Empire of Deception Read online

  Leo Koretz.

  EMPIRE

  OF

  DECEPTION

  The Incredible Story of a Master Swindler Who Seduced a City and Captivated the Nation

  DEAN JOBB

  Algonquin Books of Chapel Hill

  For Kerry

  CONTENTS

  The Players

  ACT 1

  1 Our Ponzi

  2 Ambitions

  3 The Law

  4 The Gamble

  5 The Dupe

  6 The Big Idea

  7 The Syndicate

  8 The Hanging Judge

  9 The Sting

  10 The Confidence Man

  11 The Crime Fighter

  12 The Bubble

  13 The Flight

  14 The Smash

  ACT 2

  15 The Sensation

  16 The Double Life

  17 The Victims

  18 The Manhunt

  19 The Alias

  20 The Guide

  21 The Hideaway

  22 The Prince of Entertainers

  23 The Crime of the Century

  24 The Pariah

  25 The Womanizer

  ACT 3

  26 The Trap

  27 The Gang War

  28 The Prisoner

  29 The Return

  30 The Confession

  31 The Reckoning

  32 The Final Swindle

  Epilogue

  Acknowledgments

  A Note on Sources

  Notes

  Index

  About the Author

  THE PLAYERS

  The Swindler

  Leo Koretz, a millionaire Chicago lawyer and stock promoter, developer of Arkansas rice farms, and member of the Bayano Syndicate; also known as Lou Keyte, a wealthy New York writer and literary critic, and Al Bronson, a Chicago salesman

  The Koretz Family

  Mae Isabel, Leo’s wife, a former teacher

  Mentor Henry, later known as Red Kearns, their son, and Mari Bertha, their daughter

  Henry, an insurance agent, and Marie, Leo’s parents

  Leo’s brothers Adolph and Ludwig, owners of paint and wallpaper stores; Julius, a salesman; Ferdinand, a buyer for a department store; and Emil, a partner in a real estate firm

  The Investors

  Francis Matthews, an attorney with the Chicago law firm Moran, Mayer, and Meyer

  Henry A. Klein, a wealthy financier and former distillery operator

  Charles Cohn, a partner in a Chicago insurance firm

  Samuel Richman and Samuel Cohen, Chicago lawyers

  Milton Mandel, Leo’s doctor, and his sister Sarah, a retired teacher

  Felix A. Levy, Leo’s rabbi and the leader of Emanuel Congregation

  Salo Auerbach, a Chicago theater owner, and his wife, Anna

  Josephine Schroeder, the secretary at Leo’s law firm

  Victor Polachek, an executive of the Hearst newspaper chain

  Isaac Wilbraham, a retired railroad dining car steward

  Alfred Lundborg, a Chicago tailor

  The Investigators

  Robert Crowe, Cook County state’s attorney, a former judge, and a powerful Republican politician in Chicago

  John Sbarbaro, an assistant state’s attorney and part-time undertaker

  Stanley Klarkowski and William McSwiggin, assistant state’s attorneys

  Edwin Olson, U.S. district attorney, and assistant district attorney Harry Hamlin, Chicago

  Lou Keyte’s Nova Scotia Circle

  Laurie Mitchell, the overseer of Pinehurst Lodge, a sports fisherman, hunting guide, and close friend of the author Zane Grey

  Thomas Raddall, a Liverpool bookkeeper, later one of Canada’s leading authors of historical fiction

  George Banks, editor of the Gold Hunter and Farmers’ Journal in Caledonia; his daughter, Mabelle Gene Banks, was rumored to be Lou Keyte’s fiancée

  Walter and Maurice Scott, employees of Pinehurst Lodge

  Joseph Connolly, a Halifax lawyer

  Francis Hiltz, a Halifax tailor

  Act 1

  The corner of State and Madison streets in Chicago’s Loop, 1924.

  1

  OUR PONZI

  THEY WERE DESCENDING on Chicago’s newest hotel to honor a financial wizard. The Oil King, some called him, with a mixture of reverence and gratitude. Others dubbed him the New Rockefeller, a nickname as grand and audacious as he was, one that celebrated his greatest financial triumph to date. Leo Koretz, the man of the hour, had thumbed his nose at John D. Rockefeller and his mighty Standard Oil Corporation and was making this select group of Chicagoans very, very rich.

