Sly As A Fox: How Wilbur Ross Slipped Out Of Scandal And Back Into Business - Forbes

Fresh off a years-long ethics investigation, Trump's commerce secretary is back in business with a new SPAC—which he created while still in office.

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ON JANUARY 19, 2021, while still serving as the U.S. secretary of commerce, Wilbur Ross set up a new company in the Cayman Islands. The business had no operations, but it did have big plans. It was a special purpose acquisition company, or a SPAC, which would allow Ross to raise more than $300 million from investors.

If you are surprised that a cabinet member might set up such a company while still technically in office—Ross' term didn't end until the next day, January 20—then you might need an introduction to the former commerce secretary. Three former colleagues have accused Wilbur Ross of taking or stealing their private equity interests. In 2016, the Securities and Exchange Commission fined his firm, WL Ross & Co., for allegedly breaking laws that prohibit misleading investors and defrauding clients. While in office, he issued false statements, held ethically dubious meetings and engaged in suspiciously timed trading.

But Ross has a knack for slipping out of scandals. He settled the cases with his former colleagues, signing confidentiality clauses to keep the troubles under wraps. Six months after his firm settled with the SEC, he abandoned it for Washington. He managed to operate in government for years, even as his office apparently lied about the existence of a commerce department investigation, then brushed aside its findings when they finally came out in December 2020.

Ross is now back in business, having found a new set of people willing to trust him—just as he always has. "Wilbur, to me, was the master negotiator," Ross' former right-hand man, David Storper, explained in a 2019 interview. "Because he could end up picking somebody's pocket across the table, but they would also end up thanking him for it."

LIKE DONALD TRUMP, Ross is not just a ruthless negotiator but also a relentless self-promoter. For years, Ross apparently fibbed about the size of his fortune, fooling the world—and some of his own investors—into thinking he had more money than he really did. The ruse unraveled in 2017 after Ross joined the government and filed a financial disclosure report, showing fewer assets than he had previously claimed to own. Rather than fess up to being a mere centimillionaire, Ross doubled down on the myth that he was a billionaire, describing a major asset transfer to family members that did not happen. Those comments sparked additional concerns about whether Ross had disclosed all his assets to federal authorities. On November 13, 2017, a half dozen Senate Democrats wrote a letter to the inspector general of the commerce department, requesting an investigation.

A week later, the investigation began. According to internal notes kept by the inspector general's team, obtained through a Freedom of Information Act request, "the Secretary" received a verbal "courtesy notice" just days later. In public, Ross' team played it cool, acting oblivious to the probe. "We have not been notified, nor are we aware, of a formal investigation by the inspector general," a spokesperson for the commerce secretary told Forbes in December 2017, nearly a month after the probe began. The inspector general's office did not refute that statement, sticking to its internal practice of neither confirming nor denying the existence of an ongoing investigation.

President-elect Donald Trump and investor Wilbur Ross shake hands following their meeting at Trump International Golf Club, November 20, 2016 in Bedminster Township, New Jersey.

Drew Angerer/Getty Images

Other standard practices inside the inspector general's office fell by the wayside. Inspectors general often take a hands-off approach to investigations, delegating staffing and regular oversight duties to professional bureaucrats in their office. In this case, President Trump had recently nominated the head of the investigative division, Mark Greenblatt, to serve as inspector general of another agency. In an unusual move, Greenblatt, whose nomination was still pending, recused himself from the politically charged Ross investigation. In a second unusual move, Inspector General Peggy Gustafson then inserted herself into his role. "That is what, to me, made the hair on the back of my neck stand up," says someone inside Gustafson's office at the time. "I think she wanted to slow-roll it. I think she wanted control of it at all times so she could manipulate the outcome." 

But the allegations against Ross kept mounting. Investigative reporting revealed that Ross had meetings with the CEOs of Chevron, Boeing and railcar manufacturer Greenbrier at the same time he or his wife held interests in those companies. He told federal officials that he divested investments in Air Lease, Invesco and BankUnited, even though he still had stakes in those firms. He worked on trade deals with China, while remaining in business alongside the Chinese government. He even opened a short interest in a gas company tied to Vladimir Putin, after a New York Times reporter contacted him about an upcoming story on Ross' connections to the business.

It wasn't until March 2019, nearly 16 months after the investigation began, that the inspector general issued her first subpoena. In October that year, her team finally interviewed Ross. The investigators had a partial draft of their final report in December 2019 and predicted it would be ready for the inspector general to review by February 2020. But it remained buried inside the office until December 2020. When it finally became public, three years after the start of the investigation and a month after the election, few people paid attention. By that point, Biden had been elected, Ross would soon be out of his government job—and the country was more focused on President Trump's potential power grab than Wilbur Ross' ethics issues.

"Three years is a very long time, particularly if the investigative interviews were basically concluded after two years," says Walter Shaub, who once served as the top ethics official in the executive branch. "It certainly creates the appearance of an inspector general delaying an investigation out of fear of retaliation in a year when the president went after other inspectors general."

First contacted about these concerns in January, Gustafson's office initially told Forbes it would make a member of the investigative team available for an interview. When the time for the interview came, though, the inspector general's office rescinded the offer, saying the agent had changed his mind. Gustafson instead responded in writing, confirming that she oversaw the Ross investigation but saying she did not slow-roll it. The Ross probe eventually concluded that the commerce secretary broke federal rules by failing to avoid the appearance of ethical and legal breaches but cleared him of more serious charges.

