Paper chase

William Morgan says he's just an innocent document dealer snared in a campaign finance scandal. And if you believe that, he has some old railroad bonds he wants to sell you.

The implication is clear: CSX is somehow on the hook for these things.
And what a hook. Morgan's paperwork includes a valuation that sets the bonds' worth at seven figures.

Morgan also has hired certified public accountants to take a stab at guessing the bonds' value. In a report dated April 25, 1997, a local CPA explains in excruciating detail how he computed "[t]oday's value of the bonds [the two Saginaws], applying the Gold Standard to the amount of unpaid interest and principal due."

Welcome to the world of gold-clause accounting. Here's how it works: Like all the bonds in which Morgan deals, the Saginaws have a "gold clause" that purports to require that principal and interest are paid in "United States gold coin of the same weight and fineness" as gold coins on the date of the bonds' issuance. Based on this clause--the validity of which is at best dubious--Morgan's accountant calculated the face value of the Saginaws and the interest allegedly due on them at a cool $5,242,536.19. Per bond. (Morgan's contract with Bayvest noted it was offering amounts "substantially in excess of" the market value of the bonds.)

The only problem is, President Roosevelt declared gold clauses unenforceable in 1933. Though the law changed again in 1977, the courts have uniformly declined to enforce them in old bonds.

Still, though the reasons remain deliberately foggy, Morgan apparently isn't the only one who believes the Saginaws have more than just historical or aesthetic value. Morgan produces a folder thick with faxes from companies offering to "buy" the Saginaws, or at least to place them in one of a dozen "trading programs" administered by offshore concerns.

Bayvest is typical of these eager suitors. Ostensibly headquartered in the Channel Islands, yet another haven of banking secrecy and drop-box corporations, Bayvest's offices appear to be located in Toronto, Canada. And it appears that from safely over the border, beyond the reach of the U.S. Securities and Exchange Commission, Bayvest was faxing Morgan indications that they were extremely pleased. According to faxes Morgan produced for the Observer's inspection, the bonds had been accepted for trading in a "certain high-yield, capital enhancement financial strategy."

In response to the Observer's inquiries, Mark Mansfield, the Bayvest representative with whom Morgan apparently dealt, claimed he was "not familiar with" Morgan or his company. When Mansfield's apparent communications with Morgan are read back to him, he claims he'll "have to get back with" the reporter on whether they're genuine, and declines an offer to have the contracts faxed to him for inspection.

Asked what exactly capital enhancement strategy means, Morgan is at first vague. "What they do with them is their business. It's like I told the FBI when they asked. These things are like a gun. It isn't the gun that kills someone. It's what they do with the gun that makes them bad."

Upon closer questioning, though, he resists the obvious conclusion: that they were being offered to investors somewhere, presumably with the suggestion that they had more than historic value.

Instead, Morgan offers a more fantastic explanation. He points to repeated phrases in the contracts mentioning "Federal Reserve" programs. Morgan believes, in effect, that the bonds were to be sold to the Federal Reserve, the nation's central bank, which Morgan believes is running secret programs to "get these things off the street." He says, however, that the Fed will deny this because they don't want it to be known.

He's right--about part of it, anyway.
Harvey Rosenbloom, an economist at the Federal Reserve Bank of Dallas, doesn't even want to be quoted. "I just don't want to give any credibility to this, even by commenting," he explains. But when some of Morgan's bonds are mentioned, Rosenbloom can't help himself; it's clear from his guffaw that he's heard it all before.

"These scams have been going on forever, before there was a Federal Reserve," he says, "and they'll still be going on when there isn't one anymore."

Far from fazing Morgan, however, Rosenbloom's response only reinforces his beliefs. "They deny it," he says. "They always do." By way of response, Morgan points to a typical clause in one of his dozens of contracts. The clause provides that "after the second year" of the "program," the bonds "are considered redeemed and sent to the Federal Reserve." Asked why the Fed would want to keep a lid on such a program, Morgan simply shrugs. "Why? I dunno. It's all a very secret business."

Morgan is correct--although the secrecy seems to have more to do with the law than with the Federal Reserve. According to three sets of experts consulted by the Observer, the historical document business smells a lot like securities, mail, and wire fraud.

By the time he came to the attention of the White House, Morgan had been trading antique bonds for eight years. "I got into it as a way to finance real estate," he says. "As you may recall, we had a banking crisis here in Texas."

Since then, he's gotten to the point where he "makes a pretty good living" off selling the bonds, which he buys for anywhere from $250 to $1,000 apiece and sells for whatever multiples he can get. (According to two traders, the Saginaws, for example, currently go for anywhere from $25,000 to $35,000 apiece, in 1997 cash, though it's unclear who exactly is willing to pay that price.)

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