted that Ivar’s accounting had been sloppy, and they couldn’t defend the forged Italian bills. But they insisted that Ivar’s core business had been perfectly legitimate. His directors had given him authority to transfer assets among companies as he saw fit.32 His financial statements were deliberately vague, but no one could accuse him of lying about details - there were no details. Investors who bought his securities got roughly the same amount of information about Ivar’s companies as they got from anyone else. That is, nothing. If they bought anyway, whose fault was that?
Of course, Ivar’s corporate assets weren’t worth as much as they had been before the 1929 crash. And it undoubtedly would be difficult to unravel the strands of financial claims Ivar had woven into his complicated multi-compan
y tapestry. But there was value there, somewhere. A lot of value. It just took some digging to find it.
Although it appeared at first that Ivar’s massive fraud left behind minimal assets, as the bankruptcy trustee began to dig, value popped up everywhere. The bankruptcy process was complicated, and there was a feeding frenzy to get at Ivar’s remaining assets, most of which were in Sweden. That disadvantaged International Match, which was subject to bankruptcy proceedings in the United States. It also hurt Kreuger & Toll, which held a secondary claim to many assets, behind Swedish Match. Although International Match and Kreuger & Toll ultimately did not survive, holders of their securities did receive some value.
Moreover, Swedish Match, which held Ivar’s most valuable assets, recovered. In 1936, Swedish Match filed with the new Securities and Exchange Commission to issue yet another round of securities, including B Shares, the innovative class of common shares Ivar had invented and given just 1/1000 of a vote.33 Far from being the empty shell some people thought, Ivar’s primary company, Swedish Match, survived the scandal34 and maintained a substantial share of the global match market.35 The Wallenbergs, a prominent Swedish family, bought a major stake in the company, and Jacob Wallenberg, Sr, served as Swedish Match’s chairman until 1973. Swedish Match changed its name a few times and acquired dozens of companies. It branched into new business, including paper and packaging, waste combustion, and even bowling halls.36 Today, the company has refocused on tobacco products, including environmentally friendly disposable lighters and matches, and it employs more than 12,000 people in eleven countries.37 It is once again called Swedish Match.
Although the newspapers said Ivar’s other assets were worthless, they were clearly wrong about that as well. The Boliden mine paid half a million dollars every month,38 Swedish Pulp had nearly 5 million acres of forest, Grängesberg was the biggest iron producer in Europe, and Ivar’s real estate subsidiaries held eighty-seven buildings in Stockholm alone.39 Ivar’s private apartments in Berlin, Paris, New York, and Stockholm were in high demand. Within a month of his reported suicide, real estate brokers in New York were swarming his Park Avenue penthouse, which was ultimately sold to the writer Edna Ferber.40
Ivar’s biggest claims had been for interest payments from foreign governments, including 3.75 million dollars every six months from Germany.41 Many of these claims, including those on the German government, continued to pay interest, precisely as Ivar had envisioned. The Nazis left Ivar’s agreement in place when they came to power, and the German government regularly made loan payments, even during the Second World War. After the war, the occupied powers tried to dissolve Germany’s match monopoly, but the Rome Treaty of 1952 protected it from conversion and extended the repayment schedule to 1983. Not only was Ivar’s greatest monopoly legitimate, but it continued in force for more than fifty years after his reported suicide .42
One reason the holders of International Match securities did not realize much value from Ivar’s assets was that so much was sold at fire sale prices. This was particularly true of Ivar’s personal assets, including his priceless art collection. Art historians said one of Ivar’s most significant achievements, and his most valuable property, was the beautiful Match Palace.43 But that building was in Stockholm and generated no value for International Match.
The bidding for Ivar’s personal assets drew bargain hunters and collectors. Two of Ivar’s expensive speedboats, which he had shown off to Greta Garbo and Mary Pickford, went for just 162 dollars and 180 dollars. A wealthy brewer bought one of Ivar’s expansive vacation homes for a mere 8,750 dollars.44 Even ordinary kitchen kettles and steel scissors engraved with Ivar’s name were popular .45
Reporters had been skeptical of Ivar’s claim to own 350,000 Diamond Match shares (nearly half of the American match company), in part because such a significant purchase would have raised antitrust concerns in the United States. But it soon emerged that indeed Ivar had owned those shares.46 He had purchased them indirectly through a front company in March 1930 and they were still worth more than the 4 million dollar loan they backed. The discovery of the Diamond Match shares led some people to question whether Ivar really was the massive fraudster he had been portrayed as.
As the truth emerged about Ivar’s dealings with the Italian government, it appeared that he might even have had claims on the Italian match business - and not merely because the bills he forged would fetch some novelty value at auction. In fact, investigators found evidence that Ivar had done a deal with the Italian government. It was possible that Ivar actually had secretly loaned Italy money, only to have Mussolini renege after his death. But no one was willing to confront Mussolini about this, and Ivar wasn’t talking.
