The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  This was the sum and substance of the IRS's March 1974 conclusion about the matter. As immoral as that scheme may have been, Cuccia's letter to Lazard choosing the third-party sale held one more nugget of impropriety: to wit (in keeping with Lazard's private new arrangement with Mediobanca), "as consideration for all your [Lazard's] services, including the safekeeping of such Shares, you shall, on the completion of the sale of all of such Shares," receive half of the profit, if any, as well as half of the up-front fee--the $1,332,131.22--or more than the $660,000 that Mediobanca received for doing the deal in the first place. So Lazard not only received a $1 million fee for advising ITT on the merger and handling the exchange offer for the Hartford shares; it also had cut a separate, undisclosed fee deal with Mediobanca. Lazard also received a $500,000 fee for brokering ITT's original purchase of the 1.7 million Hartford shares. On November 5, 1969, Walter Fried, on behalf of Lazard, signed the Cuccia letter and returned it to him. Lazard did not--at this time anyway--disclose to ITT its fee-splitting deal with Mediobanca. Felix would later say that he had forgotten about this fee-splitting arrangement during his early discussions with Geneen about the potential deal with Mediobanca.

  On November 10, in all of twenty-three minutes, in Hartford, the Hartford shareholders approved by a vote of 80.37 percent to 2.78 percent what was, to that moment, the largest merger in corporate history. Felix had a full day of meetings, although none of them apparently concerned ITT. He managed to find time for a meeting with a reporter from Institutional Investor magazine before heading up to see his client Steve Ross.

  BUT THE FIGHT was not over, not by a long shot. On May 27, 1970, the Justice Department renewed its vow to proceed with its efforts to block the merger on antitrust grounds if the two companies were actually combined. The trial in the case was scheduled to start in November.

  While in the fall of 1970 Felix and Geneen set out to try to negotiate a settlement with McLaren that would allow ITT to hold on to the Hartford, Mediobanca quietly set about reselling its new ITT "N" shares (which in the interim Mediobanca had exchanged for the Hartford stock when the deal closed) on ITT's behalf. What IRS and SEC investigators would later discover about these sales--but no one knew at the time--was that each one contained a highly convoluted, quid-pro-quo benefit for the purchasers, all of whom had ties to Lazard, Mediobanca, or ITT. In sum, Mediobanca had sold all of its "N" shares for close to $113 million and remitted that sum--less fees for itself and for Lazard--back to ITT, turning an almost certain loss on the sale of the shares into a $24 million gain, the difference between the value of the shares at the closing of the scheme with Mediobanca ($112.7 million) and Mediobanca's provisional cost ($88.8 million).

  In Washington, negotiations between ITT, its counsel, and the Justice Department were accelerating furiously in an effort by ITT to retain ownership of the Hartford. Felix would be a leading participant in the negotiations with McLaren and his boss, Richard Kleindienst. Attorney General John Mitchell had supposedly recused himself from the ITT settlement discussions because he had previously, in private practice, provided legal counsel to an ITT subsidiary. This did not stop Mitchell from having an important role in the matter, but for the record, anyway, his recusal put Kleindienst, the deputy attorney general, in charge.

  In August 1970, Geneen met with Mitchell in Washington. Supposedly, the two men discussed only "conglomerate policy" generally, although three of the Justice Department's four pending antitrust lawsuits involved ITT. ITT's attorneys did try to negotiate with McLaren a few times during the next year or so, and they conveyed a willingness to divest some of ITT's extensive holdings if it could keep the Hartford.

