Supermoney, p.18
Supermoney, page 18
One of the items on Paul’s desk was a partial translation of the annual report, done internally. Foreign exchange, foreign currency and margin positions for commodities had been lumped together in one big number. There was that mysterious pink slip for twenty-five million Swiss francs, apparently a realized cocoa trade. Paul deleted the reference to “margin,” in the report, even though it had already circulated in German and had been approved by the Swiss Banking Commission. “Why wave a red flag if you don’t have to?” Paul said. “We needed time to clear things up.”
The family took off for Marbella, Spain, but Paul did not enjoy his vacation.
“I didn’t sleep very well,” he said. “I had a tummy ache.”
Paul decided that the vacation just wasn’t going to work, with unanswered questions floating around. Why had that accountant given him a chit for twenty-five million Swiss francs and then asked what it was? What else was wrong?
“Something wasn’t right, and I wasn’t facing it,” Paul said, a bit belatedly. Back to Basel went the family and behind Kummerli’s back, Paul started a low-key investigation. There were, it seemed, huge losses in the commodity department. So, according to Paul, he called Kummerli in, and something like the following dialogue took place:Paul: What’s going on?
Kummerli: Losses, losses.
Paul: I know losses, but how much?
Kummerli: I don’t know.
Paul: Why not?
Kummerli: I lost control. I just lost control.
Paul: How much are the losses? Five million?
Kummerli: More than that. I lost control.
Paul: Ten million? Fifteen million?
Kummerli: More than that, I think.
Paul: Twenty million?
Kummerli: Somewhere around there, I think.
And Kummerli kept muttering “Losses, losses” and “We lost control.”
At twenty million, not only was the bank gone but so were one and a half more banks the same size. Paul decided that he had better carry the message to Los Angeles personally, and he caught the daily Swissair early bird from Basel to Paris and then an Air France flight over the pole to Southern California.
Paul and Helly checked into the Century Plaza in Los Angeles. Neil Moore, a senior vice-president of the UCB, met them. “Don’t give me the details,” Moore said. “Just tell me the loss, down to the penny.”
On Sunday, August 30, Frank King led the group of UCB officials who met with Paul in a conference room at the Beverly Hilton. The president of the bank, according to Paul, was philosophical. “Win some, lose some,” he said. The one concern everyone seemed to have was to keep the affair secret to avoid a run on the bank. “How many people know about this?” Paul was asked. “Can we keep it all a secret?”
The bank’s chief auditor was worried about the extent of the loss. “We could handle five million dollars,” he said. “But twenty million—twenty million could mean trouble even for Frank King.”
Two days later, Paul and Helly and Neil Moore and an attorney for the bank flew back to Basel. “Nobody said much across the Atlantic,” Helly recalls. Outside auditors went to work on the bank’s books; the losses seemed to be closer to $30 million than to $20 million. In Los Angeles, Paul had tendered his resignation, but he was to remain as an executive and consultant to “straighten the mess.” The idea was that the bank would remain open, still the United California Bank’s Swiss unit; the parent would work out a scheme to protect depositors and creditors.
On September 6 there was a board meeting of the United California Bank in Basel, but Paul did not stay long. He was asked to leave the room and told that he was fired. “I went home and had a Scotch.”
The UCB officials went to the Swiss Bank Commission in Bern, and presented their plan to reimburse the depositors and creditors. The Swiss Bank Commission naturally was worried about the reputation of Swiss banks; the word around Basel was that once that was protected, they were glad to see an American-owned bank get a black eye; now it would be easier to keep the foreigners out of Switzerland. The details of what went on between the UCB officials and the Swiss Bank Commission are not known; again, there were rumors that the commission told the UCB that if it would make good and get out of Switzerland, it would be kept out of the trial to follow as much as possible. On September 10 the bank suspended operations, and on September 16 at 2 P.M. it posted notices on its doors saying it was bankrupt.