  The evening was billed, tongue in cheek, as “a testimonial banquet tendered to Mr. Leo Koretz by the friends and relatives whom he has dragged from the gutter.” It was June 22, 1922. The setting was the Drake Hotel, fourteen stories of limestone-clad Italianate grandeur on the northern edge of downtown Chicago, with its broad back to Lake Michigan and a view from the front rooms of Michigan Avenue, the city’s skyscraper-studded main drag. The “most spacious hotel in the United States,” proclaimed the embossed, leather-bound city guide found in each of its eight hundred rooms, whose “reputation for elegance and quality may never be surpassed in this generation.”

  Seventeen tuxedo-clad former gutter dwellers filed through the Drake’s brass revolving doors and ascended a flight of wide stairs. They crossed the lobby’s marble-tiled floor, passed an oasis of potted palms, and entered a private dining room. Inside, the table was overflowing with fresh-cut flowers. One glance at the centerpiece confirmed that this was the place. In the midst of the flowers was a plaster model of a seaway carved through a wilderness of mountains and jungle—a replica of the Panama Canal Zone. “O, we spread it on thick,” recalled Charles Cohn, a partner in an insurance firm and a charter member of the Leo Koretz fan club. “Expense was absolutely disregarded in getting up that dinner.”

  The sky was clear, and a stiff wind off the lake kept the air cooler than the guests were accustomed to on the second evening of summer. There was plenty of news to loosen tongues as they found their seats. Prohibition agents had raided a dozen illegal saloons on Chicago’s South Side the night before, making Cohn and his companions wary of returning to their favorite speakeasy. The president of the University of Illinois was assuring parents his school was doing its part to rein in the rebellious youth of postwar America. And everyone had read the reports from the Illinois coal-mining town of Herrin, where a bloody clash between strikers and scabs had left twenty-three men dead. Shocking, the diners nodded in solemn agreement. Senseless. Perhaps it was best that King Coal’s days were numbered. Oil was the fuel of the future, and it was oil that had brought them together this evening.

  Cohn and his companions could only marvel at their good fortune. Their friend Leo had let them in on the ground floor of Chicago’s best-kept investment secret—the Bayano Syndicate, a moneymaking machine that controlled five million acres of timberland in the Republic of Panama. For more than a decade, investors had been earning fat profits from the sale of mahogany and other exotic woods. But the discovery of oil on the property in 1921 had transformed Bayano into a petroleum heavyweight that produced tens of thousands of barrels of crude every day. It was little wonder that Standard Oil had offered $25 million—more than $300 million in today’s dollars—for a small stake in Bayano. Leo had rejected the offer, assuring his dumbfounded investors that they could do much better if they held on to their stock and went head-to-head with the Old Rockefeller. He had been right, as usual. By 1922, Bayano stock was paying dividends of 5 percent a month—an astounding 60 percent annual return.

  The Oil King strutted into the Drake that night as if he owned the place. Leo had
a large suite on the sixth floor, so every doorman and porter knew him—and his reputation as a good tipper. He was meticulous about his appearance and flaunted his discriminating eye for tailored suits and silk shirts. Neckties were in fashion, but he usually sported a bow tie, ensuring he would stand out in a crowd. Even so, a stranger would have been surprised to learn that this middle-aged man was a financial genius and a multimillionaire. Take away the expensive clothes and he looked, well, ordinary.

  Leo Koretz (his surname was pronounced “korits”) was of average height, five foot nine, and a tad overweight at 170 pounds. His stroll through the lobby displayed the stoop of his shoulders and the slight paunch over his belt. His light brown hair was well groomed but thinning on top, exposing even more of his high forehead. Only his gray-blue eyes, framed by horn-rimmed glasses with lenses as round as his face, told a different story. A writer of detective stories—reading them was Leo’s guilty pleasure—would have pulled out all the stops to describe the way those eyes turned a spotlight on the world. Penetrating, piercing, razor sharp. It was as if he could peer straight into a person’s soul.

  Leo was “the wealthiest Jew in Chicago,” in the estimation of one Chicago newspaper. To another he embodied the American Dream, “an outstanding example of the Horatio Alger type of self-made young man.” An immigrant from central Europe, he had started at the bottom, as an office boy at the law firm Moran, Mayer, and Meyer, and slogged through years of night classes to earn a law degree. He practiced law, but his real talent was making money. Soon he was advising members of his inner circle to invest in mortgages, Arkansas rice farms, and the Bayano enterprises that were making him—and his friends—unimaginably rich.

