Melt Down: The Deak Saga
A precious metals empire in decline.
A few years ago Nicholas L. Deak delivered the following sage advice in his crisp Hungarian accent: "The best way for a businessman or an individual to protect himself against inflation is to stay active, engage in imaginative business, swim with the tide, and stay atop." The tide of inflation has since ebbed. But Deak & Co.—which once claimed to be the most important foreign-exchange dealer in the Western Hemisphere and the world's leading retailer of precious metals—is now sinking fast, having apparently disregarded the dictum of its own founder and namesake.
Last December 6, Deak & Co.—holding company for a worldwide network of Deak banks, foreign-exchange brokers, and precious-metals dealers—filed for government protection from its creditors under Chapter 11 of the US Bankruptcy Code. Included in the filing were two key subsidiaries, Deak-Perera Wall Street and Deak-Perera International Banking Corporation. Listing liabilities of $95 million and assets of $62.2 million, Deak & Co. cited "severe liquidity problems."
In the ensuing months, two separate groups of indignant creditors, many of them overseas individuals who had deposited money with Deak subsidiaries, have been seeking control of the company's assets. Deak's Far East offices have been closed under a cloud of controversy. The Hong Kong government has charged the Deak office there with illegally accepting deposits and in March issued a warrant for Nicholas Deak's arrest. Some have alleged that the New York headquarters "looted" depositors' funds to finance other operations.
Deak & Co., as well as its Foreign Commerce Bank (a Swiss bank, 86 percent owned by Deak & Co.), is known to be up for sale. As this article went to press, the bankruptcy court had not taken the company out of the Deak family's control. Meanwhile, some holders of precious metals under Deak's pioneering precious-metals certificate program and depositors in its banks have panicked and started to withdraw their holdings, compounding the company's liquidity problems.
How did the mighty Deak-Perera Group, as it is known, come to be laid so low?
R. Leslie Deak—Nick Deak's 33-year-old son and the holding company's executive vice-president—blames the trauma primarily on adverse publicity stemming from a government investigation of laundered narcotics money from Latin America. He claims that competitors used a report issued last October by the President's Commission on Organized Crime, implicating Deak-Perera, to frighten and steal its customers. "The damage we have suffered from maliciousness in that report to a very great extent caused the downfall of a very fine firm and the damage to a very fine man—my dad," said Deak, who is president of Deak-Perera U.S., to the New York Times.
But others with intimate knowledge of the company told me that is only partly true. The company's problems, they claim, go back years and have more to do with internal mismanagement, bad business strategy, and personalities than with any government harassment of predatory rivals. (Neither of the Deaks would make himself available for comment.)
The younger Deak's explanation is "complete bullshit," one former Deak-Perera executive told me. "It's mismanagement, that's what it is—and overexpansion."
Other former high-ranking Deak-Perera officials interviewed said that Leslie Deak antagonized his lieutenants with his abrasive manner and, worse, by abolishing the company's profit-sharing plan a few years ago. "People who were critical started to leave in droves—key people to the success of the company," said Glen Kirsch, former manager of Deak-Perera Washington. "Whatever Leslie touched turned to…well, not gold," said another ex-Deak executive. Leslie Deak refused to return my phone calls.
Besides a brain drain, Deak-Perera suffered from a drain of funds. Long before the crime commission report, knowledgeable sources say, competitors had been sapping the deposits that had long been the mainstay of Deak-Perera's corporate finance: "flight capital" that nervous Latin American investors wanted to get out of their unstable countries.
At the same time, the company, still trying to expand, was hit hard by the collapse of gold and silver prices in the early '80s. Adding to Deak-Perera's woes, noted former Deak officials, was the invasion of its traditional foreign-exchange preserve by giants like Bank of America and Citicorp, which bid away many of the company's treasured airport locations.
Whatever the reasons, it's a sad fate for a great company and its fascinating founder.
Nick Deak, a vegetarian who at age 80 still runs five miles a day and as chairman remains the company's ultimate decisionmaker, always seemed to personify the American ideals of individualism, entrepreneurship, and defiance of intrusive government. Above all, Deak stood for sound money. A long-time advocate of the gold standard, he was one of the first, beginning in the 1960s, to recommend "hard money" investments such as gold, silver, and Swiss francs. The hallmark of the Deak-Perera Group—lending a certain irony to some of the current charges against the group—was its commitment to protecting its customers' assets and their financial privacy.
Deak began his empire in 1939 after emigrating from Hungary. There he had studied international trade and finance at the Royal Hungarian Trade Institute before taking a doctorate at the Swiss University of Neuchatel and serving in the Economics Department of the League of Nations in Geneva.
Soon after beginning his foreign-exchange business in New York, war broke out in Europe and Deak joined the US Army. He quickly came to the attention of the infant Office of Strategic Services (OSS), predecessor to the CIA.
For four years he used his linguistic and paratrooper abilities in the service of "Wild Bill" Donovan on dangerous missions in the eastern Mediterranean and the Far East. As a major, he personally accepted the surrender of Japanese troops in Burma.
