Rich’s Case One of Crude Oil, Iran and RICO

Defenders of fugitive billionaire Marc Rich for years have portrayed his 1983 indictment as the relic of long-discredited regulatory policies and of a young federal prosecutor’s ruthless ambition.

True, the regulations landed on the scrap heap and the prosecutor, Rudolph W. Giuliani, vaulted to national prominence as mayor of New York.

But the actual case against Rich, on analysis, appeared to have lost little of its strength over the years. Indeed, it remained formidable enough that, even with the nation’s sharpest and best-connected lawyers at his disposal, Rich renounced his U.S. citizenship and lived palatially on the lam in Switzerland rather than return to face the charges in court.

Rich, a Belgian-born commodities wizard, broke his silence Saturday but said little that his defenders hadn’t already said to justify his controversial last-minute pardon by President Clinton.

“The indictment against me in the United States was wrong and was meant to hurt me personally,” Rich said in a statement issued from his business headquarters in Zug, Switzerland. The pardon, he said, “remedied this injustice 18 years later.”

At its heart, the case came to this: that Rich and his former oil-trading partner, Pincus Green, dodged price controls on crude oil, contributing to higher gasoline prices for U.S. motorists; that they evaded $49 million in taxes on $106 million in illicit oil profits; and that they traded with the enemy during the Iran hostage crisis. Rich’s companies also were charged in some of the counts.

What made the case front-page news in 1983 were the eye-popping sums involved, Rich’s flight to avoid prosecution and the use of a legal weapon that until then mainly had been used to fight organized crime.

Federal prosecutors charged that the complex web of transactions involving Rich-controlled entities here and abroad amounted to a conspiracy under the Racketeer Influenced and Corrupt Organizations Act, or RICO law.

RICO got its teeth from provisions empowering authorities to seize the fruits of a criminal enterprise. Just as mobsters’ yachts could be forfeited in a RICO case, so was Rich’s multibillion-dollar global trading empire potentially in jeopardy.

The 176 pardons and commutations that Clinton granted on his last day in office last month have become embroiled in scandal, but no pardon has raised more questions than that of Rich, 66. The Rich case is under investigation by Congress and by the U.S. attorney for the Southern District of New York, the office that initially prosecuted him.

Clinton, in a commentary published in last Sunday’s New York Times, defended his decision on grounds identical to those put forward by his former White House counsel, Jack Quinn, the Washington lawyer-lobbyist who negotiated the pardon.

They, like the A-list lawyers who preceded Quinn in Rich’s corner, argued that Rich was a victim of overzealous prosecutors, that the tax evasion charges didn’t hold water, that the dealings with Iran involved foreign firms under Rich’s control but technically not subject to the U.S. trade ban and that Rich was singled out for behavior that was commonplace in the oil market at the time.

Rich was socked with felony counts carrying 300 years in potential prison sentences. He complained in his statement Saturday that others who engaged in the same kind of activity were pursued in civil lawsuits or not at all.

Rayburn D. Hanzlik, for one, doesn’t buy that argument.

“There are guys in jail today who were peanuts compared to Marc Rich,” said Hanzlik, a former Department of Energy official who helped bring Rich to the attention of federal prosecutors.

Robert B. Sutton, John T. Troland and David W. Ratliff, to name a few, all did prison time on similar charges. Troland and Ratliff, in fact, allegedly participated in Rich’s schemes and might have testified against him.

To understand the allegations against Rich, it helps to know a bit about the domestic oil-price controls adopted after the 1973 Arab oil embargo.

The controls, in effect from 1973 to 1981, were meant to accomplish the divergent--if not wholly incompatible--goals of restraining energy prices while simultaneously encouraging new oil production and protecting the livelihood of “mom and pop” producers.

The federal government’s answer was to divide crude oil into three categories: “old” oil from pre-1973 wells; “new” oil, either from new wells or representing increased production from existing wells; and “stripper” oil from wells producing an average of less than 10 barrels a day.

Under Department of Energy regulations, old oil was held to a low selling price representing a small profit over its original cost of production; new oil also was controlled but allowed to sell at a higher price; stripper oil was uncontrolled and could be sold at whatever price it would fetch.

At times during 1980 and 1981, the price for stripper oil was more than $20 per barrel higher than for old oil and $15 higher than for new oil, even though all three might be chemically identical. As Quinn noted Feb. 8 in testimony to a congressional committee, such price discrepancies “created a powerful incentive for U.S. oil companies to overcome them.”

They also created a job category: oil “resellers”--middlemen who exploited the strange new regulatory landscape for profit. These ranged from minnows such as Troland and Ratliff to big fish such as flamboyant Tulsa oilman Robert Sutton to international whales such as Rich.

