The last tycoons: the secret history of Lazard Frères & Co (34 page)

Finally, on October 13, after three years of depositions, the examination of boxes of ITT documents, and the relentless effort to stitch together precisely what Lazard, Mediobanca, and ITT had pulled off, the SEC ruled, deeming "it appropriate...that proceedings be instituted with respect to" ITT and Lazard regarding potential violations of the Securities Exchange Act of 1934 having to do with ITT's disposition of the Hartford shares to Mediobanca and Mediobanca's sale of those converted shares to two buyers that simultaneously sold their companies to ITT. Somewhat surprisingly, however, after all the years of effort, the SEC also agreed to a settlement proposal, as being "in the public interest."

The settlement proposal, proffered by ITT and Lazard, permitted them to consent to the SEC's findings and its penalties "on the basis that nothing contained herein is an adjudication with respect to any matter referred to herein." Lazard agreed, within forty-five days, to "adopt procedures that will insure that it properly ascertains and records all fees received by it and the basis for such fees." Lazard also agreed to provide companies on whose board a Lazard banker sits with "full and complete" information, in writing, about all of the fees Lazard receives, in whatever form, from that corporation. Finally, Lazard agreed, upon request, to provide any former shareholder of Eurofund with a copy of the SEC order. For its part, ITT had the burden of amending its annual reports for the years 1969 through 1976, within ten days, to include the SEC's order. Within forty-five days, ITT agreed to set up a committee of independent directors of its board to review the SEC's order, and the related findings of fact, to determine what could be done to prevent a recurrence of such activities.

Sporkin's current views notwithstanding, by any measure these reprimands were light indeed. The
New York Times
reporter Judith Miller wrote a 408-word story about the settlement that the editors deftly tucked inside on page 78. She conceded the twenty-six-page settlement document shed "new light on one of the most complex and controversial mergers in corporate history," but her story never bothered to share with the paper's readers what that beacon was revealing, probably because she had not previously covered the story and was not in a good position to know. She quoted Rifkind's view that "Lazard firmly believes that its conduct throughout these transactions was in compliance with all legal requirements and in accord with high professional standards and that all appropriate disclosures were duly made."

To be sure, the SEC's single-spaced compendium displayed, in sumptuous detail, Lazard's role in the unprecedented transatlantic journey taken by the now-infamous 1,741,348 shares of the Hartford. The SEC's accounting explained that once ITT bought the Hartford shares, with Lazard's help, the shares became "a serious problem" because obtaining a favorable IRS ruling required that ITT divest the shares before the Hartford shareholders were to vote on the merger with ITT. But the market for the thinly traded Hartford shares had fallen far below the $51 per share that ITT had paid for them, making Geneen reluctant, to say the least, to sell them at the current price. ITT turned to Felix to find a solution. He tried, without luck, to find a buyer in the United States. He then appealed to the vacationing Andre, whose suggestion of Mediobanca set in motion a series of events that led eventually to the resales of the by-then-converted ITT "N" shares to two buyers, Charles Engelhard and a fund controlled by the Agnellis, that in turn each sold a company, Eurofund and Way-Assauto, respectively, where they held large stakes, to ITT. The SEC's basic conclusion--utterly correct--was that ITT bought these two companies, in effect, with their own "N" shares while allowing the owners of the companies to profit not only by receiving a premium for their companies but also by converting the proceeds of those sales into the in-the-money options on the ITT "N" shares that Mediobanca had in effect granted to the sellers of the companies.

