Marc Rich

Marc Rich
Born	Marcell David Reich; December 18, 1934; Antwerp, Belgium
Died	June 26, 2013(aged 78); Lucerne, Switzerland
Nationality	Belgian-American
Citizenship	United States; Belgium; Spain; Israel; Bolivia
Education	Rhodes Preparatory School, Manhattan; New York University (one semester)
Occupation	Commodities trader, financier
Years active	1954–2013
Employer	Philipp Brothers (1954–1974)
Company	Marc Rich + Co. AG
Title	Founder of Marc Rich + Co. AG, later Glencore
Known for	Developing the spot market for crude oil; his 1983 indictment and 2001 presidential pardon
Net worth	About US$2.5 billion
Criminal charge	65 counts including tax evasion, wire fraud, racketeering and trading with Iran during the hostage crisis (1983)
Status	Fugitive from 1983; pardoned by President Bill Clinton on 20 January 2001 without trial
Spouse	Denise Eisenberg (m. 1966; div. 1996); Gisela Rossi (m. 1998; div. 2005)
Children	3

Marc Rich (born Marcell David Reich; 18 December 1934 – 26 June 2013) was a Belgian-American commodities trader who founded the firm that became Glencore, reshaped the international oil trade by developing its spot market, and became one of the most notorious fugitives in American legal history before receiving a presidential pardon on the final day of Bill Clinton's presidency.

Rich was born in Antwerp to a Jewish family that fled the German occupation of Belgium in 1941, travelling through Vichy France, Spain and Portugal to reach the United States. He left New York University after a single semester to join the commodities house Philipp Brothers in 1954, where he traded metals and ran operations in Cuba, Bolivia and Spain. In 1974 he and his colleague Pincus Green established Marc Rich + Co. AG in Switzerland.

His commercial innovation was to break the system under which the major oil companies bought crude on long-term contracts at posted prices. Rich bought and sold cargoes for immediate delivery at prices set by the market, financing the positions with bank credit rather than with capital of his own. The Financial Times commentator Andrew Hill summarized the insight as the recognition that oil and other raw materials could be traded with far less capital and fewer assets than the producers believed, provided the trade was backed by bank finance: a leveraged model that became the template for Glencore, Trafigura, Vitol and the modern commodity trading industry.

The same disregard for established arrangements extended to political ones. Rich told his biographer Daniel Ammann that his most important and most profitable transactions were made by violating international trade embargoes, and his counterparties over three decades included apartheid South Africa, Fidel Castro's Cuba, Marxist Angola, the Nicaraguan Sandinistas, Muammar Gaddafi's Libya, Nicolae Ceaușescu's Romania and Augusto Pinochet's Chile. After the Iranian Revolution he bought Iranian crude in defiance of the American embargo, and Iran became his most important supplier for more than fifteen years; he sold Iranian oil to Israel through a pipeline whose existence was not publicly acknowledged.

In 1983 Rich and Green were indicted on 65 counts, including racketeering, wire fraud, the largest tax evasion case then brought in the United States, and trading with Iran while American hostages were held in Tehran. The indictment was filed by the federal prosecutor Rudolph Giuliani, and conviction on all counts would have carried a sentence exceeding 300 years. Rich fled to Switzerland, maintained his innocence, never returned, and remained on the Federal Bureau of Investigation's Ten Most Wanted Fugitives list for years, evading arrest in Britain, Germany, Finland and Jamaica and declining to return even for his daughter's funeral in 1996. His companies pleaded guilty to 35 counts and paid US$90 million.

Clinton pardoned him hours before leaving office on 20 January 2001, in a decision condemned across the political spectrum. Investigations by federal prosecutors and by Congress found no evidence of criminal conduct in the granting of the pardon; Clinton later said it had not been worth the damage to his reputation.

Rich lost control of his own firm in 1993 after an unsuccessful attempt to corner the world zinc market, and it was renamed Glencore in September 1994. He died in Lucerne in 2013.

Background: the oil trade before Rich

The industry Rich entered and then dismantled had been organized on the same principles for half a century.