Rich “traded bigger dollar amounts and was involved in more transactions all over the world than anybody else,” Hanzlik said.

Resellers, like speculators in any market, served the useful function of dampening huge price swings.

But less scrupulous resellers would dodge price controls through a device known as a “daisy chain,” in which controlled oil would be relabeled as it moved through a bewildering series of transactions, emerging miraculously at the end as uncontrolled stripper oil. The purported stripper oil then could be sold at a huge profit, to be split among those participating in the chain.

To the extent that the price controls were defeated, consumers got stuck with the bill, in the form of higher prices at the gas pump.

When Ronald Reagan took office in January 1981, he fulfilled a campaign pledge by abolishing oil price controls with his first executive order.

But there remained a huge backlog of investigations left over from the Jimmy Carter and Gerald R. Ford years, when the Department of Energy had accused hundreds of individuals and firms of price control violations. It was Hanzlik’s job, as an incoming Energy official, to clear up that backlog.

The bulk of the cases, if they had merit, were dispatched with civil penalties. Oil giants Exxon and Arco, for example, paid fines of $2.1 billion and $315 million, respectively, in price-control cases. Arco’s case actually involved trades with Rich.

Hanzlik and other free-market partisans of the Reagan Revolution regarded the multinationals in some respects as victims of the byzantine regulations. In fact, then-Sen. Al Gore (D-Tenn.) once accused Hanzlik of being too soft on price-control scofflaws.

“But when the violations are done deliberately, it becomes a criminal offense,” Hanzlik said, adding that that was the case with Rich. “We had enough evidence that we tossed the whole thing to [the Department of] Justice.”

The investigator who caught the ball at Justice was Morris “Sandy” Weinberg Jr., then an assistant U.S. attorney in Manhattan, now a criminal defense lawyer in private practice in Tampa, Fla.

Weinberg, in recent telephone interviews, recalled flying to the Texas Panhandle to get Troland and Ratliff out of jail--where they were serving time in an unrelated case--so they could show him documents outlining their Abilene oil firm’s dealings with Rich.

The final 65-count indictment against Rich charged him and Green with conspiring with the Texans to launder illicit oil profits--and evade taxes--by moving them through a series of sham transactions among the Abilene firm, called West Texas Marketing, or WTM; Rich’s New York and Swiss firms; and two Rich-controlled Panamanian shell companies.

“They would make up fictitious transactions to make it look like they [the Texans] were buying foreign oil from Marc Rich in Switzerland and reselling it to a Panamanian company,” Weinberg said.

Weinberg said the Texans showed investigators phony invoices and handwritten ledgers tracking what the alleged conspirators called “the pot”: their secret fund of illicit profits.

One basic scheme worked this way, according to the indictment: Rich’s New York firm would sell a shipload of controlled oil to WTM, which would route it through a daisy chain so it emerged as stripper oil. The stripper oil then would be sold to Rich, ostensibly at the much higher world price but in fact at a huge discount. Rich then would resell the oil for a big profit.

On its official set of books, it looked like WTM was racking up huge profits from these trades, but in fact, prosecutors alleged, WTM had secretly agreed with Rich that the lion’s share of profits in “the pot” belonged to Rich. WTM would collect a relatively small per-barrel fee for its role.

To clear the millions of dollars of paper profits off its official books, WTM periodically would draw up documents making it look like it was buying a cargo of foreign crude oil from Rich’s Swiss company and selling it the same day to one of the Panamanian shells for $3 per barrel less, the indictment states.

“Great international businessmen that they were, they always sold at a loss on these deals,” Weinberg observed dryly.

By making it appear that WTM, rather than Rich’s company, was reaping the profits from the daisy chains, Rich reduced his U.S. income tax liability, prosecutors alleged.

They said he also engaged in complex deals linking profitable domestic trades by the New York business unit to money-losing deals by the Swiss unit. The Swiss unit would then “bill” the U.S. unit for the difference, effectively wiping out the domestic profits for income tax purposes, prosecutors said.

Rich’s lawyers in 1990 paid $100,000 to two prominent tax experts, Bernard Wolfman of Harvard Law School and Martin Ginsburg of Georgetown University Law Center, to obtain their opinion of the tax evasion charges. Their scholarly, 28-page memorandum concludes that Rich’s companies handled all the transactions correctly from a tax standpoint.

The only problem with the report--but a fatal problem, according to Weinberg--is that it accepts at face value the fiction that all of the third parties who dealt with Rich in the suspect transactions were acting at arm’s length as independent, profit-minded businessmen, when in fact many were secret partners in a conspiracy orchestrated by Rich.

