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Money: the Charles Hurwitz story

published originally in Coast Magazine

by Bill Meyers

Charles E. Hurwitz was born 1940 in Kilgore, Texas to Hyman and Eva Hurwitz. His father owned two clothing stores and built the small town's first shopping center. Charles graduated in 1962, with a degree in marketing, from Oklahoma University. He served in the U.S. Army from 1962 to 1964. Then he became a stockbroker for Bache in San Antonio.

In 1988 the company led by Charles Hurwitz, Maxxam, bought controlling interest in Kaiser Aluminum, one of the world's largest companies. This brought Maxxam into the top 200 largest American corporations, according to Fortune's listings. Yet few people know that Charles Hurwitz controls Kaiser. Instead it is his ownership of Pacific Lumber, a northern California timber producer captured by Maxxam in 1986, that has most consistently put Mr. Hurwitz in the newspaper headlines.

To understand how a member of a small-time business family could, in 24 years, become one of America's most prominent industrialists, you need to understand three business techniques not well understood by the public. One is what I call the bankruptcy shuffle, in which funds are transferred out of a corporation, leaving it bankrupt. That technique is also referred to as the OPM, or "other people's money" method of gaining wealth. The second is the minority shareholder squeeze, in which the value of the investments by minority shareholders are captured by the party controlling the corporation. The third is Greenmail.

Using the bankruptcy laws to transfer (the victims would call it "steal") wealth is an American shady business tradition. Under the law one of the most basic features of corporations in the U.S. is that neither management nor shareholders are responsible for the corporation's debts if it becomes bankrupt. There are many variations on this technique. I will use a very simple, straightforward example. You have three corporations, A, B, and C. Corporation A is legitimate, let's say it makes dresses. Corporations B and C are controlled by the same person, whose sole desire is to rip-off Corporation A. Corporation B is set up as a retail clothing store. Corporation C consults for retail clothing stores. Corporation B buys $1,000,000 of dresses from Corporation A on credit. It then sells the dresses for $1,000,000 and has one expense itself, a $1,000,000 consulting fee to Corporation C. Corporation B then has a debt and no assets, so it declares bankruptcy. Corporation B's stockholders and management say they aren't responsible, they are protected by lawyers and the bankruptcy laws. Usually Corporation C pays out the $1,000,000 to its shareholders, who put the money in secret offshore accounts, and declares bankruptcy itself.

Want to do a shareholder squeeze? Suppose you own some stock in a small corporation that is making $5,000,000 a year in profits and is paying a dividend of $1 per share out of it. You could by enough stock to control the corporation and appoint yourself CEO and pay yourself $5,000,000 per year, leaving no profits and dropping the dividend. The stock of the other shareholders, for practical purposes, now has a value of 0. There are many other ways to "milk"a corporation besides excessive executive compensation, most notably transfer of funds to a holding company; both these techniques were used by Charles Hurwitz during his long career.

Greenmail involves targeting a (usually) legitimate business and buying a portion of its stock. You then declare (because the SEC requires you to) that you are going to buy more stock and take it over. The current management and stockholders know that if you gain control they will suffer from the Minority Squeeze, or maybe they just don't like you, or like being in control themselves. So they make a deal to buy your stock from you at a higher price than your original purchase price. You've turned a form of blackmail into green money.

To successful carry off these kinds of business dealings it helps to have a variety of corporate shells. These corporations allow an individual or group of businesspeople to move money around in ways that make it difficult for those who feel victimized to successful sue and recover their money. They may also have legitimate business purposes; shell corporations are not in themselves illegal. It should be noted that the following account, while following the essence of Charles Hurwitz's business dealings, has vastly oversimplified the tangled web of corporations (many with similar names) that he controlled, invested in, or managed.

The First $10 Million is the hardest

In 1965, after only a year as a stockbroker for Bache, Charles Hurwitz formed Investamerica with his brother-in-law Morris Penner; the firm was capitalized by the Hurwitz and Penner families. Investamerica sold mutual funds and did very well in 1965-67 bull market. By all accounts Mr. Hurwitz was a very impressive sales person. He attracted the attention of a number of wealthy Texans and in 1967 started Hedge Fund of America (with the other wealthy men) with a public offering worth $54 million in 1967.