The SEC also noted the abundance of fees that Lazard pulled out of the entire series of deals, starting with the ITT-Hartford merger itself. It was the gift that kept on giving. First, Lazard received $500,000 for brokering the sale of the 1.7 million Hartford shares to ITT. Then the firm received $1 million for its advice to ITT in the acquisition of the Hartford. (Another, tiny investment bank, Middendorf Colgate, also received $1 million.) Lazard also received half of Mediobanca's commitment fee from ITT for agreeing to "buy" the 1.7 million Hartford shares. That came to about $684,000, which Felix may or may not have remembered to tell his client Geneen about. Lazard also initially received half of another $359,000, or about $180,000, in selling fees Mediobanca received for the disposal of the "N" shares, but after the IRS reversed its 1969 ruling, in 1974, Lazard returned these fees because after the IRS raised questions, Mediobanca decided the money had been sent to Lazard erroneously. Lazard also received the $520,000 "settlement of fee--Agnelli" by way of Les Fils Dreyfus for, as Andre described, years and years of Lazard's to-then-free advice to the Agnellis on any number of topics. Lazard took no fee from Eurofund for negotiating the sale of ITT because it was also a principal, for which it received a profit of more than $1.2 million on its $450,000 investment. Lazard received another $250,000 fee from ITT for its advice with regard to the liquidation of the securities in Eurofund and for the reinvestment of the cash. Finally, Lazard received brokerage commissions on the sale of the 441,348 "N" shares that Mediobanca had sold through Lazard, 400,000 of them to Salomon Brothers and 41,348 of them in the market. In sum, Lazard had received well over $4 million in fees stemming from this one transaction, at a time when large cooperative apartments in tony buildings on Park Avenue were selling for around $50,000.

WHETHER ALL THIS added up to
criminal
activity on the part of Felix and Andre became the next crisis these two bankers, somewhat unexpectedly, had to face. It seems that Sporkin, at the SEC, had urged the U.S. attorney in the Southern District of New York, Paul Curran, to convene a criminal grand jury to investigate and to decide whether to
indict
Felix and Andre in the ITT matter. The convening of the grand jury was said to have occurred during the seemingly endless delays in the second SEC investigation. (The SEC investigations and the shareholder lawsuits were directed at Lazard, the firm, not the individual partners, although if the punishment were severe enough, the cost to the partners could have been substantial.) Now, though, a criminal grand jury investigation raised the possibility, for the first time, that Felix or Andre could go to
prison.
Here, Andre's deteriorating health played a significant role in persuading the U.S. attorney not to call for his appearance. But Felix was young and vibrant and had been very much involved, as we have seen, in the events that resulted in the ITT-Hartford scandals.

Felix would have to appear before the grand jury. And he was scared shitless. The task of preparing him for his appearance, which he had to do alone, without counsel, fell to his partner Bob Price. Price had joined Lazard four years earlier, in December 1972, as a forty-year-old vice president working for Felix in the corporate finance group. He had exactly zero formal training in M&A but was well known to both Andre and Felix as the man who masterminded the Republican John Lindsay's improbable victory in the 1965 New York City mayoral election.

After engineering Lindsay's victory, Price became one of his two deputy mayors, a position he held for about a year, with some controversy. After leaving the Lindsay administration, at the end of 1966, Price joined the Dreyfus Corporation, which controlled the Dreyfus Fund, one of the largest mutual funds at the time. After two years at Dreyfus, he set out on his own and created Price Capital Corporation, an early version of today's hedge funds. Price Capital did not achieve what its founder hoped, though, and so when Andre and Felix asked him to join Lazard at the end of 1972, he readily agreed. On February 7, 1974, Price became a Lazard partner. In 1968, he had also given Lazard and Felix a gift, in the form of a fully negotiated deal between Lorillard, the tobacco company, and Loews, the insurance conglomerate run by the Tisch family. Since the Dreyfus Fund owned a significant amount of Lorillard stock, Price could not get the fee he felt he had earned for putting together the deal. Instead, he gave the fully negotiated deal to his friends Felix and Andre, the finishing touches of which were made at the now-defunct Christ Cella steakhouse on East Forty-sixth Street. The Loews deal gave Lazard its second million-dollar M&A fee. That's not all Price gave Felix. He also introduced Felix to Elizabeth Vagliano, now Elizabeth Rohatyn, Felix's second wife. Vagliano had been a secretary in Price's law office.