The Seven Sisters

International oil was controlled from the 1920s to the 1970s by a small group of vertically integrated companies: Standard Oil of New Jersey, Royal Dutch Shell, Anglo-Persian, Standard Oil of New York, Standard Oil of California, Gulf and Texaco, collectively the Seven Sisters. They held the concessions, owned the refineries, ran the tankers and operated the retail networks, and the crude oil moving between these stages generally moved within a single company or under long-term contracts between them at administratively posted prices.

There was, in consequence, almost no free market in crude. A cargo was not something that could be bought by a third party and resold at a profit, because there was rarely a third party and rarely a price other than the posted one.

The 1970s dislocation

Two developments broke the arrangement. The producing states nationalized their oil industries through the 1960s and 1970s (Iraq, Libya, Algeria, Iran, Venezuela, Saudi Arabia), taking ownership of reserves that the majors had held under concession. And the price shocks of 1973 and 1979 introduced volatility on a scale the posted-price system could not accommodate.

Newly nationalized producers held crude they controlled but lacked the refining, shipping and marketing networks to place it, while refiners who had lost their equity supply needed cargoes. The gap between them was commercial territory that had not previously existed.

Rich, then in his late thirties and running the Madrid office of Philipp Brothers, was among the first to occupy it systematically.

The trading model

The business Rich built rested on a small number of principles.

The first was that a trader needs information more than assets. Knowing which refinery was short, which producer had an unplaced cargo, what a tanker charter cost and where the arbitrage lay was worth more than owning any of it.

The second was that the capital required is not the value of the cargo but the margin, provided a bank will finance the rest against the goods themselves. Letters of credit, whose use in the oil trade Rich popularized, allowed a small firm to move quantities that would otherwise require an oil company's balance sheet.

The third was that a trader can go where an integrated oil company cannot. Majors were constrained by home-government policy, by shareholders and by reputational exposure; a private Swiss partnership answerable to no public market was constrained principally by whether it got paid.

The third principle is the source both of Rich's returns and of his indictment.

Early life

Marcell David Reich was born on 18 December 1934 in Antwerp to a Jewish family. In 1941 his parents took him out of occupied Belgium, travelling through Vichy France, Spain and Portugal and sailing from Lisbon aboard the liner Serpa Pinto to the United States.

His father, David Reich, opened a jewellery shop in Kansas City, Missouri, and moved the family to Queens, New York, in 1950. He established a business importing Bengali jute for burlap sacks, later traded agricultural products, and helped found the Banco Boliviano Americano, an early exposure for his son to trade with Latin America.

Rich attended the Rhodes Preparatory School in Manhattan, and enrolled at New York University but left after one semester.

Philipp Brothers

Rich joined Philipp Brothers, then the largest raw materials trading house in the world, in 1954 at the age of nineteen, and remained for twenty years. There he met Pincus Green, with whom he would work for the rest of his career.

He began in the mailroom, moved into metals, and was posted to run operations in Cuba, Bolivia and Spain. The apprenticeship gave him two things: a technical education in the international raw materials markets conducted in the countries that produced them, and a set of relationships with governments that Western companies found difficult to deal with.

He learned to trade with states that were poor, unstable, subject to sanction, or all three, and concluded early that the risk in such places was principally political rather than commercial, and that political risk was manageable by people willing to be present.

The break came over money. Rich and Green, having generated very large profits for Philipp Brothers through the oil trading they had pioneered, sought bonuses commensurate with them; the firm refused. They left in 1974.

Marc Rich + Co. AG

Founding

Rich and Green established Marc Rich + Co. AG in Zug, Switzerland, in 1974. The choice of Switzerland reflected banking secrecy, tax treatment, political neutrality and a legal environment that did not require the disclosure of counterparties.

The firm expanded rapidly. It traded crude, refined products, metals, minerals and agricultural commodities, and became within a decade one of the largest privately held companies in the world, with offices across Europe, the Americas, Africa and Asia.

The spot market

Rich's central contribution was to make crude oil a traded commodity. By buying cargoes for prompt delivery from producers that had no outlet and selling them to refiners that were short, at prices reflecting the balance of supply and demand rather than a posted schedule, he created a market where the majors had maintained an administered system.

The consequence was permanent. The spot and forward markets for crude, and the derivative markets that developed on top of them, are the mechanism by which oil is priced today, and the independent trading houses that operate in them (Glencore, Vitol, Trafigura, Mercuria, Gunvor) are direct descendants of the model Rich built, several of them founded by his former employees.

Embargoes

Rich's willingness to trade with embargoed and sanctioned states was, on his own account, central to his profitability.

He supplied and bought from apartheid South Africa, which was subject to an oil embargo and had no domestic crude, over an extended period. He dealt with Castro's Cuba, with the MPLA government of Angola, with the Sandinistas in Nicaragua, with Gaddafi's Libya, with Ceaușescu's Romania and with Pinochet's Chile, a client list spanning the Cold War's ideological divisions and indicating an indifference to them.

Ammann, his biographer, wrote that Rich had no regrets, and recorded his standing justification: "I deliver a service. People want to sell oil to me and other people wanted to buy oil from me. I am a businessman, not a politician."

Iran

The most consequential relationship began after the fall of the Shah in 1979. Rich developed a working relationship with the revolutionary government and bought Iranian crude in defiance of the American embargo imposed during the hostage crisis. Iran remained his most important supplier for more than fifteen years.

He simultaneously sold Iranian oil to Israel through a pipeline arrangement that was not publicly acknowledged, a trade that supplied a country Iran did not recognize with oil from a state that had declared itself its enemy, conducted through a private intermediary. Forbes has reported that the Iranian businessman Asadollah Asgaroladi was Rich's partner in circumventing American sanctions.

Rich also gave Mossad officers contacts in Iran, a matter discussed further below.

Other interests

Rich's holdings extended beyond commodities. Marc Rich Real Estate GmbH undertook development projects in Europe, including in Prague.

In 1981 Rich and Marvin Davis bought 20th Century Fox. When Rich was indicted two years later his assets, including the Fox holding, were frozen; Davis was permitted to acquire Rich's stake and sold the studio to Rupert Murdoch for US$232 million in March 1984.

Rich's dealings brought him into contact with figures associated with organized crime in the Soviet Union and its successor states, including the Georgian-Israeli businessman Grigori Loutchansky, owner of the Austrian oil exporter Nordex, and Marat Balagula, who was convicted of gasoline price fixing in the United States.

His net worth has been estimated at about US$2.5 billion.

Indictment and flight

The 1983 indictment

In September 1983 a federal grand jury in the Southern District of New York indicted Rich and Pincus Green on 65 criminal counts. The charges included income tax evasion, wire fraud, racketeering under the RICO statute, and trading with Iran in violation of the embargo imposed while American citizens were held hostage in Tehran.

The tax charges were the largest brought in United States history to that date. They concerned an arrangement under which profits from crude oil trading, alleged to have been earned by the American entity, were reported by the Swiss parent, a structure the government characterized as a scheme to move approximately US$100 million of taxable income offshore, and which Rich's advisers characterized as a defensible allocation of profit between related companies.

The indictment was filed by Rudolph Giuliani, then United States Attorney for the Southern District of New York. Conviction on all counts would have carried a sentence exceeding 300 years.

The use of the RICO statute, enacted against organized crime and carrying provisions permitting the pre-trial freezing of assets, against a commodities firm in a tax dispute was contested at the time and remained a central element of Rich's defence. His lawyers argued throughout that the conduct alleged was at most a civil tax matter, and the government's own subsequent practice moved away from applying RICO to such cases.

Flight

Learning that the indictment was coming, Rich left for Switzerland. He never returned to the United States and never entered a plea.

His companies eventually pleaded guilty to 35 counts of tax evasion and paid US$90 million in fines and back taxes. Rich himself remained a fugitive for eighteen years, was placed on the FBI's Ten Most Wanted Fugitives list, and narrowly avoided arrest in Britain, Germany, Finland and Jamaica. He travelled with security, avoided countries with extradition treaties with the United States, and did not return even for the funeral of his daughter Gabrielle, who died of leukaemia in 1996.

Citizenship

Rich believed he had relinquished his United States citizenship on becoming a citizen of Spain. A federal appeals court ruled in 1991 that for the purposes of American law he remained a citizen and therefore remained liable to United States income tax, a holding that preserved the basis of the tax charges.

He held Belgian, Bolivian, Israeli and Spanish passports.

The pardon

The grant

On 20 January 2001, in the final hours of his presidency, Bill Clinton granted Rich a full and unconditional pardon. Pincus Green was pardoned at the same time.

A condition attached to the pardon was that Rich would waive procedural defences against any civil action brought by the United States on his return, consistent with the position that the conduct warranted civil rather than criminal treatment. He never returned.

The campaign

The pardon was the product of a sustained and well-resourced effort.

Rich's representation over the years included Leonard Garment, who had served as acting Special Counsel to Richard Nixon, and Lewis "Scooter" Libby, who acted for Rich from 1985 until spring 2000. Jack Quinn, formerly Clinton's White House Counsel and chief of staff to Vice President Al Gore, took over the petition and submitted it directly to the White House rather than through the Department of Justice's pardon attorney, a departure from standard procedure that Quinn said had been suggested by Deputy Attorney General Eric Holder.

Avner Azulay, a former senior Mossad officer who since 1993 had been executive director of two of Rich's philanthropic foundations in Israel, coordinated the effort. He persuaded Rich's former wife Denise, from whom Rich had been divorced in 1996, to appeal to Clinton personally, and used his own contacts to ask Ehud Barak, then Israeli prime minister, to raise the matter with the president, which Barak did on several occasions.

A substantial number of Israeli and Jewish figures wrote in support, among them Shimon Peres, Ehud Olmert, Shlomo Ben-Ami, the philanthropist Michael Steinhardt, Rabbi Irving Greenberg of the United States Holocaust Memorial Council, and Abraham Foxman of the Anti-Defamation League, an organization that had received more than US$250,000 from Rich. A former Mossad director, Shabtai Shavit, also urged the pardon, saying that Rich had routinely allowed intelligence officers to use his offices worldwide.

Reaction

The decision was condemned immediately and across party lines.

Former President Jimmy Carter, a Democrat, said: "I don't think there is any doubt that some of the factors in his pardon were attributable to his large gifts. In my opinion, that was disgraceful." The New York Times described it in an editorial as "a shocking abuse of presidential power". Several of Clinton's closest supporters distanced themselves from it.

Critics alleged that the pardon had been bought. Denise Rich had given more than US$1 million to the Democratic Party, including more than US$100,000 to Hillary Clinton's Senate campaign and US$450,000 to the Clinton Library foundation during Clinton's presidency.

Testimony to Congress from Clinton's chief of staff John Podesta, White House Counsel Beth Nolan and adviser Bruce Lindsey established that nearly all the White House staff advising on the petition had urged the president not to grant it.

Investigations

Federal prosecutor Mary Jo White was appointed by Attorney General John Ashcroft to investigate the pardon and stepped down before completion; she was succeeded by James Comey, who was critical both of the pardon and of Holder's role in recommending it. Congressional investigations ran in parallel.

Federal investigators ultimately found no evidence of criminal activity in the granting of the pardon.

The FBI released documents relating to the matter on 1 November 2016 under the Freedom of Information Act.

Clinton's explanation

In an opinion essay in The New York Times on 18 February 2001, Clinton set out his reasons. He noted that the tax law professors Bernard Wolfman of Harvard and Martin Ginsburg of Georgetown had concluded that no crime had been committed and that the tax-reporting position taken by Rich's companies had been reasonable, and he listed Libby among three "distinguished Republican lawyers" who had supported a pardon.

Clinton also cited the clemency appeals from Israeli officials, and said subsequently in interviews that Israeli officials of both major parties and Jewish community leaders in America and Europe had urged the pardon, telling The New York Times as much and remarking to Geraldo Rivera of CNBC that "Israel did influence me profoundly".

He later expressed regret, saying the pardon "wasn't worth the damage to my reputation".

Libby, testifying before Congress, denied that Rich had violated the tax laws but criticized him for trading with Iran while that country held American hostages. Libby himself subsequently received a commutation from President George W. Bush and a pardon from President Donald Trump in connection with the Plame affair.

Relationship with Israel

Rich was a substantial and lifelong supporter of Israel, giving an estimated US$150 million to institutions including the Israel Museum and the Tel Aviv Museum, to research centres and theatres and to a range of other causes.

