If you want to understand Dillon Read in the 1980s, you must understand R.J. Reynolds (RJR), a tobacco company based in Winston-Salem, North Carolina. According to the official Dillon history, The Life and Times of Dillon Read by Robert Sobel (Truman Talley Books/Dutton, 1991) at pages 345-346, RJR had been Dillon client for many years:
“With Dillon’s assistance, Reynolds expanded out of its tobacco base into a wide variety of industries — foodstuffs, marine transportation, petroleum, packaging, liquor, and soft drinks, among others. In the process the R. J. Reynolds Tobacco Co. of 1963, which had revenues of $117 million, became the R. J. Reynolds Industries of 1983, a $14 billion behemoth.”
Throughout the 1980s, RJR’s huge cash flow fueled the buying and selling of companies that generated significant fees for Dillon Read’s bank accounts and investor connections for our Rolodexes.
In 1984 and 1985, Dillon Read helped RJR merge with Nabisco Brands, making the combined RJR Nabisco one of the world’s largest food processors and consumer products corporations. Nabisco’s Ross Johnson emerged as the President of the combined entity. Johnson preferred the bankers he had used at Nabisco — Lehman Brothers. Johnson was on the board of Shearson Lehman Hutton.
To help RJR Nabisco digest the Nabisco acquisition, Dillon and Lehman helped to sell off eleven of RJR Nabisco’s businesses. In the process, numerous Lehman Brothers partners joined Dillon Read. Among them was Steve Fenster, who had been an advisor to the leadership of Chase Manhattan Bank and was on the board of American Management Systems (AMS), a company that figures in our story in the 1990s.
After tours of duty in Dillon’s Corporate Finance and Energy Groups, I spent four years recapitalizing the New York City subway and bus systems on the way to becoming a managing director and member of the board of directors in 1986. I did not work on the RJR account. Odd bits of news would float back. They were always about the huge cash flows generated by the tobacco business and the necessity of finding ways to reinvest the gushing profits of this financial powerhouse.
One of the young associates working for me teamed up with another young associate who worked on the RJR account to buy a sailboat in Europe. The second associate arranged to have the sailboat shipped to the U.S. through Sea-Land, an RJR subsidiary that provided container-shipping services globally. I was told RJR tore up the shipping bill as a courtesy. What kind of cash flows did a company have that could just tear up the shipping bill for an entire boat as a courtesy to a junior Dillon Read associate?
I was to get a better sense of these cash flows many years later when I read the European Union’s explanation. The European Union has a pending lawsuit against RJR Nabisco on behalf of eleven sovereign nations of Europe who in combination have the formidable array of military and intelligence resources to collect and organize the evidence for such a lawsuit. The lawsuit alleges that RJR Nabisco was engaged in multiple long-lived criminal conspiracies.
Excerpt From European Lawsuit Against RJR Nabisco
If you like spy novels, you will find that the European Union’s presentation of fact to be far more fascinating than fiction. One of the complaints filed in the case describes a rich RJR history of business with Latin American drug cartels, Italian and Russian mafia, and Saddam Hussein’s family to name a few. The Introduction reads as follows:
1. For more than a decade, the DEFENDANTS (hereinafter also referred to as the “RJR DEFENDANTS” or “RJR”) have directed, managed, and controlled money-laundering operations that extended within and/or directly damaged the Plaintiffs. The RJR DEFENDANTS have engaged in and facilitated organized crime by laundering the proceeds of narcotics trafficking and other crimes. As financial institutions worldwide have largely shunned the banking business of organized crime, narcotics traffickers and others, eager to conceal their crimes and use the fruits of their crimes, have turned away from traditional banks and relied upon companies, in particular the DEFENDANTS herein, to launder the proceeds of unlawful activity.
2. The DEFENDANTS knowingly sell their products to organized crime, arrange for secret payments from organized crime, and launder such proceeds in the United States or offshore venues known for bank secrecy. DEFENDANTS have laundered the illegal proceeds of members of Italian, Russian, and Colombian organized crime through financial institutions in New York City, including The Bank of New York, Citibank N.A., and Chase Manhattan Bank. DEFENDANTS have even chosen to do business in Iraq, in violation of U.S. sanctions, in transactions that financed both the Iraqi regime and terrorist groups.
