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

by William D. Cohan

  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"

  The 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 th
e 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.

  In the midst of that process, on December 7, Grambling came up with the nifty idea that he would also ask the Bank of Montreal for a separate, personal loan of $7.5 million. As would be typical in an LBO, he told the Bank of Montreal, he had incurred numerous expenses--for lawyers, accountants, and consultants--as the deal came together, and his personal cash to pay the cost of these professionals was virtually nonexistent. So not only would the entire purchase price of $100 million be borrowed; Grambling intended to borrow an additional $7.5 million.

  In truth, he needed the other $7.5 million to pay off a host of increasingly irritated creditors nationwide, from whom he had borrowed money previously and had no way to repay. In evaluating the creditworthiness of the proposed $7.5 million loan, the bankers asked Grambling for a copy of his personal balance sheet. Grambling provided the document, which showed, among other things, that he owned 375,136 shares of Dr Pepper. In November 1983, Forstmann Little & Co., a large New York private-equity firm, had agreed to buy all of Dr Pepper's publicly traded shares for $22 each, a total of $512.5 million. The deal, according to Grambling, was to close no later than January 22, 1985, and Grambling's shares were about to be bought by Forstmann Little for a total of almost $8.3 million. In fact, though, Forstmann Little closed the Dr Pepper deal on February 28, 1984, not January 22, 1985--an easily verifiable fact that should have been (but wasn't) the first tip to everyone that something was terribly amok. Understandably, the Bank of Montreal demanded Grambling's Dr Pepper shares as collateral for the $7.5 million personal loan. Those shares, soon to be turned into cash, the bankers reasoned, would be the best security should Grambling fail to repay the personal loan.

  Dr Pepper had hired Felix and Lazard to sell the company beginning in July 1983. Felix conducted an auction and found Forstmann Little, which agreed to pay $22 a share, in cash, for a company that had been trading at around $13 per share. For the impressive feat of getting shareholders an almost 70 percent bump in value, Lazard earned a $2.5 million fee. The Dr Pepper sale to Forstmann Little was one of the largest LBOs to that time, and so the deal--even though Felix was one of the more outspoken critics of the LBO frenzy and the so-called junk bonds used to finance it--was big news around the firm. Although for some reason the Canadian bankers missed the fact that the Dr Pepper sale had already closed, they asked Grambling how the bank could get its hands on the Dr Pepper stock as collateral. Grambling directed them to Wilkis, the Lazard vice president with whom he had shared an office, a secretary, and a brief career at Citibank.

  The Bank of Montreal banker called Wilkis, who walked him through the public documentation of the Dr Pepper buyout--he did not work on the deal--and, mysteriously, confirmed the erroneous January 22, 1985, closing date, three weeks after Grambling's RMT deal was to have closed. In a follow-up call, Grambling again directed the Canadian banker Ivor Hopkyns to Wilkis. "Ivor, call Bob Wilkis again," he told him. "The stock is in my Lazard Freres account, and Bob can give you the necessary details." When Hopkyns called Wilkis again to get the Dr Pepper stock information, Wilkis responded, "I can't give you that information. I'm not John's account officer. For the details on John's stock, you have to ask someone in the back office." Increasingly frustrated with figuring out how to get the collateral he needed, Hopkyns asked Wilkis if he was authorized to sign the document transferring Grambling's Dr Pepper stock to the bank. "No," Wilkis replied. "I am an associate, not a member of the firm. Only a partner can sign such a transfer. You're going to have to get a firm member to sign any kind of transfer document." Hopkyns then called Grambling to complain that the personal loan could not be closed "until we have the ownership facts for the assignment" of the Dr Pepper shares. Grambling responded to this problem by saying, "Everything has been straightened out at Lazard, Ivor. Bob just needed to get the numbers. He has them now waiting for you. Just give him a call."

  Hopkyns called Wilkis again, and the Dr Pepper stock information was now available. Wilkis told him: "I just received a call from the record keeper at Continental Illinois Bank"--the paying agent for the Dr Pepper stock. "This is how John holds his stock. There's 181,000 shares of stock in his own name, certificate number DX67144. He owns another 194,036 shares in the name of E. F. Hutton and Company, certificate number DX24618." Continental Illinois Bank's contractual obligation was to disburse cash to Dr Pepper shareholders in exchange for their legitimate shares. The company Forstmann Little formed to buy Dr Pepper signed a nonpublic contract with Continental Illinois Bank on February 22, 1984--six days before the closing--requiring the bank to perform this function until six months after the closing date, which would have been at the latest August 28, 1984. Forstmann Little placed an ad in the Wall Street Journal announcing the closing of its acquisition of Dr Pepper on March 7, 1984.

