The Dead Man Fund

How the world’s worst investor fleeced clients who couldn’t complain.

Jack El-Hai | Longreads | November 2017 | 7 minutes (1,672 words)

In 1989, Morningstar, Inc., an advisory service, issued a strongly worded and unusual recommendation to its clients who had placed money with a firm then called the Steadman Funds (later known as the Ameritor Funds). “We urge you to cut your losses and get out,” Morningstar counseled. Doubtless, some investors heeded this advice. Many couldn’t, though, because they were dead.

A few years ago, the fate of Ameritor— nicknamed “The Dead Man Fund” — and its unfortunate investors, became entangled with the history of my house. An envelope had landed in our mailbox containing a check in the amount of $10.32 made out to one Anna Mae Heilman. She was nobody we knew, but the name rang familiar to me for some reason. With the check was a letter explaining that the money was a final settlement of Heilman’s investment of 171 shares in the Ameritor Security Trust mutual fund, which had closed down.

It didn’t take long for me to remember how I knew Heilman’s name. When we bought the house, we acquired its abstract, a thick and crumbling packet of legal documents that chronicled more than a century of transactions involving the property. Heilman’s name was in there. She and her husband had owned our house for several years ending in 1971.

Heilman’s tiny payout at a rate of only six cents per share seemed strange, so I began looking into the history of Ameritor and the circumstances of the Heilmans’ sale of our house. I then learned of two terrible misfortunes that afflicted one family.

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In 1939 or 1940, William A. Steadman, owner of a securities firm in Orange, N.J., launched a new mutual fund. That fund had its ups and downs over the decades until 1964, when the founder died and his brother, Charles Steadman, began managing it. From then on, the downs far outnumbered the ups.

The surviving Steadman, a graying and bespectacled corporate attorney, “became captivated by the opportunities and potential of the mutual fund business,” he told a reporter. Most of the time, however, he refused to talk with journalists. Working sixteen hours a day and sleeping only five, he energetically attracted investors, hired a large sales team and used his charm and force of will to take the fund from $3.5 million to $200 million in net assets in just five years. He introduced new Steadman funds focusing on industrial, technology, science, and growth stocks, and he was among the first to allow no-load investments.

In all these funds, though, Steadman frequently changed the portfolios and racked up high transaction costs and other annual expenses of as much as 25 percent of the funds’ value. Most other funds were able to hold expenses at around 1 percent.

As early as 1971, investment regulators scrutinized Steadman’s management practices. The SEC cited Charles Steadman’s own suspect financial transactions and conflicts of interest in managing the funds and tried to block him from controlling them. Steadman successfully fought off those allegations. Again, in 1989, the SEC made a run against Steadman and his business, charging that the funds were improperly registered in most states. The agency wanted to replace Steadman with a receiver to protect the assets of investors. When investigators made allegations of improper practices, Steadman passed the resulting legal expenses on to his investors. A federal appeals court dismissed the SEC’s injunction to replace Steadman, and from then on regulators unwisely ignored most of the firm’s improprieties.

Meanwhile, Steadman’s investment picks often lacked acuity or good timing. He invested heavily in electronics stocks just before a slump in those equities during the early 1980s, and he allowed speculative losses in warrants, options, and futures to eat up gains. He transformed one of his funds from exclusive holdings in stocks in 1984 to exclusive holdings in bonds the following year. “We’ve had the unhappy situation of being in the market at the wrong time and out of the market at the wrong time,” he admitted in 1989. Over time, squirreling away money in a mattress brought better results than investing in a Steadman fund, and the occasional profitable years lagged far behind the returns from other funds.

How did Steadman’s board of trustees view the situation? In the mid-1980s they voted to stop holding annual meetings, give themselves time-unlimited terms, and surrender their right to ever close the funds. They handed Charles Steadman the power to amend the operating rules of the funds at will and veto any fund amendments that the board approved.