In a pattern that is not particularly unusual in business, and would characterize Charles Hurwitz's business arrangements for the rest of his career, a set of shell corporations was created. Shell corporations own or are owned by other companies, but conduct no business of their own. Hurwitz left Investamerica to run Summit Management & Research Corporation, which owned Hedge Fund of America and was controlled in turn by SMR Holding Company. Also note that a complex, ever changing group of individuals worked with Mr. Hurwitz; here I will refer to them simply as "the Hurwitz group."

The market collapse and bear market in 1969 killed Investamerica and Hedge Fund of America. SMR Holding bought the unrelated Summit Group, Inc., a New York holding company in the high-risk auto insurance business, the main asset being Summit Insurance Company of New York. (Note that while the value of Hurwitz's holdings collapsed, so did the value of most stocks, so it was possible to buy companies very cheaply at that time.) In 1970 the Securities and Exchange Commission (SEC) charged Hurwitz with securities fraud for his role in Summit Group, Inc. Yet Summit was taken public (its shares began being sold on a stock exchange) with Hurwitz as chairman. To do this Mr. Hurwitz signed a consent decree saying he would engage in no future violations of securities laws.

By 1975 Summit Insurance Company of New York was in bankruptcy proceedings, and shortly after Summit Group, Inc. was also declared bankrupt and closed down by the State of New York. Charles Hurwitz was charged with insurance fraud for illegally transferring funds between his corporations. Hurwitz settled the case for $400,000 in 1979.

At this point the reader might ask how, with so many corporation bankruptcies in his wake, Charles Hurwitz managed to continue to buy new companies. This is where the bankruptcy shuffle, or Other People's Money (OPM) technique came in. To make a long story short, enough money had been taken out of the businesses by Charles Hurwitz and his group to buy or set up other companies.

Federated Development Corporation

One of the outside stockholders in Summit Insurance Company of New York was Federated Development Corporation, a Real Estate Investment Trust (REIT). Hurwitz's group successfully took over Federated in 1973 using, in part, $12.5 million they borrowed from Continental Illinois and other banks. Hurwitz became CEO of Federated. The Hurwitz group then created a transaction in which Federated (which they controlled and mostly owned) bought SMR Holding (which they owned) and assumed SMR's debt, which included the very loans used to buy Federated in the first place! Then SMR defaulted on the loans, and after negotiations paid 53 cents on the dollar to the lending banks. SMR dissolved and, for a while, Federated was the Hurwitz's main business vehicle. There are few better examples of a successful bankruptcy shuffle than this.

Federated had stockholders other than the Hurwitz group. In 1979, Hurwitz engineered a reverse, 1 for 40, stock split that drove out many small investors, so that there were less than 300 shareholders left in Federated. This was largely in order to avoid filing public disclosures with the SEC, but it also an example of the Minority Squeeze technique frequently used by Mr. Hurwitz. I'll note here that this story is only an outline of Charles Hurwitz's career. It can't possibly describe all his transactions, or use of the minority squeeze, or even any one transaction in full detail. But is should be said that there have been several lawsuits against Mr. Hurwitz involving this issue.

Federated Development Corporation had one legitimate business interest: real estate management. But its real money would come from corporate takeovers and the practice known as Greenmail.

Through an extremely complicated series of transactions, some legitimate investments in undervalued companies and some Greenmail campaigns, many masterminded by the infamous leveraged buyout and junk bond specialists Drexel, Burnham, Lambert (led by Michael Milken) and many involving junk bonds, Hurwitz would build up his net worth and that of Federated during the 1970's and 1980's.

One critical step was Charles Hurwitz's hostile takeover was of McCulloch Oil Corporation, which was a large corporation focused on oil exploration and extraction. but which suffered a $60 million loss in 1976. In 1978 Federated bought an option to buy 1 million shares at $3.50 a share and 1,216,931 shares at $10 per share. In 1980 the takeover was completed and the company was re-christened MCO Holdings. By stock manipulations Hurwitz increased his voting control. Federated had 47% of the voting power at MCO.