  Bayano profits paid the lease on an Arts and Crafts mansion overlooking the lake in the posh suburb of Evanston and filled it with antiques and fine furnishings. They surrounded his wife, Mae, and their young daughter with live-in servants and sent their teenage son to private school. The mansion was “one of those kinds of places where a person knows without looking that there are Rolls-Royce automobiles in the garage,” in the words of one newsman. There were two, in fact, and when Leo was not being chauffeured around town in a gleaming Rolls, he was traveling on Bayano business. He was a regular at the St. Regis Hotel in New York, where the cashier, Basil Curran, was convinced his net worth must have been in the $20 million range—a quarter of a billion dollars in today’s terms. In Chicago, Leo schmoozed with the city’s elite. He belonged to a long list of clubs and, in the Chicago Daily Tribune’s eyes, enjoyed “a rating of 100 per cent in both social and business circles.” He was a lavish entertainer who hired musicians or acting troupes to stage private performances at downtown hotels for his friends and investors. When other wealthy Chicagoans hosted parties, his name was often on the guest list.

  Everyone wanted to be around him, and not just because he knew the secret to making money. Bighearted Leo, Lovable Lou—his other nicknames said it all. He was charming, with a quick wit and an ingratiating way of cracking jokes at his own expense. He exuded “a personal magnetism that was well-nigh hypnotic,” W. A. Swanberg, a Pulitzer Prize–winning author, would later note. “He had a handclasp and warm smile that made men—and women—feel that he loved them.” Especially women. He was “a genius with the ladies,” a writer for the Chicago Evening American declared with envy, and doted on the wives of his investors and business associates.

  “His manners were wonderful,” recalled Anna Auerbach, a Bayano investor. “Why, a woman was made a social success if she could but persuade Leo Koretz to come to one of her parties.” Smart, classy, fluent in German, and able to toss in a few Czech phrases as well, he captivated listeners with his deep, suave voice. He was the kind of smooth talker who could sell refrigerators in Alaska.

  The guest list that June night was a who’s who of prominent businessmen, doctors, and lawyers. Most, like Leo, were drawn from Chicago’s large and influential German Jewish community. Charles Cohn had known him since their school days and had been profiting from his friend’s stock schemes for a decade. He was one of the syndicate’s bigger investors, holding $55,000 worth of Bayano’s green-bordered share certificates. Samuel Cohen, another major shareholder, was a lawyer with the downtown firm Elmer and Cohen. If Leo had been asked to name his best friend, the answer would most likely have been Cohen. Another longtime friend, Henry Klein, had struck it rich selling whiskey; when Prohibition forced him into early retirement, he had entrusted his money to Leo. Seated across the table was another old friend, Francis Matthews, a lawyer from the blue-chip firm where Leo got his start as an office boy.

  Leo Koretz’s lakeside mansion on Sheridan Road in Evanston, just north of Chicago—a stately home fit for an Oil King.

  There were plenty of Koretzes on hand. Leo’s five brothers were not accustomed to rubbing shoulders with such an upscale crowd—Adolph and Ludwig each operated a paint and wallpaper store, Julius sold women’s hats, Ferdinand was a buyer for a department store, and Emil, a former postal clerk, managed rental properties—but all held sizable blocks of Bayano shares. Even their elderly mother was sitting on a $38,000 Bayano nest egg. “He has always been good to us,” Emil would later say, speaking for the entire family. “We were proud of him—so proud!”

  To the Chicago sportswriter Westbrook Pegler, the twenties were “the era of wonderful nonsense.” It was a time of dance crazes and bathtub gin, of bob-haired flappers and ballyhoo. And the well-heeled businessmen assembling at the Drake were proof, as well, that the postwar economy was booming. “More people were comfortably well-off, well-to-do, or rich than ever before,” the economist John Kenneth Galbraith would note a generation later. It was as if the United States Constitution guaranteed every American the right to life, liberty, and a pile of cash. F. Scott Fitzgerald captured the mood of the times in a best-selling novel of 1920, This Side of Paradise. “I want a great deal of money,” declared the main character, the pampered, self-centered Princeton graduate Amory Blaine. “That’s what every one wants nowadays, but they don’t want to work for it.”