In another exploit he likes to recall, Deak masterminded and carried out the wholesale smuggling of some 1,000 railroad freight cars out of Russian-occupied Hungary to the West at the end of the war. Later, such tactics were to be used in the service of Deak customers who wished to remove their money from economically or politically inhospitable countries.
In 1946 Deak restructured his foreign-exchange firm and incorporated as Deak & Co. A few years later he acquired his major competitor, the Perera Company, which had been the number-one name in foreign exchange in Latin America. By 1967 Deak had bought a small-town bank in upstate New York and changed the name to Deak National Bank; had broken into the preserve of the "Swiss gnomes" by opening his own bank in Zurich, Foreign Commerce Bank (affectionately known as Foco Bank); and had bought a bank in Vienna, changing its name to Bankhaus Deak (since folded into Foco Bank).
Meanwhile, Deak was opening foreign-exchange offices all over the country and around the world. These offices bought and sold banknotes from nearly every country on earth and handled remittances, foreign collections, and other international transactions at a fraction of the cost charged by most banks.
Over the years, Deak was the first to introduce many financial services. Its airport offices pioneered currency vending machines. Along with conventional services, Deak National Bank offered certificates of deposit denominated in foreign currencies, checking accounts denominated in gold or silver, gold- and silver-collateralized loans, and "OMNI" checking accounts, by which checks could be written in any currency.
When gold ownership by US citizens was legalized in the mid-'70s, Deak-Perera quickly geared up to meet the growing public demand for bullion and bullion coins. Later it began a precious-metals certificate program, allowing investors to buy a specific but undivided interest in gold or silver (and later platinum and palladium) stored in Switzerland or Delaware.
Deak-Perera also became renowned for its ability to move money through a variety of often byzantine "blocked fund" transfers to get around foreign governments' currency restrictions. But Deak's methods have occasionally landed him—or at least his employees—in trouble.
In the early '70s, it was Deak-Perera that acted as a conduit for $8.3 million in bribes paid by the Lockheed Corporation to Japanese officials. The scandal, which resulted in 1983 in the criminal conviction of former Prime Minister Kakuei Tanaka, demonstrates what a former employee termed the elder Deak's "cavalier attitude" toward the law and his "ruthlessness."
When a priest who was acting as the courier for Deak was finally caught carrying the Lockheed payments into Japan in a flight bag and appealed for help, Deak's Hong Kong office telexed Deak in New York. A former Deak-Perera Far East employee told me that Deak telexed back, "Tell him we'll pray for him."
In 1978, Deak again escaped personal responsibility for his underlings' actions when a vice-president in one of Deak-Perera's offices was convicted of failing to report large currency transactions, as required by federal banking regulations.
So it was little surprise when it was charged last year that Deak-Perera had failed to report millions of dollars' worth of alleged cocaine profits it received as deposits. "Deak has an OSS mentality," said one former manager. "The ends justify the means."
Libertarians may smile on infractions of federal currency-reporting requirements and regulations governing who may and may not accept deposits. But less savory is the possibility that Deak-Perera misappropriated customer funds.
The Hong Kong government has issued a warrant for the arrest of Nicholas Deak and Otto E. Roethenmund, president of Deak & Co., and is seeking extradition. Anthony Pong, former manager of Deak-Perera Far East, was arrested in March and charged with accepting deposits in contravention of Hong Kong law.
In fairness to Deak, it was well known that the company had been accepting deposits in Hong Kong for years, and the Hong Kong government looked the other way. So the British colony's belated action amounts to an effort to appease a hornets' nest of Deak depositors.
Well they might. For when Deak-Perera Far East shut its doors the day after the US company filed for bankruptcy, an estimated $25–$30 million in customer funds were put out of reach of furious depositors. And knowledgeable sources charge that some of those monies had long since vanished—drained out of Hong Kong into Deak's US operations.
What's more, reports from Hong Kong quoting government officials there raised fears that investors who had bought gold and silver through Deak-Perera Far East's independent precious-metals certificate program would lose their investments. Because the metals are registered in Deak-Perera's name, the officials said, they might be subject to seizure and sale to meet the company's general obligations. Before Hong Kong officials decided otherwise, such speculation gave rise to an exodus from Deak's much larger US certificate program.
James Hildebrandt, senior vice-president of Deak-Perera Washington, in a December client letter, assured certificate holders that "the metal is your asset, not ours, we are merely your custodian. Therefore, in the unlikely case that we were to become involved in the (bankruptcy) filings, your metals would be free from the claims of our creditors." Nevertheless, at the urging of competitors and many investment advisors, at least 1,000 of an estimated 15,000 investors are believed to have cashed in their certificates or taken delivery of their metal.
Similar assurances have been given by Foco Bank, which is 86 percent owned by Deak & Co. and 9 percent owned by Nicholas Deak and Deak & Co. president Roethenmund. "Foco Bank and its affiliated banks are in no way affected by the insolvency of their majority shareholder, and there are no financial obligations of any kind between them and the Deak group companies in question," stated a press release the bank issued last December in Zurich.