The United California Bank in Basel AG was by no means the first Swiss bank to go broke. In the Depression of the 1930’s, three of the top seven Swiss banks folded, just as banks everywhere did. Swiss banks were overinvested in Germany, and suffered from the German inflation of the 1920’s and the rise of the Nazis, and then from the impact of World War II on their German investments. In more recent years, the German Bank had folded because of bad loans, and the Aeschen Bank and Arbitrex on speculation, and the Seligman Bank had bought a huge tract of land south of Rome without clearing the building permits, and expired, suffocated by illiquidity. So busted banks were not new to Switzerland.
But my bank goes in the almanac. That is the biggest Swiss bust ever.
Paul was about to come down to breakfast on Wednesday, September 9. He was wearing loafers without socks and was in his shirt sleeves when two Basel policemen appeared at the door. They said he was wanted for questioning. Paul expected this; he would be there, he thought, two or three days. The Basel police also picked up the Lee boys, Kummerli and Zurmuhle, as well as Helmut Brutschi, the accountant Beat Schweitzer, Louis Thole, and Alfred Kaltenbach.
Paul was shown to a cell with a toilet, a fold-up bed and a table. The schedule went like this: lights on at 6:30 A.M., and a broom handed through the door. At 7:00 A.M., a mug of cocoa and some bread, the mug reached for at 7:30. Occasionally a half-hour in the exercise yard was offered; then lunch through the door at 11:00. “Lunch was not so bad,” Paul said. Dinner—soup and black bread—came through the door at 5:00, and the lights went out at 9:30 P.M.
At 8:00 A.M. every morning, the warden came by and asked through the door if everything was all right.
The Basel prison itself is a grim seventeenth-century building, downtown, with small windows high above the floors. Even though no charges had been brought against him, Paul was not allowed to see a lawyer. He was permitted to write two letters a week, and allowed one visit of about fifteen minutes per week from his wife. The expected questioning did not materialize for weeks.
Then there would be a key turning in the door, and a guard would escort him to another building for interrogation. I asked if the guard was armed. “He was armed with a dog,” Paul answered, but that was all. Paul faced the investigating magistrate across the table.
“What happened?” asked the investigating magistrate.
For Helly, life was, if anything, even more difficult. She was, first of all, without means, since the family’s assets were all in the bank. She got a job as a secretary with a pharmaceutical firm, and moved the girls and her Alsatian help—who volunteered to stay without pay—to a small apartment.
“I was scared,” Helly said. “Because no one in Basel would talk to me. I thought the house was watched. People were afraid to call me on the telephone. It was like a bad criminal show on TV.”
Later, some of Helly’s Basel friends were to say that it served her right for marrying an American, and that an American so aggressive had to have unsound practices and was therefore getting what he deserved. Some of the Baselers suggested this was a good time for a divorce. “Basel,” Helly said, “is not a pleasant place for a woman alone with children, especially one whose husband is in trouble.” When Helly was not working, she was trying to get Paul released on bail and talking to lawyers, but it looked as though, if bail ever were to be set, it would be one million Swiss francs, or about a quarter of a million dollars. That would be far beyond anything she could raise. The general feeling was that Helly’s husband had committed a crime so unspeakable it could barely be discussed. Murder, at least, was comprehensible. But Paul was still not charged. In Switzerland a citizen may be held on suspicion for three weeks, with the three-week periods continuously renewed if the authorities feel they need additional investigation. Paul was to spend ten months in the Basel prison—most of it in solitary, all without bail and without being charged. When his lawyer inquired, he was told that the charge would probably be Verdacht der ungetreuen Geschäftsführung, which turned out not to be Crimes Against a Bank but Suspicion of Untrue Management. To which Urkuendenfälschung, Falsification of Documents, was added.
Later I asked a Swiss lawyer about the process. “This is not an Anglo-Saxon country,” he said. “We do not have the doctrine of habeas corpus, nor the underlying idea of innocent until proved guilty. The job of the investigating magistrate is to determine as far as possible the truth, and if you hold a citizen in jail and permit him to talk to no one, only the investigating magistrate, that is quite efficient.”
