SCANDALS: One of the Largest Frauds

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Receiver. If the SEC can prove its allegations, several reputations will be tarnished. Most of the defendants are accused of helping Vesco set up his dummy corporations. As a director of three of the funds, James Roosevelt, according to the SEC, knew what Vesco was up to and did nothing to stop it; the SEC says that Roosevelt's independence was "impaired" by a $150,000 loan from a Vesco-controlled Bahamian bank. Three members of the law firm of Willkie Farr & Gallagher—Allan F. Conwill, Raymond W. Merritt and John S. D'Alimonte—are accused of having used their legal skills to help Vesco plan and carry out his schemes. The lawyers and Roosevelt protest innocence.

Donald Nixon has not been accused of anything, but he has worked for nearly two years as an administrative assistant to Vesco. Young Nixon said that he took the job because it offered him the best opportunity for business experience. Vesco gave $50,000 to the re-election campaign of Donald's uncle in September and October—by coincidence or not, the very time when the SEC investigation of Vesco was reaching a climax.

So far, the SEC is seeking only civil remedies: an injunction to stop further illegal acts, and appointment of a receiver for the four IOS-managed funds. The receiver would try to track down and get back the money allegedly siphoned off by Vesco. Trial of the case against Vesco and the others has been set for February. If the SEC can prove its charges, it could later hand over to the Justice Department a readymade criminal case.

The SEC is trying to break new legal ground. In the past, "offshore" mutual funds—the IOS-managed type that raise money abroad but invest it in the U.S.—have operated in a regulatory vacuum. No government believed that it had full jurisdiction over them. The SEC contends that a U.S. court can assert authority over foreign-headquartered funds for a variety of reasons, among them a principle in international law that a country can halt activity occurring outside its borders if it "causes an effect" within those borders. If the SEC can make that claim stick, the offshore funds' freedom from supervision may be over—too late to help IOS-fund shareholders who have suffered the Cornfeld and Vesco regimes. In early 1970, IOS-managed funds had almost a million shareholders and assets of $2.3 billion; now the count is down to about 300,000 shareholders and assets of roughly $630 million—including the $224 million that Vesco allegedly made off with. But closer regulation of offshore funds might safeguard the money of future investors.