Rich Made His Fortune by Breaking the Rules
By Michael Dobbs
Washington Post Foreign Service
Tuesday, March 13, 2001; Page A01
ZUG, Switzerland -- For decades, traders from all over
Europe have flocked to this lakeside Alpine town,
attracted by stringent
privacy laws, low tax rates and guarantees of
corporate anonymity. But none has achieved the
dominance of Marc Rich, the
billionaire metals dealer and indicted tax fugitive
pardoned by Bill Clinton in one of the last acts of
his presidency.
At the age of 66, after a lifetime of deal-making and
sanctions-breaking, Rich is the uncrowned king of Zug,
a place that boasts
10,000 international companies, or roughly one
corporation for every two residents. He is rarely seen
but constantly talked about,
his exploits buying and selling the world's natural
resources becoming the stuff of legend -- and scandal.
During the quarter-century that he has been operating
from Zug, including 17 years hiding from U.S.
marshals, Rich has
mastered the art of clinching a deal with everyone
from Communist bureaucrats to Third World dictators to
Iranian ayatollahs.
Many of the business practices cited in his 1983
indictment for racketeering by the Southern District
of New York -- trading with
pariah states, manipulating the market for huge
personal gain, hiding profits in a thicket of offshore
companies -- are techniques
that he perfected here both before and after he got
into trouble in the United States.
The list of countries that Rich has traded with reads
like a compendium of rogue states: Iran during the
hostage crisis,
apartheid-era South Africa, Slobodan Milosevic's
Yugoslavia, North Korea, Moammar Gaddafi's Libya, the
Soviet Union under
Leonid Brezhnev.
"He sees himself as a citizen of the world,
unencumbered by the laws of sovereign nations," said
Howard Safir, a former U.S.
marshal, who lay in wait outside Rich's Swiss
residence in 1985 in one of several futile attempts to
enforce an arrest warrant
against Rich on charges of swindling U.S. taxpayers of
nearly $50 million. "His view is that everything and
everyone can be
bought and sold, and government is irrelevant."
In keeping with his usual practice, Rich declined to
be interviewed for this article, although he released
a statement last month
saying he did not think he could receive a fair trial
in the United States. For the past few weeks, he has
kept out of sight, holed up
at his luxurious estate in the village of Meggen, 15
miles away, with his collection of Van Goghs, Picassos
and Miros, and a
breathtaking view of the mountains rising above the
shimmering waters of Lake Lucerne.
According to his supporters, Rich is waiting for the
controversy generated by Clinton's pardon to blow over
before speaking out.
"There is nothing mysterious about him," said Georg
Stucky, a former finance minister from the canton of
Zug who now runs
Rich's charitable foundation in Switzerland. "He is
just a normal businessman who does not like publicity.
He is a very shy
person."
Here in Switzerland's wealthiest canton, in one of the
world's wealthiest countries, there is a saying that
"money doesn't smell,"
according to local Green party leader Josef Lang, who
has waged a 20-year campaign to expose alleged
wrongdoing by Rich and
other international traders, and their cozy links with
local politicians. In Zug, Lang said in a tone of
disgust, "you don't ask where
the money comes from, you just ask how much."
University Dropout
He was born Marc Reich on Dec. 18, 1934, in the
Belgian city of Antwerp, the only child of a
prosperous Jewish family. When
the Nazis took over Belgium in 1942, the family fled
to the United States, settling first in Kansas City,
Mo., and then in New
York, where Rich's father David went into the burlap
bag business.
The Korean War created huge demand for burlap bags,
pushing prices sky-high and turning David Rich into a
millionaire. For
Marc, it was an early lesson in the economics of
scarcity. Dropping out of New York University at age
19, he set his sights on
becoming a commodities trader.
The company that Rich joined, Philipp Brothers, was
the largest raw materials trading company in the
world. He started in the
mailroom but soon came to the attention of Ludwig
Jesselson, a legendary trader skilled in the art of
concluding long-term
contracts with Third World countries. Cool,
calculating and exceptionally aggressive in his
deal-making, Rich quickly became a
Jesselson favorite. By the late 1960s, he was his heir
apparent.
Then, in 1975, in an act of betrayal that is still the
talk of commodities traders, Rich broke with his
mentor in a dispute over
bonuses. He and his partner, Pincus "Pinky" Green,
quit Philipp Brothers, taking the company's most
closely held secrets and a
half-dozen of its leading traders with them. Marc Rich
and Co. set up shop in a glass tower in Zug, down the
street from Philipp
Brothers' European headquarters.