  On April 16, 1971, Lawrence E. Walsh, a partner at Davis Polk & Wardwell, a top New York law firm, wrote an astonishing letter to Kleindienst at the request of his client Harold Geneen, urging Kleindienst not to appeal any of the ITT antitrust matters to the Supreme Court. He said he had been asked by Geneen to make a presentation to Kleindienst "urging that the Department of Justice not advocate any position before the Supreme Court which would be tantamount to barring such mergers without a full study of the economic consequences of such a step." Walsh wrote that he was afraid that the Supreme Court's record regarding antitrust matters did not bode well for ITT. "To us this is not a question of the conduct of litigation in a narrow sense," he wrote. "Looking back at the results of government antitrust cases in the Supreme Court, one must realize that if the government urges an expanded interpretation of the vague language of the Clayton Act, there is a high probability that it will succeed. Indeed, the court has at times adopted a position more extreme than that urged by the Department." Here was Walsh, whose firm, Davis Polk, had been ITT's outside counsel for more than fifty years, asking the government's top antitrust official not to bring a case to the Supreme Court involving his client that Walsh thought the government would win. Walsh knew what he was talking about, too, having served as deputy attorney general--Kleindienst's job--from 1958 to 1960 and as a U.S. district judge in Manhattan from 1954 to 1957. He joined Davis Polk in 1961.

  Geneen's choice of Walsh to send the letter to Kleindienst was a clever one for two other reasons as well, despite Davis Polk having had no previous role in the ITT antitrust cases: First, Walsh had been Nixon's deputy chief negotiator at the Paris peace talks in 1969, and even more important, he was the chairman of the American Bar Association Committee on the Federal Judiciary--and so Nixon's federal judgeship appointees had to be signed off on by Walsh. Since part of Kleindienst's job was to appoint federal judges, the two men had become quite close. "It was, I am afraid a rather elliptical observation that meant regardless of the merits of these cases if you look at the record of the Department of Justice in the Supreme Court in any antitrust case, you have to be concerned with the probability of Government success," Walsh would later say. Indeed, from 1960 to 1972, the government won twenty of twenty-one antitrust cases brought before the Supreme Court. Walsh wrote in his letter that "it is our understanding that the Secretary of the Treasury"--John Connally--"the Secretary of Commerce"--Maurice Stans--and "the Chairman of the President's Council of Economic Advisors"--Pete Peterson--"all have some views with respect to the question under consideration. Ordinarily I would have first seen Dick McLaren, but I understand that you, as Acting Attorney General, have already been consulted with respect to the ITT problem and the Solicitor General also has under consideration the perfection of an appeal from the District Court decision in the ITT-Grinnell case." McLaren had lost the Grinnell antitrust case at the district court level and had appealed the result to the Supreme Court. The letter from Walsh, who later became a special prosecutor in the Iran-contra scandal during the Reagan administration, would soon put Kleindienst in a very difficult position indeed. Walsh was asking for a delay in the government's procedural filing that had to be stamped no later than four days from the time of his letter. Kleindienst, in fact, agreed to delay the procedural filing until May 17, but not without first playing some high-stakes Washington poker.

  Meanwhile, a few weeks before Walsh sent his letter and in keeping with Geneen's strategy of swarming the enemy, a top ITT executive in Washington, Jack Ryan, ran into Kleindienst at a neighborhood cocktail party in suburban McLean, Virginia, where they lived five houses from each other. Ryan asked for and received Kleindienst's consent for ITT to plead its case for antitrust relief directly to him. "The door is open," Ryan said Kleindienst told him. Ryan relayed Kleindienst's invitation up the ITT chain of command. And on April 20, 1971, Felix--at Geneen's request, after hearing from Ryan--went over McLaren's head and met privately with Kleindienst for about an hour to lobby the deputy attorney general of the United States on his client's behalf--remember, Felix was also on the ITT board--about the horrors that were certain to befall ITT if forced to divest the Hartford. Ryan had met Felix at the airport and drove him to the Justice Department. "He is a rather quiet individual," Ryan said of Felix. "He did not say much of anything."