In 1981 Charles Hurwitz first teamed up with Michael Milken of Drexel Burnham Lambert. Drexel issued junk bonds for MCO Holdings. Junk bonds carry a high interest rate because they are risky investments backed by uncertain revenue streams. The proceeds are almost always used to takeover other companies. Mr. Hurwitz also tried to force out minority shareholders in Federated Development Company at a loss through a 1 for 600 stock reverse split, but was blocked by lawsuits.

In 1982 Mr. Hurwitz and MCO Holdings took over Simplicity Pattern Company, Inc. Yes, the company that makes the patterns that homemakers buy to make clothing at home. The first stake, 33%, was bought using a $100 million loan from 1st Interstate Bank of California. This gave Charles control of a second major company engaged in legitimate business. He and his friends owned or controlled numerous smaller corporations at that time.

Using Simplicity Pattern Company, Inc., MCO Holdings, and United Financial Corp, Hurwitz continued the greenmail game. Victims included Holly Sugar, Amstar, and Castle & Cook. It should be noted that in the Castle & Cook case savings and loans deposits were used, and a federal court issued an injunction, but the greenmail went forward and succeeded after Hurwitz amended the Federal Trade Commission filings.

Maxxam Created

Maxxam Group Inc. was created from Simplicity Pattern Corp in June 1984 in a complex multi-company deal. The deal was financed with Drexel junk bonds. Maxxam was a shell corporation to be used to invest in or control other corporations. In effect MCO Holdings was absorbed into Maxxam.

Drexel targeted Pacific Lumber as a potential takeover target in 1984, and talked to Maxxam as well as other corporate raiders about it, but nothing came of it. By the spring of 1985 Hurwitz changed his mind and decided to pursue Pacific Lumber.

The Savings and Loans Takeovers

Ronald Reagan had been elected in 1980, and the savings and loan industry was deregulated in October 1982, so it is not surprising Hurwitz went on a savings & loan buying spree at that time. In 1983 Federated and MCO Holdings gained control of United Financial Group (UFG) which in turn controlled United Savings Association of Texas (USAT), a group of small Savings & Loans, which then absorbed another savings and loan, Houston First American. Drexel also became a stockholder of United Financial Group.

Meanwhile Hurwitz's Savings & Loan operation was involved in buying and selling banks and other companies. It should be noted that Drexel Burnham Lambert required quite a bit in return for its help in financing deals. Drexel bought 7% of the UFG/USAT common stock. But USAT bought $5 million in Drexel bonds and increased its stake in Drexel mortgage backed securities from $250 million in 1984 to $6.5 billion in 1986. In effect USAT was converting savings deposits to junk bonds so that Drexel could finance corporate takeovers. USAT sold about half its branches to IASA in 1984, for its only profitable year. The normal profits from savings & loan operations were being drowned in a sea of red ink by the use of funds to acquire other companies.

Drexel created a "blind pool" of $150 million in junk bonds for Maxxam in May of 1985.

Maxxam was involved in buying and speculating in numerous companies that were targeted for takeover by Drexel allies, notably TSG (Maxxam kept 12% ownership), Revlon, and General Foods.

On September 23, 1985, TSG bought 15,000 shares of Pacific Lumber.

Savings & Loan Bankruptcy

The Office of Thrift Supervision [OTS] of the Department of the Treasury in the Matter of United Savings Association of Texas and United Financial Group, Inc., has formally charged Maxxam, Inc., Federated Development Co., Charles E. Hurwitz, and Barry A. Munitz, Jenard M. Gross, Arthur S. Berner, Ronald Huebsch, and Michael Crow (Present and Former Directors and/or officers of the above named institutions) with a variety of violations of the law, which on the whole amount to enriching themselves with savings and loans assets and then leaving the savings & loans with huge debts that were paid off with Federal Deposit Insurance funds. The following quotations are from the Notice of Charges in the case. It should be noted that the Hurwitz group denies the charges (though not necessarily the facts they are based on) and are vigorously opposing the government in court.