The grand jury investigation, though, forced Price to earn his keep at Lazard. In 1959, he had been an assistant U.S. attorney in downtown Manhattan. In the mid-1970s, in the midst of the second SEC investigation, Felix and Andre desperately needed Price's legal expertise. Price relentlessly coached Felix on his grand jury appearance, even going so far as to sneak him into the hearing room after hours to conduct mock question-and-answer sessions. "I came into the firm a year or two after Sporkin had started the investigation," Price explained thirty years later. "So I was totally free. I wasn't part of the ITT-Hartford transaction. Andre liked me and asked me to give him advice about how to handle things, and the thing was that Sporkin had decided to have a major grand jury investigation until Felix and Sam Harris, from Fried Frank, calmed Sporkin down and made him see this wasn't the way he was going to succeed in life. And then I gave them [Felix and Andre] the advice that they should offer to appear before the grand jury for questioning. What they would say was secondary. Getting them to accept the concept of appearing before the grand jury, though, was earthshaking." Price said his "job was really to coach them on answers and get them ready for the grand jury and to give them truthful answers that skipped the truth." He said that Paul Curran, an old friend, had given him the key to the grand jury room so that the night before Felix was to appear they could both go in together. "Felix sat in the chair, and I bombarded him with questions so he wouldn't go into the pit cold," said Price.

In the end, Felix dodged the bullet. Whether because the evidence was inconclusive or because political strings were pulled or because, as Price suggested, Sporkin--who later became a federal judge--decided it would be a poor career move to mess with the powerful Felix, the prosecutors and hence the grand jury lost interest in the case, not unlike how the former SEC investigator Gary Aguirre claimed the SEC lost interest in his 2005 investigation of insider trading by the well-connected Arthur Samberg, CEO of Pequot Capital, and John Mack, CEO of Morgan Stanley. But there was a lot of arm-twisting along the way. "Sporkin was all over Lazard like a blanket," Price said. But then Felix started to romance the SEC investigator, and, according to Price, by the end of the process "Sporkin was in Felix's pocket." Price explained that Felix had many meals with Sporkin down in Washington to try to convince him to let the matter drop and had his powerful Washington friends, such as Ted Kennedy and Jacob Javits, also weigh in on his behalf. "But who do you know who goes before a grand jury and doesn't try to do that?" Price asked years later, rhetorically. Paul Curran's son James got a job at Lazard at around the same time--1976--and worked at the firm until the early 1980s. In the end, the matter got "stale" and the "file was lost," Price explained. The SEC and Sporkin decided to reach a settlement agreement with Lazard instead. Sporkin's boss at the SEC was Felix's old friend Bill Casey. After Casey became director of the CIA, Sporkin followed him to the agency and was his general counsel. When Casey died in office, Sporkin won his appointment to the federal judiciary. He is now a partner in the Washington office of the Wall Street law firm Weil, Gotshal. Had the "broad investigation" in front of the grand jury "proceeded," Price said, "Sporkin wouldn't have become a judge but would have had a helluva story."

Felix adamantly and repeatedly denied having any recollection that he was the target of a criminal grand jury investigation into the ITT matter. "I'm not denying that it happened," Felix said. "I'm just telling you that I have absolutely no recollection." But the very idea that someone had even suggested such a thing was anathema to him. He repeatedly made it clear he did not want the thought even mentioned. "The notion that I could appear as a defendant in front of a grand jury without it getting into some newspaper or some column or something is just not credible," he explained. "It just couldn't have happened." There are no records that can be checked about withered grand jury investigations; by law, grand jury records must be sealed or destroyed, if they were ever kept in the first place. All that can be relied on is the recollections of people involved at the time, some thirty years ago. Felix has one supporter for his view, who was there at the time and would know: Stanley Sporkin. Sporkin, who has nothing but good things to say about Felix, said he never asked the U.S. attorney's office to convene a grand jury investigation into Felix's role in the ITT matter. But one former Lazard partner, Disque Deane, said he recalled that around this same time, Andre offered Sporkin a job at Lazard; Sporkin denied this was true. Paul Curran, the U.S. attorney, would not say whether or not he convened such an investigation. Along with other Lazard partners at the time, Bob Price was equally adamant that the grand jury investigation did happen. "I swear on the Torah it is true," said Price, who is Jewish. Deane, a close friend of Price's, said he, too, believed that Felix and Andre were the targets of a grand jury investigation and that Felix had appeared before the grand jury. "Yes," Deane said. "I will confirm that, yes." He said Price is telling the truth. "The soul of the earth and very honest," he said of his former partner. "He'll tell it the way it is."