  Felix ha
d a lot to say, though, to Kleindienst. Since ITT had been claiming it would suffer immense financial hardship if forced to divest the Hartford, Kleindienst had wanted some "recognized financial figure" to appear on behalf of ITT and "make the case." Felix later testified that he went to see Kleindienst that day "at his invitation, to give him what I felt were the economic arguments pursuant to which we couldn't agree to a divestiture of Hartford Fire." He also testified that he told Kleindienst that as long as ITT could keep the Hartford, ITT would be willing to sell Canteen and Grinnell, which together had about $25 million in earnings. "I made the case as best I knew how to make it," he said. In response, Felix testified later, Kleindienst asked him to "make the case" again to McLaren. Oddly, though, Kleindienst did not invite McLaren to the first meeting, nor did he tell his antitrust chief about what Felix said. When asked if Kleindienst seemed "convinced at all" by his presentation, Felix answered, "I thought he might have seemed impressed, but I might have been flattering myself." For his part, Kleindienst later testified that Felix called him up and introduced himself as a director of ITT, said he was not a lawyer, and wanted "to come to my office to discuss some of the economic consequences" of the Justice Department's view of having ITT divest the Hartford. Without hesitation, Kleindienst agreed to see Felix.

  On April 20, when, conveniently, he and Felix were alone--"I believe that for the record that any time that I had any meeting with Mr. Rohatyn only he and I were present," Kleindienst testified--Felix made the case, in dramatic fashion, against what Justice wanted: ITT and the Hartford shareholders "would suffer a loss in excess of $1 billion," stemming from a $500 million tax liability that would cause a liquidity crisis at ITT and "interfere" with the company's ability to complete some $200 million to $300 million of foreign contracts that would, in turn, have a negative impact on the country's balance of payments and thus hinder ITT's competitive position internationally.

  Also, Felix confided, should ITT be deprived of its competitive position "it might have additional repercussions so far as the general stock market was concerned." Felix asked Kleindienst if he would "direct" McLaren to meet with him to hear the case for ITT's financial hardship. Kleindienst told Felix he would not "direct" his deputy but ask him if he would meet with Felix. No surprise, McLaren agreed to the meeting.

  Who knew it was so easy for a perfect stranger--but key advocate for ITT--to have an audience alone with the top Justice Department official leading the antitrust prosecution against ITT? Indeed, Walsh later testified that had he been in Kleindienst's shoes, he would never have met with Felix once, let alone four times. "I probably would have had somebody there from the Antitrust Division," he said. "I would do that just to avoid friction with the Antitrust Division, not because I would think it was in any way improper for me to meet with Mr. Rohatyn."

  What Felix did not know was that on April 19, the afternoon before his first private meeting with Kleindienst, the deputy attorney general had received two calls, the first from John Ehrlichman, Nixon's chief domestic adviser, and the other from Nixon himself. Both calls concerned Kleindienst's decision to appeal to the Supreme Court the antitrust ruling that the government had recently lost in Connecticut involving ITT's acquisition of Grinnell. "I informed him [Ehrlichman] that we had determined to make the appeal," Kleindienst said, "and that he should so inform the President. Minutes later, the President called me and, without any discussion, ordered me to drop the appeal." A portion of Nixon's recorded conversation with Kleindienst that afternoon follows:

  PRESIDENT: Hi, Dick, how are you?

  KLEINDIENST: Good, how are you, sir?

  PRESIDENT: Fine, fine. I'm going to talk to John [Mitchell] tomorrow about my general attitude on antitrust--

  KLEINDIENST: Yes sir.

  PRESIDENT: --and in the meantime, I know that he has left with you, uh, the IT&T thing because apparently he says he had something to do with them once.

  KLEINDIENST: [Laughs] Yeah. Yeah.

  PRESIDENT: Well, I have, I have nothing to do with them, and I want something clearly understood, and, if it is not understood, McLaren's ass is to be out within one hour. The IT&T thing--stay the hell out of it. Is that clear? That's an order.

  KLEINDIENST: Well, you mean the order is to--

  PRESIDENT: The order is to leave the God damned thing alone. Now, I've said this, Dick, a number of times, and you fellows apparently don't get the me----the message over there. I do not want McLaren to run around prosecuting people, raising hell about conglomerates, stirring things up at this point. Now you keep him the hell out of that. Is that clear?

