Serpent on the Rock

by Kurt Eichenwald

  Harold proved adept at steering the firm. Over the next twenty years, its influence surpassed what it had under his uncle’s guidance. He committed himself to a philosophy of constant, unrelenting growth. His dream, recited often to his friends and partners, was to build a brokerage even bigger than Wall Street’s giant, Merrill Lynch. He never succeeded, but not for lack of effort—in a little more than two decades, the number of Bache employees grew from 1,800 to almost 6,000.

  Every day, Harold awoke at 6:00 A.M. at his duplex apartment on Park Avenue and was whisked downtown forty-five minutes later by the same taxicab. He arrived at his desk by 7:15, long before the 9:30 opening bell of the stock market, a habit that won him the nickname in the newspapers of “the man who opens Wall Street.” From his office just off the firm’s entryway, Harold kept a steady eye on the stream of Bache executives arriving each morning, greeting them as they walked down the firm’s red-carpeted corridor. He frequently wandered about the offices, stopping to ask each man about his job and his life. Sometimes he would relive his days in the marines, rolling up his sleeves to talk battlefield tactics and tell war stories with other veterans.

  Such strategizing proved useful in managing Bache, where life grew increasingly treacherous. While Harold’s decision to bring in new partners saved the firm, it also created an environment where the intense political maneuvering never ended. With the new capital, his ownership stake in Bache was only about 10 percent. Any of Harold’s new partners could throw the firm into disarray by withdrawing their money. Since, for many, that investment composed much of their personal wealth, they wanted as much say in the firm’s management as Harold himself.

  To keep everyone happy, Harold blurred lines of authority, leaving no one with the power for final decision making. Anyone who gained authority was viewed as a threat by the others and toppled from power. No one could afford to lose any political strength, so no one could gain any. Harold became a master manipulator of Bache’s fragile egos. With so much infighting, a strong management team couldn’t develop; Bache was transformed into a haven for Wall Street’s mediocrities.

  Titles became virtually meaningless, as they were transformed into symbols of ego gratification rather than descriptions of responsibility. By the 1960s, more than seventy vice-presidents roamed the halls of Bache, and all of them jealously guarded whatever small power they might have. The thick bureaucracy slowed the firm’s responses and destroyed managers unwilling to play Bache’s politics of appeasement.

  By 1968, Bache was in the same shape it had been in when Jules died: one person in control, and no designated successor. With prodding from his longtime partners, Harold, then seventy-three, finally agreed to name a new Bache president. He picked Harry Jacobs, the head of the firm’s syndicate department, and planned to announce his decision in April.

  The announcement never came. On March 15, 1968, Harold’s driver arrived as always at the Bache Park Avenue home at 6:45 for the morning trip downtown. Unlike most days, Harold was not waiting for him. The driver knocked on the front door, and Harold’s wife, Alice, opened it. She did not know what delayed her husband—the two had been sleeping in separate bedrooms for years. She and the driver went to Harold’s bedroom. When he didn’t answer a knock on the door, they swung it open: Harold was lying in his bed, dead from a heart attack.

  For the second time, the death of a Bache threw the firm into chaos. Senior executives launched an endless series of meetings. The squabbling continued for almost a month. Finally, on April 11, the firm made an announcement that reflected its true inner turmoil—no one would be Bache’s chief executive. Instead, three rivals for power would share those duties: Jacobs as president; John Leslie, an accountant and lawyer at the firm, as chief administrative officer; and Robert Hall, the firm’s treasurer, as chief financial officer.

  The arrangement was part of a complex political ploy engineered by Leslie, perhaps the most unlikely candidate to succeed Harold Bache. Leslie had no experience in the firm’s moneymaking businesses, having spent all his time on legal and accounting issues since joining the firm in 1955. He had minimal personal interest in the stock market—for years, executives at the firm gossiped that Leslie never owned a single share of common stock. But Leslie craved the power and prestige of running a securities firm.

