SCANDALS: One of the Largest Frauds

AFTER Founder Bernard Cornfeld finished manipulating and misusing the Geneva-based IOS mutual fund complex in 1970, it was a wonder that there were any assets left to drain off. In fact, enough cash and American stocks remained in IOS-managed funds to provide the makings of an international scandal juicier than any that Cornfeld produced. Last week the Securities and Exchange Commission accused Cornfeld's successor, Robert L. Vesco, and a group of Vesco's associates of "looting" no less than $224 million from four IOS funds so far this year. The SEC brought a civil action to stop the alleged plundering from the funds' hundreds of thousands of shareholders, mostly Europeans, Latin Americans and U.S. citizens living abroad.

SEC Commissioner Philip Loomis called it "one of the largest securities frauds ever perpetrated." The scene of the dealings sweeps from New York to Luxembourg, the Bahamas, Puerto Rico and Costa Rica, and the characters in the story are a movie director's dream. Besides Vesco, who denies all charges, the 42 individual and corporate defendants include James Roosevelt—oldest son of the President who created the SEC—three lawyers from Wendell Willkie's old Wall Street firm and a gaggle of shadowy American, European and Latin financiers. Involved on the fringes of the case, though not named in the complaint, are Costa Rican President José ("Pepe") Figueres, Spanish Prince Gonzalo Borbón y Dampierre, and Donald A. Nixon, 26-year-old nephew of the President.

The key figure is Vesco, a dapper mystery man who will turn 37 this week. The engineer son of a Detroit auto worker, Vesco appeared on the financial scene out of nowhere in 1965 to create by merger International Controls Corp., a New Jersey electric equipment company, which he once said he had built "on financial agility." He entered IOS in 1970 in the role of savior, arranging a desperately needed $10 million loan and later becoming chairman. Soon, though, the SEC charged, Vesco began acting as despoiler. His "brazen" scheme, according to the agency, unfolded in three steps:

1) Vesco first set out to cement his control by buying out Cornfeld, who had been deposed as chairman but still held a large block of IOS stock. In early 1971, Vesco secretly bought the block for $5.5 million—$3,500,000 more than the market price—through a dummy Panamanian corporation called Linkink. Later, Vesco had International Controls buy Linkink. The SEC complaint states that Vesco chose this circuitous route because he wanted to hide his operations as thoroughly as possible. If the charge is true, Vesco bought Cornfeld's stock at an inflated price by using stock of an International Controls' subsidiary without ever fully explaining to International Controls' shareholders what he was doing with their assets.