The following is an adapted excerpt from Stephen R. Foerster’s book Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor (Wiley 2024).

This story brings together a tipster, a villain, a visionary, and Warrren Buffett, arguably the greatest investor of all time. And it’s mixed with salad oil.

The villain

Tino DeAngelis had an early business start in the meat industry. He was allegedly involved in black market sales during World War II. He paid $100,000 in damages for exporting substandard cooking fat to Yugoslavia. After acquiring control of a public meatpacker, he was required to pay new damages of $100,000 because of inferior products. Then another one of his companies was accused of exporting inferior lard to Germany, resulting in “the usual” $100,000 in damages. DeAngelis later created Allied Crude Vegetable Oil Refining Corporation (Allied). Allegations of fraud and underworld connections followed him.

The visionary

American Express Company (Amex) was dominant in travel and financial services. In 1960, Howard Clark became chief executive. His priority was focusing on the viability of the money-losing American Express credit card. He then focused on four marginally-profitable Amex subsidiaries. One was the separately incorporated American Express Field Warehousing Company (AEFW). It had made money in only 10 of the past 19 years and had a cumulative loss. In the late 1950s, AEFW had 500 client accounts, but all the profits were from two companies, with the same owner: DeAngelis. One company was Allied.

Birth of the Oracle

In 1956, Warren Buffett, age 25, started his first investment partnership. In 1962, He dissolved all eleven partnerships and brought them into Buffett Partnership Ltd. (BPL). Net assets were $7.2 million. Buffett was already a millionaire. BPL had strong performance. Buffett inherited his value-investing style from Benjamin Graham. Buffett viewed stock investing akin to owning a business, but only at a reasonable price. Buffett’s 1964 investment in Amex would begin a different investing approach.

Prior to Buffett’s Amex acquisition, he pushed for board representation or control, like with his Dempster Mill Manufacturing Company investment. Buffett pushed management to increase profits but was unsuccessful. So, he installed a new manager who turned things around, but at a reputational cost to Buffett. The new management team laid off one hundred workers from the only town factory. Buffett was vilified in the local newspaper. Starting with Amex, Buffett’s approach was to first uncover undervalued firms that were fundamentally good businesses with capable managers, then let them do their jobs.

The voice

In June 1960, Donald Miller, chief executive of AEFW, received a phone call from a tipster, “the Voice.” He claimed to work the night shift at Allied in Bayonne, New Jersey. He warned Miller, “The biggest hoax ever pulled is being pulled on American Express because there is in fact water in the tanks, and we are counting it as oil. Whenever we went to take inventory at the tank, we would be dropping the weight into this metal chamber, which was filled with soybean oil, but the balance of the tank had water in it.”

Miller ordered a surprise inspection at Allied. Inspectors found all the tank openings were welded shut except for the measuring hatch. They then found water in the five tanks they were able to check. However, when they returned after the weekend, there was nothing suspicious in the other tanks. A report later attributed water to “broken steam pipes.” Business between Allied and AEFW continued as usual.

Unbeknownst to investigators, DeAngelis had created an elaborate network of pipes with false compartments and special sampling tubes that held actual oil. Three years later, when the fraud was finally detected, when the tap on one tank was finally opened, instead of $4 million of soybean oil, seawater poured out for 12 days.

Scams and the downfall

In 1961, Allied started buying heavily in the oil futures market. By 1963, DeAngelis was pushing up the prices of oil futures in anticipation of heavy demand by foreign countries. Rumors swirled that Russia’s crops had failed, and Russia would soon be buying U.S. vegetable oil. Actually, there were bumper foreign crops, so high futures prices weren’t sustainable.

With each subsequent oil price decline, Allied needed to provide more money in margin accounts. By November 1963, the exchanges and government commodities agencies finally realized that Allied was driving up futures prices. When a commodities exchange investigator demanded to see Allied’s records, the gig was up. Allied filed for bankruptcy. Futures prices plummeted. AEFW’s warehouse receipts had totaled twice as much vegetable oil as all the oil in the U.S.

The brand

Amex was a joint stock company, the last large U.S. public company with unlimited liability. By 1963, Amex was considering incorporating, becoming a limited liability company like almost all other public companies.

Soon after Allied went bankrupt, claims against AEFW were more than $150 million, close to the year-end value of Amex’s stock of $162 million. Since AEFW was a separately incorporated subsidiary, Amex probably wasn’t responsible for its liabilities. But there were legal rules that might have overridden the separation. This created uncertainty about Amex’s potential liability.

Regardless, Clark pondered whether Amex should compensate losses at AEFW. He considered important stakeholders with different perspectives. If Amex denied liability for AEFW, banks would suffer losses. Given the huge role banks played in Amex’s travelers cheques business, that might kill all the business banks brought to Amex.

Conversely, satisfying bankers might upset shareholders. Clark also had to consider how the swindle would affect customers. Would they stop using Amex products? With permission of the board, on November 27, 1963, Clark publicly announced: “If our subsidiary should be liable for amounts in excess of its insurance coverage and other assets, American Express Company feels morally bound to do everything it can, consistent with its overall responsibilities, to see that such excess liabilities are satisfied.”

