Dillon Read & Co. Inc. and the Aristocracy of Prison Profits
by Catherine Austin Fitts
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"Make a Law, Make a Business"  — Old New Jersey street saying

Dillon Read Profits on Cornell - An Example of How to Estimate "Prison Pop"

Dillon Read’s Estimated Total Profits on Cornell Corrections:

$32.1 Million

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

$26.1 Million --- Return on Investment (ROI) for Dillon Investors of Est. 35-45% --- Representing 8X Increase on Investment

EXPLANATION: Cornell’s October 1996 Prospectus describes Dillon and its funds as having a stock position of 1,359,863 shares. Dillon's April 1997 Cornell 13-D filling describes shareholdings of 1,191,864 shares and an original cost of $3,359,736. The difference appears to be a distribution of shares to the Concord partners in early 1997. We assume that this distribution was 168,000 shares and for purposes of estimating cost, assume their average purchase price on these shares was $2.75 average cost per share for all existing shareholders (Dillon managed funds and employees were approximately 44% of existing shareholders) in Cornell’s October 4, 1996 Prospectus. (A prospectus is the document provided to investors that describes the company and its securities.)

Dillon did not appear to sell shares in the October 4, 1996 or the October 10, 1997 offering, yet was not shown as a holder of 5% or more in the March 9, 1998 proxy. (A proxy is the annual filing soliciting annual shareholder votes that describes the stock holdings of officers and directors as well as any holder known to the company to have 5% or more of the outstanding shares.)

For purposes of estimation, we are assuming that stock options can be treated as shares and Dillon and partners to whom they distributed shares sold their various positions between October 10, 1997 and March 1997 at or between the first quarter high of $24 — shown in Cornell’s 1998 10K -- or the offering price in October 1997 of $19.625. As a result, we assumed an average sales price of $22.

Under these assumptions, total proceeds would have been $29,916,986. Profits would have been these amounts, less the costs of $3,821,736, or $26,095,250 in capital gains (stock profits). Of this amount, the officer and director personal positions of 335,233 shares (including options) would have been proceeds of $7,375,126 less costs of $652,999.99 ($2.15 per share shown in SEC filings breakdown for costs of the different Dillon positions -- which differs by slight amounts than the total of the stock costs listed for the 32 Dillon officers and directors listed as shareholders at Exhibit E in the April 1997 13-D filing), generating estimated profits for officers and directors directly of $6,722,126.

Actual profits will differ from these estimates based on such factors as different timing of investments, sales or stock and option costs.

PROFIT #2: Estimate of Dillon Read Fees (Underwriting Spreads) on 2 Stock Offerings:

$3 Million

EXPLANATION: Total underwriting spreads were $7.5 Million assuming the 30-day option to sell additional shares were exercised. Dillon Read as lead manager would have made the largest portion of all the underwriters in the underwriting syndicates. The underwriters spread is the discount on the purchase price given to the underwriters who buy at the discounted price and then attempt to sell the securities at the higher stated offering price.

PROFIT #3: Estimate of Dillon Read Secondary Market Profits on Market Making in Cornell Stock:

$1 Million

EXPLANATION: When I was at Dillon we often made more money on trading the securities after the initial offering then we did on the initial offering. Because we had placed many of the securities when they were first sold, investors would come to us to buy and sell the shares in the future. Dillon was not traditionally strong in the equity area, so I am assuming a conservative number in this category. Actual profits could be higher.

PROFIT #4: Estimate of Dillon Fees (Underwriting Spreads) on $30,106,000 Rhode Island Port Authority Municipal Bonds for Donald C. Wyatt Facility & Secondary Market Profits on Market Making in the Bonds:


EXPLANATION: The Harvard design case study indicates the underwriting discount on the municipal bond offering was $451,325 with Dillon Read and Fleet handling the underwriting.[78] Dillon would have made a percent of the underwriting discount and profits on the subsequent aftermarket trading in the bonds. We are assuming that Dillon did not lose money when Cornell had trouble making debt service payments. (See the New York Times story of Al Gore’s office arranging prisoners to be shipped to Rhode Island so that the Cornell revenues would be sufficient to cover debt service on the municipal bonds issued to finance the facility.) The bondholders presumably would have included the investors Dillon and Fleet sold the bonds to.[79]

PROFIT #5: Dillon Read Private Placement Fees:


EXPLANATION: Cornell had a large credit facility from ING, the Dutch insurance company that took over Barings, and in the process became Dillon’s lead outside investor. It is likely that Dillon arranged for this financing for Cornell and, if so, would have been paid a fee. A “private placement” is done privately between a company and an investor rather than offered to the public.

PROFIT #6: Dillon Fees Associated with Venture Fund Asset Management:

$1 Million

EXPLANATION: Dillon would have charged fees in connection with its raising and management of the Concord, Concord Japan and Lexington Funds. If their fees included a % of the capital gains on the fund and its investments, the Dillon fees related to Cornell investments could have been much greater that this estimate.

TOTAL PROFITS: Total Estimated Profits:

$32.1 Million

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© 2006 Catherine Austin Fitts