THE WINDS OF WERNER

Richard Behar and Ralph King Jr., Forbes, November 18, 1985

The IRS, the Order of Malta and a Swiss banker have a problem: a one-time used car salesman from Philadelphia.


Plenty of controversy has swirled around Werner Erhard, the millionaire guru of est (Erhard Seminars Training) who began life as Jack Rosenberg of Philadelphia and who once sold used cars for a living. One man undoubtedly wishes that he had never heard of Erhard: Zurich-based Wolfgang Somary, heir to one of the oldest banking fortunes in Switzerland.

Bankers normally ask lots of tough questions - and demand plenty of solid collateral - before making loans to foreigners. But on one occasion that he's never likely to forget, Somary seems to have done neither.

Described by associates as ethereal, otherwordly and dedicated to humanitarian causes, Somary, 53, apparently became so enamored of Erhard's messianic notions about transforming the world that in 1981 he authorized a low-interest $15 million loan to help him spread his message. That money is now a key prop in Erhard's empire, which stretches across 20 countries and a bewildering array of foundations, trusts and tax-haven shells.

Somary apparently began to wonder if he would ever see the money again, and took the matter to a federal court in San Francisco, charging that Erhard was welshing on his deal. Both Erhard and Somary are tight-lipped about the dispute. In fact, when Forbes began pressing for an interview, Somary grew increasingly noncooperative and eventually withdrew the suit. Meanwhile, Forbes had turned up an astonishing labyrinth of characters and organizations in the case. They reach from a foundation in Switzerland to a bank in Panama and a government-connected charity in Costa Rica.

One way or another, all have left their finger marks on the multimillion dollar loan, shedding much light not only on the way Erhard does his deals but also on the complexities of offshore financial gamesmanship when big bucks are at stake.

When last heard from in these pages (Forbes, Dec. 1, 1975) Erhard was riding high with his consciousness-raising cult, which combined everything from Scientology, Zen and Gestalt to echoes of Erhard's own upbringing by a Jewish father who turned Episcopalian. Est made Erhard rich, but it gradually lost its attraction, and Erhard closed his est training business last year.

Now Erhard, 50, lives on a boat in swanky Marin county, devoting himself to pet projects like The Forum, a kind of Son of est, and the Hunger Project, which seeks to eradicate world hunger through education (see box).

Meanwhile, Erhard no longer retains his longtime offshore tax expert, Harry Margolis, who is under federal indictment for fraud and perjury involving over $100 million in false loans and tax returns. Erhard himself is spending plenty of time in court. He faces over $2 million in tax liabilities that the IRS asserts he has, and is in the midst of a nasty divorce from his wife, Ellen, who is seeking 50% of all his assets under California community property law.

That divorce is what has Somary shaking. Assuming that Ellen Erhard prevails, there will be that much less for Somary to go after if Werner Erhard does not live up to the terms of the loan.

The way the loan was set up was astoundingly complex. Somary used an obscure nonprofit Zurich association he cofounded in 1974, the Intercultural Cooperation Foundation, to lend the funds. But instead of having the money go directly to Erhard, he had Intercultural send the money via the First National Bank of Boston's branch office in Panama City, Panama, through what appears to be a spurious Costa Rican foundation, the Fundacion Soberana Orden de San Juan de Jerusalem, and only thereafter to Erhard's pocket in San Francisco.

The loan, made on Sept. 15, 1981, when est enrollment was peaking and Erhard was casting about for funds, proved enticing. Not only did it carry a virtual giveaway 2% interest rate and required no repayment of principal for ten years, but it also went to Erhard's for-profit, sole proprietorship Werner Erhard & Associates.

The Costa Rican group that acted as intermediary in the deal had in fact been set up by an Erhard friend several days before the transfer occurred, and also stood to benefit. Under the terms of the deal, a major portion of the interest payments would wind up not with Intercultural but, if Intercultural so chose, with the Costa Rican outfit instead.

What in fact is this Costa Rican group? A check with a staff attorney at the Controller General's office in San Jose reveals that the organization has never filed an annual report. And other local authorities claim that the group seems to do precious little charity work of any sort. The group makes pretenses to having a connection with the 900-year-old Rome-based Sovereign Military Order of Malta, an international charitable organization that has close ties to the Vatican. But authorities in Rome and Denmark (where an ecumenical version of the order is based) disavow any association with the Costa Rican organization and insist that it is illegitimate.