Ross took a victory lap. "I am pleased that the inspector general's report puts to rest any notion that I violated the conflict-of-interest statutes," he said in a statement, later adding that "I have always been and will remain committed to adhering to the highest standard of ethics in the discharge of my duties."

His actions indicated otherwise. A month later, Ross incorporated the SPAC while still in office—a parting shot at ethics norms on his way out the door. In another statement, his office acted like that was no big deal either: "Mr. Ross took 20 minutes to create this SPAC one day before he resigned."

IT WAS NOT a forgone conclusion that Ross would dive back into business after leaving the government. At 83 years old, with an estimated fortune of $600 million, other people in his position would have called it a career and spent their final years relaxing by the water in Palm Beach. But the former commerce secretary wanted to get back in the hunt.

He understood the concept of Wall Street's buzziest trend, SPACs, having launched one in 2014, years before they became ubiquitous in the finance world. SPACs work like this: Managers list a shell entity in an initial public offering, raising a big pile of money that trades like a stock. Generally the managers grab a 20% stake in the entity at the outset, then spend up to two years looking for a private company with which they can merge their publicly traded pile of money. When they find a business, they tell the original investors. Those investors can then ask for their money back or stick around to get a stake in the target company. The two entities merge, allowing the target company to begin trading publicly, with its stock going up or down depending on how well it performs.

Wilbur Ross, Hilary Geary Ross, Melania Trump, Donald Trump, Judith Giuliani and Rudy Giuliani attend the Andrea Bocelli concert at The Mar-a-Lago Club on February 28, 2010 in Palm Beach, Florida.

Lucien Capehart/Getty Images

Ross' earlier SPAC raised about $500 million in 2014 but almost didn't complete a merger, which would have forced Ross and his partners to swallow the costs of searching for a company to buy. With just a couple of days left in his two-year-long search period, Ross pounced on a chemicals distributor named Nexeo Solutions Holdings. Many of the investors didn't want anything to do with it, so they elected to redeem their original investment. That sucked about $300 million out of the entity, most of the $500 million it raised at the start.

To plug the hole, Ross and his partners then had to give part of their 20% stake to other investors who, in exchange, promised to hang onto their shares and buy new ones.

When the dust cleared, Ross and his team walked away with nearly 7.1 million shares of the merged company, for which they had paid an average of $3.01 apiece. Not bad considering that Ross' initial investors had paid $10 to get one share and one warrant.

In February 2017, Ross resigned his position as chairman of Nexeo to become secretary of commerce. Those who got in at $10 couldn't have been happy a month and a half later when, with the shares trading at $8.84 and the warrants priced at 69 cents, Ross dumped his personal stake for an estimated $44 million. A nice payday, especially for a guy whose remaining original investors had lost 5% of their money over three years (while the S&P 500 had climbed 20%).

Ross is now in position to repeat the trick, following the same cynical playbook that he—and plenty of others like him on Wall Street—have used to pad their wallets. Ross' team has already grabbed a 20% interest in the new SPAC, paying next to nothing for it. Ross seems to have set himself up to skim smaller, almost trivial sums on top of that. A March prospectus showed that the SPAC would be paying "an affiliate" of the sponsor $10,000 a month for office space, secretarial and administrative services. The document specifically states that the payments include the cost for maintaining headquarters at 1 Pelican Way in Palm Beach, which appears to be Ross' personal home. When asked about this, Ross said the SPAC would not pay rent but would cover incremental costs.

Given that the SPAC has no real business yet, it's mostly just a bet on the team, which includes Ross, two of his old private equity colleagues, a couple of former underlings at the commerce department, a British lord who served on the board of Ross' previous SPAC and Larry Kudlow, the TV talking head that Trump tapped to be director of the National Economic Council. Ross serves as chairman and, lest there be any confusion of who is in charge, the SPAC's ticker symbol is "ROSS."

That branding might help draw some Trump fans, but it probably won't appeal to those who know Ross' recent track record. After a well-timed rollup of the steel industry in the early 2000s, which propelled his first two funds to amazing returns, Ross hasn't fared so well. His third major fund, which dates to 2005, lost investors an average of 5.3% of their money annually. His firm's fourth significant fund, which started in 2007, returned a decent 7.3%. Its fifth, which began in 2011, returned just 1.6% despite operating through the longest bull market in American history.

"When you think about that type of a guy coming to market and then still trading on his name to get this done, it just kind of blows your mind that it's even possible," says one former WL Ross investor. "It's a total joke. I've never trusted the guy. I don't have any faith that that guy can generate any sort of outsized performance."

The recent popularity of SPACs could make it even harder for Ross to generate high returns, since he'll now be competing with a crowd of others looking for similarly structured deals.

IPO investors may be having second thoughts about putting their money with an ethically challenged, recently struggling manager. But they do have a way out. Ross' original investors can redeem their shares at the time of the merger, just as so many did in his previous SPAC. The more people who demand their money back this time, the more Ross will presumably have to replace to complete the merger. The more money he needs, the more deals he might have to strike to entice new investors. He and his partners could theoretically end up having to forfeit most of the 20% stake they grabbed at the outset.

Or put it another way, if everyone flees, then the fox—who has always seemed to find more prey—will finally be left without a feast.