The last tycoons: the secret history of Lazard Frères & Co (80 page)

But instead of joining Lazard or Swiss Bank, Edouard chose to see how quickly he could turn the $170 million into $500 million. His ability to do just that, within four years, added yet another dimension to his growing legend. In this regard, he was taking after Sir James Goldsmith, the famed British corporate raider, who was Stern's distant cousin. In partnership with Goldsmith, Stern bought a number of hotel properties in Vietnam. Accounts vary as to just how immensely successful the private partnership was, but the two men were said to have split $250 million on a $75 million investment. Stern also bought into Elysee Investissements, a French holding company, where his friend Kristen van Riel was on the board. He was said to have tripled his investment on Elysee, receiving at one point a $150 million dividend from the company. Without question, at a very young age, Edouard had proven his mettle as an extremely savvy investor. He had also become a very rich man in his own right--at one point the thirty-eighth of the four hundred richest French families--and was that rare being, an independently wealthy relative of a billionaire. For Michel, this added to Stern's luster. "Michel found himself in Edouard," observed one David-Weill family friend. On the one hand, Michel had always claimed to be unimpressed by self-made men. His father often told him with regard to Andre, for instance, "Beware of self-made men because they always think it is their fault." "And I thought it was a wonderful saying," he continued, "because it's so true. Because at least I don't think it's my fault." But on the other hand, he felt comfortable around people with immense wealth. He was also impressed by Edouard's investing prowess.

Edouard also had immense appetites: among them for food, for sex, for risk, and for mercurial behavior. He especially enjoyed dining at Nobu, the notoriously expensive and delectable New York sushi restaurant. "The single most distinctive and unusual characteristic of Edouard's was how much sushi he ate," explained Jeffrey Keil, one of Stern's financial partners. "He could eat fifty or seventy pieces of sushi at one sitting. I'm not kidding. We took turns paying the bill. Usually $300 or $400." There is an apocryphal story about how Edouard was hosting a dinner in a private room at a Paris restaurant in the early 1990s, and all the guests were so busy chatting they had left their bowls of soup untouched--and now cold--in front of them. They decided they would all pour their soup back into the tureen, in the middle of the table, and would have it reheated. When the waiter came around to clear away the uneaten soup, Edouard stopped him and rose from his seat. He then found a little silver knife and made a small incision at the end of his left index finger. Then he placed his hand above the soup tureen, and a single drop of blood from his cut finger fell into the soup. He looked at each of his guests and supposedly said, "Those of you who trust me will help themselves later." He was also said to relish demanding in front of others that his wife fellate him, much to her embarrassment. Jon Wood, a proprietary trader then at UBS in London, recalled flying on a British Airways flight from Miami to Paris and finding that Edouard was the only other person in first class. Stern happened to be returning from his grandmother's funeral in the Bahamas. "Edouard sauntered onto the plane," Wood recalled, "and he immediately started snapping his fingers--'I want to watch this film, eat this meal, and put on my pajamas.' He was hopping mad. He threw the videos on the ground. He didn't put on his seat belt. He demanded to speak to the captain. He said he wanted to get off the plane. I thought to myself, 'What a wanker! Who is this guy?'"

Wood's observation was consistent with Edouard's penchant for irreverence and flaunting the rules. "He was too solitary and too independent to be part of a formal structure," Peyrelevade recalled. Braunschvig saw this as early as age fifteen. "He always wanted to challenge the existing order of things," he recalled. "There were no taboos. This might seem a bit ordinary from an American perspective, but in France a high school education is more strict than it is here, the discipline, the long hours. Many kids, as a result, develop a shy or introverted demeanor. Edouard was always outspoken and irreverent. That's because at an early age he had this sense of self--he was not going to be threatened by any existing order. He wrote his own rules."