3. The RJR DEFENDANTS have, at the highest corporate level, determined that it will be a part of their operating business plan to sell cigarettes to and through criminal organizations and to accept criminal proceeds in payment for cigarettes by secret and surreptitious means, which under United States law constitutes money laundering. The officers and directors of the RJR DEFENDANTS facilitated this overarching money-laundering scheme by restructuring the corporate structure of the RJR DEFENDANTS, for example, by establishing subsidiaries in locations known for bank secrecy such as Switzerland to direct and implement their money-laundering schemes and to avoid detection by U.S. and European law enforcement. This overarching scheme to establish a corporate structure and business plan to sell cigarettes to criminals and to launder criminal proceeds was implemented through many subsidiary schemes across THE EUROPEAN COMMUNITY. Examples of these subsidiary schemes are described in this Complaint and include: (a.) Laundering criminal proceeds received from the Alfred Bossert money-laundering organization; (b.) Money laundering for Italian organized crime; (c.) Money laundering for Russian organized crime through The Bank of New York; (d.) The Walt money-laundering conspiracy; (e.) Money laundering through cut outs in Ireland and Belgium; (f.) Laundering of the proceeds of narcotics sales throughout THE EUROPEAN COMMUNITY by way of cigarette sales to criminals in Spain; (g.) Laundering criminal proceeds in the United Kingdom; (h.) Laundering criminal proceeds through cigarette sales via Cyprus; and (i.) Illegal cigarette sales into Iraq.[13a]
The European Union goes on to explain the role of cigarettes in laundering illicit monies:
V. THE LINK BETWEEN RJR’S CIGARETTE SALES, MONEY LAUNDERING, AND ORGANIZED CRIME
Money-Laundering Links Between Europe, The United States, Russia, and Colombia
20. Cigarette sales, money laundering, and organized crime are linked and interact on a global basis. According to Jimmy Gurule, Undersecretary for Treasury Enforcement: “Money laundering takes place on a global scale and the Black Market Peso Exchange System, though based in the Western Hemisphere, affects business around the world. U.S. law enforcement has detected BMPE-related transactions occurring throughout the United States, Europe, and Asia.”
21. The primary source of cocaine within THE EUROPEAN COMMUNITY is Colombia. Large volumes of cocaine are transported from Colombia into THE EUROPEAN COMMUNITY and then sold illegally within THE EUROPEAN COMMUNITY and the MEMBER STATES. The proceeds of these illegal sales must be laundered in order to be useable by narcotics traffickers. Throughout the 1990s and continuing to the present day, a primary means by which these cocaine proceeds are laundered is through the purchase and sale of cigarettes, including those manufactured by the RJR DEFENDANTS. Cocaine sales in THE EUROPEAN COMMUNITY are facilitated through money-laundering operations in Colombia, Panama, Switzerland, and elsewhere which utilize RJR cigarettes as the money-laundering vehicle.
22. In a similar way, the primary source of heroin within THE EUROPEAN COMMUNITY is the Middle East and, in particular, Afghanistan, with the majority of said heroin being sold by Russian organized crime, Middle Eastern criminal organizations, and terrorist groups based in the Middle East. Heroin sales in THE EUROPEAN COMMUNITY and the MEMBER STATES are facilitated and expedited by the purchase and sale of the DEFENDANTS’ cigarettes in money-laundering operations that begin in THE EUROPEAN COMMUNITY and the MEMBER STATES, Eastern Europe, and/or Russia, but which ultimately result in the proceeds of those money-laundering activities being deposited into the coffers of the RJR DEFENDANTS in the United States.
