At the time, though, he did not think he was being "used" by ITT and Nixon. "I thought it was straight up, which is why I say I was naive, to say the least," he said, "because the notion that sort of by the normal course of events I would be invited to meet with the deputy attorney general to make an economic case with nobody else in the room, today I would find that beyond belief. So that's why I say I was really, truly naive. On the other hand, to this day, I am convinced that ITT should've let this thing go to the Supreme Court and that we would've won...that we would not have lost the decision and that ITT made a big mistake in settling and that in settling that they gave away much too much, that it was a silly case, that there was no antitrust issue, [and that] the business of 'potential entry' is nonsense." He continued: "The notion here that I would show up and brilliantly convince them that the economic case was overwhelming--I believed it, and I thought, 'Gee, isn't this exciting,' which shows how you can delude yourself in terms of your sense of importance."
As further evidence of his naivete, Felix cited his decision to appear at Kleindienst's side at the first day of the Senate hearing, alone. "I went down to this hearing without a lawyer," he said. "Next to Kleindienst and McLaren. And I walked into this hearing room with this mob in there, and Jack Anderson tried to interview me, and the television cameras--and I thought, 'Shoot, what am I doing here?' So I called Andre. I said, 'Get me a lawyer. I have to have a lawyer.' By lunchtime, I guess, I think it was Sam Harris or Sy Rifkind, I forget which one was there."
Still unanswered in Felix's mind, all these years later, is whether Andre may have, for lack of a better description, set up Felix to take the heat publicly for the firm's role in the ITT-Hartford mess. Why else would he not be provided with a lawyer to accompany him to these high-profile hearings? he wondered. "When I thought back on it, [Andre] was pretty relaxed about my going down to this hearing," Felix reflected. "Nobody asked me if I had a lawyer or who was gonna go with me. And I've never quite resolved...whether Andre knew anything about what was going on or whether Geneen had talked to him or something, but that is still a completely unresolved question."
Of course, Felix believes nothing good came out of the experience. "It was all downside," he said. "Kay Graham called me one day and--after--this was then or a little later, and said, 'Look, you have to get off this ITT board.' And I said, 'Well, you know, if I resign from the board, everybody's gonna think that I believe Geneen is guilty or that I'm guilty, so I can't do it 'cause I don't believe he's guilty.' She said, 'You know, you will never be able to work in a Democratic administration again if you don't.' I said, 'Well, I'm not sure that I'm ever gonna be invited in any case, but so be it.'" He also believed his career had been badly damaged by the negative publicity, which was also taking its toll on his family. He and his wife had recently separated, and his three sons were attending a French school on the East Side of Manhattan. "And they would get insulted, not only by the other kids, but by some of the teachers," he explained, adding that insults were along the line of "'Your father is this ITT man.' Because they had no clue what this was all about."
CHAPTER 6
THE SAVIOR OF NEW YORK
Needless to say, the relentlessness of the scandal involving ITT and Lazard was not welcome news at 44 Wall Street. Until these hearings, the firm had steadfastly--and successfully--remained out of sight. This had been Andre's strategy, and it had served him and the firm well. But by the early spring of 1972, Lazard's role in ITT's deal making and Felix's testimony in the Kleindienst hearings had put the firm on the front page. The New York Times and the Washington Post, almost alone, had been reporting about Felix's and Lazard's role in the ITT-Hartford scandal regularly in early 1972, but the reporter Michael Jensen's lengthy article in the May 28 Sunday Times Business and Finance section, titled "The Lazard Freres Style: Secretive and Rich--Its Power Is Felt," shined the spotlight on the firm as a whole. "The world of investment banking is powerful and secretive, but probably none of the handful of wealthy financial houses that dominate the field is quite so powerful, or so secretive, as Lazard Freres & Co.," Jensen wrote. The article proceeded to describe Andre's role at the center of Lazard and also noted his extreme preference for secrecy. A former partner told the newspaper that actually Andre was not particularly shy "but simply liked to control what was said about him."
