When the SEC lawyers asked Andre, at the end of October 1975, if he had sent Heineman to meet with Cuccia, he said, simply, "No," before adding, "Mr. Heineman is a nice man but [I had] not very much to do with him."
When asked if he knew what the Way-Assauto transaction was all about, Heineman said he did not, nor had he heard about it before being sent to Italy. "What was your understanding before you went to Italy about what you would be doing there?" he was asked.
"To the best that I can recall, I went to Italy to be of assistance to Dr. Cuccia who was, I gather, perhaps a client of Lazard, or there was some relationship and I was sent there to be of assistance to him. That is all that I frankly remember about it." During his testimony, Heineman must have realized how strange it sounded for him not to know why he was being sent to Italy for five days or what the people were talking about when he got there, so he volunteered the following: "At the time I went to Italy, I was at Lazard for under two years. I was an associate in the mergers and acquisitions area, as I previously testified. As I conceive of it now, and definitely as I conceived of it at the time, my function with respect to the trip was a clerical function. There would be no reason, in my judgment, for anyone to necessarily explain details of the transaction to me, other than what I was supposed to do. Certainly, I would have nothing to do with the kind of policy questions that you think you are asking me, which I said I did not know."
The opposing SEC attorney found this a bit hard to believe. "I still don't understand, even generally, what you were supposed to do over there," he said. "Could you be more specific about it? I am sure you received instructions more general and more specific than just 'Go to Italy, and help Dr. Cuccia.'"
"To the best of my recollection, I was sent to Italy to be of assistance to Dr. Cuccia," he replied. "I may have taken some language with me on paper, and I have no recollection whether I did or didn't, but I am quite clear on the fact that, as far as I can recall it, there were no specific instructions given to me, nor did I consider that to be in any way extraordinary."
Now, even though Felix deemed the early 1970s to be the Dark Ages of investment banking, for a graduate of Harvard and Harvard Law to be sent to Italy for five days, with his wife--including two days spent skiing in Saint Moritz before taking a bus to Milan--and to have absolutely no idea what he was sent there to do, or why, is quite peculiar, even by the rigidly hierarchical standards of behavior that ruled at Lazard at that time. What is even more ironic is that Mel Heineman would, after the incapacitation of Tom Mullarkey--whose testimony he seemed to be aping--become Lazard's general counsel and the keeper of most, if not all, of Lazard's most precious secrets. Eventually, he would become the consigliere to both Felix and Michel David-Weill and serve on the firm's executive committee. Perhaps his ability to accept an amorphous assignment overseas for a clandestine series of transactions was a crucial litmus test of his suitability for the job he would hold for most of his thirty years at the firm. Some of their former partners said that Mullarkey and Heineman--both bankers turned Lazard general counsels--agreed to take the legal reins of the firm in return for substantial compensation in order to keep them quiet about the ITT matters. (Heineman very graciously declined repeated requests to be interviewed extensively for this book.)
Mullarkey, too, once again testified twice before the SEC, on January 31, 1975, and then on March 5, 1976. In the course of his testimony, which included the usual inability to recollect most things, he said it now seemed to him after much study that the sale of Way-Assauto to ITT and the purchase by the Way-Assauto sellers of 400,000 ITT "N" shares "were linked."
Mullarkey was also asked about a somewhat mysterious payment of $520,000 made by the Agnellis to Lazard--but actually paid by Les Fils Dreyfus in Switzerland--in June 1971 that represented four years of advisory services to Fiat and the Agnellis. In his June 1975 written testimony to the SEC--prepared with Mullarkey's help in Switzerland--Andre explained that since 1964 Lazard had "rendered advisory services" to the Agnellis and their affiliates, including "general advice with respect to markets in relation to securities in the United States," "discussions of trends in foreign exchange and commodities," "opinions about the American economy and investments in North American companies," studies of attempts to sell various Agnelli businesses, studies of the Italian aircraft industry, and "studies of possible Fiat participation in Chrysler's European operations and in the Citroen automobile enterprise." These were the services rendered that resulted in the $520,000 fee paid in 1971 as well as an additional $200,000 fee paid in December 1973. After 1974, Lazard firmed up its fee arrangement with the Agnellis, receiving $600,000 per year, to provide an annual valuation of the family's various investments. One SEC attorney, Gary Sundick, asked Mullarkey if he was satisfied with Andre's written explanation of the services he provided to Fiat and the Agnellis to earn the fee.