Background on the Convergence of Narcotics Trafficking and Money Laundering
23. This complaint is about Trade and Commerce or, more correctly, illegal Trade and illegal Commerce, and how money laundering facilitates the financing and movement of goods internationally. Merchants engaging in global trade often turn to the more stable global currencies for payments of goods and services purchased abroad. In many markets, the United States dollar is the currency of choice and, in some cases, the United States dollar is the only accepted form of payment. Merchants seeking dollars usually obtain them in a variety of ways, including the following three methods. Traditional merchants go to a local financial institution that can underwrite credit. Private financing is usually available for those with collateral. A third and least desirable source of dollar financing can be found in the “black markets” of the world. Black Markets are the underground or parallel financial economies that exist in every country. Criminals and their organizations control these underground economies, which generally operate through “money brokers.” These “money brokers” often fulfill a variety of roles not the least of which is an important intermediate step in the laundering process, one that we will refer to throughout this complaint as the “cut out.”
24. The criminal activity that provides the dollars for these black market money laundering operations is often drug trafficking and related violent crimes. South America is the world leader in the production of cocaine, and the United States and the European Union are the world’s largest cocaine markets. Likewise, Colombia and countries in the Middle East produce heroin. Cocaine and heroin are smuggled to the United States and Europe, and are sold for United States dollars as well as in local European currencies (and now the Euro). Russian drug smugglers obtain heroin from the Middle East and cocaine from South America, and sell both drugs in large quantities in the United States and in Europe. Retail street sales of cocaine and heroin have risen dramatically over the past two decades throughout the United States and Europe. Consequently, drug traffickers routinely accumulate vast amounts of illegally obtained cash in the form of United States dollars in the United States and Euros in Europe. The U.S. Customs Service estimates that illegal drug sales in the United States alone generate an estimated fifty-seven billion dollars in annual revenues, most of it in cash.
25. A drug trafficker must be able to access his profits, to pay expenses for the ongoing operation, and to share in the profits; and he must be able to do this in a manner that seemingly legitimizes the origins of his wealth, so as to ward off oversight and investigation that could result in his arrest and imprisonment and the seizure of his monies. The process of achieving these goals is the money-laundering cycle.
26. The purpose of the money-laundering cycle is to establish total anonymity for the participants, by passing the cash drug proceeds through the financial markets in a way that conceals or disguises the illegal nature, source, ownership, and/or control of the money.
Background on Black Market Money Exchanges
27. Within Europe, the United States, South America, and elsewhere, a community of illegal currency exchange brokers, known to law-enforcement officials as “money brokers,” operates outside the established banking system and facilitates the exchange of narcotics sale proceeds for local cash or negotiable instruments. Many of these money brokers have developed methods to bypass the banking systems and thereby avoid the scrutiny of regulatory authorities. These money exchanges have different names depending on where they are located, but they all operate in a similar fashion.
28. A typical “money-broker” system works this way: In a sale of Colombian cocaine in THE EUROPEAN COMMUNITY, the drug cartel exports narcotics to the MEMBER STATES where they are sold for Euros. In Colombia, the cartel contacts the money broker and negotiates a contract, in which the money broker agrees to exchange pesos he controls in Colombia for Euros that the cartel controls in Europe. The money broker pays the cartel the agreed-upon sum in pesos. The cartel contacts its cell (group) in the European Union and instructs the cell to deliver the agreed-upon amount of Euros to the money broker’s European agent. The money broker must now launder the Euros he has accumulated in the European Union. He may also need to convert the Euros into U.S. dollars because his customers may need U.S. dollars to pay companies such as RJR for their products.
29. The money broker uses his European contacts to place the monies he purchased from the cartel into the European banking system or into a business willing to accept these proceeds (a process described in more detail below). The money broker now has a pool of narcotics-derived funds in Europe to sell to importers and others. In many instances, the narcotics trafficker who sold the drugs in THE EUROPEAN COMMUNITY is also the importer who purchased the cigarettes. Importers buy these monies from the money brokers at a substantial discount off the “official” exchange rates and use these monies to pay for shipments of items (such as cigarettes), which the importers have ordered from United States companies and/or their authorized European representatives, or “cut outs.” The money broker uses his European contacts to send the monies to whomever the importer has specified. Often these customers utilize such monies to purchase the DEFENDANTS’ cigarettes in bulk and, in many instances, the money brokers have been directed to pay the RJR DEFENDANTS directly for the cigarettes purchased. The money broker makes such payments using a variety of methods, including his accounts in European financial institutions. The purchased goods are shipped to their destinations. The importer takes possession of his goods. The money broker uses the funds derived from the importer to continue the laundering cycle.
