Kreuger & Toll

The Kreuger & Toll Company, founded by Ivar Kreuger, was the holding company of an international match trust based in Sweden whose securities were popular during the 1920s. The company was organized as a giant pyramid scheme and went bankrupt in 1932. The company consisted of over 250 subsidiaries, the two largest being the Swedish Match Company, based in Stockholm, and its American subsidiary, the International Match Corporation. Kreuger & Toll also granted millions of dollars in loans to European and South American governments in need of funds following World War I in return for match monopolies or other trade concessions. Kreuger (1880-1932) was a Swedish civil engineer who worked first in the United States and then in Sweden, specializing in building with steel and concrete and speculating in real estate. He earned a reputation as a shrewd and reliable businessman, which later allowed him to obtain credit in almost any country. He took over his father's small match-making factory in 1913, and also at that time formed the construction engineering firm of Kreuger & Toll with a partner, Paul Toll. They soon merged the match company into Kreuger & Toll. Paul Toll only participated in the operations of the engineering branch of the firm, while Kreuger began to seek control of the Swedish match industry. Kreuger controlled the company and made all the important decisions for Kreuger & Toll throughout the company's history. Difficulties experienced by the Swedish match industry due to competition from foreign factories allowed Kreuger & Toll to acquire control of eleven independent factories under the firm the United Swedish Match Factories. Pressure from the export slump caused by World War I allowed for further acquisitions. The company soon gained control of the entire Swedish match industry under the holding company the Swedish Match Company, which was formed in 1917 as a subsidiary of Kreuger & Toll. Following World War I, Kreuger & Toll began to expand beyond Sweden, acquiring factories throughout Europe, as well as shares in paper mills, forests and logging rights, machine-making workshops, and chlorate of potash factories, controlling the production of matches from the raw materials through to the finished product. The company grew to own or control approximately 250 factories in 43 countries in Europe, North and South America, and Asia. By 1928, Kreuger & Toll controlled more than half of the world's match production, which increased to 90% by the end of 1930. Kreuger & Toll also ultimately included a pulp company, a gold mine, an iron company, a telephone company, shares in a real estate enterprise, and a chain of banks and investing companies throughout Europe. Kreuger & Toll formed the International Match Corporation in the United States in 1923, and transferred the majority of its European factories to this daughter company. After that, most international activity was carried out through the International Match Corporation. However, the corporation remained under Swedish control. Directors were largely Swedish, with Kreuger as the head. Swedish control over Kreuger & Toll was preserved through the sale of two types of shares. The A shares, with full voting rights, could only be sold in Sweden. The B shares sold to foreign investors only carried 1 vote for every 1,000 shares. Kreuger & Toll expanded beyond match production, granting millions of dollars in loans to European and South American governments in need of funds following World War I. In return for the loans, Kreuger & Toll received a match monopoly or other trade concessions, eventually acquiring monopolies in fifteen countries and concessions in many others. The loans redistributed capital around the globe in a way that governments had been unable achieve. Kreuger was hailed as a financial genius by some of the most distinguished economists and financiers of the time, and was lauded as the "Savior of Europe" and even the "Savior of the World." He was knighted by France, became an advisor to presidents and kings and a frequent visitor to President Herbert Hoover's White House, served as a peacemaker for the League of Nations at the Hague, and was suggested as a candidate for the Nobel Peace Prize. Kreuger & Toll loaned more than $300 million to foreign governments, typically through the International Match Corporation. The funds were obtained from investors, largely the American public, through the sale of Kreuger & Toll securities and the securities of its subsidiaries. The securities were very popular, especially with small investors, because they were issued in small denominations and had high, regular dividends, over 20% annually. Kreuger & Toll stocks and bonds were the most-widely held securities in the United States and throughout the world during the 1920s. However, dividends were so high because by 1924 they were largely paid out of capital instead of from profit. Later investigation of the company's finances concluded that dividends of only 1.5% were justified by the profits