What, I asked, if the citizen were innocent?
“If he is innocent, then he receives justice,” the Swiss lawyer said. “He is paid his former salary for his jail time. If his salary is sixty thousand dollars a year, then he is paid that. And of course, if he is guilty, the time he serves counts, and for good behavior it counts half again, and the sentences are not as long as in the United States.”
“At first, I was glad it was over,” Paul said. “And I really thought I would be there only a week or two. I was guilty of negligence. No doubt about that. But that doesn’t mean I should spend years in solitary, eh? After a few weeks I could see if I just sat in that cell I would become a vegetable. So I established a strict discipline. After sweeping my cell, I did half an hour of calisthenics. Then I asked for a typewriter. I decided that as long as I was in jail and in solitary, I would write a novel.”
Paul, of course, was not an ordinary prisoner, he was an uncharged bank president. And the Basel prison was no Attica. Spartan it might be; but it was also Swiss. In Switzerland you get what you pay for. Paul paid for subscriptions to The Wall Street Journal, the Financial Times of London, the Economist, and the Neue Zürcher Zeitung, the leading Swiss newspaper. He also paid for the rental of a television set.
“Within a short time,” he said, “I was as well informed as I have ever been in my life. Except for the uncertainty, I enjoyed the rest.”
It was not only a seventeenth-century jail, it was a seventeenth-century prison life, like Captain MacHeath in The Beggar’s Opera, who could send out to the best restaurants for his meals and even for Polly.
“You can send out for meals only on occasion,” Paul said, “if you pay for them. In Switzerland, you can have what you pay for.”
Meanwhile, back at the ranch in New York, I did what any aggrieved citizen would do. I called a lawyer. Several, in fact. It should, I figured, be interesting. After all, this was not just a sour investment, a stock that went down. This was a crime. The management of the bank was all in jail. For crimes there is some sort of justice.
The reaction of the great Wall Street law firms was very interesting, enough to inspire a certain amount of cynicism, if you are inclined to be cynical about lawyers. They acknowledged there was a case, but scuttled away like rabbits through the brush because of their own banking connections. I was as popular with the Wall Street lawyers as a Black Panther.
One friend said, “Listen, don’t think we don’t take unpopular cases. Why, we represent ex-Nazis out of Spandau—rich ex-Nazis, I grant you. We represent Greek shipowners who are so far beyond any national laws they think a law is an insult. But you’re talking about an action against a bank. We represent a major New York City bank. This is a major West Coast bank. They do a lot of business together. Our New York City bank pays a lot of the bills, and they wouldn’t like us in this. Sorry, baby, but go away.”
I called Abe. I should have done that first anyway. Abraham Pomerantz is sixty-nine, portly, and has a nice white mane. He is also the name that scares banks most, not to mention mutual funds and other financial institutions, because Abe is the Ralph Nader of the investment business. There are differences, of course. Ralph Nader lives in a boarding house and operates from a pay phone down the hall. Abe lives in a penthouse and operates from the senior partner’s corner suite of a prosperous midtown law firm. Ralph Nader burns with righteous zeal; Abe thinks there are many defects in the society which can be corrected through legal action, and he gets enormously well paid for the corrections when they work.
One day in the early 1930’s, when Abe was a struggling young lawyer, the widow of his high school gym teacher came to see him. The widow Gallin’s husband had left her twenty shares of the National City Bank. Once they had been worth $400 a share, and now they were worth only $20 a share. “I remember telling her there was no law against losing money,” Abe said, and the widow Gallin went away. Then the Senate Committee on Banking and Currency, identified usually by its counsel, Ferdinand Pecora, began to investigate the skulduggery that had gone on in some of the nation’s board rooms: the excessive compensation, the dealing in corporate assets, and so on. Charles Mitchell and some of the directors of the National City Bank seemed to be high on the list, in a famous case adequately chronicled elsewhere. Abe filed suit on behalf of the widow Gallin against National City Bank—and hence its stockholders—in a derivative action, so-called because the stockholders derive their rights from the shares in the corporation they own. The stockholder who brings the suit brings it on behalf not only of himself but of his class—that is, his fellow stockholders.