Jensen revealed, in annotated fashion, for the first time the names of the firm's twenty-one general partners as well as seven limited partners, volunteering that they had "no voice in management." Among the partners was a French count, Guy Sauvage de Brantes, the brother-in-law of Valery Giscard d'Estaing, the future French president; the former ambassador to NATO Robert Ellsworth, who was described as being close to President Nixon; C. R. Smith, the former secretary of commerce in the Johnson administration; and Andre's twenty-six-year-old grandson, Patrick Gerschel. Felix, then forty-three, was described as potentially being "Mr. Meyer's heir-apparent."
Ellsworth was a particularly interesting and politically motivated hire. He had been a congressman from Illinois before Nixon plucked him to be ambassador to NATO. He had been friendly with Nixon and also with John Mitchell, and it was Mitchell who urged Felix to interview Ellsworth about joining Lazard. Felix agreed, and when Andre returned from Switzerland, Lazard hired Ellsworth. "Andre was impressed that I was close to the White House," Ellsworth said. Ellsworth was a Republican in a sea of Democrats at Lazard, at the very moment--given the ITT mess--Lazard needed some friends in Republican Washington. But Andre didn't really have a job for Ellsworth, and as he had no experience being a banker, there was a daily shadow dance for a substantive role. Andre suggested that Ellsworth, who because of a chronic back ailment stood behind a tall desk in his corner office, lead something called Lazard International, which was one of those periodic efforts to forge a working relationship between the London, Paris, and New York houses. "Andre didn't know what it really did, and I didn't know, either," he told Cary Reich in Financier. "I mean, it was actually ridiculous--the concept of having something called Lazard International. What would it do? Lazard was international."
Next, Andre asked Ellsworth to report to him the doings at the annual meeting of the International Monetary Fund and also arranged for him to serve on the boards of both General Dynamics and Fiat. Then they would worry together some more about what Ellsworth should do. "I'd go over to his apartment on Sunday afternoon, and we'd talk about that," Ellsworth explained. "Then he'd say, 'Now we're going to get organized. Next Sunday we'll have Felix over.' So Felix would come over and enter into the conversation, but nothing ever happened." Ellsworth quickly concluded that he was to be nothing but a high-paid promulgator of "trivial political gossip" who might help the firm influence the Nixon administration. After around three years of this nonsense, he left Lazard to go back into government as President Ford's deputy secretary of defense.
At more or less the same time that the Senate Judiciary follies were at full throttle and Jensen's article appeared, the Securities and Exchange Commission was conducting its own investigation about the legality of ITT's stock sale to Mediobanca. Both Felix and Tom Mullarkey, Lazard's general counsel and one of the chief negotiators of the Mediobanca transaction, testified.
Mullarkey was up first. He coyly described his position at Lazard as being "in charge of the back office." The SEC investigators, naturally, were quite focused on Mullarkey's role in the Mediobanca transaction. He claimed to be but an insignificant associate carrying out the orders of his boss, Walter Fried. He explained how he had been sent to Milan at the end of September 1969 to meet with Cuccia, the head of Mediobanca, and testified that they met for "four or five hours" but only discussed the side agreement between Mediobanca and Lazard. He said he had no role in the overall agreement between ITT and Mediobanca. He explained that while he took note of the $1.3 million fee that had been negotiated between ITT and Mediobanca--of which Lazard would receive half--he was not in a position to negotiate it or to inquire about it. He was rea
lly nothing more than a clerk.
Five days later, just as the Kleindienst hearings were winding down, Felix testified for close to six hours in hearing room 488 at the SEC's offices on North Capitol Street. Felix said he assumed Andre sent Mullarkey to Milan, and that he "had nothing to do with it." Here Lazard was entrusting a crucial aspect of the largest deal in corporate history with by far its best client to an errand boy, which seemed hard to imagine. Felix did concede that he reviewed several interim drafts of the final agreement between ITT and Mediobanca and found the deal to be "an unusual transaction, sure." When asked if it occurred to him that the entire transaction might be a "sham," Felix replied, "Well, I have learned not to, you know, not be my own lawyer," referring to his all-too-fresh experience at the Kleindienst hearings.