How did a man like Wolfgang Somary let himself get drawn into this mess? Good question - and one that seems to puzzle his own Intercultural colleagues. Dr. Hans Fischer-Barnicol, the executive director of Intercultural's research arm in Heidelberg, seemed completely in the dark about a $15 million Intercultural loan to Erhard through Costa Rica. So did James George of Port Murray, N. J., a current Intercultural board member who has been active off and on since Intercultural was founded. Said he ''This $15 million is new to me. [The organization] has been in mothballs for a number of years, without financial resources.''

Court documents obtained by Forbes reveal that Somary arranged for Intercultural to make the loan on little more than Erhard's promise to transform Werner Erhard & Associates into a charity, as well as to devote the funds to further ''charitable purposes'' and ''benefit the world.''

Benefit the world? That's a pretty broad charter, especially considering that Erhard was, basically, answerable to no one. ''Werner Erhard & Associates is a sole proprietorship, and it funnels right in to Mr. and Mrs. Erhard's tax returns,'' says Allan Goddard of Arthur Young & Co., Erhard's accountant.

What did Erhard do with the money? Here is where $12.5 million of it went: in 1975 Erhard's tax attorney, Margolis, established a charitable trust in the tax-haven isle of Jersey, consigning ownership to it of a California-based company entitled est, An Educational Corp., which happened to have certain real estate and office equipment assets.

With $8.5 million of the loan, Erhard in 1981 ''bought'' those assets for Werner Erhard & Associates, along with another $900,000 worth of artwork directly from the Jersey trust. Result? Erhard personally acquired the property that was formerly held by the trust, while the trust acquired $9.4 million in cash, courtesy of the Intercultural loan.

Another $1.6 million of the loan was used to pay off Werner Erhard's personal debt. An additional $1.5 million went toward purchasing a ''body of knowledge'' from a Netherlands-based firm called Welbehagen (meaning ''pleasure''), which in turn was owned by a Zurich-based foundation known as the Werner Erhard Foundation for est. Swiss government records show that several months later the foundation liquidated itself, asserting that it had insufficient capital to carry out its stated functions. Really? When its Dutch subsidiary had just received that $1.5 million from the loan?

As Wolfgang Somary has apparently learned the hard way, making sense out of Werner Erhard's finances is about as easy as coming to grips with his high-sounding blather about ''benefiting the world.''


Fuzzy, but fervent

The est fad has faded, but Werner Erhard goes on. He still sits on the board of a lively outfit he cofounded in 1977 called the Hunger Project. Since then it has become an in thing for the socially involved, having attracted a whole range of est alumni, from ComputerLand founder William Millard to entertainers Valerie Harper and John Denver. All are drawn by the group's fuzzy yet fervent ideas about how to fight global hunger.

Set up as a California-chartered charitable foundation with a $100,000 grant from the est Foundation, the Hunger Project today boasts 4 million participants in 152 countries. Although this year it expects to show only $9 million from contributions, the organization is beginning to rival long-standing groups like Care and Unicef as the highest-profile hunger charity in the country.

What in fact is the Hunger Project? A lot of it boils down to est-like ''briefings'' in which well-meaning but naive do-gooders attend four-hour seminars. At the sessions, people are invited to change the ''context'' in which they think about hunger, to close their eyes and imagine what it would be like to starve, and, among other things, to make regular monthly cash donations to the project.

To be assured of a fresh supply of acolytes, the graduates then go forth into the world to spread the word not just that starving is bad but that Hunger Project seminars are good. And this brings in the next wave, creating a kind of chain letter.

Although very little of the money collected actually goes to feed people, the Hunger Project does have the occasional token development project to show the curious. The largest such project is a five-year, $1 million development effort funded jointly with Save The Children in rural Costa Rica.

Why Costa Rica, the most prosperous country in Central America, and a place where most aid experts say hunger is virtually non-existent? One reason may be the man who put the deal together, a prominent Costa Rican government official and friend of Erhard's named Fernando Flores-Banuet. He just happens to be the same individual whose San Jose charity served as a conduit for the $15 million Zurich loan to Erhard in 1981.

copyright 1985 Forbes


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