The courts awarded the widow Gallin $1.8 million, of which Abe—and the lawyers and accountants who worked on the case—took $472,500. Abe became a champion of the minority stockholder. The Chase Bank was next; that was $2.5 million for a Mrs. Gertrude Bookbinder.
Abe went on to test the way mutual funds used the commissions derived from buying and selling their portfolios to pay for the selling of their funds; excessive sales loads for mutual funds; using the commissions to buy research, and so on. In the courts, he questioned the way banks use the commissions from their trust departments to gain deposits for themselves. Eventually he even got to the drug companies on the price-fixing for tetracycline, which resulted in a judgment against the drug companies of $152 million. Since it was impossible to pay back the individual consumers of the drugs, that amount was spread out among the health departments of the fifty states. Most of Abe’s efforts, though, were in the securities and investment fields, and the structure of that industry was hardly the same for having known Abe.
So I called Abe. Normally, and at this stage of his career, Abe does not take phone calls from private citizens, however grievously wounded, but in our peregrinations through the securities business, our paths had crossed. Abe had already read about it in the papers. He told me to come right up. “Makes me feel young again,” Abe said.
I had made up a list of questions. If a big bank bought a little bank, and hence had the power to hire and fire people, and in fact the right to name the whole board, weren’t they responsible for proper procedures? They did have that power; they had, in fact, fired the president in ten minutes one Sunday, without even telling us junior partners. So wasn’t the big bank guilty of ungetreuen Geschäftsführung, even if they weren’t guilty of Urkundenfälschung? And the outside auditors certified all the Urkundenfälschung and the ungetreuen Geschäftsführung; Price Waterhouse and Peat Marwick had gotten into a lot of trouble for less. Weren’t the auditors liable too? And the board: naturally, the board.
But when I went to see Abe, he was in a sober mood. He had read through some research, and he looked up from the papers.
“If this had happened in this country,” he said, “this would be worth a hundred million dollars as a class action. But it happened in Switzerland and everything in Switzerland is a secret. We don’t even know who the stockholders are. Switzerland is a very backward country. They have never heard of a class action. So the answer to all your questions is yes. Yes, the board is clearly liable, but the management of the bank is in jail and clearly busted, except for the two Californians from the parent. And yes, if it were here, the auditors would be culpable. And yes, if it were here, the controlling bank would have a liability. But it wasn’t here. So I can’t take the case, but I like you and you like me, and out of all the people that the UCB doesn’t want to have overhanging the cleanup of this, the two of us have to be at the top of the list. I have a reputation as an ogre in this field, and so I will write them on my ogre stationery, and we’ll offer them your stock, at cost. Maybe they’d like to buy out a partner, just to clean things up. Their name was all over the prospectus, after all.”
But the United California Bank didn’t seem eager to buy any more stock. We got a stiff letter from O’Melveny and Myers, the lawyers for the United California Bank. The entity to which we referred, they said, was a Swiss bank. Funny it had the same name, but clearly, how could they be involved?
“I was afraid of that,” Abe said. “You see, that’s the trouble. This whole damn thing is in Switzerland. The Swiss won’t even tell you the telephone number. You’ll have to sue in Switzerland, and the trouble with that is, there is no bank left in Switzerland, so there’s nothing left to sue. And the United California Bank itself is in Los Angeles.”
“Is there no justice?” I asked.
“That’s a metaphysical question,” Abe said. “I don’t know if there is or isn’t justice, but I do know one thing: there’s no class action in that damn backward country over there. You know, I had a client once who put me into a sure thing in commodities.”
