Gramco: The Second Domino

Only three months ago, Bernard Cornfeld's beleaguered I.O.S., Ltd., the biggest of the foreign mutual fund empires, teetered on the brink of collapse. Last week financial misfortune struck the second largest offshore investment complex, Gramco Management Ltd. and its USIF,* Real Estate. Swamped by the equivalent of a run on the bank, the directors of the Nassau-based USIF "temporarily" suspended sales and redemptions, thus freezing the assets of 23,000 European, Latin American and Asian investors who had put up $276 million. The closedown leaves the future of the fund in considerable doubt; to some degree, it also tarnishes the more than 350 other funds that operate in similar fashion from foreign tax havens beyond the regulatory reach of countries where they seek investors.

The bad news was announced in London by Pierre Salinger, one of Gramco's top officers. Salinger, still sporting a PT-109 tie clasp from the Kennedy years, also suggested that offshore funds need more official regulation. Speaking of the offshore fund business and some of his competitors in it, Salinger told newsmen: "Jesus, that is a rough game. They spend more time knifing each other than any bunch I've ever seen."

Irresistible Lure. Gramco's leaders have impressive backgrounds. Keith Barish, 26, chairman of the top holding company, is a onetime White House intern who conceived the idea for the fund and has made millions from the venture. Rafael G. Navarro, 34, Gramco's president, is a wealthy Cuban refugee who was a diplomat in pre-Castro days. And then there is the portly Salinger, 45, the former White House press secretary; he serves as a Gramco director, spokesman, supersalesman and deputy chairman of the British unit.

Under them, Gramco had an irresistible lure for foreign investors who are suspicious of stocks, bonds and other paper assets. Unlike most mutual funds, Gramco's USIF invested not in securities but in solid U.S. real estate. Colorful brochures showed some of the 214 properties that prospective investors would be able to buy into through the fund. Among Gramco's holdings: the 32-story LTV Tower in Dallas, the Northeast Airlines Building in Miami, an industrial park in Phoenix and apartment complexes and shopping centers in 17 states. The fund valued its holdings at $758 million, but that figure included large mortgage loans.

Burgers and Scotch. Troubles began piling up for Gramco soon after upheavals in Cornfeld's I.O.S. shook investor confidence in American-run investment plans in Europe. Last month redemptions began to climb alarmingly after West Germany's Federal Credit Supervisory Board abruptly banned sales of Gramco's USIF. The board acted on the disputed grounds that the fund failed to comply with some complex provisions of a new German securities law. In the last five weeks, the owners of more than $40 million worth of shares asked for their money back. But real estate is not so easy as securities to convert into quick cash. Though Gramco officers boasted that the fund's 20% cash reserve would always enable shareholders to redeem their holdings, the fund simply ran short of money when the theory was put to its first test.

Hastily summoned to Nassau last week, Gramco's directors assembled in marathon meetings, occasionally sending out for hamburgers and Chivas Regal. Meantime, employees at Gramco's mock colonial headquarters fended off a flood of transocean phone calls from anxious shareholders in many far-off countries. Emerging from one meeting, Vice President Joseph Jordan delivered a pep talk to worried USIF salesmen. "We are solvent," he said. "If we have to, we'll clear the deck--tighten our belts, cut officers' salaries, drop employees. I get nothing. The shareholders will get paid." That, of course, remains to be seen. Gramco places such generous valuations on its properties that some U.S. real estate men doubt that they could be sold now--except at a loss.

* For United States Investment Fund.

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