Since before they established their own company in
Zug, Rich and Green have had an "odd couple"
relationship that has proved
highly beneficial to both men. Elegant and debonair,
Rich made his reputation as a deal-maker. Green, by
contrast, is the shabbily
dressed logistics wizard whose skill at making the
ships run on time earned him the nickname "the
admiral." Rich has long been
surrounded by glamorous women, including his
songwriter wife Denise, whom he divorced in 1997.
Green is an Orthodox Jew
with an enduring marriage.
The split with Philipp Brothers coincided with a
seismic shift in the world's oil markets that Rich,
perhaps more than any other
trader, was quick to exploit. In the early 1970s,
oil-producing nations rebelled against the dominance
of international oil
companies. Instead of selling their oil to the majors,
they began marketing it through independent traders
such as Rich, who is
credited with virtually inventing the spot market,
where oil was freely traded to the highest bidder.
The oil crisis was a fabulous boon for Rich: As prices
spiraled, he was able to pocket the difference between
the purchase price
and the sale price. But it also proved his undoing.
When successive U.S. administrations introduced a
series of energy price
controls in the 1970s, he devised a scheme for making
money out of the bureaucratic confusion that
prosecutors say was illegal.
Under the Carter-era regulations, oil pumped under
pre-1972 production agreements, called "old oil," was
sold for around $6 a
barrel. "New oil," by contrast, went for up to $40 a
barrel. If a trader could somehow relabel old oil as
new oil, he could make a
fortune. Evidence collected by U.S. prosecutors shows
that Rich or his representatives did just that by
funneling the oil through a
"daisy chain," allegedly using sham invoices and
Panamanian front companies, with profits deposited in
offshore accounts.
Morris Weinberg, the prosecutor in the case, estimates
that Rich and Green concealed more than $100 million
in ill-gotten profits
in 1980 and 1981. While the pair denied wrongdoing and
refused to produce documents relating to the case,
they ended up paying
about $200 million in back taxes and penalties in a
partial settlement that allowed their companies to
continue operating in the
United States.
According to the September 1983 indictment, Rich and
Green were also buying large amounts of Iranian oil at
a time when
American diplomats were being held hostage in Tehran
and U.S. citizens were prohibited from dealing with
Iran. The indictment
lists five such trades between July and September 1980
for more than 5 million barrels of oil valued at $186
million. In a rare
1992 interview with NBC, Rich acknowledged trading
with Iran, "but as a Swiss company," not an American
one.
The government's charges were never tested in court.
In the summer of 1983, at the height of the U.S.
attorney's investigation,
Rich left his $10 million Park Avenue apartment and
fled to Zug, renouncing his U.S. citizenship in favor
of Spanish and Israeli
passports. (The State Department still considers him a
U.S. citizen, subject to U.S. tax law.) Rich and Green
remained on the
Justice Department's "most wanted" fugitive list until
their pardon in January. Clinton said he granted the
pardon because he
agreed with the arguments of Rich's lawyers that the
case should have been handled in civil court rather
than as a criminal case.
Weinberg, now a defense attorney in Florida, says the
alleged daisy-chain caper was very typical of the way
Rich did business
throughout the world. "There is a lawless quality
about the way he operates," Weinberg said. "He will do
whatever he needs to
do to close a deal."
Broken Embargoes
The daisy-chain oil deals set a precedent for dozens
of similar plays, from South America to the Middle
East to Asia; the greater
the bureaucratic controls over the price of oil or raw
materials, the greater the potential profit. According
to former traders, Rich
and Green specialized in Third World countries whose
leaders could be easily bribed.
"Whenever cracks appear in the market, there are
people like Marc Rich who are willing to go where
nobody else will, either
because of embargoes, legal restrictions or political
problems," said an executive for a leading oil
company. "Rich has always
been willing to do the kind of things that bigger,
more respectable companies refuse to do."
One Rich specialty was breaking embargoes -- trading
with international pariahs was a sure way of
generating extra profits. The
best documented example is apartheid-era South Africa,
which relied on traders like Rich to get around a U.N.
oil embargo
designed to deprive the country of the one raw
material it did not possess.
A leading anti-apartheid watchdog organization, the
Amsterdam-based Shipping Research Bureau, recorded 149
deliveries of oil
to South Africa by companies linked to Rich between
1979 and 1993.
The group reported that Rich was the leading supplier
of oil to South Africa before the collapse of
apartheid, responsible for at
least 15 percent of identifiable deliveries. Some of
the oil came from countries such as the Soviet Union,
which were leading
opponents of apartheid. Typically, Rich companies
would file false shipping reports for the destination
of the oil, and redirect
tankers to South African ports once they were safely
at sea.