“What happened?” seemed to be the proper inquiry.
“I lost my shirt,” Abe said. “I’ve never made a penny on an investment. It’s good I’ve been lucky in the law.”
While I was pondering the fickleness of justice, and its limitations at natural boundaries, Paul was typing away in his cell.
The family took off for Marbella, Spain, but Paul did not enjoy his vacation.
“I didn’t sleep very well,” he said. “I had a tummy ache.”
Paul decided that the vacation just wasn’t going to work, with unanswered questions floating around. Why had that accountant given him a chit for twenty-five million Swiss francs and then asked what it was? What else was wrong?
“Something wasn’t right, and I wasn’t facing it,” Paul said, a bit belatedly. Back to Basel went the family and behind Kummerli’s back, Paul started a low-key investigation. There were, it seemed, huge losses in the commodity department. So, according to Paul, he called Kummerli in, and something like the following dialogue took place:Paul: What’s going on?
Kummerli: Losses, losses.
Paul: I know losses, but how much?
Kummerli: I don’t know.
Paul: Why not?
Kummerli: I lost control. I just lost control.
Paul: How much are the losses? Five million?
Kummerli: More than that. I lost control.
Paul: Ten million? Fifteen million?
Kummerli: More than that, I think.
Paul: Twenty million?
Kummerli: Somewhere around there, I think.
And Kummerli kept muttering “Losses, losses” and “We lost control.”
At twenty million, not only was the bank gone but so were one and a half more banks the same size. Paul decided that he had better carry the message to Los Angeles personally, and he caught the daily Swissair early bird from Basel to Paris and then an Air France flight over the pole to Southern California.
Paul and Helly checked into the Century Plaza in Los Angeles. Neil Moore, a senior vice-president of the UCB, met them. “Don’t give me the details,” Moore said. “Just tell me the loss, down to the penny.”
On Sunday, August 30, Frank King led the group of UCB officials who met with Paul in a conference room at the Beverly Hilton. The president of the bank, according to Paul, was philosophical. “Win some, lose some,” he said. The one concern everyone seemed to have was to keep the affair secret to avoid a run on the bank. “How many people know about this?” Paul was asked. “Can we keep it all a secret?”
The bank’s chief auditor was worried about the extent of the loss. “We could handle five million dollars,” he said. “But twenty million—twenty million could mean trouble even for Frank King.”
Two days later, Paul and Helly and Neil Moore and an attorney for the bank flew back to Basel. “Nobody said much across the Atlantic,” Helly recalls. Outside auditors went to work on the bank’s books; the losses seemed to be closer to $30 million than to $20 million. In Los Angeles, Paul had tendered his resignation, but he was to remain as an executive and consultant to “straighten the mess.” The idea was that the bank would remain open, still the United California Bank’s Swiss unit; the parent would work out a scheme to protect depositors and creditors.
On September 6 there was a board meeting of the United California Bank in Basel, but Paul did not stay long. He was asked to leave the room and told that he was fired. “I went home and had a Scotch.”
The UCB officials went to the Swiss Bank Commission in Bern, and presented their plan to reimburse the depositors and creditors. The Swiss Bank Commission naturally was worried about the reputation of Swiss banks; the word around Basel was that once that was protected, they were glad to see an American-owned bank get a black eye; now it would be easier to keep the foreigners out of Switzerland. The details of what went on between the UCB officials and the Swiss Bank Commission are not known; again, there were rumors that the commission told the UCB that if it would make good and get out of Switzerland, it would be kept out of the trial to follow as much as possible. On September 10 the bank suspended operations, and on September 16 at 2 P.M. it posted notices on its doors saying it was bankrupt.
The United California Bank in Basel AG was by no means the first Swiss bank to go broke. In the Depression of the 1930’s, three of the top seven Swiss banks folded, just as banks everywhere did. Swiss banks were overinvested in Germany, and suffered from the German inflation of the 1920’s and the rise of the Nazis, and then from the impact of World War II on their German investments. In more recent years, the German Bank had folded because of bad loans, and the Aeschen Bank and Arbitrex on speculation, and the Seligman Bank had bought a huge tract of land south of Rome without clearing the building permits, and expired, suffocated by illiquidity. So busted banks were not new to Switzerland.