"In 1982, MCO and Federated, assisted by Drexel, began to acquire shares of UFG, the holding company of USAT, with the intention of obtaining control of UFG and USAT. By June 1983, MCO, Federated, Hurwitz and Kozmetsky, acting in concert, had purchased nearly 25% of the shares of UFG, and on June 29, 1983 filed an Application H (e) -1 with the FHLBB

for approval to obtain control of UFG through the proposed purchase of an additional 10% of UFG's shares."

The Federal Home Loan Bank Board [FHLBB] in December 1984 approved the Hurwitz group's buying of up to 35% of UFG shares, provided they infuse capital sufficient to maintain USAT's net worth at levels required by the regulations. Drexel also obtained shares of UFG and sold MCO a call option on them. By 1986 the Hurwitz group had transformed USAT "from a traditional savings and loan association into a vehicle for speculative, highly-leveraged, high-risk investments... in low grade corporate bonds ("junk bonds") and in mortgage-backed securities (MBS's) and their derivatives."

"Between 1984 and 1988, USAT purchased over $1.5 billion of Drexel junk bonds and other Drexel-brokered securities. Because Drexel had acted in concert with MCO, Federated, and Hurwitz to obtain control of UFG and USAT, the purchases of these securities from Drexel were prohibited affiliated person transactions in violation of applicable regulations."

"28. In order to maintain the appearance of substantial net worth (when, in fact, USAT's net worth failed to meet the minimum regulatory requirements), avoid contributing capital to USAT to maintain its net worth pursuant to the FHLBB condition, stave off regulatory intervention, and maintain USAT as a purchaser and trader of Drexel-underwritten junk bonds, the Respondents engaged in unsafe and unsound practices and violations of numerous regulations, which are the subject of this Notice of Charges."

"[They] utilized the proceeds to speculate in mortgage-backed securities in a manner that increased the risk of loss to USAT dramatically. In order to conceal the additional risks to USAT, the Respondents made misrepresentations to the federal regulators that USAT's portfolio of MBS's was a fully-hedged investment portfolio, rather than a speculative trading portfolio."

"30. In addition, the Respondents caused USAT to engage in unsafe and unsound lending practices and real estate investments.

"31. Finally, when it became apparent that they could no longer conceal that USAT failed its minimum capital requirements, the Respondents caused UFG and USAT to enter into employment agreements with exorbitant, illegal, unsafe and unsound severance provisions for the benefit of certain of the Individual Respondents. After USAT was found to be insolvent and placed in receivership, Respondents caused UFG to fund the payment of benefits under the severance provisions, and Respondents Munitz, Berner, Crow, and Gross were unjustly enriched by their receipt of such payments.

"32. In November 1988, less than five years after Drexel, Hurwitz, Federated, MCO, and Kozmetsky gained control of UFG and USAT, USAT was required to execute a supervisory agreement with FSLIC. On December 30, 1988, USAT was placed in receivership, with FSLIC acting as receivers Immediately thereafter, USAT's deposit liabilities were assumed by, and

substantially all of its assets were transferred to, a new federally chartered savings bank. The loss to the insurance fund exceeded $1.6 billion, of which more than $200 million is attributable to the MBS transactions and more than $50 million to the real estate loans that are the subject of this Notice of Charges.

"33. Hurwitz, MAXXAM (as successor to MCO), Federated, and UFG contributed no assets to maintain the net worth of USAT in accordance with their obligations under the resolutions issued by the FHLBB."

The Pacific Lumber takeover

So on December 30, 1988, a major Hurwitz group asset was taken over by the federal government, which would cost taxpayers $1.6 Billion dollars. But Pacific Lumber had been acquired by Maxxam in 1986, using junk bonds floated by Michael Milken of Drexel Burnham Lambert. These junk bonds obligated Maxxam to pay enormous amounts of interest to the holders. It was in 1988 that Maxxam captured a far larger prize, Kaiser Aluminum, one of America's largest corporations.

Compared to some of Charles Hurwitz's other deals, the takeover of Pacific Lumber was relatively straightforward. Pacific Lumber's stock did not reflect the real value of its assets, largely because the company was harvesting its timberlands at a conservative rate compared to other timber companies. Drexel had been unable to interest other buyers in Pacific Lumber largely because of environmental issues: it was clear to everyone, in advance, that in order to buy Pacific Lumber with junk bonds, the plan would have to include not just a higher rate of logging, but rapid destruction of rare old-growth redwood forests.