  Born in Vienna, Leslie was aloof and something of a stuffed shirt. Unlike the gregarious Harold Bache, Leslie rarely chatted up his colleagues, who considered him funereal, with cold, clammy hands. Formalities meant a lot to Leslie: He called no one by their first name and demanded that he be referred to as “Mr. Leslie.” He advertised his appointment as an honorary consul general for Austria by always wearing the title’s ribbons and medals to the firm’s formal functions.

  In the months after the selection of the new management team, Leslie quickly gathered political strength, bluntly letting executives know that he would remember who didn’t support him when he gained control. The tactics worked—in April 1969, Bache named Leslie as chairman. No one opposed him for the job.

  With Leslie’s stiff personality setting the firm’s tone, formalities took hold throughout the firm, even in the men’s bathroom, where he posted a sign advising “Please flush.” Fortifying his control, Leslie reinforced the old politics of Bache that were the source of his power. A new, complex web of committees diffused the authority of any possible successors for the job and allowed Leslie to play each executive’s interests off another’s. Success at Bache became a matter of who could be pushed out of the way, as internal politics transformed into guerrilla warfare. Executives launched investigations of one another’s expense accounts, looking for problems. If that didn’t work, the same tactic would be used on a competing executive’s underling. Life at Bache was getting nasty.

  Still, fate proved Leslie to be the right man for the job at the time. Within months of his selection, a deep financial funk descended on Wall Street. After years of riding a giddy, rising stock market during the 1960s, the Dow-Jones Industrial Average began sinking mercilessly. Bache lost millions. If it was to survive, its dreams of expansion had to be killed.

  Leslie championed a brutal cost-cutting program. He shrank the number of employees from 7,200 to 2,500. He sold whole branch offices, or simply shut them down, and raised $40 million in new capital by selling shares of the firm to the public in 1971. Still, when the market rallied in mid-1971 and competitors began rebuilding, Bache kept cutting back. Its rank on Wall Street slid.

  After coming close to the top, Bache deteriorated into a Wall Street also-ran, falling into the ranks of third-tier firms. It seemed almost symbolic in 1971 when, to further reduce expenses, Bache moved from its prestigious Wall Street offices to 100 Gold Street, a drab address near the Brooklyn Bridge, far from the financial district. The dowdy offices were cramped and unremarkable. The luster that had once been at the firm now existed only in its history.

  In the mid-1970s, Bache executives tired of Leslie’s continuing cutbacks and worried about the firm’s slumping position and reputation. Leaning on the chairman, they urged him to relinquish power and name a successor. But, as happened under Harold Bache, all of the rising stars during Leslie’s tenure dimmed after gaining modest influence. With no one else in the wings, Leslie turned to Jacobs, who had surrendered much of his own power under Leslie’s committee system. Finally, in 1976, after almost a decade of waiting, Jacobs became chief executive of Bache.

  It could be argued that Harry Jacobs arrived on Wall Street by plane. Born to a family of architects, he had little interest in stocks and bonds in his youth, instead aspiring to become a pilot. He won his private pilot’s license on December 2, 1940, while still a junior at Dartmouth. During the following summer, his flying helped forge a strong tie to Bache that lasted the rest of his life. Jacobs was taking a course in acrobatic flying using a Waco UPF biplane. The equipment was old and the flying school somewhat shoddy, but Jacobs didn’t worry. Then, at the end of one practice run, as he came in for a landing, t
he left strut on his plane collapsed. The plane hit the ground and flipped over. Not knowing he was upside-down, Jacobs unfastened his seat belt and fell, knocking himself unconscious. The hot engine raced, and gas ran over it. The plane seemed ready to explode.

  Suddenly a man appeared and grabbed Jacobs, dragging him from the wreckage. It was Jimmy Israel, the brother of Ace Israel, a senior partner at Bache. Jimmy Israel also flew planes and took the same course as Jacobs at the school next door. When he saw Jacobs crash, he ran over to help and saved the young man’s life. The two men became fast friends and went on to serve as pilots in World War II. Jacobs survived his stint flying B-25s; Jimmy Israel died when his B-24 blew up at the end of a runway, killing the crew.