This risk-taking extended to his approach to investments. One of these landed him front and center in an insider trading investigation by the British Department of Trade and Industry, or DTI, the equivalent of the SEC. In February 1989, Stern purchased a total of 320,000 shares, worth about PS4.7 million, of Consolidated Gold Fields, a British gold company, in the middle of a takeover battle between Consolidated Gold and Minorco, which was the Luxembourg subsidiary of a South African gold conglomerate owned by the wealthy and powerful Oppenheimer family. The Oppenheimers had long been associated with Lazard, first through Andre and then through Felix. At the time of its bid for Consolidated Gold, Minorco still owned 30 percent of Engelhard Corporation, a stake that came about as a result of a number of deals Lazard arranged in the 1970s. In 1986, Felix was on the board of Minorco for a year; then Jim Glanville took over his seat. By 1987, Bill Loomis was the Lazard representative on the Minorco board. The Lazard partners Loomis and Agostinelli represented Minorco on its hostile PS2.9 billion offer for the 71 percent of Consolidated Gold it did not already own. During a November 1988 meeting, Agostinelli spoke to Stern about Lazard's role in advising Minorco, but supposedly only as a "topical" indicator of the kinds of deals the firm was involved in.

When DTI became aware of the familial relationship between Michel and Stern, the investigators "were concerned to ascertain whether the connection influenced, in any way," Stern's purchase of the shares. Under questioning, Edouard said he had never discussed Lazard's role as adviser to Minorco with Michel, Loomis, or Agostinelli. The investigators were not pleased that Edouard had not told them of his relationship with Michel at the outset, and so sought some answers from Michel himself. Through his lawyer, Michel responded that he had never discussed the Minorco bids with Edouard, nor would he have, and he had no awareness that Edouard had bought the Consolidated Gold shares. Aside from finding that Edouard "deliberately failed to ensure" that the information about his Consolidated Gold purchases was reported properly and that "we are surprised that it did not occur to him that the prudent course of action would have been to give careful consideration to the implications" before buying the shares, given his relationships with both Lazard and Swiss Bank, the DTI investigators concluded, in their
public
finding, "There is no evidence to suggest that either Minorco, Lazard Freres (New York or London), Mr. David-Weill or Swiss Bank Corporation had any knowledge of the transactions in ConsGold undertaken by M. Stern...and we have no criticism of them." In any event, Stern lost money on the investment after Minorco's offer for Consolidated Gold did not succeed. Another British conglomerate, Hanson, bought Consolidated Gold in August 1989.

The findings of the DTI investigation notwithstanding, Michel made the decision, as he said, to "try" Edouard in the firm. Michel said he had read the DTI report and was "okay" with it. "I see it as a learning experience," he said. "Edouard is impetuous. He is someone who had success early. There are allowances for that. I have made allowances." But there was opposition to his hiring on both sides of the Atlantic. "In Paris there were people who didn't like him because they didn't like the way he had treated his father," Michel said. "In New York, there were people who didn't like him because they were questioning whether he was rigorous in his behavior." And the partners in London simply thought it wholly inappropriate for someone who seemed like a crook to be at Lazard. Bill Loomis, for one, was not happy about Edouard's arrival in New York. He had formed a negative view of him from the Minorco-Consolidated Gold incident. "I think it had a huge impact on Bill personally because he didn't like Stern from the moment he met him," one partner explained. Others were wary of his mercurial temperament. "He can be absolutely the most charming person, absolutely
seduisant,"
said a banker who had been friendly with Edouard since childhood. "He's witty, very well read, and a great storyteller. And he can be so brutal that men twenty years older than he have left his office crying." Of Edouard, a former Lazard partner in London said, "There was only one person I ever met who made the hair on the back of my neck stand up, and that was Edouard." Added Peyrelevade: "When things didn't go exactly as he wished, he was capable of extraordinary verbal violence."

But Michel plunged ahead anyway. And his logic for doing so, as always, was impeccable. "If you had to choose, in France, a natural leader for the firm, there are very few which would fit the theoretical bill as well as Edouard," he explained.

There is a fellow who is obviously very enterprising, very, very smart, hardworking, and who is very at ease in the United States, who speaks absolutely perfect English, much better than I do, who has no relationship problems with Americans. They understand him right away. They don't feel he is a total foreigner. He is very wealthy on his own--which for a banker is useful and gives a degree of independence--and is the heir to a banking tradition. His grandfather--I love this one story of his grandfather--was on the board of Banque Paribas, and he was very deaf. They were reviewing credits, and they said, "We are lending 100 million francs to the Ottoman Empire," and he said, "What? What?" "Mr. Stern, we are lending 100 million francs to the Ottoman Empire." And he turned around and said, "A hundred million francs? I would not lend that to myself!" I cite it very often when I speak about banking because bankers forget that there are sums which you shouldn't be lending, even to the credit you adore the most, which is your own. You should just say, "This is ridiculous." So, now the fact that he had married my daughter, curiously nobody believed it, but it really did not enter the equation.