  If easy money was the goal, Chicago was the place to find it. The novelist Henry Blake Fuller called it “the only great city in the world to which all its citizens have come for the one common, avowed object of making money.” The city, which accounted for much of the population of the surrounding jurisdiction of Cook County, was the nation’s railroad hub, linking the industrial East to the western half of the continent. Thirty-four railroads served the city, and it was said there was more track in the Chicago area than in all of the United Kingdom and northern Europe. It was a city of superlatives. “No other place butchers as much meat, makes as much machinery, builds as many railcars, manufactures as much furniture, sells as much grain, or handles as much lumber,” marveled one writer in 1919. The city’s wealth and power made it a center of culture and learning, with fine museums and art galleries, well-tended parks, and thousands of acres of forest preserves within its boundaries.

  There was another Chicago, with its own dubious superlatives. A dark, violent world of slums and crooks festered in the shadow of the city’s soaring skyline. It had become known across America as the Wicked City, a modern-day Sodom and Gomorrah where corrupt cops and civic officials allowed brothels and gambling dens to operate in their midst. Crime was on the rise as Prohibition drove the liquor trade underground and trigger-happy gangsters battled for profits and turf. There was a murder almost every day, making Chicago a deadlier place to live than much-larger New York City. As Leo and his friends gathered at the Drake, a young hoodlum and bootlegger named Alphonse Capone was beginning his ruthless campaign for underworld supremacy.

  As Capone’s power grew, Cook County State’s Attorney Robert Crowe was making headlines as a crusader against this surge of gangland crime. Crowe was bright and ambitious, a former judge who had become one of the most powerful Republicans in the city. By 1922 the mayor’s office, and perhaps even the governorship, seemed to be within his grasp. But corrup
tion pervaded politics and justice in Chicago, and Crowe was not immune to the disease. He enlisted crooks and thugs to intimidate his political opponents and win elections, and some of his prosecutors made little effort to hide their ties to the underworld. Crowe’s rapid rise in this cutthroat world paralleled Leo’s dizzying ascent in the financial realm. Crowe and Leo knew each other, had begun their legal careers together. Their worlds would collide barely a year and a half after the banquet at the Drake, in a way Leo had long feared and Crowe could never have suspected.

  Everything about the Chicago of Leo Koretz and Robert Crowe was big and brash. It was the Windy City as well as a wicked one, but the moniker had nothing to do with the winds blowing in from the prairie or the lake; the New York newspaperman who first used the term was mocking the bravado that surrounded everything about the place. The population was approaching three million, and the skyscraper—devised and perfected by Chicago architects—was transforming the city into one of the most modern in the world. Chicagoans amassed fortunes as big as their buildings. George Mortimer Pullman made his producing the passenger railcars that bore his name. Samuel Insull controlled most of the city’s utilities, from the electrical grid to streetcars and railroads. Marshall Field—famous for admonishing an employee to “Do as the lady wishes!”—had started out as a dry goods clerk and built the country’s largest department store chain. Chicago was a place where an ambitious, self-made lawyer could be reborn as an investment guru.

  LEO’S BAND OF PULLMAN, Insull, and Field wannabes took their places at the Drake’s banquet table. The menu set a lighthearted tone for the evening. The entrée was Bayano duckling, with Panama salad-oil dressing for the greens. The meal would be washed down with beverages “sanctioned by the U.S. shipping board,” a nod to the dry times. A booklet printed on fine vellum—“the last word in appropriateness,” as one observer put it—accompanied each place setting. The cover featured a photograph of a boy above the caption “The Child of Yesterday.” It was young Leo with a thick mop of hair and a scarf tied around his neck. Inside was a flattering shot of “The Man of Today,” with much thinner hair and a confident smile. Below it, for the amusement of the diners, was a biographical sketch of “The Man of the Evening.” “Leo Koretz was born near Prague, in Bohemia,” it began—and that much, at least, was true. “From birth he refused nourishment unless fed with an 18 carat gold spoon,” it claimed. “At 5 years he first showed signs of great financial genius, negotiating a deal for the world’s supply of apple sauce.” The sketch continued: