The last tycoons: the secret history of Lazard Frères & Co (47 page)

His fellow bankers, though, waved off Felix's criticisms. "Sour grapes," they replied, especially since Lazard increasingly seemed to be on the losing side of many of the deals or else was just missing them completely--and therefore missed out on many of these big fees. One unnamed banker suggested Lazard had "lost some standing on Wall Street" as a result of the growing success of competitors such as Wasserstein at First Boston and Marty Siegel at Kidder, Peabody, an old-line firm that had, under Siegel, developed a "takeover defense service" for companies fearful of getting taken over. Felix dismissed the competitors' observations. "Anyone can win as long as they're willing to pay anything," he said. "I think we gave correct advice" to United Technologies in the Bendix deal--to not pay up to win. To the increasingly voluble charges from the competition that Lazard was becoming less and less relevant, Felix said simply: "Time will tell whether we're an anachronism. But if our choice was changing to conform to what I take to be a general degradation of quality in investment banking, I'd rather go out of business."

It was left to no less a social critic than Michael Kinsley, then a top editor of the
New Republic,
to call Felix on the carpet for his bewildering trail of contradictions. The occasion was Kinsley's lengthy March 1984 review, in his own magazine, of Felix's
The Twenty-Year Century: Essays on Economics and Public Finance,
Random House's 175-page collection of his various ruminations on the state of the world. The title of the review, "The Double Felix," was a clever pun and foretold Kinsley's apt criticisms. "Rohatyn's progress from Felix the Fixer to Felix the Philosopher is one of the great public relations ascents of our time," he wrote, with an insight seemingly overlooked by everyone else. "The transformation has been so complete that even
The Washington Post
forgot along the way that he first hove into view (and got his nickname) as a minor figure in the Watergate scandal." Kinsley recounted the many twists and turns of Felix's involvement in the ITT-Hartford scandal and, with a fair amount of awe, professed jaw-dropping astonishment at Felix's ability to extract himself from the mess. "Chuck Colson put Watergate behind him by finding religion," Kinsley wrote, no doubt with a wry smile. "Felix Rohatyn has gone further: he has become a secular saint. He is simultaneously a leading member of the business community and the official investment banker of the New York left-wing intelligentsia." Kinsley pointed out that Felix's central thesis, whether perceived from the political left or the political right, was the maintenance of the status quo. "The terribly conservative essence of Rohatyn's philosophy is fear of change," he wrote. "He would invest the leaders of today's elites with extraordinary power and money in order to preserve the industrial, geographic, and financial status quo."

AS FELIX CONTINUED to lead Lazard's M&A practice and was, by design, its most prominent figure, Michel quietly set about accomplishing the few goals he had set out for himself and the firm when he took over from Andre. Mezzacappa's capital markets group slowly began to grow. Municipal finance did, too, after Michel recruited a few bankers and traders from other firms. Michel also turned his attention to improving the asset management department, a backwater at the firm that he thought, through annual fee income, might help balance out the cyclicality of the high-margin M&A business. To do that, on Mezzacappa's recommendation, he hired from the outside Herb Gullquist and Norman Eig, the two heads of Oppenheimer's successful asset management business.

But the hiring of Gullquist and Eig created an ethical dilemma for Lazard from the outset, although Felix was not bothered by it. It turns out that Oppenheimer had
hired
Felix to sell Oppenheimer's mutual fund business, giving Lazard the unique opportunity to discover who, according to Leon Levy, the legendary founder of Oppenheimer, were the "best and brightest" fund managers and to woo them. "To me, this was an outrageous breach of ethics," Levy wrote in his 2002 memoir,
The Mind of Wall Street.
When, at a meeting at Lazard to discuss the matter, Levy complained to him about the hiring of Gullquist and Eig, Felix responded: "Look, this conversation is going nowhere. All of us have been through a divorce, right? Well, this is like any divorce where you have different sides." Unmoved, Steve Robert, then president of Oppenheimer, barked to Felix, "You're right. It's like a divorce but it's like a divorce in which your lawyer is sleeping with your wife."

Once they were on board, Michel pretty much left Eig and Gullquist alone to run their separate fiefdom, and they rewarded him by delivering steadily increasing and consistent financial performance. Along the way, of course, there were the occasional bumps. Inconvenient partners were jettisoned unemotionally. Before the arrival of the two men from Oppenheimer, Lazard Asset Management, then a tiny operation managing money for a few clients, was run by Stanley Nabi. But a year after their arrival, Eig and Gullquist called Nabi into a conference room. "We don't like you," Nabi said the "blunt and combative" Eig told him. "We don't want to work with you." Nabi said nothing. He left the firm shortly thereafter.

As the firm started to grow and new business lines such as capital markets and asset management expanded, Michel's laissez-faire management style began to show its flaws. True, Andre's iron grip had produced the ITT-Hartford fiasco, but that could
almost
be excused as his failure to grasp how the regulatory rules were changing around him while he continued to take full advantage of the old clandestine and clubby mores of Europe's postwar reconstruction. Felix, who obviously knew better, said he was only peripherally involved and, in any event, also claimed to be smart enough not to challenge Andre's will. While Felix's frequent attempts to wash his hands of the ITT scandals strain credibility, it is also abundantly clear the scandal had no effect whatsoever on Lazard's business. But Lazard would begin paying a price for Michel's management philosophy and for his decision to grow the size of the firm.

