The Loophole That Made a Fortune

This article was originally published on LinkedIn

George Remus was a lawyer and a pharmacist. That combination turned out to be a dangerous and profitable skill set in Prohibition-era America. He knew medicine, he knew the law, and he knew how to read the Volstead Act closely enough to find a gap others had missed: liquor could still be sold legally for medicinal purposes with a doctor's prescription.

Remus saw an opportunity. He bought distilleries, which gave him legal ownership of large quantities of whiskey, and set up drug companies to distribute it through physicians and pharmacies. On paper, he had built a legitimate medicinal whiskey business. Behind that business, he built something much larger.

His employees would hijack his own liquor shipments, allowing whiskey that had left a warehouse for a legal purpose to find its way into the illegal market. The legitimate operation gave him a reason to manufacture, store, and move liquor. The bootlegging operation turned that access into a fortune. Before long, Remus was known as the "King of the Bootleggers." 

Understand the incentives

The mechanics of the scheme are interesting, but the business lesson sits underneath them. Remus understood incentives. Physicians had a reason to write prescriptions. Pharmacists had a reason to fill them. Distributors had a reason to keep product moving. Each piece of the chain could point to paperwork showing that its part of the transaction was legitimate. Remus created a system in which everyone had a reason to keep the system going.

By 1923, he had amassed a fortune and was living in a Cincinnati mansion he called the Marble Palace, complete with an elaborate mosaic-tiled swimming pool. His wealth became part of his image, but the more interesting part of the story is how much of the operation depended on the difference between what could be defended on paper and what was actually happening.

That distinction still matters in business today. Every industry has rules, contracts, policies, incentives, and performance measures. Smart people learn how those systems work, and good businesses use that knowledge to operate more effectively. The less scrupulous use the good as a cover story for the bad.

Problems begin when the question shifts from "Is this the right thing to do?" to "Can we technically get away with it?" 

I've seen versions of that question throughout my career. A contract may allow something a customer never expected. A sales presentation may make a claim that can be defended while leaving out an important piece of context. A metric may look impressive because of the way it was defined. A process may follow every written rule while producing an outcome nobody would be particularly comfortable explaining.

Those situations can be tempting because they come with a ready-made defense: we followed the rules. Sometimes that is exactly the right answer. Rules matter, and businesses need people who understand them. But compliance and trust are two different tests. A decision can pass the first and still fail the second.

My parents had a rule when I was a teenager. Be home before midnight, no matter what you are doing or where you are. On my 18th birthday, I went out with friends to celebrate on a school night and came home well after midnight. Mom met me at the door, clearly angry.

Before she could say anything, I said, “Hey, I’m just following your rules, Mom.”

Technically, I was right. But she was disappointed in my choices and my tone of voice, and I knew it. That hit harder than any scolding she may have been planning.

Technically, I was right. But I was unquestionably wrong.

Remus eventually learned how fragile his arrangement really was. Federal agents uncovered the illegal side of the operation, and he was convicted and sent to prison. While he was incarcerated, his personal life unraveled as well. His wife began an affair with a Prohibition agent who had gained Remus' confidence and learned details about his operation and wealth. After Remus was released, he confronted her in Cincinnati's Eden Park and shot and killed her. He later represented himself at trial, with assistance from another attorney, and was acquitted by reason of temporary insanity, perhaps not-so-ironically, a legal defense Remus himself had helped pioneer more than two decades earlier as a criminal defense attorney.

It's an extraordinary ending to a story that began with someone reading a law carefully and spotting an opportunity. The loophole helped create the fortune. It also gave Remus a way to make an illegal enterprise look legitimate for a while. Eventually, the distance between the appearance of the business and the reality underneath it became too large to hold together.

That's part of what drew me to stories like Remus' while writing Against the Grain. Moonshiners and bootleggers were operating businesses under unusual circumstances, and their stories often put familiar business questions into sharper focus. Incentives mattered. Reputation mattered. Relationships mattered. So did the choices people made when the rules left room for interpretation.

Most business owners, marketers, salespeople, and executives eventually encounter some version of the same gap between what is technically defensible and what is actually true. The stakes are usually far less dramatic than they were for George Remus, but the question is remarkably similar.

The real test isn't whether you can explain why something is allowed or technically true. It's whether you'd be comfortable explaining exactly how it works to the person standing on the other end of it.