of the match industry. To raise sufficient funds to provide loans for governments, Kreuger needed to induce higher sales of Kreuger & Toll securities, which he achieved through increasing dividends. Capital from the purchase of new securities was also required to pay the interest and dividends on outstanding securities. The system depended on the constant input of new capital, essentially a giant pyramid scheme. When the stock market crashed in 1929, Kreuger & Toll securities continued to sell well, and unlike other corporations it never suspended dividend or interest payments. In fact, since its dividends were not based on profit, the Depression did not initially effect the company. However, as the legitimate businesses of Kreuger & Toll began making less money and investors had less money to purchase new stocks, Kreuger & Toll began to experience financial difficulties, as there was not enough new capital being invested to sustain the pyramid scheme. Also at that time, Kreuger made loans to Germany, Poland, and took a share of the Young loan, over-extending the company's finances. In an effort to recover, he put large sums into Paris real estate, pawned assets, and finally forged Italian State bonds with a face value of 21 million pounds, hoping to use them to bolster his credit, but he was unable to rectify the company's financial problems. Ivar Kreuger committed suicide on March 12, 1932. Initially, the world mourned him as a victim of the Depression. After Kreuger's death, the accounting firm Price, Waterhouse & Co. examined the finances of Kreuger & Toll to determine if it was viable to continue as a company without the founder, and the auditors quickly began to uncover Kreuger & Toll's true financial state. They discovered a quarter of a billion dollars in reported assets had never existed. In addition to the many legitimate businesses of Kreuger & Toll, many were only shell corporations. Some were created in small European countries to avoid income taxes, and others had been created to generate profits on paper to allow high dividend payments. The company was declared bankrupt in Sweden on May 24, 1932 and in the United States on August 6, 1932, the largest bankruptcy on record at that time. Thousands of investors, university endowment funds, and banks lost hundreds of millions of dollars. Kreuger had been able to keep his financial manipulations secret because he never permitted an audit of the company while he was alive. Kreuger maintained that the only information investors needed was a corporation's dividend policy. If any investment bankers demanded an audited balance sheet, Kreuger refused to deal with them, and because of the high demand and high dividends of Kreuger & Toll's securities, no investment banker was willing to risk that loss. Investors instead based their purchasing decisions on dividend payments, the reputation of Ivar Kreuger, and the prestige of the brokerage firm Lee, Higginson & Company that had underwritten the American securities. Kreuger was further protected by a corporate culture of secrecy practiced by many firms at that time. Kreuger even maintained secrecy within the organization. The subsidiaries were financially linked but administratively isolated, ensuring that only Kreuger was controlling the company as a whole. He revealed little even to his directors, who did not attend directors' meetings or receive financial reports. Indeed, the company kept relatively few financial records. Later court testimony revealed that Kreuger prepared the financial statements issued by his companies without reference to any statistics or ledgers, and had his accountants create books to match those financial statements. Price, Waterhouse & Co. was retained as an impartial fact-finder and conducted a thorough investigation of all of the Kreuger & Toll companies. The location and distribution of the majority of the company's assets was handled by a Swedish committee of five liquidators. Assets in the United States were managed by a trustee, first Gordon Auchincloss and then, beginning on February 18, 1933, Edward S. Greenbaum. In addition to creditors, the subsidiaries also made substantial claims against Kreuger & Toll and each other. The internal affairs of the company were difficult to decipher due to Kreuger's manipulations of the assets between Kreuger & Toll, subsidiaries and himself, and conflicting, sometimes fraudulent, books. Swedish Match Company was one of the few principle companies able to avoid bankruptcy. Claims between Kreuger & Toll companies were settled in 1936, and the final payments of dividends to the holders of Kreuger & Toll securities were made in 1938. Within two months of the bankruptcy, there were calls in the United States for legislation to prevent frauds of a similar nature. Federal securities legislation had been considered in Congress since 1918, and the public outcry and media coverage of the Kreuger & Toll fraud provided some of the impetus to finally pass the laws. In 1933, the first securities act was passed.