CHAPTER
9

"THE CANCER IS GREED"

T
he first cracks in Lazard's carefully constructed facade came at the beginning of January 1984. Just after the new year, James V. Pondiccio Jr., thirty-seven, the firm's former assistant head trader, pleaded guilty in federal court to the charge of violating insider trading regulations. Felix and Lazard had been hired by Joseph E. Seagram & Sons, the liquor giant, to advise and to structure a $2 billion hostile tender offer for St. Joe Minerals Corporation, the nation's largest lead producer. Seagram's hostile tender offer for St. Joe was launched on March 11, 1981. Shortly beforehand, Pondiccio caught wind of it and bought call options on St. Joe's stock through family members' accounts at another brokerage. According to the U.S. attorney's office, Pondiccio made $40,000 after the St. Joe stock rose with the tender offer. Seagram later dropped its bid after Fluor Corporation made an even higher bid for St. Joe and Seagram decided not to compete. Pondiccio faced a maximum penalty of five years in prison and/or a $1,000 fine.

While insider trading had long been an unfortunate fact of life on Wall Street, the SEC chairman John S. R. Shad made the prosecution of insider trading a top priority after taking over the commission in May 1981. During the year ended October 31, 1979, the SEC filed only seven insider trading cases. In the year ended October 31, 1983, under Shad, twenty-four insider trading cases were filed, and another seventeen were filed between November 1 and January 1, 1984. Of course, the late 1980s would bring a plethora of high-profile and embarrassing insider trading scandals to Wall Street--the Pondiccio case was simply one of the first involving a Wall Street trader. But it was not the last, and not even the last that year at Lazard.

On December 10, 1984, Danny Davis, then thirty and considered one of the top salesmen in Lazard's equity department, "calmly handed a co-worker the phone numbers of his next of kin," opened one of the windows on the thirty-first floor of One Rockefeller Plaza, and jumped out, plunging to his death. He left a wife and one young child and a new $300,000 Tudor home in Scarsdale they were renovating. The SEC probed the circumstances surrounding his suicide because of suspicious trading activity in several stocks favored by Davis, particularly Value Line, a publisher of investment information, the IPO of which Lazard had recently underwritten. The regulators requested Lazard's trading records in Value Line from December 5, 1984, to December 13, 1984, during which time the stock declined to $23.25 per share, from $31.50, after a poor earnings announcement. (The SEC now says it has no records of the Davis investigation.) The firm also investigated the Davis suicide, Michel said later, to see if any impropriety had occurred, and found nothing amiss.

The Davis suicide followed by a few weeks the embarrassing leak to the
Wall Street Journal
of a detailed confidential Lazard study of a potential $4 billion takeover of Allied by United Technologies, one of Felix's best clients. Lazard had done the work at the request of Harry Gray, UT's chairman and CEO, a year after United Technologies, with Felix advising, lost Bendix to Allied. Bankers do these kinds of analyses all the time, of course, but rarely, if ever before, had the press obtained one and reported on it. Much to Lazard's embarrassment, the leak naturally scuttled any potential deal. This is not the way you want your trusted M&A adviser to behave. Felix launched an internal probe into the source of the unwanted disclosure. "I think there were three people in this firm who had access to that report," he said later. "We satisfied ourselves, as much as you can ever satisfy yourself, that it didn't come out of here. We turned the place upside down."

WITHIN WEEKS OF the United Technologies leak and Davis's suicide, another, more outrageous scandal began to unfold, involving John A. Grambling Jr., a former Lazard associate, and his supposedly unwitting accomplice, Robert M. Wilkis, then a Lazard vice president. Grambling came to Lazard, after a stint at Citibank, in the early 1980s through the auspices of Jim Glanville, his fellow Texan. Grambling's father had been the CEO of a Texas utility, and the Gramblings were one of the wealthiest families in El Paso, where he grew up--in other words, a typical Lazard hire. But Grambling didn't last long at Lazard. He left under mysterious circumstances a year or so after he arrived. The suspicion was that he was quietly dismissed after he made unwelcome sexual advances toward Mina Gerowin in an elevator at One Rockefeller Plaza. After Lazard, Grambling went briefly to Dean Witter Reynolds. In 1983, he set up Grambling & Company, with offices in Greenwich and on Park Avenue.

Soon thereafter, he became aware that Husky Oil Ltd., a Canadian company, had put its American subsidiary, RMT Properties, up for sale. RMT owned and operated oil wells and refineries in several western states and also distributed its products through eight hundred gas stations. RMT's revenues were in the hundreds of millions of dollars, and it employed thousands. Grambling won the bidding for RMT with an offer of $30 million. He also realized RMT required another $70 million of working capital to run the business. So, in total, he needed, he believed, an even $100 million to buy the business and run it. Despite being from a wealthy family, Grambling had nothing close to the money required. But as the mid-1980s were the early days of the leveraged buyout, or LBO, craze, Grambling figured he could borrow the money, all the money, from others. And that is what he set out to do. First he turned to the finance subsidiary of General Electric--then called General Electric Credit Corporation--to get the bulk of his $100 million. But in September 1984, GECC pulled the plug after it decided Grambling was paying too much for RMT.

Fearful the sale would fall through after GECC pulled out, Husky introduced Grambling to one of its main banks, the Bank of Montreal, to see if it would finance the deal. Husky also offered to guarantee any loan the Bank of Montreal agreed to make, effectively eliminating the bank's risk. The Canadian bankers quickly analyzed the deal and came to the conclusion the RMT opportunity made sense, especially with the Husky guarantee. The sellers had given Grambling a January 1 deadline to close the deal, making the time short for the Bank of Montreal and its Manhattan law firm, Shearman & Sterling, to complete the loan documentation.