Pacific Lumber also had $65 million in a pension plan for its employees. After the takeover Maxxam used this cash for its own purposes.

Interestingly, the Securities and Exchange Commission, in September 1988, charged that Drexel forced its client, Maxxam, to pay an inflated price for Pacific Lumber Company. As outlined in the SEC lawsuit, on September 30, 1985, Maxxam made a tender offer for Pacific Lumber at $36 a share, and the same day demanded and received a 50% cut in Drexel's fee. Then Ivan Boesky started to buy stock for Michael Milken at Drexel, without Maxxam's knowledge, pushing the open market price of Pacific Lumber above the offer price. Maxxam raised its tender offer to $38.50 a share. On October 22 Maxxam increased its offer to $40 per share and Pacific Lumber capitulated. Drexel's fees exceeded $22 million. In other words, Drexel/Milken stabbed their buddy, Charles Hurwitz, in the back. Unless he was secretly in on the deception.

Several other lawsuits attended the Pacific Lumber takeover, including one by the heirs of the family that had controlled Pacific Lumber, and one over the raid on the pension fund.

In 1993, Pacific Lumber used $235 million in its own junk bonds (with a yield of 10.5%) and $385 million of "Timber Notes" issued by Scotia Pacific to acquire ownership of Scotia Pacific

Pacific Lumber's financial outlook is heavily dependent on the outcome of a variety of lawsuits and regulatory proposals and the proposed deal for the California and Federal government to acquire a small part of the Headwaters forest area of Pacific Lumber's timber holdings. This excludes earlier lawsuits from the actual takeover of Pacific Lumber, which netted settlements of about $150 million, of which Maxxam paid $52 million. According to Pacific Lumber's SEC filing 10-K405 of 3/26/98, the long list of laws that must be complied with "have not had a significant adverse affect on its financial position, results of operations, or liquidity. However, these laws and related administrative actions and legal challenges have severely restricted the ability of Pacific Lumber to harvest virgin old growth timber." Pacific Lumber claims that these timberlands have been "taken" by California and the U.S. and Pacific Lumber should receive just compensation.

According to the same filing, Pacific Lumber and Maxxam entered into an agreement with the US and California which "provides a framework for the acquisition of approximately 5,600 acres of Pacific Lumber's timberlands" known as the Headwaters Forest. These would be traded for property with a fair market value of $300 million and "approximately 7,755 acres of adjacent timberlands (the "Elk River Timberlands") to be acquired from a third party." This will be dependent on the approval of a Sustained Yield Plan (SYP) for all of Pacific Lumber's remaining timberlands. Pacific Lumber looks forward to the approval of the SYP because "While the Company expects these environmentally focused lawsuits to continue, it believes that the HCP/SYP Agreement will enhance its position in connection with these challenges... [and] expedite the preparation and facilitate the approval of its THP's."

Maxxam also gained control of Kaiser, the aluminum company, in 1988. From a financial point of view this was a far greater achievement than buying Pacific Lumber. In 1998 Maxxam held 35.4% of Kaiser shares. Income from Kaiser represents about 75% of Maxxam's income. Maxxam now has created one race track, Sam Houston Race Park, and bought another, Mexico City's Hipodromo de las Americas.

In 1997 Maxxam reported a net income of $65.2 million, or $2.42 per share. Net sales for 1997 were $2.7 billion. Aluminum operations (Kaiser) created operating income of $174 million for 1997. Forest products Operating income (Pacific Lumber) was $84.9 million. Real estate and other operations lost $5 million. Interest received was $50 million. Interest expense ($211 million) on junk bonds is the main reason the net income of Maxxam is far lower than the total income of its three types of operations. On April 3, 1998 Maxxam shares, traded on the American Stock Exchange, closed at $60 per share. In 1994 Texas Monthly Magazine reported Charles Hurwitz's personal wealth to be estimated at $140 million.

More on Charles Hurwitz and the Headwaters Forest:


For a funny look at Hurwitz and other CEO's check out Ignoring Binky.

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