Warren Buffett invests

The swindle started featuring in the press on November 20, 1963, with few details. Two days later, President John F. Kennedy was assassinated. $11 billion in shareholder value was destroyed in the half hour before an emergency closure of the NYSE. Kennedy’s death relegated the Great Salad Oil Swindle to the back pages. Intrigued by the possibility of buying the stock cheaply, Buffett tracked Amex’s stock price. Even after markets reopened, the stock never recovered and continued to drop. Based on the market’s reaction, the survival of Amex was in doubt. Between November 20 to December 2, its price dropped from $61.81 to $40.00 and would bottom on June 2, 1964, at $35.31, a drop of 43 percent in less than eight months since the scandal broke.

Buffett wondered what impact the scandal would have on Amex’s reputation. With travelers cheques and credit cards, trust mattered. Buffett needed facts. So he and an acquaintance visited restaurants and other places that accepted Amex cards and cheques. They talked to bank tellers, bank officers, credit-card users, hotels employees, and restaurants workers to get a feel for whether usage had fallen off. Based on that research, Buffett concluded that while Wall Street had punished Amex by battering the stock price, Amex’s reputation hadn’t been tarnished on Main Street.

By early 1964, BPL was flush with cash from both profits and new money, with capital of $17.5 million. It takes both strong conviction and nerves of steel for to risk huge amounts of capital on one stock. But that’s what Buffett did. By June 1964, he had invested $3 million in Amex, BPL’s largest single holding, at 17 percent.

Shareholder versus shareholders

Before an eventual resolution with creditors, some shareholders took action against the firm, arguing Amex had no legal obligation to settle liabilities of AEFW. They felt any settlement would hurt Amex’s shareholder value. They were particularly concerned that holders of many forged warehouse receipts that DeAngelis invented would be compensated.

Buffett felt management was doing the right thing and was concerned that trying to derail any settlement would damage the brand. Buffett sent a letter to Clark, praising management, and imploring them to settle for the sake of reputation. Buffett likened the situation to a typhoon that would soon pass. He even offered to testify, at his own expense, supporting management’s actions. This was another pivotal moment for Buffett, taking a long-term perspective, willing to sacrifice short-term profitability. Buffett’s assessment of Amex’s future was accurate. Almost six decades later, Buffett still owned Amex stock.

The period when Buffett was buying Amex’s stock was mid-April to June 1964. Its average price was $41.22. Two-and-a-half years later, Amex’s stock was $92.50, a gain of 124 percent. The Dow lost 6 percent over that period. Given the amount of capital risked, Buffett’s ability to buy near the bottom, and the huge gains in such a brief period, arguably this was one of the best investments ever, certainly for Buffett and his partnership.

Greed and fear

By 1967, Amex negotiated a $60 million settlement with creditors. After-tax, that was $31.6 million. Profits between the time the scandal broke and the settlement exceeded that amount. Amex was able to put the scandal behind it by late 1964.

Amex executives later realized the swindle was the greatest public-relations event in its history. Press coverage was favorable, and the public saw that Amex stood behind its obligations. In 1964 travelers cheques sales increased by 12 percent. Later Clark was asked if a salad oil swindle every few years might be a clever idea. He replied: “I don’t think I have enough good years of my life to give away for another swindle.”

The scandal showed why character and reputation matter. DeAngelis had a long record of unscrupulous behavior and never really changed. Paying fines was just a cost of doing business. Yet it didn’t deter other companies from dealing with him, until his empire came crashing down.

Why did banks and commodity exporters increasingly lend to DeAngelis’s businesses? Before his downfall, rumors had swirled for years that a swindle was happening at Allied. Partly, it was tunnel vision. One lender commented, “We didn’t deal with this Tino character. We dealt with American Express.” There’s no substitute for your own analysis. Buffett did a lot of legwork before investing in Amex. He didn’t simply rely on a hunch.

Clark made a bold decision by pronouncing that Amex was “morally bound” to cover AEFW’s liability. He recognized the importance of a brand’s reputation. He also didn’t let a good crisis go to waste. Both Clark and Buffett recognized that long-term value trumped short-term profit.

What was the root cause of the scandal? Incentives and motives matter. To survive, AEFW needed to show consistent profits. This may have caused Donald Miller to overlook DeAngelis’s character flaws, since his dealings with Allied were profitable. As author Norman Miller concluded, “Tino succeeded because bankers, brokers and business[people], despite the glaring indications that they were dealing with a crook, could not resist the bait of big profits…The reason they were convinced that Tino’s deals were good can be stated in one word—greed.”

Those bankers, brokers, and businesspeople were all greedy until they feared they would lose it all. Buffett turned that premise on its head when he famously proclaimed his investing goal: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Stocks may become overvalued when everyone wants to invest in them, and undervalued when no one wants them.

Stephen R. Foerster is an author and finance professor at the Ivey Business School at Western University in London, Ontario, Canada. He has a PhD from the Wharton School, University of Pennsylvania and a Chartered Financial Analyst designation.

Adapted with permission from the publisher, Wiley, from Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor by Stephen R. Foerster. Copyright © 2024 by Stephen R. Foerster. All rights reserved.