XV. Dillon Read — Cashing Out on Cornell

When Cornell Corrections listed its shareholders with investments of greater than 5% in its proxy statement filed with the SEC in March 1998, Dillon Read was no longer listed. Making the assumption that Dillon Read and its various funds and officers and directors cashed out at or between the second Cornell offering in October 1997 and early 1998 when this proxy was filed, we can pause in the telling of our story to estimate the total profits to Dillon and their investors. We should first note that it appears that Dillon sold their shares at a historical high for Cornell’s stock price.

Cornell Historical Stock Prices

1996 High Low
Fourth Quarter (from October 3)
$12 3/4
$8 7/8
First Quarter
$11 5/8
Second Quarter
Third Quarter
$16 3/4
$14 7/16
Fourth Quarter
$20 3/4
$15 3/4
First Quarter
$24 5/8
$19 1/4
Second Quarter
$25 7/16
$18 1/2
Third Quarter
$21 1/16
Fourth Quarter
First Quarter
$19 7/8
Source: Yahoo! Finance

Cornell Corrections historical price graph Courtesy: Cornell Companies Inc.

While Dillon was not required to disclose their total investment banking revenues and investment profits on Cornell Corrections between 1991 and 1998, I estimate Dillon’s total profits for their stock investment in Cornell to have been $6.7 million for Dillon employees who invested and $19.4 million for the investors in Dillon’s funds, which also included Dillon officers and directors. This represented an annual return on investment of approximately 35-45%. These are the kind of profits you get when you buy stock for a price of $3.8 million and several years later sell that stock for $29.9 million — or an almost 800% increase on your investment. In addition, I estimate that Dillon also generated at least $6 million in fees for investment banking and investment advisor services. This results in an estimated total of $32.1 million in profits for Dillon, its leaders and its investors over a seven-year period.

Profits on Cornell

Dillon Read’s Profits on Cornell Corrections: An Example of How To Estimate “Prison Pop”

PROFIT #1: Estimate of Dillon Read Profits on Stock Investments: $26.1 Million

EXPLANATION: Cornell’s October 1996 Prospectus describe Dillon and its funds having a stock position of 1,359,863 shares. Dillon’s April 1997 Cornell 13-D filing describes shareholdings of 1,191,864 shares and an original cost of $3,359,736. Read on …

I remember reading some of the Carlyle Group’s marketing material about their success in leveraged buyouts of companies that did lots of contracts and business with the federal government. They claimed to have achieved annual investment returns of 35%, in the range of the returns that I estimate Dillon to have made on Cornell Corrections. If you understand the story of Cornell Corrections, you will get a good understanding of the type of investment that achieves 35% investment returns for private investors on the stocks of companies that enjoy growth in government contracts and the fruits of “privatization.”

It is imperative in understanding investments like these to look not just at the companies involved, but to look through to the individuals who make the critical decisions. In Dillon Read’s case, the key leaders were also personal investors. We do not know if, as sometimes happens in cases like this, the firm financed or arranged financing for their purchases in an arrangement where, in essence, they can buy for “no money down.” An estimate of their personal profits is as follows:

Estimated Personal Profits of Seven Largest Dillon Direct Investors * $22 Est. Sales Price **

John P. Birkelund 39,579 3,736 $96,990.16 $773,748
John Haskell, Jr 36,730 3,505 85,382.75 722,677
David W. Niemiec 35,018 3,279 76,989.51 693,406
Fritz Hobbs 30,455 2,803 56,986.04 613,024
George A. Wiegers 28,176 2,571 44,988.85 574,883
Peter Flanigan 28,178 2,687 48,781.40 571,134
Kenneth M. Schmidt 24,778 2,454 35,622.38 509,494
* Does not include potential bonus and compensation resulting from other profits on Cornell Corrections. Treats options as shares for purposes of estimate. Options are included in share numbers.

** Average of high lows used in the sales price estimates of $24 -19 5/8.

To generate these profits for Dillon and the Dillon leadership at a stock market valuation of $25,962 (the value “per bed” at the time of the October 1997 offering) when Dillon had invested when Cornell had no prisons and prisoners, the following table estimates how many people had to go to prison for an extended period:

Estimated Number of People Incarcerated for Extended Period to Generate Dillon Stock Profits

John P. Birkelund
John Haskell, Jr.
David W. Niemiec
Fritz Hobbs
George A. Wiegers
Peter Flanigan
Kenneth M. Schmidt
All Dillon Read Investments


Another useful calculation is to look at the how many taxpayers will have to work their entire lives to pay the taxes for this many people to be imprisoned. Let’s assume that the average taxpayer pays $150,000 of federal taxes in an entire lifetime. Based on the General Accounting Office’s (now the General Accountability Office, the Congressional Auditor) study in 1996 that indicated the total annual federal, state and local system expenditures per prisoner were approximately $154,000. That means that ten taxpayers would have to work their whole lives to pay for one prisoner with a mandatory sentence of ten years. On this basis, the following table estimates how many people would have to work their whole lives to pay the taxes to fund the incarcerations necessary to generate Dillon’s profits on Cornell Corrections.

Estimated Number of People Working Their Entire Lives to Pay Taxes to Fund Prisoners Incarcerated for Extended Period to Generate Dillon Stock Profits

John P. Birkelund
John Haskell, Jr.
David W. Niemiec
Fritz Hobbs
George A. Wiegers
Peter Flanigan
Kenneth M. Schmidt
All Dillon Read Officers and Directors Investing

Cornell’s March 1998 proxy filed with the SEC inspires some additional questions regarding the source of funds that bought Dillon Read out at a price that generated tens of millions of profit on their venture investment. There are several new large shareholders listed:

J&W Seligman 100 Park Avenue New York
Alliance Capital c/o the Equitable Companies 1290 Avenue of the Americas New York
AMVESCAP 11 Devonshire Square London

When Cornell Corrections filed its 1999 proxy the following year, AMVESCAP and Alliance were each up to 9% of the outstanding shares.

Based on the foregoing filings, it is fair to assume one way or another these investors were helpful in making it possible for Dillon Read to cash out at or near a market high in Cornell’s stock price.

John Haskell, the second largest personal investor among the Dillon officers and directors was a board member of Equitable. Alliance Capital was soon to become much more visible as a result of its role in using Florida pension funds to buy Enron stock when one of its executives and Lockheed Martin board members, Frank Savage, was also on Enron’s board and member of its finance committee.[81]

However, in the category of “it’s a small world” was the relationship of Cornell’s largest European shareholder AMVESCAP to RJR. In 1999, AD Frazier, President and CEO of INVESCO joined the board of R.J. Reynolds Tobacco Holdings. The press release describes Frazier as a member of the Board of Directors of INVESCO’s parent AMVESCAP.

RJR’s 2003 Proxy, filed after the European Union lawsuits were filed list INVESCO as the third largest shareholder with 5.6% of outstanding shares. RJR’s 2004 Proxy lists INVESCO in London as having 11% and INVESCO North American Holdings as owning 11%. RJR’s 2005 Proxy lists INVESCO in London with 6.3% and AMVESCAP in London with 6.32%.

Which means that when one of RJR Nabisco’s former lead investment bankers, Dillon Read, and its investors made in the range of $30 million cashing out of a private prison company, they were cashed out directly or indirectly by one of RJR Nabisco lead investors.

I wonder what the ghost of Barry Seal would say about what that might all have to do with the alleged $5 billion of drugs he pumped through a little airport in Arkansas, and who was responsible to reinvest that money. I wonder what Lou Gerstner, Henry Kravis and George Roberts as CEO and lead investors in RJR would say if given truth serum about who may be responsible for reinvesting the dirty money allegedly laundered with RJR cigarette sales.