But my bank goes in the almanac. That is the biggest Swiss bust ever.
Paul was about to come down to breakfast on Wednesday, September 9. He was wearing loafers without socks and was in his shirt sleeves when two Basel policemen appeared at the door. They said he was wanted for questioning. Paul expected this; he would be there, he thought, two or three days. The Basel police also picked up the Lee boys, Kummerli and Zurmuhle, as well as Helmut Brutschi, the accountant Beat Schweitzer, Louis Thole, and Alfred Kaltenbach.
Paul was shown to a cell with a toilet, a fold-up bed and a table. The schedule went like this: lights on at 6:30 A.M., and a broom handed through the door. At 7:00 A.M., a mug of cocoa and some bread, the mug reached for at 7:30. Occasionally a half-hour in the exercise yard was offered; then lunch through the door at 11:00. “Lunch was not so bad,” Paul said. Dinner—soup and black bread—came through the door at 5:00, and the lights went out at 9:30 P.M.
At 8:00 A.M. every morning, the warden came by and asked through the door if everything was all right.
The Basel prison itself is a grim seventeenth-century building, downtown, with small windows high above the floors. Even though no charges had been brought against him, Paul was not allowed to see a lawyer. He was permitted to write two letters a week, and allowed one visit of about fifteen minutes per week from his wife. The expected questioning did not materialize for weeks.
Then there would be a key turning in the door, and a guard would escort him to another building for interrogation. I asked if the guard was armed. “He was armed with a dog,” Paul answered, but that was all. Paul faced the investigating magistrate across the table.
“What happened?” asked the investigating magistrate.
For Helly, life was, if anything, even more difficult. She was, first of all, without means, since the family’s assets were all in the bank. She got a job as a secretary with a pharmaceutical firm, and moved the girls and her Alsatian help—who volunteered to stay without pay—to a small apartment.
“I was scared,” Helly said. “Because no one in Basel would talk to me. I thought the house was watched. People were afraid to call me on the telephone. It was like a bad criminal show on TV.”
Later, some of Helly’s Basel friends were to say that it served her right for marrying an American, and that an American so aggressive had to have unsound practices and was therefore getting what he deserved. Some of the Baselers suggested this was a good time for a divorce. “Basel,” Helly said, “is not a pleasant place for a woman alone with children, especially one whose husband is in trouble.” When Helly was not working, she was trying to get Paul released on bail and talking to lawyers, but it looked as though, if bail ever were to be set, it would be one million Swiss francs, or about a quarter of a million dollars. That would be far beyond anything she could raise. The general feeling was that Helly’s husband had committed a crime so unspeakable it could barely be discussed. Murder, at least, was comprehensible. But Paul was still not charged. In Switzerland a citizen may be held on suspicion for three weeks, with the three-week periods continuously renewed if the authorities feel they need additional investigation. Paul was to spend ten months in the Basel prison—most of it in solitary, all without bail and without being charged. When his lawyer inquired, he was told that the charge would probably be Verdacht der ungetreuen Geschäftsführung, which turned out not to be Crimes Against a Bank but Suspicion of Untrue Management. To which Urkuendenfälschung, Falsification of Documents, was added.
Later I asked a Swiss lawyer about the process. “This is not an Anglo-Saxon country,” he said. “We do not have the doctrine of habeas corpus, nor the underlying idea of innocent until proved guilty. The job of the investigating magistrate is to determine as far as possible the truth, and if you hold a citizen in jail and permit him to talk to no one, only the investigating magistrate, that is quite efficient.”
What, I asked, if the citizen were innocent?