And Erich Stoeger, manager of the Vienna branch of Foco Bank, told me that Deak creditors can only press for the sale of Foco Bank stock held by Deak & Co. in order to raise cash and to get compensated for their claims. On Foco Bank, he noted, "this has the same impact as if some Citibank shares on the stock exchange change hands, but definitely not more."
Nevertheless, sources say that Foco Bank has been hit by a run on its deposits of some proportions. Although the bank has a sterling reputation as a profitable, well-managed institution, many depositors fear the Deaks (or a court-appointed trustee) may find a way to tap its assets.
A number of bids to buy Foco Bank have been reported, and others have been rumored. "Every day that goes by, it's worth less and less," observed a former top corporate officer in the New York headquarters.
The connections are complicated. Within the last two years the Deaks sold 49 percent of Deak-Perera U.S., which runs the company's retail currency and precious-metals operations, to Foco Bank to raise funds. "If Deak & Co. owns 100 percent of Foco Bank and Foco Bank owns 49 percent of Deak-Perera U.S., it's not really an arm's length deal," averred a former financial officer for the company. "Maybe there's a way (for Deak & Co.) to free up some funds from Zurich." And that's what worries many depositors.
But most observers agree that it was the company's apparent inability to tap Foco Bank to compensate for the loss of other sources of money that led to the bankruptcy filing in December. Sources close to the Deak operations claimed that the supply of Latin American funds being funneled into Deak-Perera U.S. had long since started to dry up—falling from $40–$60 million several years ago to below $5 million in the last year, according to one estimate. The crime commission report and the attendant adverse publicity came out long after the Latin American well ran dry, these sources said. "If you examine the books, the money was leaving in droves before that ever came out," said one.
One former Deak officer attributed the loss of funds to new competition, including former Deak employees, and to Deak-Perera becoming "less flexible in their dealings with the cambio (exchange) dealers, so they started looking elsewhere to place their money." In fact, a sort of managerial hardening of the arteries seems to have set in throughout the company.
Ironically, the ex-Deak employees I talked to uniformly asserted that the rigidity and skin-flintedness came with the passing of the mantle of control to young Leslie in 1980. Beginning about that time, former managers said, day-to-day decisionmaking was increasingly centralized in New York and Leslie Deak. Instead of everything flowing up from relatively independent offices, everything now flowed down. The local managers were also removed from the board of directors.
"The company was always able to innovate, because we didn't have a lot of restrictions on us," said one former manager. "But over time we were left with the responsibility, but they took away our authority to innovate. Everything was supposed to come down from the top, and there were no ideas coming down from the top. They got bogged down and were not able to innovate in the foreign-exchange and precious-metals group" (Deak-Perera U.S.).
Another key element of the Deak-Perera organization had always been its compensation package. Managers earned relatively low salaries but were rewarded with a share of the profits (15 percent) if the company was successful. But Leslie Deak began phasing this out in 1981 and eliminated it entirely in 1982, insiders say. "Leslie made a big mistake by taking the incentives away," said one former manager, "because the people who made the company a success over the years left."
"Right now they need their experienced people the most," remarked Glen Kirsch, who developed the company's tremendously successful precious-metals certificate program and now runs a precious-metals firm in Virginia. "And where are they? They're in competition with them."
Along with the loss of managerial talent and sources of financing, Deak-Perera was beset by a host of other problems in the '80s. The company had faced changing market conditions before and adapted to them, but this time Deak-Perera failed to do so.
Large banks began getting involved more heavily in the wholesale banknote business. Worse, they began outbidding Deak-Perera by large margins to run foreign-exchange concessions at key airport locations in order to gain a foothold in those cities in anticipation of interstate banking deregulation. Deak-Perera is already out of the airports in Los Angeles, Miami, Honolulu, and San Francisco and may soon be out of others as contracts come up for renewal.
Another major problem was overexpansion in the teeth of a collapse in the prices of precious metals, which had become one of the company's staples. When precious metals began their big run-up in the late '70s, Deak-Perera responded by expanding existing offices and opening new offices in such unlikely places as Denver, Las Vegas, and San Diego. Expensive computer equipment was bought, and scores of new employees were hired to make "cold calls" to potential clients and to handle an increased volume of paperwork. But when gold and silver peaked in early 1980 and began their steep decline, Deak-Perera found itself unable to retrench fast enough.
Finally, former top company officials said, much money was wasted on what one called "feeble attempts at getting into other areas," such as securities and commodity futures. "So much of what they told us to do was totally nonprofitable," winced one ex-Deakette.
Certainly it didn't help that the federal government spooked some of Deak-Perera's customers, but the bottom line to the company's downfall seems to be as former Deak manager Kirsch stated it: "It was decay from within, and it was just a matter of time."
Steve Beckner was the editor of Deaknews from 1976 to 1981. He wrote "Making Money from Sound Money: The Nicholas Deak Story," in REASON's June 1977 financial issue. He has been a financial reporter on the staff of several newspapers, most recently the Washington Times, which he left recently to pursue free-lance writing.