The professors acknowledged in their report that they made “no independent verification of the facts” but accepted the version supplied by Rich’s former lawyer, Leonard Garment, and others in his law firm.

Rich’s defenders have had less to say about the Iran trades, conducted during the spring of 1980 while Iran was holding 52 Americans hostage at the U.S. Embassy in Tehran. In a series of executive orders earlier in the 14-month crisis, President Carter had outlawed virtually all financial dealings with Iran.

Quinn, in the 2-inch-thick pardon application he submitted to Clinton, wrote: “The Iranian counts were added to the indictment to incite public opinion against the defendants. In essence, the prosecutors accuse Mr. Rich and Mr. Green of causing the companies to trade with Iran when, under the applicable regulations, the companies were permitted to trade with Iran. The prosecutors quietly dropped the Iranian claims against the companies but never dealt with the claims against the individuals.”

According to the indictment, Rich’s Swiss company made a contract with the National Iranian Oil Co. to purchase Iranian crude and fuel oil. Then Rich and Green, working from their New York offices, negotiated a deal with a Bermudan oil company for it to buy 6.25 million barrels of the Iranian oil for $202 million, and they arranged payment for Iran through credit arrangements with New York branches of foreign banks, the indictment states.

Rich’s defenders point to the fact that the companies involved all were based overseas and were technically exempt from Carter’s executive orders.

Weinberg acknowledged that prosecutors revised their original indictment and dropped the trading-with-the-enemy charges against the Rich companies in the final version. But it was always their intention to charge Rich and Green--both U.S. citizens at the time--with those counts.

“Marc Rich did this from New York City. We had telexes that would have demonstrated it,” Weinberg said.

Gary G. Sick, currently director of the Middle East Institute at Columbia University, worked with the U.S. hostage negotiators as a member of the National Security Council in the late 1970s and early 1980s.

“We would have been distressed to find that an American was trading oil behind our backs,” Sick said last week. “He certainly deserved to be prosecuted if indeed he was trading Iranian oil at that time.”

Sick noted, on the other hand, that the oil blockade never was very effective in pressuring Iran because the ban was widely ignored by other nations.

“Iran was always able to sell its oil,” he said.

Thus, according to Sick, it would be incorrect to say that Rich’s alleged trades in themselves had any real effect on the hostage negotiations.

Still, during his 18-year exile, Rich’s business dealings seem to have been little influenced by U.S. foreign policy. Said Rep. Dan Burton (R-Ind.), chairman of the panel investigating the pardon: “Mr. Rich was publicly reported to have traded with just about every enemy the U.S. has had over the last 20 years.”

In his testimony to Burton’s committee, Quinn said that then-U.S. Atty. Giuliani improperly wielded “the RICO sledgehammer” against Rich. The threat of losing his entire organization to a RICO forfeiture was so overwhelming, Quinn said, that Rich was coerced into a 1984 settlement of the charges against his companies, for $200 million in fines and penalties.

Rich, Quinn went on, “had been wrongly labeled a fugitive for not returning from his headquarters in Switzerland to be subjected to what he believed would be a patently unfair and grossly overhyped racketeering trial.”

The Israeli public relations firm that released Rich’s statement Saturday added that Rich feared he’d have little chance of a fair trial “in the wake of the negative antagonistic public opinion carefully created and orchestrated by the prosecution.”

Giuliani indeed became known as one of the earliest and most aggressive proponents of using RICO laws against white-collar crime suspects.

But when Rich was indicted in September 1983, Giuliani had just returned from the Justice Department in Washington to take over as U.S. attorney for the Southern District of New York. The Rich investigation in fact had been underway for nearly two years by then.

Nor has Giuliani been a key figure in the prosecutors’ continued refusal to reduce or dismiss the charges against the fugitives.

Rich’s efforts to negotiate a return to the United States began almost from the moment he fled. A former senior State Department official recalled being approached as early as 1985 by representatives of the trader, trying to learn whether a deal was possible.

Rich intensified his quest in later years, enlisting Israeli statesmen and other notables to lobby on his behalf.

Several times during the 1990s, Rich lawyers approached the U.S. attorney’s office in Manhattan, offering the Wolfman-Ginsburg analysis and other arguments for why the case should be dropped.

Mary Jo White, the current U.S. attorney, replied to one such overture this way: “If your clients genuinely believe that they have done nothing wrong, they should board the next plane to New York and subject themselves to the jurisdiction of the court.”

But finally, Clinton made that unnecessary.

“I do not consider the pardon granted by President Clinton as an eradication of past deeds,” Rich said in his statement Saturday, “but as closing a cycle of justice and as a humanitarian act.”