Bryan Taylor, Chief Economist, Global Financial Data
Eddie Gilbert died on December 23, 2015, four days shy of his ninety-third birthday, though few people outside of Albuquerque, noticed his passing.
This is surprising. Gilbert was once known as the “boy wonder of Wall Street” for his successful stock market trading and his takeover of E.L. Bruce in which he created the last corner on a U.S. Exchange. Gilbert also went to prison twice, was friends with Jack Kerouac, John Dos Passos and other luminaries, made and lost fortunes, and finally succeeded with his real estate business in New Mexico, becoming a multi-millionaire. Despite having one of the most colorful histories of anyone in the financial world, Eddie Gilbert doesn’t even have an entry in Wikipedia, though a cricketer, wrestler and hockey player of the same name do.
Eddie Gilbert was one of those driven individuals who was a born salesman and deal maker with plenty of chutzpah. He always had to make a deal, and no matter what the circumstances were, Gilbert could always find a way to make money. He would leverage his transactions, get others involved, and oversaw and coordinated his market transactions like a general at war. Gilbert was determined to win, and usually did, but sometimes the deals blew up in his face.
The Shorts Get Cornered, but Who Owns Bruce?
Gilbert began his business career in the 1950s working for Empire Millwork, which had been founded by his grandfather, and which was then headed by his father. By the 1950s, Gilbert had already spent years trading stocks and commodities, and had produced two plays on Broadway, including a production of Peter Pan with Jean Arthur and Boris Karloff.Between 1955 and 1957, largely due to Eddie Gilbert’s determination, sales at Empire increased from $5 million to $30 million. Eddie demanded that his pay be increased from $15,000 to $50,000, the same as the officers of the company. When they refused to raise his salary, he quit, but he was soon hired back at $50,000 when they realized how much the company needed him.
Gilbert discovered that one of their competitors, E. L. Bruce, was poorly run, and he felt he could run it much more efficiently. Bruce’s sales had been stagnant for the past ten years while Empire’s sales were increasing. Gilbert began buying up shares of Bruce in February 1958 at 16.875 to acquire majority ownership of the company. As Gilbert bought more and more shares, Bruce’s stock price rose, and short sellers entered into the market believing that an underperforming company like Bruce wasn’t worth the price it was trading at.
In the process, Gilbert was acquiring all the float in Bruce’s stock. As the price of Bruce stock rose further, the shorts were forced to cover their positions. On June 12, 1958, the American Stock Exchange suspended trading in E. L. Bruce Stock when the stock soared to $77 a share. Shares were in short supply because the management of E. L. Bruce owned 50% of the outstanding shares and Gilbert had taken control over the remaining 50% of Bruce stock.
The shares that were sold short represented the balance between Bruce and Gilbert. Typically, in a situation like this, the exchange would step in, negotiate a fair price for the shorts to cover their position, and settle outstanding short contracts for cash, but Gilbert didn’t want to do this. Gilbert wanted the shares the shorts had borrowed because getting those few extra shares meant the difference between who owned E. L. Bruce Corp.
Although the American Stock Exchange required that all shorts cover their positions, the stock no longer traded on the ASE, and the shorts had to find shares over-the-counter. This led to a mad scramble among the shorts, and the stock reportedly traded as high as $190 as shorts desperately tried to cover their positions. Short interest in the stock gradually declined from 16,134 shares on May 15 to 6,440 shares by August 15 and to 3,500 shares by September 4.
E. L. Bruce (Old) Stock Price, 1955-1959
The remaining shorts simply could not find the shares to cover their position, so they filed suit to avoid having to cover their positions claiming there was no “fair market” in the stock and refused to have their shares bought in until a fair market was established; however, in Aronson v. McCormick, the court denied their preliminary injunction and the shorts were required to cover their shares.The real question was, who controlled E. L. Bruce? Gilbert had invested over $5 million in his attempt to take over E. L. Bruce and the outstanding short shares could determine whether Gilbert had control of the company. It was important to have this issue resolved by September 18, 1958 when shareholders of record would be contacted for the corporate meeting at which Gilbert wanted to take over the company. Gilbert’s group demanded delivery of the shorts’ shares in the hope that it would give them 50.1% ownership in the company.
On September 22, the Gilbert and Bruce factions met at the Waldorf-Astoria hotel in New York. Gilbert arrived in a limousine followed by an armored truck. Inside the armored truck were the actual certificates for all the shares Gilbert owned. He had the shares taken up to the suite in the Waldorf-Astoria and had them dumped on the floor. Gilbert told the Bruce board members that he had over 50% of the outstanding shares and if they didn’t believe him, they could count them. Gilbert said he would allow the Bruce management to still be on the board, but he would have control of the company. Gilbert said was going out to lunch and when he came back, he wanted to know if they would accept his offer. When Gilbert returned from lunch, the piles of stock lay untouched on the floor, and the Bruce management acceded to Gilbert’s demands. Gilbert later confessed that they were a bit short of the full 50%, but he was happy his bluff had worked. With this coup, Gilbert became known as “the boy wonder of Wall Street.”