According to Rich biographer Craig Copetas, Rich
representatives sometimes bribed Third World leaders
to turn a blind eye to
the deliveries to South Africa. The payoffs were known
as "chocolates."
"We told the Nigerians that their oil had been going
to Spain," recalled a Rich trader cited by Copetas.
"One day they followed
our ship 25 miles out of port and saw it hang a left
instead of a right." The Nigerians were very angry but
allowed themselves to
be placated for "a million chocolates."
Rich spokesmen declined to comment on the
sanctions-busting allegations. His supporters point
out that the U.N. embargo
against South Africa was nonbinding, as it was never
endorsed by the Security Council. Unlike the United
States, Switzerland
never joined the embargo.
Another Rich technique was to control the supply of
strategic metals so the price would go up. At one
point, in the early 1990s,
he was believed to control about 40 percent of the
international aluminum market, an accomplishment that
earned him the
nickname "aluminum finger." He had negotiated a highly
advantageous 10-year contract for virtually the entire
aluminum
production of Jamaica. He also used intermediaries to
acquire control of several aluminum smelters in West
Virginia, according
to documents unearthed by the United Steelworkers of
America.
"His modus operandi is very interesting," said Tom
Juravich, professor of labor relations at the
University of Massachusetts at
Amherst, who wrote a book about a labor dispute that
pitted Rich representatives against the steelworkers
union. "He always
operates in the shadows, never directly in the light
of day. He doesn't just buy companies. He is
interested in controlling and
manipulating the market."
Not all of Rich's ventures have turned to gold. In the
early 1980s, according to press accounts, he made a
disastrous foray into
the international tin market, buying up most of
Malaysia's tin production. Prices skyrocketed, but
landed with a thud after the
U.S. government began selling tin from a federal
stockpile. Rich was reported to have lost more than
$60 million.
Profiting in Russia
The collapse of communism offered Rich new
opportunities, opening up vast new markets and a host
of business partners with
few scruples when it came to turning a profit.
According to Yugoslav and U.S. officials, Rich was
active in Yugoslavia during
the first U.N. trade embargo in 1992-95, dealing in a
wide variety of commodities, from copper to oil.
But it was in the former Soviet Union that he made his
biggest mark. According to traders familiar with his
operations, he had
been active during the Soviet era, courting officials
at Raznoimport, the state monopoly for commodity
trading, and selling the
Soviets zinc, a strategically important metal. After
the Soviet Union fell apart in 1991, these
relationships helped Rich become for
a time the single most important Western trader in
Russia.
"Marc Rich was way ahead of the big international
corporations," said Vladimir Kvint, a leading expert
on Soviet and Russian
business practices at Fordham University in New York.
"He was one of the initiators of barter trade with the
former Soviet
Union. He bought oil, aluminum, cobalt at domestic
Russian prices, and then sold it at world prices,
which were often 10 to 15
times higher."
Anders Aslund, a Swedish economist who served as an
adviser to the reformist Russian government led by
Prime Minister
Yegor Gaidar, said Rich was responsible for setting up
more than 100 front companies in Russia. He added that
Gaidar
attempted to close Rich's Moscow operation in April
1992. Although tax inspectors mounted a few raids on
Rich firms, the
attempt was unsuccessful. In December, Gaidar was
replaced by Viktor Chernomyrdin, who took a more
lenient attitude.
In recent years, opportunities for making huge profits
in Russia have waned as domestic prices have come in
line with
international prices. But Rich continues to have a
significant business presence in Russia. Court
documents filed last year in New
Jersey show that he was trading large amounts of
aluminum with the Russian Chernoi brothers, who are
accused in a lawsuit by
their business rivals of using mafia-style techniques
to consolidate their control over the Russian aluminum
industry.
Last month, Rich announced the sale of the
international investment arm of his company to Crown
Resources, a subsidiary of the
Alfa Group, a leading Russian conglomerate with
extensive oil holdings. The terms of the sale
envisaged a long-term partnership.
"In order to penetrate Russia these days, you have to
get in bed with a Russian company," said a London
trader. "As for the
Russians, they gain access to the global market under
a big name."
Some analysts say they believe that, after a lifetime
of chasing deals, Rich may simply be slowing down.
"Margins are much
tighter now than they used to be," said Jonathan
Bearman, editor of Energy Compass, a leading oil
industry newsletter. "The
whole trading business has become much more
competitive."
Others see his successful campaign for a pardon as the
crowning play in a career packed with similar
maneuvers. "This guy is
the greatest trader in the 20th century," said
Weinberg, the former prosecutor. "He orchestrated and
manipulated the pardon, just
like he did all his other deals."
© 2001 The Washington Post Company