OBITUARIES : Bernie Cornfeld

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The Independent Online
Ever since the South Sea Bubble, which finally burst in 1720, there has never been a lack of investors willing to put their money into a colourfully presented scheme to make money quickly; if in its early days the first punters appear to be doing well, multitudes will follow. The 20th century has seen many such bubbles, most of them created by rogues like the match king Krger, Horatio Bottomley, the newspaper tycoon and financier, and the forger Charles Hatry, one of whose companies failed in 1929, causing a crash and heavy losses to investors. But nothing could have been more spectacular than the rise and fall of Bernie Cornfeld.

Cornfeld was not, at least in intention or in his own eyes, a crook, but an entrepreneur with a big idea that went wrong. He was the creator of Investors Overseas Services that at its peak controlled billions of dollars of investors' money, who heated up both the American and the international stock markets, and which was largely responsible for the financial crash of 1970, when a period of investing euphoria came to an end.

Bernie Cornfeld was a brilliant salesman who built a giant company by seeing an opportunity, grasping it, and watching it grow beyond his wildest dreams. In common with many whose credo is sales, he never understood the most basic principles of running a business. Instead he exploited greed with a messianic fervour, and swallowed the American dream of success with all the optimism of an outlook that refuses to believe that what goes up can also come down; he was even able to bring idealism into his philosophy, seeing himself as offering the average citizen the same opportunities to invest in a variety of stocks that the rich had always enjoyed.

As a student in the late Forties in Brooklyn, Cornfeld grew up among its Jewish liberal intelligentsia, and he tended, once successful, to give an idealistic motivation to his own success, even up to the time when he became a salesman of mutual funds in Philadelphia. His real object then was to have money to take out young girls: and in his days of greatest affluence he travelled around his many mansions and castles with the equivalent of a harem.

He was born in Istanbul in 1927. His father, Leon, was a Romanian actor, impresario and film producer, with offices in Vienna and Istanbul. But one day he fell through a faulty skylight in Istanbul, was badly hurt. His career ended, Leon Cornfeld moved to New York in 1930 where he made a precarious living as a teacher of German literature. Bernie was three at the time of the move and only six when his father died. His mother, Leon Cornfeld's second wife, went to work 20 hours a day as a nurse. But coming from an intellectual Russian-Jewish family which had lost its wealth in the revolution, she endured hardship stoically and instilled ambition and an ethic of hard work into her son. As a boy, much loved and encouraged by his mother, Bernie eschewed her Tsarist principles for radical politics and claimed to have raised much money in nickels and dimes for the Abraham Lincoln Brigade during the Spanish Civil War. In 1948, an election year, he worked for the socialist candidate Norman Thomas against Truman and Dewey; later he joined the much more revolutionary Socialist Youth League.

He went to Brooklyn College, then as now a centre of intense intellectual political activity, and while there overcame his worst handicap, a stammer. Willard Beecher, a prominent Adlerian psychiatrist, urged him not to avoid, but to seek out, opportunities to speak in public. He showed a will-power that not only overcame the stammer, but helped form his public persona and self-confidence.

When Cornfeld began selling mutual funds a change was taking place in the American stock market, and the traditional closed-end investment companies (those that raised a fixed amount of capital sufficient to get the company started and to enable it to thrive) were losing venture capital to new open-end mutual funds where money received went into a variety of stocks and shares: the advantage lay in diversity and the general belief that, on average, stock values would always grow, so that gains would outway losses. A persuasive salesman like Cornfeld could easily point out to potential investors the advantage of diversity on a rising market, and at one point he made the Empire State Building, in New York, his only territory, going from office to office in the country's largest skyscraper, where he had no travel expenses and could ignore the weather. At the time he was selling mutual funds for Investors Planning Corporation, but also learning how mutual funds worked: most of the managers of the money that was put into their funds were looking for fast-growing new companies, where capital gains rather than steady income was their incentive to buy, and they were only interested in short-term advantages. The background to this attitude was the need to make up the loss to the investor of the funds' overheads, out of which their profit also had to come.

Although he was doing well as a salesman in New York, Cornfeld was looking for a less competitive market. He went to see Jack Dreyfus, a legendary fund manager, and he talked him into letting him start a new European dealership.

Cornfeld went to Paris in 1955 and recruited a sales team from American exiles, mainly from the nonconformists and bohemians who had wanted to escape from the rat-race and McCarthyism, but needed a source of income. Cornfeld targeted the large number of well-paid American GIs in army camps throughout Europe. Cornfeld inspired his sales teams with a simple question: "Do you sincerely want to be rich?" He convinced them they would be if they followed his directions.

His company Investors Overseas Services (IOS) grew rapidly, creaming 20 per cent off the money invested and paying 8.5 per cent to its salesmen. He soon found a partner to run the administration: Edward Cowett, an ambitious young American lawyer. Cornfeld looked for new markets in which to invest and looked to South America and all convertible currencies. "Whatever it looks like, it's all money," was his maxim.

The secret was that, by running what was basically an American company trading in Europe, Cornfeld and Cowett managed to steer between the regulations and safeguards imposed by national governments, while being considered to be a European company in the US. When de Gaulle's fiscal authorities in France became suspicious and obstructive, Cornfeld moved the whole operation to Geneva. By then IOS was one of the biggest financial organisations in the world. Over 100 IOS salesman had become millionaires by the mid- Sixties and the high yields of the rising market had made legendary a company about which little was known by government regulators or its own investors.

IOS started its own bank, which acquired other banks. It started new industries, and invested widely in real estate. Money was poured into mining companies, and into a venture to find oil in Alaska. New investment funds were started and one, the Fund of Funds, invested entirely in other mutual funds, attracted much attention. Cornfeld's fund managers were set high targets for growth which led to ever greater investment in junk bonds, the phenomenal growth of which was almost entirely caused by IOS's having twice as much money to invest annually as share issues were available in the American market.

By being based in Switzerland, with money invested internationally, IOS managed to evade close scrutiny by any government. It was Cornfeld's aim in the late Sixties to make IOS the most important financial force in the world. By the end of the 1960s they were managing about $2.5bn of other people's money, and were predicting that by 1975 it would be over $15bn. Cornfeld's personal fortune was well over $100m.

In February 1970 Bernie Cornfeld was invited by the prestigious financial journal Institutional Investor to address its national conference in New York, attended by the leading stockbrokers, bankers and money managers of the world. As the principal speaker, he prophesied a golden and continuing boom into the future, as ever more wealth was created by a dynamic world economy, fuelled by ever-increasing investment. But within the year an accountant working for IOS, cutting through the complex labyrinth of interlocked companies and their performance, realised that the actual profits, after all the creaming-off by salesmen, managers and the international overheads, were almost non-existent, and that was before making provision for an enormous number of bad investments at a time when the peak caused by over- confidence was already over. There was no money to meet debts and thewhole structure crashed, ruining investors everywhere.

Cornfeld was prosecuted for fraud, and spent 11 months in a Swiss jail before the charges against him were dropped. He was thereafter less visible, living much of the time in Acapulco, but made the news again in November 1992, as a member of a consortium bidding for MGM studios in Hollywood. He died in London after suffering a stroke last year.

John Calder

Bernard Cornfeld, financier: born Istanbul 17 August 1927; married; died London 27 February 1995.