Empire Millwork Corp. changed its name to Empire National Corp. in 1960 and to E. L. Bruce in 1961. By 1962, Bruce had $60 million in sales and Gilbert began eyeing Celotex, with sales of $80 million, as his next takeover target. In 1962, Gilbert began buying up shares of Celotex, both on his own account and through E. L. Bruce. The market was in the midst of a bull market, and by March 1, Celotex had risen from around 26 to 41 5/8.
Empire Millwork Corp.-E. L. Bruce Corp. (New) Stock Price, 1955-1971
Blue Monday for Bruce and Celotex
Gilbert had also gotten André Meyer from Lazard Frères involved in the Celotex takeover. In 1960, Gilbert had sold Lazard Frères $2 million in convertible debentures which could either be paid off or converted into shares of E. L. Bruce. Meyer approved of the takeover, and he and Gilbert agreed that Meyer would buy up shares of Celotex, then sell the shares to Gilbert at a profit when the takeover was consummated. Meyer redeemed half of the convertible debentures in early 1962, but since Bruce stock had doubled in price since 1960, redeeming half the convertible debentures meant that this cost E. L. Bruce $2 million which was provided through a loan from Union Planters Bank.Meyer bought 87,000 shares of Celotex, but demanded that Gilbert redeem the rest of the debentures in order that Meyer could buy an additional 163,000 shares of Celotex. Gilbert asked that the funds be held in escrow to be paid when the Celotex deal was completed, but instead, Meyer withdrew the funds from the escrow account, nearly wiping out Gilbert’s cash reserves.
Gilbert had bought shares on margin, and when the stock market crashed on Blue Monday, May 28, 1962, Gilbert received margin calls on his Celotex shares. Gilbert now was cash poor, and the $500,000 in cash he had left was insufficient to meet the margin calls. If Gilbert were unable to cover the margin calls, not only would his holdings in Celotex be sold making the merger impossible, but the prices of both Celotex and E. L. Bruce would crash. E. L. Bruce Corp. would also suffer because the company owned 77,300 shares of Celotex.
Gilbert directed that $1.953 million of corporate funds be used to cover his margin calls to prevent the collapse in the price of Celotex and Bruce shares. Unfortunately, he did this without first getting the approval of the board. Gilbert knew that the Ruberoid Co. was also interested in acquiring Celotex, so he contacted a friend at Ruberoid to see if they would buy out his position in Celotex. This would provide sufficient funds for Gilbert to cover the $1.953 million.
Gilbert called a meeting of the E. L. Bruce board met on June 12 to discuss how he and the company would handle the $1.953 million Gilbert had taken. Since Meyer had taken out the $2 million from the escrow account, Gilbert had insufficient funds to cover the $1.953 million, but he pledged all of his resources as collateral to guarantee he would return the sum. As Gilbert had become successful, he had built up a sizeable stamp collection, purchased antiques and paintings for his home, had acquired a villa on the Riviera where he entertained, and regularly went to Monte Carlo where he would win or lose hundreds of thousands. In fact, John Brooks referred to Gilbert as “the Last Gatsby.”
Unfortunately, Ruberoid called back and said they would not be interested in acquiring the block of Celotex shares, Gilbert knew he was sunk. He had ample resources, just very little cash. Not wanting to face the consequences of his actions, when Gilbert left for lunch, he booked a flight to Rio, and after resigning his position at E. L. Bruce, fled the country.
The Fugitive Playboy
When Gilbert arrived in Brazil, he left behind a spacious apartment on Fifth Avenue in Manhattan, a villa on the French Riviera, a $3.5 million tax lien and $14 million in debts. When news of his flight to Brazil broke, the press went wild, and Gilbert became known as the “fugitive Playboy.” The story followed him to Brazil. Gilbert was featured in a nine-page spread in Life Magazine and was the subject of a half-hour “Eyewitness Reports” feature on CBS entitled “Refuge in Rio.” Gilbert also became the basis of a character in Louis Auchincloss’s novel A World of Profit. This was not how Gilbert had wanted to become famous.
Even though Gilbert had left the United States with almost no money, Gilbert traded stocks on the Rio stock exchange and speculated in United States dollars. By the time Gilbert returned to the United States five months later, he had made $100,000.
One huge problem Gilbert faced was that the IRS demanded that Gilbert pay taxes on the $1.953 million he had taken from the Bruce treasury. Instead of treating the money as a loan Gilbert would repay, the IRS treated it as income to be taxed. The IRS put a lien on Gilbert’s assets, putting them first in line. Until the IRS matter was resolved, Gilbert was unable to pay any of his creditors, putting him in an even worse position. It also didn’t help that his wife Rhoda had purchased $732,000 of jewelry from Cartier’s shortly before the stock market collapsed.