  After the war, Jacobs tried unsuccessfully to land work as a commercial airline pilot. In January 1946, he decided to switch careers. Meeting over lunch with Ace Israel, he discussed his various interests and plans. Israel sent Jacobs to the firm, where he was hired in the investment supervisory department. Jacobs’s days were filled with menial tasks for other executives, such as looking up stock dividends. But he advanced quickly. By the early 1950s, Jacobs was a member of a group of young institutional salesmen and traders from various firms who were known as the Sandbox Set because of their youth. For Jacobs, Bache became something of a second family for the next several decades.

  When Jacobs was tapped as chief executive, Bache’s reputation was in tatters. Giants like Merrill and Hutton had moved into new businesses and had grown their sales forces while Bache cut back. The times called for bold and decisive action, but Jacobs dithered. He refused to break up the committee process that created the firm’s encrusted bureaucracy. The Bache tradition of indecisiveness and intensive politics was set to continue.

  That kind of drift could not continue long at a public company. Bache stock had lost half its value since going public, and its investors were bitter. Anyone with the money and desire could buy Bache and throw out the executives who let it go so badly astray. It was only a matter of time until someone decided to try.

  The time arrived in 1978, with a threat from an old friend of Bache. On May 17, Gerald Tsai landed his helicopter on a field in Westchester County to pick up Jacobs for a flight. Tsai was a Shanghai-born stock picker whose success at the Fidelity Capital Fund had helped set off the mutual fund craze in the 1960s. When Tsai split with Fidelity, it had been Bache that had raised the money for his new venture. That had solidified a long, friendly relationship with Jacobs and other senior Bache executives.

  Jacobs climbed aboard Tsai’s helicopter for what he thought would be a relaxing trip to West Point. But instead, Tsai guided the small helicopter to a New Jersey landing field. There Tsai turned to his friend to tell him the real reason for the day’s outing. The recent death of Harold Brady, a large investor and critic of Bache, had opened up an opportunity. With Brady’s block of shares possibly up for grabs, Bache seemed vulnerable. Before anything else happened, Tsai had snapped up more than 70,000 shares on the open market and had opened talks about joining forces with two other large Bache investors. Together, they controlled about 8 percent of the firm. Tsai had big plans. He wanted to take over.

  Jacobs was aghast. “I want you to fly this helicopter back right now!” he growled.

  The conversation came to an abrupt halt, as Tsai flew the helicopter through the rain to a field beside Jacobs’s home. Jacobs ran into the house and grabbed the kitchen telephone to call John Leslie. The two decided immediately to phone Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz and the country’s dean of takeover defense strategy.

  The best approach, Lipton advised, would be to offer to buy back the stake controlled by Tsai and the other investors at a price attractive enough to make them agree to go away. Bache offered $10.25 a share for their stock, $2 above what the market was paying. With $1.2 million in free cash on the table, Tsai and the other investors pocketed the money and moved on. Jacobs felt relieved. He successfully fought off a threat to the careers of his friends for a relatively small sum of money. Now he could turn his attention to the firm and mend the scars that years of political intrigue had left behind.

  He never had the chance.

  The threat from Sam Belzberg emerged slowly from the time of its conception with a single young broker in Toronto.

  In the spring of 1978, the broker, John Clark, pored through Bache’s balance sheet over and over again. The numbers just didn’t add up. Clark, who handled certain investments for the Belzberg family, knew that Bache stock was in the tank, trading at around $8 a share. But the firm’s holdings seemed to be worth far more than that. The international division appeared to be particularly misunderstood—Bache had branches and relationships all over the world but assigned no dollar value to that division in its books. Clearly, Clark thought, this was an undervalued stock, weighed down by the market’s perception of mismanagement at the firm. It was like finding hidden gold.

  Clark had long been responsible for managing the Belzbergs’ investment company; called Bel-Fran Investments. He was authorized to purchase as much as $1 million of a single stock without seeking approval. So, on a day in 1978, at his own initiative, Clark purchased more than 100,000 Bache shares for the Belzbergs in the Bel-Fran account.