Brown University: Cashing Out on Cornell Corrections

In Cornell’s prospectus when Dillon Read led its second stock offering on October 10, 1997, Brown University’s Third Century Fund was listed as a shareholder with 88,818 shares, of which 28,818 shares were to be sold through the offering. John Birkelund, Chairman and CEO of Dillon Read, was a long time trustee of Brown University. The price on the 1997 offering was $19 5/8 per share. If Brown’s average profit was the difference between the 1997 price and the 1996 offering price of $12 per share, it would have generated a profit in a year’s time of $677,237. Brown’s return on investment under these assumptions would have been a smashing 63.5%. If it had sold when the stock peaked after the offering at or around the time that Dillon appears to have sold out, it would have been higher.

Prison Populations

The number of people who needed to be imprisoned for many years to generate such investment profits based on the foregoing assumptions was 67 people. An estimate of the number of men and women in the U.S. who would have to work their whole life to pay the taxes to imprison those 67 people would be 670 people.

Brown University also benefited from John Birkelund’s success at Dillon Read — including from Cornell Corrections — presumably through his donations and fundraising for the school — a primary function of a trustee. Typically, funding a “chair” at a university requires a donation greater than a million dollars — even several million. According to Brown’s website, there is a John P. Birkelund Professor of History at Brown, Omer Bartov.

Professor Bartov is an expert in genocide. His publications listed on Brown’s website include:

  • In God’s Name: Genocide and Religion in the Twentieth Century, edited volume with P. Mack (Berghahn Books, 2001).
  • Mirrors of Destruction: War, Genocide, and Modern Identity (Oxford UP, 2000)
  • The Holocaust: Origins, Implementation, Aftermath, edited volume (Routledge, 2000)
  • Murder in Our Midst: The Holocaust, Industrial Killing, and Representation (Oxford UP, 1996)

For the Fall 2005 semester Professor Bartov taught a course called “Modern Genocide and Other Crimes against Humanity.” The course description is as follows:

“The emergence, evolution, varieties, and underlying causes of and confrontations with genocide and other crimes against humanity in the 20th century: genocide in colonial empires, Ottoman Turkey, Nazi Germany, Cambodia, and Rwanda; killing of the handicapped, wartime massacres, mass crimes of Communism, and ‘ethnic cleansing’; the role of racism in and moral arguments about crimes against humanity; and policies of retribution and restitution.”

Professor Bartov also serves on the Brown University Slavery and Justice Committee whose mission is described on the University’s website as follows:

“Welcome to the website of Brown University’s Steering Committee on Slavery and Justice. The committee was appointed in 2003 by President Ruth Simmons and charged ‘to organize academic events and activities that might help the nation and the Brown community think deeply, seriously, and rigorously about the questions raised’ by the national debate over slavery and reparations. As an institution whose early benefactors included both slave traders and pioneering abolitionists, Brown has an intimate relationship to the history of American slavery. This history gives us, in the president’s words, ‘a special opportunity and a special obligation’ to contribute to this ongoing debate.” [82]

A 2003 press release regarding one of Professor Bartov’s articles describes his work as follows:

“Throughout the last century, the scholarly community played a prominent role in providing the rationale and supplying the know-how and personnel for the perpetration of state-directed mass violence, according to new research by a Brown University historian. Omer Bartov, the John P. Birkelund Distinguished Professor of European History, cited incidents of ethnic cleansing, genocide and terrorism which were legitimized and supported by academics in his paper “Extreme Violence and the Scholarly Community,” published in the current issue of the International Social Science Journal. “We must recall that scholars and intellectuals have not infrequently found themselves at the forefront of support for mass crimes and inhumanity and have often distinguished themselves by their extraordinary political blindness and moral callousness,” Bartov wrote. “We ignore its implications at our peril.”

From a survey of Professor Bartov’s research online there is no indication of what his thoughts are regarding Brown’s quick profits on Cornell Corrections or possible sources of funds to support a John P. Birkelund Professorship in European History and the facts and circumstances of John Birkelund’s fortune — including fees and profits from RJR Nabisco and Cornell Corrections.

Professor Bartov was contacted by e-mail at Omer_Bartov@brown.edu for comment in late November 2005 and has not yet replied.