“If he is innocent, then he receives justice,” the Swiss lawyer said. “He is paid his former salary for his jail time. If his salary is sixty thousand dollars a year, then he is paid that. And of course, if he is guilty, the time he serves counts, and for good behavior it counts half again, and the sentences are not as long as in the United States.”
“At first, I was glad it was over,” Paul said. “And I really thought I would be there only a week or two. I was guilty of negligence. No doubt about that. But that doesn’t mean I should spend years in solitary, eh? After a few weeks I could see if I just sat in that cell I would become a vegetable. So I established a strict discipline. After sweeping my cell, I did half an hour of calisthenics. Then I asked for a typewriter. I decided that as long as I was in jail and in solitary, I would write a novel.”
Paul, of course, was not an ordinary prisoner, he was an uncharged bank president. And the Basel prison was no Attica. Spartan it might be; but it was also Swiss. In Switzerland you get what you pay for. Paul paid for subscriptions to The Wall Street Journal, the Financial Times of London, the Economist, and the Neue Zürcher Zeitung, the leading Swiss newspaper. He also paid for the rental of a television set.
“Within a short time,” he said, “I was as well informed as I have ever been in my life. Except for the uncertainty, I enjoyed the rest.”
It was not only a seventeenth-century jail, it was a seventeenth-century prison life, like Captain MacHeath in The Beggar’s Opera, who could send out to the best restaurants for his meals and even for Polly.
“You can send out for meals only on occasion,” Paul said, “if you pay for them. In Switzerland, you can have what you pay for.”
Meanwhile, back at the ranch in New York, I did what any aggrieved citizen would do. I called a lawyer. Several, in fact. It should, I figured, be interesting. After all, this was not just a sour investment, a stock that went down. This was a crime. The management of the bank was all in jail. For crimes there is some sort of justice.
The reaction of the great Wall Street law firms was very interesting, enough to inspire a certain amount of cynicism, if you are inclined to be cynical about lawyers. They acknowledged there was a case, but scuttled away like rabbits through the brush because of their own banking connections. I was as popular with the Wall Street lawyers as a Black Panther.
One friend said, “Listen, don’t think we don’t take unpopular cases. Why, we represent ex-Nazis out of Spandau—rich ex-Nazis, I grant you. We represent Greek shipowners who are so far beyond any national laws they think a law is an insult. But you’re talking about an action against a bank. We represent a major New York City bank. This is a major West Coast bank. They do a lot of business together. Our New York City bank pays a lot of the bills, and they wouldn’t like us in this. Sorry, baby, but go away.”
I called Abe. I should have done that first anyway. Abraham Pomerantz is sixty-nine, portly, and has a nice white mane. He is also the name that scares banks most, not to mention mutual funds and other financial institutions, because Abe is the Ralph Nader of the investment business. There are differences, of course. Ralph Nader lives in a boarding house and operates from a pay phone down the hall. Abe lives in a penthouse and operates from the senior partner’s corner suite of a prosperous midtown law firm. Ralph Nader burns with righteous zeal; Abe thinks there are many defects in the society which can be corrected through legal action, and he gets enormously well paid for the corrections when they work.
One day in the early 1930’s, when Abe was a struggling young lawyer, the widow of his high school gym teacher came to see him. The widow Gallin’s husband had left her twenty shares of the National City Bank. Once they had been worth $400 a share, and now they were worth only $20 a share. “I remember telling her there was no law against losing money,” Abe said, and the widow Gallin went away. Then the Senate Committee on Banking and Currency, identified usually by its counsel, Ferdinand Pecora, began to investigate the skulduggery that had gone on in some of the nation’s board rooms: the excessive compensation, the dealing in corporate assets, and so on. Charles Mitchell and some of the directors of the National City Bank seemed to be high on the list, in a famous case adequately chronicled elsewhere. Abe filed suit on behalf of the widow Gallin against National City Bank—and hence its stockholders—in a derivative action, so-called because the stockholders derive their rights from the shares in the corporation they own. The stockholder who brings the suit brings it on behalf not only of himself but of his class—that is, his fellow stockholders.