  For years, few outside Canada knew of the Belzbergs, a family of Orthodox Jews who lived in Vancouver. The family immigrated there in 1919 from Poland, where Abraham Belzberg, the family patriarch, had worked as a fishmonger. In Canada, he opened a used furniture business, which became the centerpiece of a vast fortune built on real estate and other investments. After Abraham died in 1976, his three sons, Sam, Hyman, and William, established Bel-Fran as their personal investment company.

  Sam Belzberg wanted updates from Clark every three months about Bel-Fran’s holdings. At one meeting that year, Clark mentioned his purchase of Bache stock and asked for permission to buy more. Investors were sour on Bache, Clark said, in part because of its history of mismanagement. Still, it had fabulous assets. Over time, the firm’s management might improve, he added, and the stock would go up. And even if Bache didn’t fix its problems, the Belzbergs wouldn’t likely lose much money. A stock can’t fall much farther than the gutter.

  Clark convinced him, and Belzberg approved the purchase of more Bache shares.

  Guy Wyser-Pratte was always among the first at Bache to hear the newest market rumors. As head of the firm’s arbitrage department, he spent his days watching the ticker, looking for stock movements and listening for market rumors about potential corporate takeovers. He heavily bought the shares of corporate targets after the announcement of a bid, assuming the risk that a deal would get done. He was good at the job—his group consistently made great profits. By listening so carefully to the market, Wyser-Pratte noticed quickly when big blocks of Bache shares started trading in 1978. He heard that the buyer was the Belzbergs.

  The trades set off alarm bells at Bache. Jacobs, who had feared a takeover since the Tsai affair, was telephoned in Munich, where he was attending a business managers’ meeting. He instantly feared the Belzbergs wanted control of his firm. At a meeting of the board of directors a few days later, Jacobs approached Wyser-Pratte to ask about the Canadians. The best he knew, Wyser-Pratte said, they were basically a bunch of corporate raiders.

  Jacobs blanched. “This is terrible,” he muttered. “Terrible.”

  Over the following weeks, Jacobs became obsessed with the Belzbergs. On March 21, his concern deepened when the Belzbergs filed a Schedule 13-D with the Securities and Exchange Commission, disclosing that they owned 5.1 percent of the firm. Profanity and name-calling weren’t in Jacobs’s character, so even his mild invective of calling the Belzbergs “that bunch” shocked his colleagues. Hoping to repeat the success the firm had with the Tsai threat, Jacobs again sought out Marty Lipton. But this time, the lawyer begged off the assignment—the Belzbergs were among his roster of clients.

  Jacobs racked his brain, convinced that the B
elzbergs were an enormous threat. He discussed little else. Wyser-Pratte had seen the reactions of enough corporate managers in takeover situations to understand what was happening: Jacobs was hitting the panic button.

  Sam Belzberg reached for the telephone on his desk as soon as his secretary told him that Marty Lipton was on the line. Belzberg liked Lipton and admired his intelligence. He always enjoyed having a chance to talk with the lawyer.

  After exchanging pleasantries, Lipton asked cryptically if they could get together. Belzberg readily agreed but said he had no plans to travel to New York anytime soon. Perhaps, Lipton suggested, they might meet in Los Angeles. Lipton would be traveling there soon, and he knew that Belzberg frequently visited there. Belzberg agreed.

  Days later, Belzberg and Lipton met at the lawyer’s bungalow at the Beverly Hills Hotel. Lipton quickly got down to business.

  “What are your intentions with Bache?” he asked.

  The question surprised Belzberg. Even though he had kept purchasing tens of thousands of shares in the firm almost every week, a fact he disclosed in several filings with the SEC, he didn’t expect his own lawyer would be the one asking him about it.

  “Marty, I have no intentions,” he said. “Why do you ask?”

  “They’re very worried about your position,” Lipton replied. “It’s been very unsettling for them. So they want to know whether you want to bid for the whole company, whether you want to sell your interest, or whether you would accept a seat on the board and not buy any more stock.”

  The offer just fell in his lap. At that point, Belzberg viewed his Bache investment as just one of many in his portfolio. Maybe someday he might want to do something with the firm, but at this point, as far as he was concerned, he was just another passive investor. Now, without raising a finger or saying anything, he could get a seat on its board. He wouldn’t pass that up.