  KLEINDIENST: Well, Mr. President--

  PRESIDENT: Or either he resigns. I'd rather have him out anyway. I don't like the son-of-a-bitch.

  KLEINDIENST: The, the question then is--

  PRESIDENT: The question is, I know, that the jurisdiction--I know all the legal things, Dick, you don't have to spell out the legal--

  KLEINDIENST: [Unintelligible] the appeal filed.

  PRESIDENT: That's right.

  KLEINDIENST: That brief has to be filed tomorrow.

  PRESIDENT: That's right. Don't file the brief.

  KLEINDIENST: Your order is not to file a brief?

  PRESIDENT: Your--my order is to drop the God damn thing. Is that clear?

  Clearly upset, Kleindienst later testified, "Immediately thereafter, I sent word to the President that if he persisted in that direction, I would be compelled to submit my resignation.... The President changed his mind and the appeal was filed 30 days later in the exact form it would have been filed in one month earlier." Nevertheless, Nixon's message was clear: lay off ITT.

  But Kleindienst was nothing if not a shrewd negotiator, and he kept the substance of his conversation with Nixon out of his subsequent discussions with Felix and ITT. On April 29, as suggested, Kleindienst, McLaren, and the Justice team plus two representatives from the Treasury Department held "a rather large" meeting with thirteen people in McLaren's office to hear Felix's one-hour presentation of how the loss of the Hartford would mortally wound ITT and ill serve the public. The meeting had been scheduled to begin at 10:30 a.m. But Felix kept the group waiting fifty-five minutes because he was upstairs in Mitchell's office working through the DuPont Glore rescue mission.

  Felix had told Andre about his first two meetings with Kleindienst, but at Kleindienst's specific request thereafter he informed no one at Lazard about the sum or substance of the negotiations. In a follow-up four-page letter, on May 3, to McLaren (with a copy to Kleindienst), Felix wrote on his own letterhead from 44 Wall Street--curiously not on Lazard letterhead--that he wanted to "amplify and augment" several points that had been made the previous Thursday "in the hope that its importance will not be overlooked." To wit: should Justice force ITT to divest the Hartford, "ITT would be placed in a very difficult cash position which would severely impact its ability to compete in markets abroad." He further argued that ITT's borrowing capacity would be diminished by the loss of the Hartford earnings, leading to the potential cash drain. Felix argued that the cash drain would hurt the value of ITT's public debt and equity and hinder its ability to raise capital, especially abroad. In closing, he raised the specter that no less than national security was at risk if ITT were forced to divest the Hartford. "Among the adverse consequences to the nation that would inevitably follow from the requisite contraction by ITT of its foreign operations is loss of market shares to major foreign competitors such as Ericsson, Siemens, Philips, Nippon Electric and Hitachi. Loss of market shares abroad can only result in a diminution of the cash, which ITT would have otherwise repatriated to the United States. It would appear contrary to the national interests of this country to take consciously actions which would have such an adverse impact on the balance of payments." Who knew the stakes were so high?

  Felix met privately with Kleindienst again on May 10 to reinforce both his May 3 letter and the April 29 presentation, and first suggested the idea that ITT be permitted to keep the non-fire-protec
tion business of Grinnell. Kleindienst later testified he told Felix at the May 10 meeting that McLaren still had not made up his mind. "Rohatyn said it was a serious matter for ITT," Kleindienst recalled, "and wanted to know what was going on with respect to the financial and economic presentation that his company made on April 29. I told him I didn't know and that was up to McLaren and until he came up with a recommendation I wasn't going to bother myself about it."

  On May 13, Nixon and H. R. Haldeman met in the Oval Office, and in the context of a discussion about raising money for the president's 1972 reelection, the topic of ITT's pending antitrust settlement came up. "They give us Grinnell and one other merger they don't need and which they've been kind of sorry they got into, apparently," Nixon said on tape. "Now this is very very hush hush and it has to be engineered very delicately and it'll take six months to do properly."