In 1997, after a five-year period when the Standard & Poor’s 500 had soared by 108 percent, Steadman funds were performing abysmally. Steadman Technology and Growth had a total return of -78 percent. Steadman Investment saw a loss of 46 percent. Only the Steadman Associated fund had a weak gain of 3 percent. Meanwhile, Steadman’s American Industry fund had achieved what was nearly impossible: It was down close to 50 percent over the previous 38 years, a stretch in which the S&P 500 had shot up nearly 1,500 percent. The total assets of these funds under Steadman’s management had withered from over $100 million during the 1970s to just $8 million.

By the late 1990s, around 40 percent of Steadman accounts were abandoned — accounts with no transactions for ages, and the account holders were deceased or close to it. State abandoned-property agencies held 15 percent of all shares. The firm didn’t send statements to the owners of inactive accounts, increasing odds that relatives, caretakers, or survivors were unaware the accounts existed.

When Steadman died in 1997 at age 83, he left behind a string of breathtaking losses that had earned him the nickname the “Rembrandt of Red Ink.” His four funds regularly appeared on fund-watchers’ lists of the worst investments. By extracting from investors such high expenses, he had conned them within the limits of the law. No independent trustees of the funds had money invested in them, and Steadman himself had sacrificed only about $16,000 to them at the time of his death.

In 1998, longtime Steadman treasurer Max Katcher rebirthed the family of funds under the Ameritor name, and Charles Steadman’s daughter, Carole Steadman Kinney, soon took control. She had a background as an investments representative with Steadman and other firms, and she continued the company’s money-losing ways. Many financial reporters alleged that Kinney treated the funds as a source of a personal annual annuity, allowing expenses that went to management to remain high as the fund balances dwindled. In 1999 Katcher admitted that “somebody was making money [from the funds], but it wasn’t the investors.”

William Steadman’s four funds regularly appeared on fund-watchers’ lists of the worst investments. By extracting from investors such high expenses, he had conned them within the limits of the law.

The Steadman Associated Fund and the Growth and Technology Fund merged, producing the Ameritor Security Trust, where Anna Mae Heilman’s money had come to rest. “We can’t avoid the history,” a fund representative said in 2002, “but we hope to convince people to ignore it because it’s not the same fund anymore. We’ll have a new fund run in a completely new style…and we’ll be able to say that as of a specific date, the fund’s portfolio and strategy were changed to where current performance is no longer a reflection of the past.”

The rate of loss only accelerated, and the recession of 2008 dealt this frail fund a killing blow. Ameritor Security Trust spiraled deeply into a vat of red ink. Taken as a whole, Ameritor’s funds lost 99 percent of their total value during Carole Kinney’s oversight. The SEC belatedly shut down Ameritor as an investment company in 2012.

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How much had Anna Mae Heilman’s final payout of $10.32 previously been worth? If she made her investment with Steadman in the 1960s, her money certainly once had a value in the four figures, and possibly five.

There seemed no point in returning Heilman’s check to Ameritor, which was out of business, so instead I tried to track her down. I eventually found her mentioned in a two-inch article in The New York Times published on October 2, 1971, headlined, “4 Die in Dakota Air Crash.” She and her husband, along with another couple, had perished in an accident during a thunderstorm near Sioux Falls, South Dakota. There it was: For some 40 years, Heilman had been one of Steadman’s and Ameritor’s notoriously dead investors.

Her death explained why our house changed hands that same year. The Heilmans, in their late 30s, left behind several children, who surely could have used the money mis-invested with Ameritor.

I still have the check from Ameritor (signed by Carole Kinney’s husband Jerome), and I’d love to pass it along to Heilman’s survivors — but as a memento of what? Their mother’s premature death? Her hopes for financial security? An investment firm’s utter disregard for its account holders?

Somehow I envision the Heilman family accepting the check with the thought, Mom cared about us. It’s too bad Ameritor cared so little about her.

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Jack El-Hai writes about the history of science, medicine, and business, as well as the connection between current events and the past. He is the author of The Nazi and the Psychiatrist, among other books. Follow him on Twitter at @JackEl_Hai.

Editor: Mark Armstrong
 Fact-checker: Matthew Giles