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.

Around this time--early 1995--Meddoff may have made the same offer to the Clinton White House. "I'm fairly confident...that there was a letter directed to then-chief of staff at the White House, which I believe at that time was Leon Panetta," Meddoff testified in deposition this summer.

Within the bond dealers' rumor mill, the letter to Panetta apparently grew into a meeting. Morgan says he was told by more than one person that Meddoff and his clients had a meeting with someone at the White House around that time--or so they all said. "Depending on which version you believe," Morgan relates, "someone in the White House said, 'If we do this for you--help you collect--what's in it for us?' And that's when Meddoff promised them a contribution." (Meddoff did not return repeated phone calls seeking his side of the story.)

Neither political party responded to Meddoff. The Bulgarian government fell, and with it went the contract.

A year later, though, Meddoff and company were at it again. In February 1996, Meddoff attempted to set up a meeting at the White House over a new Bulgarian deal. To that end, he sent the president, unsolicited, a copy of the contract they had signed.

"I thought the president would want to know about a contract of that size," Meddoff later said of the $11 billion deal. (As before, it fell through.)

According to Meddoff's Senate testimony, the White House never responded. At the same time, though, he was telling Morgan a different tale. In the summer of 1996, Meddoff faxed Morgan a hilarious memo designed to look as if it came from Leon Panetta, White House Chief of Staff from 1993 until just after the '96 election. Written on what looks like official White House stationery, the letter, dated February 9, 1996, purports to advise Meddoff about how the president wishes the Weimar bond situation to be handled.

The letter states that the president believes that American courts would not only order Germany to pay up, but also to pay up based on gold clause calculations. This the government cannot allow, "Leon" explains, since international financial mayhem would surely follow. "Leon" instead suggests a time-honored capitalist strategy: dump 'em on the Russians. ("We strongly suggest that you pursue acquisition by the Russian Federation...")

"Each one of these things is a different game," Morgan explains, showing some of the different bonds he owns or has access to. Today he has brought along Asian instruments: two Chinese nationalist government bonds, as well as copies of Japanese bank CDs he says he received from "the Vatican's representative."

The Chinese bonds, issued on September 14, 1912, just months after the imperial Chinese government fell, were among the first issues of the Chinese nationalist government. In 1949, the Chinese nationalists, led by Chiang Kai-shek, finally retreated to Taiwan. The People's Republic of China disavowed the bonds.

Issued in London on a satiny white paper that appears to contain silk, the instruments are printed in black with red highlights and are, if possible, even lovelier than the Saginaws. "Their calculated gold value is a half a billion dollars," says Morgan. "Apiece. And it's because of the change of status of Hong Kong, and because China needs to put its economy on a Western basis, that they need to get these things off the books."

Perhaps. But the problem is that this game has been played before. And with little or no luck, thanks to a very simple legal principle: sovereign immunity. The bottom line is that in a dozen cases, some involving Chinese nationalist bonds, federal circuit courts have uniformly held that foreign governments have immunity from bondholders' suits.

Which is why, in the end, all the debates and talk of "dirty tricks" are so much sound and fury. Take the Weimars, for example. If Morgan and his colleagues are correct and Germany is determined to deny all claims, they aren't going to have much luck collecting there. And since the odds of getting any U.S. court to entertain a lawsuit on the bonds are almost nil, there's no way to enforce payment.

Nevertheless, many of the players insist that Germany will eventually be forced to pay something on the bonds. And they're faxing offers around the world, with promises of gold-clause-based payoffs based on "sinking" funds that may no longer exist and secret, "quick-pay trading program[s]" administered by central government banks, most notably our own.

The real reasons for all the secrecy, though, may have little to do with conspiratorial theories of international banking. Two of the securities and international law experts the Observer consulted say that the contracts smell of fraud. "This is one cut above the old Nigerian letter scam," says one international lawyer who specializes in investment banking at a major Dallas firm. "The only thing that's more speculative than this would be selling interests in buried treasure, based on they think they've got the map."

"We're seeing real problems with these foreign bonds, ancient bonds," says Harold Degenhardt, district administrator in the Fort Worth office of the U.S. Securities and Exchange Commission.

Degenhardt points to recent actions the SEC has brought against a Miami brokerage that was trying to trade the Weimar bonds, as well as a recent New York case against a number of people trading in fraudulent Japanese bonds and Argentinean certificates of deposit.

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