Gulling the Beautiful People

Getting Penny Pincher Jack Benny to kick $300,000 into a shaky oil scheme is no easy job. Enticing Financial Cognoscente George J.W. Goodman ("Adam Smith," author of The Money Game) to chip in $110,000 seemingly should be even harder. Or consider trying to gull $211,000 out of Walter Wriston, chairman of the First National City Bank.

All three--and 2,000 other investors from show business, sports, politics, the law, business and banking--succumbed to the inspired salesmanship of an Oklahoma lawyer named Robert S. Trippet. By last summer, when he resigned one step ahead of a barrage of civil suits and a criminal investigation, Trippet sold $130 million worth of subscriptions in oil-drilling funds. Trippet denies charges that he handled the money illegally, but when asked how much oil he has found, he replies cryptically: "That's relative." In any case, his Tulsa-based Home-Stake Production Co. (no relation to Homestake Mining Co. of San Francisco) is now bankrupt. According to the Wall Street Journal, which first reported the story last week, Home-Stake pulled off one of the biggest swindles of its kind in history; some $100 million that it took in has not yet been accounted for.

Certainly no questionable operation has ever matched the star quality of Home-Stake's investor list. Singer Andy Williams' stake ($538,000*) was among the largest, but he had plenty of celebrity company: Alan Alda ($145,000), Mia Farrow (amount unknown), Barbra Streisand ($28,500), Barbara Walters ($28,500), Bob Dylan (who now has $78,000 more reason to sing of capitalist exploitation). New York Yankee Catcher Thurman Munson put up an unknown amount; Republican Senator Jacob Javits of New York, $28,500; Federal Judge Murray Gurfein, who wrote the decision in the Pentagon-papers case, $70,000. Most astonishing is the list of astute businessmen like Wriston who invested their personal funds. Fred J. Borch, former chairman of General Electric, put up $440,920; William H. Morton, president of American Express, $57,000; Donald Kendall, chairman of PepsiCo, an unknown amount; James R. Shepley, president of Time Inc., $68,500; Thomas S. Gates, who was once Defense Secretary and chairman of the Morgan Guaranty Trust Co., $133,000.

Some Action. One secret of Trippet's success was his skill as a name dropper. Lawrence Kartiganer, a partner in a Beverly Hills law firm that invested in Home-Stake and suggested it to Benny, Williams, Director Mike Nichols and Singer Bobbie Gentry, says that Trippet, a man of some aplomb, would let slip "oh, casually" the names of celebrities he had already signed up. Says Kartiganer: "When investors of the caliber of the top executives at the First National City Bank have a piece of the action, there is a tremendous psychological effect." (Wriston says that First National City itself never recommended investments in Home-Stake to anybody.)

Some of the investors doubtless knew that the venture was risky but figured that they had little to lose. In order to encourage oil exploration, the Government allows part of the money invested in drilling funds to be written off on income tax returns, so many of Home-Stake's victims were putting in money that they would otherwise pay out in taxes. Trippet for a while surprised them by paying handsome dividends, so many upped the ante, investing more than they would have for tax purposes. Apparently, Trippet did it by running a Ponzi scheme, a type of swindle named for Charles Ponzi, a conman who used it to shake more than $10 million out of the citizens of Boston in 1919 and 1920. The principle is simple: the first group of investors are paid dividends out of the money contributed by newer investors. Eventually, such an operation has to collapse of its own weight, but the rewards can initially look good. In 1970, for example, Western Union Chairman Russell W. McFall invested $60,000 in Home-Stake and got a dividend of $6,220, or 10.4%.

At least some of Home-Stake's victims now admit embarrassedly that they should have known better. Hoyt Ammidon, chairman of U.S. Trust Co., concedes that the oil department of his own bank took a dim view of Home-Stake, but he disregarded its opinion and invested $114,000. A revised Home-Stake prospectus issued in 1971 should have raised red flags for businessmen, if they read it. Robert Metzger, president of Resource Programs, a firm that sells advice to investors in oil and gas, says that he and his colleagues used to "sit down and read the Home-Stake prospectus and laugh." Among other things, the prospectus admitted that estimates of oil and gas reserves cited by Home-Stake in promotional materials "were extremely uncertain and speculative" and that Home-Stake's managers were permitted to do whatever they pleased with funds that were left over after drilling costs were met.

Get Rich. People who took the trouble to look at Home-Stake's oil operations sometimes found them impressive, but if they had looked more closely they might have changed their minds. The Wall Street Journal reports Home-Stake employees persuaded a California farmer to let them paint his irrigation pipes orange so they would appear to be part of an oil-pumping network.

Beyond its picaresque aspects and the individual investors' losses, the Home-Stake affair has broader implications. Officials of the Securities and Exchange Commission worry that such glittery schemes are siphoning away investment capital needed badly by legitimate businesses to expand or modernize their enterprises. Late last week the SEC issued an unusual public warning to investors not to fall for "get-rich-quick schemes, promising spectacular returns without any basis of fact." It came too late, of course, for the people who invested in Home-Stake.

* All investments are as computed by the Wall Street Journal and do not necessarily represent potential losses. In some cases, investors put up less than the full amount in cash, and some got part of their money back.

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