"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 Jose ("Pepe") Figueres, Spanish Prince Gonzalo Borbon 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.

2) Having got rid of Cornfeld,* Vesco and associates zeroed in on the securities held by four IOS-managed mutual funds: Venture Fund, Fund of Funds, International Investment Trust (IIT) and Transglobal Growth Fund. Between April and October of this year, the SEC says, Vesco and friends sold out of the funds' holdings nearly a quarter of a billion dollars worth of stocks, including Chase Manhattan, General Motors, Mobil Oil, A T & T and IBM, and used the cash to further "their personal interests and pursuits."

Some $99 million of the money has simply vanished. The other $125 million, says the SEC, was mostly "spirited" away to Luxembourg and Bahamian banks controlled by Vesco's group and then placed in a series of dummy corporations also serving as fronts for Vesco.

Some $15 million went to Gulf Stream (Bahamas) Ltd., a Vesco company that is trying to buy the Paradise Island gambling complex in the Bahamas from Resorts International. Vesco's IIT fund also lent $2,150,000 to Sociedad Agricola y Industrial San Cristobal, a company that was founded and is still partly owned by Costa Rican President Figueres. Meanwhile Fund of Funds put $60 million into Inter-american Capital, a shell company allegedly controlled by Vesco and formally headed by Alberto Inocente Alvarez, an adviser to Figueres.

According to the SEC, Vesco has chosen Costa Rica as a "haven" and Alvarez is helping him relocate there. President Figueres says that Vesco is still welcome to Costa Rica. At IOS's complex of buildings at Ferney-Voltaire in France, just across the border from Geneva, functionaries are preparing for relocation. They are selling everything movable, including bosses' rosewood desks and even toilet seats. Rumors are that the move will be either to Madrid or--no surprise--Costa Rica.

3) All the time that the stock sales were going on, Vesco sought to conceal his part in them by pretending that he was out of IOS. He resigned as chairman in September 1971 and later had International Controls sell its IOS stock. But, says the SEC, the stock was sold to Kilmorey Investments, yet another dummy company set up by Vesco in the Bahamas.

Whether Vesco is out even yet is unclear. Kilmorey on Oct. 30 sold control of IOS to a group of Spanish and Latin American businessmen headed by Prince Gonzalo Borbon y Dampierre and including Rafael Diaz-Balart, a former brother-in-law of Cuba's Fidel Castro, but the group now is reportedly trying to back out of the deal. In any case, the group has ties to Vesco; one of its members is Alberto Alvarez, the head of the Costa Rican company that got $60 million from Fund of Funds.

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.

*Who has moved to Beverly Hills, where he is raising money to produce movies.

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