"Mr. Sundick, are you, in effect, asking whether I'm going to impeach the integrity of my senior partner?" he replied, incredulous. "Is that your question?"
"I'm asking what your belief is and whether you have--", Sundick tried to answer, before being cut off.
"Mr. Sundick, my senior partner is a man of great integrity," Mullarkey stated. "If he told me this, I have no reason to dispute him."
When asked by Sundick if anyone had ever told him there was a link between IIA's purchase of 400,000 "N" shares and the sale of Way-Assauto to ITT and Les Fils Dreyfus's purchase of 100,000 "N" shares, the sale of 30,000 of those shares to Charles Engelhard, and the purchase by ITT of Engelhard's Eurofund, Mullarkey answered that, of all people, Simon Rifkind, the Paul, Weiss lawyer who had ferociously defended Lazard over the years, had told him the transactions were linked-- a rather remarkable admission, not only because the conversation was covered by attorney-client privilege but also because for years no one had been a more reliably resolute defender--albeit well paid--of Lazard's mischievous behavior than Rifkind.
"Anyone else?" Sundick inquired.
"It's my present impression that anybody, even of the meanest intellect understands these transactions were linked," Mullarkey answered. His March 5, 1976, deposition was the last one taken in the matter.
One of Mullarkey's longtime partners said years later that Mullarkey told him he would often wake up in the morning and be sick to his stomach--literally throw up--before the many days when he had to deal with the ITT litigation.
Years later, Felix reflected upon the entire incident and the countless investigations. "Andre found some people who could buy the stock," he said. "And did he have any arrangements with them that were silent? I don't think so, but maybe he did. I don't know." As the investigations persisted, Felix said he found himself increasingly being blamed by Andre for the fiasco (along with Walter Fried, of course). "Andre was already fading," Felix continued, "and Andre really disappeared more and more and forgot more and more and remembered less and less as time went on. And I found Andre more and more saying, 'This is Felix's deal.' Did I feel very comfortable about that? No. But what was I gonna do about it?"
The SEC finished taking depositions in the spring of 1976 and encouraged Lazard's legal teams at Paul, Weiss and Fried Frank to make whatever arguments they cared to on their clients' behalf. On May 14, 1976, Rifkind wrote a cover letter to Irwin Borowski, the SEC attorney, seeking a negotiated settlement. Rifkind's letter made clear the seriousness with which Lazard was taking the SEC's latest enforcement action--and, as the SEC's Stanley Sporkin explained, with good reason.
Both Rifkind and Andre's attorney Samuel Harris had made eloquent, if not completely factual, arguments for their clients' innocence and unimpeachable integrity. Unfortunately, though, their lengthy treatments seemed simply to disappear into the SEC's black hole as the months passed and the investigation continued. Over the summer of 1976, while on a visit to London, Harris wrote a moving letter to Borowski on Claridge's hotel letterhead. "Dear Irwin," he wrote, "I am deeply grateful to you for letting me know that I need not worry about
anything recurring with respect to the Lazard matter during my brief business visit here...to me, the most important matter on my business agenda is the Lazard investigation because it involves the reputations and careers of these fine human beings. I can't begin to emphasize how strongly I feel about the possibility of Andre Meyer ending an extraordinary career, which has involved conferring tremendous benefits on men and women in many nations--particularly in the U.S., France and Israel--with a suit in which he is named by the Commission as a party defendant."
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 last tycoons: the secret history of Lazard Frères & Co Page 24