THE CON: Out of a castle in Switzerland, Bernie Cornfeld made millions selling mutual funds to expats, including one that invested only in other mutual funds. He skirted U.S. regulation for years, until the market crashed and his game was up.
THE DAMAGE: When share prices dropped 50 percent, investors lost most of what they put in. Cornfeld was replaced with Robert L. Vesco, widely considered a more successful con artist when he stole $220 million from the company and disappeared in 1972.
THE OUTCOME: Accused of defrauding his employees by encouraging them to buy stock as the company sank, Cornfeld spent 11 months in a Geneva prison. He was later cleared of the charges and retired.
In 1956, Bernie Cornfeld seized an opportunity to make serious money. He went to Paris and began selling shares of American mutual funds to G.I.’s. The eager clientele, and distance from the Securities and Exchange Commission, worked for Cornfeld. He moved the headquarters of his offshore mutual fund, Investors Overseas Services, Ltd. (IOS), to a castle outside of Geneva. In 1962, he launched a brand new, and profitable, venture: the “Fund of Funds,” a mutual fund that invested exclusively in shares of other mutual funds.
Cornfeld assembled a huge team of salesmen, who went door-to-door peddling shares in more than 100 mutual funds. IOS grew fast, thanks to the hefty commissions Cornfeld dangled before his salesmen, as well as the “investment program” they offered clients who could buy now and pay later. Cornfeld’s sales pitch certainly had a special ring: “Do you sincerely want to be rich?”
By the end of 1969, IOS was the world’s largest financial sales organization; it had 13,000 salesmen and 750,000 clients in 110 countries, according to an article in Time magazine. Within a decade of starting his business, Cornfeld had built a $2.5 billion empire; he dipped into a variety of moneymaking schemes, from investment and commercial banking to insurance and real estate.
The salesmen who pitched the Fund of Funds profited, as well; more than a hundred were millionaires by the mid-1960s. Their sales goals were set so high, and the opportunities to invest were so irresistible, IOS began making more and more speculative investments in junk bonds.
By 1965, more than $450 million was invested in American mutual funds. That year, the SEC accused Cornfeld and IOS of violating American securities laws. Unlike registered mutual funds in the U.S., which were barred from owning more than 3 percent of another fund, IOS owned as much as half of other funds. This gave Cornfeld tremendous power.
Cornfeld bowed to pressure from regulators in 1967 and agreed to stop selling to Americans in the U.S. or abroad. He also agreed to limit the Fund of Fund’s purchases to more than 3 percent of an American mutual fund. With regulators off his back, Cornfeld might have thought his troubles were over. Then, in the spring of 1970, the stock market crashed. IOS share prices dropped by 50 percent and the firm found itself short on cash. The IOS board fired Cornfeld and took on a new chairman, Robert L. Vesco. Within a year, the SEC had launched a major investigation and accused Vesco of securities fraud and stealing more than $220 million from IOS. He fled Switzerland in 1972, allegedly for Costa Rica, and was never heard from again.
In 1973, Cornfeld was arrested and charged with defrauding IOS employees by selling them stock as the company sank. He spent 11 months in a Geneva prison – an experience he described as fairly comfortable. In an interview printed in The New York Times in 1974, he described the prison as the “St. Antoine Hilton.”
Released on bond in 1974, he returned to the U.S. where he was found guilty two years later of defrauding the telephone company by using a device to avoid paying long distance fees. A judge, who sentenced him to three months in jail, permitted him to return to Geneva in 1978 for an appearance in an appeals court. There, he was acquitted of the charges against him. He died in London in 1995.
Con Timeline: 1962-1973
"Cornfeld, a onetime social worker, proclaimed that "everyone can be a millionaire." As if to prove it, he lived a sybaritic life in a Geneva mansion built by Napoleon, where he was surrounded by purring cheetahs, freeloading jet-setters and a harem of adolescent beauties."
- Time magazine, "Bernie Cleared," Oct. 29, 1979