Given all the publicity relating to his case, Gilbert feared that the trial might not go his way. Two years after returning to the United States, Gilbert pled guilty to three counts of grand larceny and securities violations in the hope that he would get a suspended sentence. Instead, Gilbert was sentenced to two years in prison by the Federal government and two years by the state of New York.
Gilbert served two years in prison, where he reportedly cornered the cigarette market, and was released in 1969. In 1977, the U.S. Court of Appeals ruled that Gilbert was not guilty of any of the crimes he had pled guilty to, but that he had “tripped over a legal technicality while risking his own fortune in a sincere effort to save his company’s interests,” since he had planned to repay the money taken from the treasury. Though this saved Gilbert’s name, it didn’t give him back the two years he had spent in prison.
The Conrac Conspiracy
Unfortunately, Gilbert got into more trouble a few years later. In 1975, he was investing in a stock called Conrac, a communications equipment manufacturer, which he had recommended to several friends. One of his fellow traders, James Couri, bought shares on margin, and when Couri received margin calls, 20,000 shares were sold by his brokers, driving the price of the stock down from $28 to $23.375. Consequently, on December 18, 1975, the NYSE suspended trading.This led to a civil suit by the SEC against Gilbert, Couri and 17 others alleging they had obtained over 100,000 shares of Conrac to profit from manipulating the stock. Gilbert had been involved in about 75% of the transactions. No action was taken by the SEC in 1976, but in 1980, Gilbert was indicted on 34 counts of stock manipulation along with traders James Couri and John Revson and stock broker Harvey Cserhat.
Conrac Stock Price, 1974-1976
In order to convict Gilbert, the prosecution had to prove that Gilbert and the others had conspired to manipulate the price of the stock and had coordinated their actions through wash sales, in which someone sells a stock to himself in another account at a higher price, or through match sales in which one person sells the stock to another co-conspirator at a higher price.The four admitted they were all trying to profit off the stock, but contended they did not coordinate their activities to manipulate the stock. James Couri made an agreement with the prosecutor to plead guilty and testify against Gilbert in exchange for a suspended sentence. Revson and Cserhat had their trial severed from Gilbert.
The prosecution put together charts to show the jury how the trades were interrelated and coordinated, but the key to the trial was the credibility of Couri. After the trial was over with, it turned out that Couri was facing criminal indictments for fraud and related charges in another case, but the Jury and Gilbert didn’t know this. Gilbert was found guilty on 34 counts of stock manipulation.
When Couri testified at the trial of Revlon and Cserhat, the jury did not find Couri credible, and the two defendants were found not guilty. Of the four, Gilbert was the only one found guilty, and he went to prison for two years. This case makes you realize exactly why it is so hard to prove criminal intent in securities cases.
Gilbert Becomes a Real Estate Mogul
After being released from prison, Gilbert was forbidden from the securities market. He moved to New Mexico in 1989 and started the BGK Group in 1991 along with Ed Berman and Fred Kolber to profit from investing in real estate. By the early 1990s, commercial real estate prices had collapsed from their levels in the 1980s, in part because of the fallout from the Savings and Loan crisis.Gilbert, of course, was the deal maker for BGK. He scoured the market for underpriced office buildings and made an offer for them. If the offer was accepted, Gilbert put together a limited partnership to raise money from investors. Gilbert negotiated the pay back to the investors to maximize the return up front. Gilbert made sure that investors always got a 20% return in their first year, whether the funds came from profits or from the investors’ own capital. When BGK sold the property, the company would return all the capital to investors, and keep half of the profits for themselves.
For example, BGK bought an Albuquerque, New Mexico shopping center (Plaza at Paseo del Norte) for $5.9 million in 1993. BGK raised $1.8 million and borrowed $4.3 million. The property was sold in 1998 for $17.8 million, netting a $11.4 million profit split between BGK and investors. This and other properties were bought on leverage with BGK usually borrowing around 75% of the purchase price. This time, the leverage did not blow up in Gilbert’s face.
In 2010, Gilbert cashed out when BGK sold a majority stake to Rosemont Capital. Gilbert died a multi-millionaire.
It is a tribute to Gilbert that he never gave up, and though he was forbidden from dealing in securities after the Conrac conviction, he was able to succeed in real estate even more than he had in the stock market. Was Gilbert a criminal, or the victim of zealous prosecutors? Was he a great salesman and a financial genius who could make money wherever he went, or did he manipulate markets in his favor?
Gilbert kept his word and repaid all his debts. Most people would have given up after what Gilbert went through, but he persevered and finally ended up on top. Eddie Gilbert wasn’t just the “boy wonder of Wall Street,” but he was a wonder all around.
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