1963 Soybean Oil Scam

Discussion in 'Wall St. News' started by Hook N. Sinker, Dec 28, 2007.

  1. I just discovered this story and thought some members of elitetrader.com might enjoy it. The panic was hidden by the assassination of President Kennedy. Also notice the sentence about Warren Buffett near the end.

    http://en.wikipedia.org/wiki/Tino_De_Angelis

    Tino De Angelis
    From Wikipedia, the free encyclopedia
    Anthony "Tino" De Angelis (born in 1915) was a Bayonne, NJ-based commodities trader who bought and sold vegetable oil futures around the world. In 1962 he started a huge scam, attempting to corner the market for soybean oil, used in salad dressing. In the aftermath of the salad oil scandal, investors (51 banks) learned that he had bilked them out of about $175 million in total ($1.2 billion in year 2000 dollars). The scam is named after De Angelis's company, Allied Crude Vegetable Oil Refining Corporation.

    De Angelis grew up in the Bronx, the son of Italian immigrants. He worked in a meat and fish market, and while still a teenager was managing some 200 employees. He soon found that the new National School Lunch Act program would buy practically anything given certain price requirements. After he took over Adolph Gobel Company in North Bergen, NJ, he gained a large contract, but then overcharged the government $31,000. He also delivered over 2 million pounds of uninspected meat. Gobel went to court and went bankrupt. In 1955, he formed Allied Crude Vegetable Oil Refining Corporation and other related companies to take advantage of the U.S. Government's Food for Peace program. In a bold and brilliant move, De Angelis decided that a New York based port could be just what the Midwest seed crushers needed to grow exports. He formed Allied in a dilapidated "tank farm" in Bayonne and with the patronage of major grain exporters, he began shipping massive quantities of substandard shortening and other vegetable oil products to Europe, whose infrastructure was still struggling in the aftermath of World War II. De Angelis slowly became a major player in Europe and the commodities markets, both in what was then a brisk trade in vegetable oil and vegetable oil futures, as well as cotton and soybeans.

    Starting in 1962, De Angelis decided that his network was strong enough that he could make a serious attempt to corner the market on soybean oil and started to buy massive quantities. On the basis of this huge value of inventory, he took out massive loans from various Wall Street banks and companies, and used the cash to buy all of the futures on the oil. This way he would not only own a large quantity of soon-to-be expensive oil, but also cheap futures that would soon be worth a considerable value when the prices went up. He also used this cash to pay his staff, influence the community and occasionally make sincere gestures, such as paying a government official's hospital bill. (But many felt this charity was all part of his confidence trick.)

    "Inventory in Action": Manipulation of Amex warehouse receipts
    American Express in the early 1960s was a respected name in traveler's checks and credit cards. They created a new division that would specialize in "Field Warehousing". It was a way for Amex to loan a business money based on inventory of goods and commodities. Tino De Angelis was a new customer, and Amex wrote him warehouse receipts for many millions of pounds of vegetable oil. The receipts could be taken to a bank or broker and exchanged for cash. The lender would then "own" the oil as collateral. At times, the broker wasn't actually buying any oil at all. The tanks at Allied Crude were increasingly filled with water, with a small, and constant, amount of oil floating on top. Some tanks had special compartments at the top, and others were a maze of pipes where oil could be shuttled between them to make one tank of oil appear in other tanks at key times. When inspectors visited and dipped the tanks, they found oil and everything seemed fine. The loans based on the warehouse receipts were "guaranteeing" that the oil was really in the tanks. What was puzzling about the quality of Amex's Field Warehousing operation was that since De Angelis was theoretically buying so much, they essentially authenticated the existence of much more salad oil than was actually accounted for in the entire United States, according to monthly reports from the Dept. of Agriculture. While the warehouse operation was small for Amex, they were lenient with De Angelis, as he was one of their biggest customers. With Amex continuing to vouch for the inventories, their trusted seal of approval combined with De Angelis' talent for offering great deals, mainstream companies such as Bunge Limited (then known as Bunge Corporation), Staley, Procter and Gamble, and The Bank of America chose to make deals and loans with the swindler.

    Scam exposed
    The inspectors were eventually tipped off by such things as attempted bribery and delivery mistakes. So they returned to Allied's tanks in Bayonne and found the water. The result was a massive crash of the futures market, wiping out in minutes the entire value of the loans. On November 19, 1963, De Angelis's company filed for bankruptcy, at which point investors learned hundreds of millions were unaccounted for. The brokerages who handled De Angelis's futures trades were now tainted, and the next day the NYSE, worried about potential U.S. Securities and Exchange Commission involvement, suspended Williston and Beane and Ira Haupt and Co. from trading. Word started spreading as traders investigated the suspension, and desperately tried to get their holdings out of the companies. The entire debacle was overshadowed by the assassination of U.S. President John F. Kennedy on November 22, 1963. Hours before Kennedy was shot, NY Stock Exchange president G. Keith Funston was attempting to avoid a massive crash caused by the 20,700 customers of Ira Haupt, who feared their holdings were now worthless. Because of the trading the brokerage firm did on De Angelis' behalf, they owed various banks over $37,000,000 that it could not pay. The Kennedy assassination provided the panic that Funston was trying to avoid. In 27 minutes, the Dow dropped 24 points and 2.6 million shares were sold off; the exchange closed 83 minutes early that day.

    During investigations it was learned that De Angelis had hidden over $500,000 in a Swiss bank account and this led to a charge of contempt, since he had declared bankruptcy. He also could not explain large cash withdrawals from Allied. Eventually the details were sorted out, and Amex was forced to take a massive loss when they made good on their warehouse contracts. The two trading firms were eventually snapped up by larger players, and De Angelis ended up with a seven year jail term. Interestingly, keen observer and investor Warren Buffett took advantage of the stock plunge of American Express and bought 5% of the company for $20 Million (US).

    In 1972, De Angelis was released. He was soon involved in another scam, this time a Ponzi scheme involving Midwest cattle. This attempt collapsed before it really got started.

    The swindle was documented in detail by Norman C. Miller in The Great Salad Oil Swindle (Baltimore, MD: Coward McCann Books, 1965). The book is based on Miller's coverage of the story in the Wall Street Journal, which won a Pulitzer Prize in 1964.
     
  2. Interesting story I wonder how large Buffet's return was on this investment.