  Clearly unaware of the specifics of the closing and having been deceived by Wilkis, Hopkyns made note of the certificate numbers and forwarded the information to his Shearman & Sterling lawyer, who was preparing the crucial consent and agreement document that was to have assigned the Dr Pepper stock as collateral for the $7.5 million personal loan. The Shearman & Sterling attorney, James Busuttil, reconfirmed the information himself with Wilkis, by telephone, and asked him who from Lazard would be signing the consent form. "I can't sign and I don't know who John is going to get to sign the consent," Wilkis explained to Busuttil. On December 24, 1984, Busuttil had the consent form hand-delivered to Wilkis at Lazard's Rockefeller Center offices. The signature lines were left blank.

  Four days later, Grambling showed up at Shearman & Sterling's offices in the sleek new Hugh Stubbins-designed Citicorp Center at 599 Lexington Avenue in midtown Manhattan. He was there to close on the $7.5 million personal loan and carried with him the all-important, and now signed, consent and agreement form. There had been two signature lines on the document, and both were filled in. The first line was signed "Lazard Freres & Co.," and in the same hand just below was what purported to be the signature of Peter Corcoran, a longtime Lazard partner in New York who had come to the firm in the early 1970s, also from Citibank. Underneath Corcoran's signature was another signature, that of "Robert W. Wilkis, Vice President." The quaint Lazard signature documents showing which partners could contractually bind the firm had been around for decades. The Grambling closing was a clear instance where the importance of the accuracy of that authority became essential. The documentation for the personal loan to Grambling was complete, and together Busuttil and Grambling called Hopkyns in Canada so that Busuttil could inform his client that a Lazard partner--Corcoran--had indeed signed the crucial form. Hopkyns told Grambling he wanted to speak with Corcoran to confirm he could legally bind Lazard, a point that Hopkyns had become sensitive to after his earlier calls with Wilkis.

  "Reaching Corcoran might be a problem," Grambling replied. "I think Corcoran may already have left for vacation." Hopkyns called Lazard and confirmed that Corcoran had left for the New Year's holiday. Grambling offered to get a phone number where Corcoran could be reached. He then called Hopkyns. "I've gotten the number, Ivor," Grambling told him. "Corcoran's already in Miami. He's at 305-940-7536." Hopkyns made the call, and a man answered. "Peter Corcoran?" he asked. "Yes, this is he," the man said. After Hopkyns identified himself as the Bank of Montreal banker, Corcoran supposedly replied, "You're calling about the consent form I signed for John. I am a general partner at Lazard Freres and have been for years." This Corcoran--who was really Grambling's accomplice Robert Libman--told Hopkyns that he had known Grambling at Lazard, and despite Grambling's departure from the firm, "I anticipate that Lazard Freres will be doing a great deal of business with J
ohn's companies in the coming year." This Corcoran confirmed to Hopkyns he had signed the consent form and that he was authorized to do so. After hearing Corcoran's confirmation, Hopkyns authorized the closing of Grambling's $7.5 million loan. Acting quickly, Grambling approved the transfer of the funds out of the Bank of Montreal's Park Avenue New York office to his highly agitated creditors--banks in Kansas, Texas, Arizona, Connecticut, and Tennessee.

  Meanwhile, the real Peter Corcoran was on vacation. But not in Miami. He was in Vermont with his family for a ski holiday. About two weeks later, on January 15, another Bank of Montreal banker, Scott Hean, who was busy trying to put the finishing touches on the $100 million loan needed for Grambling's purchase of RMT, recalled that the bank had not yet received the cash from the sale of Grambling's Dr Pepper shares, which was the security for the personal loan. Hopkyns called Wilkis. When will the Bank of Montreal get its cash pursuant to the consent and agreement that Corcoran and Wilkis had signed? Hopkyns wondered.

  "I don't know what you are talking about," Wilkis said.

  "I'm talking about the agreement you signed, the consent I have a copy of, here right in front of me," Hopkyns said. "It bears your signature, Robert W. Wilkis, and--"

  "You have a problem," Wilkis said. "My middle name is Mark." Wilkis hung up the phone.