Michel was correct that nobody around Lazard believed that Edouard was at the firm for any reason other than the familial relation ship. "Maybe I would have felt different if he was my son because maybe I would have related differently to him, but he was to me one fellow," Michel continued. "Not more, not less than my other partners. It was not because he was sleeping with my daughter that it made any difference. It didn't. Really. Nobody really believed it, they always, they all felt, well, it's more than it seems. No. It was simply an evaluation that--now, I knew that the fellow was not trained to be in an investment bank. He had been more of an entrepreneur, and basically he said so. He had two mothers in life: he had Jimmy Goldsmith and me. He didn't know which way he wanted to go, the Jimmy Goldsmith way or the Michel way." Stern spent much of the first two years at Lazard in New York but shuttled frequently between there and Paris. His New York office was on the thirty-first floor of One Rockefeller Plaza, near Mezzacappa's capital markets operation and one floor below his father-in-law and most of the other banking partners. He had a safe installed in his office, bolted to the floor. This was considered extremely odd even by Lazard standards. Every night, he put his papers in the safe. He was also said to keep a change of underwear in there as well.

Stern was busy right from the start, mostly focused on private-equity investing as opposed to M&A advisory. On the heels of Corporate Partners' Phar-Mor disaster, Stern organized a new, $350 million private-equity fund, Jupiter Partners, focused on management buyouts. He put an end to efforts to raise a second Corporate Partners fund at a time when "there were a lot of questions about Lester's and Ali's judgments," one partner said, speaking of the two men responsible for Corporate Partners. Edouard sent packing Lester Pollack, the head of Corporate Partners. Much of the money for Jupiter came from Lazard partners. He recruited to run Jupiter a management team from outside Lazard, led by John Sprague, who had been one of the early partners at Forstmann Little. But Jupiter made some poor investments during the Internet bubble and, although still in existence, never lived up to expectations. "Jupiter turned out to be a total disaster for the firm," a partner said. "A total disaster." Some partners questioned the wisdom of Stern's decision to end the fund-raising for Corporate Partners II, which could have been a $2 billion fund despite its perceived troubles, in favor of the much smaller Jupiter fund.

Stern also devised a strategy that proved disastrous for Lazard in Asia. He recommended, and Michel agreed, that Lazard open an office in Singapore and in Beijing, both headed up by proteges of Edouard. "This sent a clear message," one Lazard partner said. "Stern was the man. Michel trusts him." Stern also set up a joint venture, called CALFP, with Credit Agricole, the large French bank, to structure complex derivatives for clients. Credit Agricole invested $50 million of the $75 million in capital the venture required; Lazard put up the $25 million balance. Edouard became the chairman of CALFP and received equity in the deal as part of his management arrangement. He could not serve as CEO of the venture, because the Bank of England would not permit it after the accusations that permeated the Minorco-Consolidated Gold deal. So Stern recruited Philippe Magistretti from AIG to head CALFP. He also recruited Bernard Saint-Donat to run CALFP in New York. The venture did very little business, and Saint-Donat and Magistretti squabbled from the outset. Saint-Donat thought CALFP "was a disaster" where the stated purposes of helping Lazard's clients access Credit Agricole's massive balance sheet masked the "hidden" purpose to create a hedge fund to "make a lot of money" for Lazard. When Saint-Donat complained to Stern that the joint venture was not working well, Magistretti got upset and fired him. Stern then arranged for Saint-Donat to get a new job working at Lazard in New York.

CALFP ended up doing one deal of significance, for Televisa, Mexico's largest media company, and made around $50 million. After that deal, Edouard wanted to sell his equity in the joint venture. Miraculously, Michel and his sister, Eliane, agreed to buy Edouard's stake in CALFP for
$50 million.
Edouard had been given the stake for free. Shortly thereafter, CALFP was closed. Michel and his sister lost their full investment. "I was not sure absolutely that I would lose it," Michel said of that money. "Although it was more probable in my eyes that I would lose it than make it."