30. In that fashion, the drug trafficker has converted his drug proceeds (which he could not previously use because they were in Euros) to local currency that he can use in his homeland as profit and to fund his operations; the European importer has obtained the necessary funds from the black market money broker to purchase products that he might not otherwise have been able to finance (due to lack of credit, collateral, or U.S. dollars, and/or a desire for secrecy); the company selling cigarettes to the importer has received payment on delivered product in its currency of choice regardless of the source of the funds; and the money broker has made a profit charging both the cartel and the importer for his services. This cycle continues until the criminals involved are arrested and a new cycle begins. Money laundering is a series of such events, all connected and never stopping until at least one link in the chain of events is broken.
31. Many narcotics traffickers who sell drugs in THE EUROPEAN COMMUNITY now also purchase and import cigarettes. In particular, as the trade in cigarettes becomes more profitable and carries lesser criminal penalties compared to narcotics trafficking, the “business end” of selling the cigarettes has become at least as attractive and important to the criminal as the narcotics trafficking. Finally, it makes no difference whatsoever to the money laundering system whether the goods are imported and distributed legally or illegally.
Regardless of whether he sells his cigarettes legally or illegally, the narcotics trafficker has achieved his goal in that he has been able to disguise the nature, location, true source, ownership, and/or control of his narcotics proceeds. At the same time, the cigarette manufacturer (in this case RJR) has achieved its goal because it has successfully sold its product in a highly profitable way.[13b]
Particularly endearing, the European Union alludes to one of the most important secrets of money laundering — that the attorney-client privilege of lawyers and law firms, particularly the most prestigious Washington and Wall Street law firms, are a preferred method for the communication of corporate crimes:
RJR has been aware of organized crime’s involvement in the distribution of its products since at least the 1970s. On January 4, 1978, the Tobacco Institute’s Committee of Counsel met at the offices of Phillip Morris in New York City. The Committee of Counsel was the high tribunal that set the tobacco industry’s legal, political, and public relations strategy for more than three decades. The January 4, 1978 meeting was called to discuss, among other things, published reports concerning organized crime’s involvement in the tobacco trade and the tobacco industry’s complicity therein. The published reports detailed the role of organized crime in the tobacco trade (including the Colombo crime family in New York) and the illegal trade at the Canadian border and elsewhere. RJR’s general counsel, Max Crohn, attended and participated in the meeting. All of the large cigarette manufacturers were present at the meeting and represented by counsel, such as Phillip Morris (Arnold & Porter, Abe Krash) [Author’s note: Arnold & Porter is a firm that will come up several times later in our story] and Brown & Williamson (Paul Weiss Rifkind Wharton & Garrison, Martin London). The Committee of Counsel took no action to address, investigate, or end the role of organized crime in the tobacco business. Instead, the Committee agreed to formulate a joint plan of action to protect the industry from scrutiny of the U.S. Congress.”[13c]
More information on the RJR and other tobacco company lawsuits is provided at the Resource Page at this website. The reader can access directly by linking through this footnote.[13d]
You will find an update in the litigation section in the SEC annual report for 2004 for RJR’s successor corporation, Reynolds American, as well as other updates on litigation cases involving smuggling and slavery reparations.
According to Dillon Read, the firm’s average return on equity for the years 1982-1989 was 29%. This is a strong performance, and compares to First Boston, Solomon, Shearson and Morgan Stanley’s average returns of 26% , 15%, 18% and 31% respectively. Given what we now know from the European Union’s lawsuit and other legal actions against RJR Nabisco and its executives, this begs the question of what Dillon’s profits would have been if the firm had not made a small fortune reinvesting the proceeds of — if we are to believe the European Union — cigarette sales to organized crime including the profits generated by narcotics flowing into the communities of America through the Latin American drug cartels.
To understand the flow of drug money into and through Wall Street and corporate stocks like RJR Nabisco during the 1980s, it is useful to look more closely at the flow of drugs from Latin America during the period — and the implied cash flows of narco dollars that they suggest. Two documented situations involve Mena, Arkansas and South Central Los Angeles, California.