The courts awarded the widow Gallin $1.8 million, of which Abe—and the lawyers and accountants who worked on the case—took $472,500. Abe became a champion of the minority stockholder. The Chase Bank was next; that was $2.5 million for a Mrs. Gertrude Bookbinder.
Abe went on to test the way mutual funds used the commissions derived from buying and selling their portfolios to pay for the selling of their funds; excessive sales loads for mutual funds; using the commissions to buy research, and so on. In the courts, he questioned the way banks use the commissions from their trust departments to gain deposits for themselves. Eventually he even got to the drug companies on the price-fixing for tetracycline, which resulted in a judgment against the drug companies of $152 million. Since it was impossible to pay back the individual consumers of the drugs, that amount was spread out among the health departments of the fifty states. Most of Abe’s efforts, though, were in the securities and investment fields, and the structure of that industry was hardly the same for having known Abe.
So I called Abe. Normally, and at this stage of his career, Abe does not take phone calls from private citizens, however grievously wounded, but in our peregrinations through the securities business, our paths had crossed. Abe had already read about it in the papers. He told me to come right up. “Makes me feel young again,” Abe said.
I had made up a list of questions. If a big bank bought a little bank, and hence had the power to hire and fire people, and in fact the right to name the whole board, weren’t they responsible for proper procedures? They did have that power; they had, in fact, fired the president in ten minutes one Sunday, without even telling us junior partners. So wasn’t the big bank guilty of ungetreuen Geschäftsführung, even if they weren’t guilty of Urkundenfälschung? And the outside auditors certified all the Urkundenfälschung and the ungetreuen Geschäftsführung; Price Waterhouse and Peat Marwick had gotten into a lot of trouble for less. Weren’t the auditors liable too? And the board: naturally, the board.
But when I went to see Abe, he was in a sober mood. He had read through some research, and he looked up from the papers.
“If this had happened in this country,” he said, “this would be worth a hundred million dollars as a class action. But it happened in Switzerland and everything in Switzerland is a secret. We don’t even know who the stockholders are. Switzerland is a very backward country. They have never heard of a class action. So the answer to all your questions is yes. Yes, the board is clearly liable, but the management of the bank is in jail and clearly busted, except for the two Californians from the parent. And yes, if it were here, the auditors would be culpable. And yes, if it were here, the controlling bank would have a liability. But it wasn’t here. So I can’t take the case, but I like you and you like me, and out of all the people that the UCB doesn’t want to have overhanging the cleanup of this, the two of us have to be at the top of the list. I have a reputation as an ogre in this field, and so I will write them on my ogre stationery, and we’ll offer them your stock, at cost. Maybe they’d like to buy out a partner, just to clean things up. Their name was all over the prospectus, after all.”
But the United California Bank didn’t seem eager to buy any more stock. We got a stiff letter from O’Melveny and Myers, the lawyers for the United California Bank. The entity to which we referred, they said, was a Swiss bank. Funny it had the same name, but clearly, how could they be involved?
“I was afraid of that,” Abe said. “You see, that’s the trouble. This whole damn thing is in Switzerland. The Swiss won’t even tell you the telephone number. You’ll have to sue in Switzerland, and the trouble with that is, there is no bank left in Switzerland, so there’s nothing left to sue. And the United California Bank itself is in Los Angeles.”
“Is there no justice?” I asked.
“That’s a metaphysical question,” Abe said. “I don’t know if there is or isn’t justice, but I do know one thing: there’s no class action in that damn backward country over there. You know, I had a client once who put me into a sure thing in commodities.”
“What happened?” seemed to be the proper inquiry.
“I lost my shirt,” Abe said. “I’ve never made a penny on an investment. It’s good I’ve been lucky in the law.”
While I was pondering the fickleness of justice, and its limitations at natural boundaries, Paul was typing away in his cell.