He acknowledged reluctantly, in interviews with Ammann, that he had assisted Mossad; Ammann reported the account as confirmed by a former Israeli intelligence officer. According to Ammann, Rich helped finance Mossad operations and supplied Israel with strategically significant volumes of Iranian oil through the undisclosed pipeline. Shavit's statement that intelligence officers used Rich's offices around the world is consistent with that account.

The relationship is generally regarded as the reason the pardon campaign was able to mobilize senior Israeli political figures across party lines, and it is the element of the affair that remains least documented in the public record.

Loss of the company

Rich lost control of his own firm not to prosecutors but to his partners.

At the end of 1993 an attempt to corner the world zinc market failed, producing losses reported at around US$170 million. Senior traders, the group known internally as the Rich Boys, insisted that he surrender his majority stake, and a management buyout followed. Marc Rich + Co. AG was renamed Glencore, a contraction of Global Energy Commodities and Resources, on 1 September 1994.

He sold his remaining interests over the following years and continued to operate on a smaller scale through Marc Rich & Co. Investment AG, which merged in 2001 with Crown Resources AG, associated with the Russian Alfa Group.

Legacy

Glencore

Glencore became the largest commodity trading house in the world. Ivan Glasenberg, who had joined under Rich, became chief executive in 2002, took the company public in 2011 in the largest London listing to that date, and merged it with Xstrata in 2013 to form Glencore Xstrata, headquartered at Baar in Switzerland.

Glencore's own account of its history dates the company from 1974 as Marc Rich + Co. AG and records the 1993 management buyout, an acknowledgement of a founder the company spent years distancing itself from.

Trafigura and the trading industry

Trafigura, established in March 1993 by Claude Dauphin and other former senior Marc Rich executives, became one of the largest independent trading houses in the world. It was never owned or managed by Rich.

The wider legacy is the industry itself. The independent commodity trader (privately held, thinly capitalized relative to the value it moves, financed by banks against cargoes, operating in jurisdictions that integrated producers avoid) is Rich's design, and it intermediates a substantial proportion of the world's traded oil, metals and grain.

The Paradise Papers

The Paradise Papers, published on 5 November 2017, showed that the law firm Appleby had continued to act for Rich and for Glencore on major projects after the 1983 indictment.

Personal life

Rich married Denise Eisenberg, an American songwriter, in 1966; they had three daughters and divorced in 1996. Their daughter Gabrielle died of leukaemia that year, and Rich did not attend the funeral in the United States for fear of arrest. Denise Rich's role in the pardon campaign, and her political donations, made her a central figure in the subsequent controversy.

He married Gisela Rossi in 1998; they divorced in 2005.

Rich lived principally in Switzerland and Spain after 1983, maintained an extensive art collection, and gave few interviews. He cooperated with Daniel Ammann for the biography The King of Oil: The Secret Lives of Marc Rich, published in 2009, which remains the principal source for his own account of his career.

He died in Lucerne on 26 June 2013, aged 78, and was buried in Israel.

Assessment

Rich is assessed in two largely separate registers, and the difficulty of reconciling them is the substance of his reputation.

As a trader he was among the most consequential commercial figures of the twentieth century. He identified that the integrated oil system was vulnerable to a market it had been designed to prevent, built the mechanism by which that market came into being, and left behind an industry structure that still governs how the world's raw materials move. The leveraged, asset-light, information-driven trading house is his invention, and the largest firms in the sector are either his company, or companies founded by his employees, or imitations of both.

As a legal and political matter he was a fugitive for eighteen years from charges he never answered, whose companies pleaded guilty to 35 counts, who traded with an adversary state while it held American hostages, and who obtained a pardon through a campaign directed at the president personally, financed in part by his former wife's donations to the president's party. That the pardon was preceded by advice from nearly all the relevant White House staff not to grant it, and followed by the president's own regret, has left it among the most criticized exercises of the clemency power in American history.

A narrower question, whether the underlying tax charges were sound, has never been resolved, because no trial took place. Tax specialists cited by Clinton concluded that the reporting position was reasonable; the prosecutors who brought the case did not accept that, and Giuliani has continued to defend the indictment. Rich maintained his innocence for thirty years and died without a court having tested either claim.

References

External links

Glencore