The SEC lawyers pressed Felix hard about whether or not he knew Lazard would get half of the $1.3 million commitment fee Mediobanca received at the time of the closing of the stock transfer. "I can't answer that question," Felix replied. "I am not sufficiently acquainted with the actual details of how the contract worked and how this applied to the profit." But he did recall telling Geneen before the end of October 1969 that "Lazard would get half of whatever Mediobanca got." Felix also testified he never knew about the November 3, 1969, understanding between Mediobanca and Lazard that effectively confirmed that Lazard would get half of the profits from the sale of the ITT stock plus half of the commitment fee. He said he found out about its existence only ninety days before his April 1972 testimony. And he reiterated his testimony that he had no idea how the $1.3 million fee came about.
Today, Felix's take on these events is that he and Andre had a clear bifurcation of responsibility on the ITT-Hartford deal, which, while unusual, was not one Felix had any intention of violating. Andre was his boss, after all. "I just distanced myself from it because it was Andre's stuff, and I wasn't about to get in between Andre and Mediobanca or Gianni Agnelli," he explained. "Andre was on the board of Fiat and Mediobanca. He was head of Lazard Paris. I don't remember another deal where there was almost a division of labor between Andre and myself on the same deal, not on Avis, and then after that fairly rapidly I was doing more and more things totally on my own." His explanation seemed hard to believe given how important the Hartford deal was to his best client, ITT, and that he was an important member of the ITT board of directors. He continued, about Andre: "Agnelli was his client. Cuccia was his client. Geneen was his friend, and I also was very, very careful not to get in between Geneen and Andre because when Geneen invited me on his board, it was against Andre's wishes, essentially, because Andre wanted to put either himself or Stanley Osborne on the board because Andre didn't think a young Jewish Polish refugee should go on the board of this big, prestigious, white-shoe American company, that that was sort of an overreach. So there were these things in the background."
On June 16, 1972, the SEC charged ITT, Mediobanca, and Lazard with violating sections 5(a) and 5(c) of the Securities Act of 1933, essentially for knowingly failing to register with the SEC the by now infamous 1.7 million shares of the Hartford that ITT owned and "sold" to Mediobanca with Lazard's help. In retrospect, these were narrow violations--the failure to provide adequate disclosure to potential buyers of the ITT stock--especially given how exhaustively the series of transactions related to the ITT-Hartford merger had been investigated by the insurance commissioner of Connecticut, the Justice Department, the Senate Judiciary Committee, and now the SEC. But the violations as charged by the SEC were no small matter, for the Securities Act of 1933 and its required disclosures form the bedrock of our capitalist system by insisting on adequate and thoroughly vetted disclosure to investors by corporations seeking to sell securities. Violations of such simple and basic requirements were tantamount to sticking a finger in the eye of the system. For Lazard, and by implication for Felix (who was in charge of the ITT-Hartford deal), to be accused of violating such basic disclosure as part of its cloak-and-dagger operation with Mediobanca was as appalling as it was astounding. The SEC sought a "final judgment of permanent injunction restraining and enjoining" ITT, Mediobanca, and Lazard and their officers, directors, partners, and employees from in effect selling shares of ITT until a "registration statement" had been filed with the SEC as to such securities.
At about this exact moment, Senator Kennedy called William Casey, the SEC commissioner, to inform him that Andre Meyer was a family friend and a trustee of the Kennedy family's charitable foundation (presumably Kennedy didn't need to remind Casey of his friendship with Felix). Indeed, Andre kept a "simple gold Tiffany clock" on his office desk inscribed: "To Andre--with deep appreciation and affection--Rose, Eunice, Jean, Pat and Ted." Kennedy told Casey that Andre was a "man of high reputation" who "had been very helpful" to the Kennedy family. He also said that Andre was "concerned that the firm would be named and perhaps besmirch his reputation." Casey later testified that he thanked Kennedy for the information about Andre and assured the senator "the case would be considered on its merits." Still, Casey thought it "improper" for a regulator to receive such a call from a senator. Improper or not, Casey did intervene to Lazard's immense benefit by overturning the SEC staff's recommendation that would have added a charge of fraud to the list of accusations against ITT and Lazard and could, once again, have put Lazard out of business. The other SEC commissioners accepted Casey's decision not to include a fraud charge.