Ivar clearly had interests in and contracts with some Italian match factories. It was undisputed that he had met with one of Mussolini’s assistants in Florence on October 18, 1930, and with Mussolini himself after that.47 At the time of those meetings, the Italians had been desperate for cash, particularly after Jack Morgan’s 100 million dollar loan became due.
The Italian government made a show of fury about the forged Italian treasury bills. But some commentators thought it protested too much. A note from the Italian finance minister Boselli, whose name was forged on the Italian bills, appeared only after Ivar’s reported suicide, and some argued that it sounded like it was written in 1932, not 1930. Boselli wrote to Ivar, in full:Dear Sir,
I note that you prefer to wait on account of the present economic situation. With regard to this, and also with regard to the tendentious and lying prattle which has been caused, I am compelled to inform you that we do not wish to continue negotiations. They are hereby concluded.48
The Italians claimed that Ivar had rejected the possibility of a loan when his cash reserves, depleted after the 1929 crash, dwindled so low that he would be fortunate to have enough money to pay the second installment on the German loan. According to the Italian government, when Boselli learned that Ivar would have to postpone the loan, it was Ivar who became offended and canceled the deal.
That explanation was dubious. Ivar frequently had committed to government loans when he didn’t have the money. Why wouldn’t he do the same for Italy, particularly when he was claiming to his accountants and bankers that he was working on an Italian loan? Might Ivar have secured an Italian loan-for-monopoly deal, which Mussolini opportunistically rejected? The forgeries obviously were illicit, but they were so crude that it seemed unlikely Ivar, or anyone, would think they would pass more than casual scrutiny. Perhaps Ivar made the forgeries after he learned that Italy planned to back out of a deal, thereby destroying his ability to raise more money? Given Ivar’s fragile mental state, either version of the story was possible.
Of course, even according to the version offered by Ivar’s supporters, he still committed fraud. There was no good explanation for the Italian bills, and no exculpation. Forging government signatures was inexcusable, particularly in the amateurish fashion Ivar did it. The point of looking at all of the evidence is not to acquit Ivar of that crime, but to note that his motivation for the forgeries might have been more complex than people thought at the time. The fact that Ivar lied to prop up his business at the end does not mean that Ivar had been lying continuously from the beginning.
Whatever the truth about Italy, International Match turned out not to be the empty shell many reporters had imagined. Progress was slow, but within two years, the trustee had collected more than 1 million dollars after expenses.49 The next year, the company resumed paying dividends, and even obtained a refund from the US Treasury Department for taxes paid on fictitious earnings. 50 In October 1936, the trustee sent more than 15,000 checks to investors - about 10 million dollars overall, or 15 cents for every dollar they invested .51 And those checks were just the first installments.
The International Match trustee also collected money from lawsuits. The first suits, against the directors for negligence, were mostly for show. The trustee demanded 35.8 million dollars from Donald Durant,
31.4 million dollars from Percy Rockefeller, and 36.3 million dollars from Frederic Allen,52 but even if the trustee could prove a case, these men were financially devastated and in no position to pay. They held worthless securities that they had purchased for nearly 8 million dollars; they could not afford any damages.53 Lee Higginson, which was declared insolvent, paid just 30,000 dollars to settle claims. But International Match’s other bankers agreed to pay 765,000 dollars, a historic amount, particularly given the limited rights and remedies available to holders of securities at the time.54 That money went to holders of International Match securities.
The final report of the International Match bankruptcy was filed in 1945, after the Second World War .55 Between 1923 and 1931, investors had bought $154 million of International Match securities. 56 Ultimately, after thirteen years of digging, the trustee recovered 32 cents for each dollar .57 Including the value lost from the fire sale of Ivar’s assets, the total value of International Match after Ivar’s reported suicide was about half of the amount investors originally had paid Ivar. That was a massive loss, but it wasn’t that much worse than the average return during that time period, which included the 1929 crash and the depression. The markets had lost a quarter of their value in two days during October 1929, when Ivar’s securities held firm. The collapse of International Match didn’t cost investors nearly as much as Price Waterhouse initially suggested it would.
Kreuger & Toll investors did even better. By late 1937, investors in Kreuger & Toll had received more than half of their money back,58 including a 23 percent dividend.59 After Kreuger & Toll declared its last dividend, the trustee ordered the cremation of all of its American Certificates, the innovative securities Ivar had introduced just a few years earlier. Given the huge dividends Kreuger & Toll had paid before 1932, someone who held the securities continuously actually outperformed most other investors.
The Match King Page 28