In any event, the defendants took the SEC suit sufficiently seriously that exactly four days later, on June 20, 1972, all parties reached an out-of-court settlement. Lazard agreed to the precise relief the SEC sought and in particular agreed to be enjoined "from offering to sell the securities of International Telephone and Telegraph Corp., unless a registration statement has been filed with the Commission, and from selling or delivering after sale the securities of International Telephone and Telegraph Corp., unless a registration statement is in effect with the Commission as to such securities."
Stanley Sporkin, the SEC's enforcement chief and later, for fourteen years, a federal judge in Washington, D.C., said the SEC's action at the time against ITT, Mediobanca, and Lazard, while appearing to hinge on a technicality, was virtually unprecedented. "That was big, big stuff in those days," he explained. "It was never done before. It can't be compared with today's standards. Any lawsuit by the government in those days against major corporations like ITT, Mediobanca, and Lazard was big stuff. In those days, if you sued a big company, that was a big thing. Nobody wanted to be sued by the SEC, particularly Geneen, who wanted to be cleaner than Caesar's wife." Sporkin credited his colleague at the SEC Irwin Borowski with developing the legal theory under which the three defendants were prosecuted and agreed to settle the charges. "He was an extraordinary intellect," Sporkin said of Borowski. "He was a Talmudic scholar and he developed a theory for suing ITT that was a very esoteric--almost Talmudic--allegation and it worked and he was right." He said the speed of the settlement was a tribute to the wisdom of Borowski's legal theory and the practical astuteness of the defendants' high-priced attorneys. "They realized, correctly, that the best thing to do was to settle these claims and not let them fester." Most important, though, the settlement between the SEC and Lazard was accomplished "without trial or argument of any issue of fact or law" and did not "constitute any evidence or admission by" Lazard or its partners or other employees "of any wrongdoing or liability for any purpose." In other words, the horrifying public humiliations that Felix and Lazard had suffered for four straight years since the start of the Celler commission hearings in 1968 would, theoretically, be put to an end. Lazard issued a rare public statement, which it hoped would finalize the matter:
Since the SEC's complaint was filed late last Friday, we have had an opportunity to review it. The substance of the allegation is that Lazard Freres rendered some professional services in connection with the sale by Mediobanca of shares of ITT Series N Preferred, and in some instances, as broker, executed orders for the sale of such shares, and that additional
registration was required and was not had. Whether registration was required is a highly technical question. Our eminent counsel have expressed their opinion to the Commission that such registration was not required. However, we have no desire to engage in protracted litigation over so technical a question, and in order to avoid such time-consuming litigation, we have consented to the entry of an order which enjoins Lazard Freres in the future from selling unregistered securities of ITT. Our policy has always been meticulously to observe the securities laws and to act only in reliance on advice of counsel whenever any questions were presented. We have no intention of departing from that policy in the future.
But Lazard's settlement with the SEC did not finalize the matter, as Lazard had hoped. The ITT-Hartford merger was simply a bad penny, and unfortunately for Felix and Lazard there was no predicting where it would turn up next. Two weeks after the settlement, the first of several shareholder lawsuits were filed against ITT and its board of directors, including Felix. Hilde Herbst, a housewife from Jamaica, Queens, had purchased one hundred shares of Hartford Fire for $39.75 per share on April 29, 1970, and exchanged them for the ITT "N"-preferred in the tender offer in May. She sold the "N" shares on August 4, 1970, for a profit of about $700. Herbst, who emigrated from Germany to Queens in 1937--like Felix, a refugee--was educated in Germany "as long as Mr. Hitler let me." She never graduated from high school. In her complaint, she and her lawyers alleged that ITT's representations made in the exchange offer for Hartford Fire "with respect to the federal tax consequences of the acceptance of the Exchange Offer were false and misleading." In other words, Herbst was suing because she feared--and her lawyers clearly agreed--that ITT had erroneously received a favorable tax ruling from the IRS related to the acquisition of the Hartford and that should that tax ruling be changed--something the IRS was looking into at that very moment--there would be adverse tax consequences for her and her fellow Hartford shareholders.
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