The last tycoons: the secret history of Lazard Frères & Co (27 page)

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 really 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.

THERE WAS NO disputing the magnitude of the shock wave that Jack Anderson unleashed with his reporting about ITT and its aggressive tactics for gaining the government's approval of its merger program. But ITT's aggressive corporate behavior wasn't restricted to improperly seeking to influence top Nixon administration officials about M&A deals; ITT was also not beyond trying to overthrow foreign governments. And once again, Anderson and his colleague Brit Hume were at the center of the storm. Among the documents ITT released during the Dita Beard circus was a pile of twenty-five memorandums that disclosed ITT's efforts to prevent the 1970 election of Salvador Allende, a Marxist, as the president of Chile. Since ITT owned several businesses in Chile, including the national phone company, Geneen had been worried that the election of a Marxist might result in the nationalization of the ITT companies. His meddling in Chile, with the CIA's aid and approval, was meant to somehow prevent the Allende election. Geneen had pledged $1 million of ITT money to the overthrow effort. "Secret documents which escaped shredding by ITT show that the company maneuvered at the highest levels to stop the 1970 election of leftist Chilean President Salvador Allende," Anderson wrote in his first column about ITT's effort in Chile. "The papers reveal that ITT dealt regularly with the Central Intelligence Agency and, at one point, considered triggering a military coup to head off Allende's election. These documents portray ITT as a virtual corporate nation in itself with vast international holdings, access to Washington's highest officials, its own intelligence apparatus and even its own classification system. They show that ITT officials were in close touch with William V. Broe, who was then director of the Latin American Division of the CIA's Clandestine Services. They were plotting together to create economic chaos in Chile, hoping this would cause the Chilean Army to pull a coup that would block Allende from coming to power." A second column revealed ITT's offer, through Felix's fellow board member John A. McCone--who also just happened to be a former CIA director--to Henry Kissinger, then Nixon's national security adviser, to "assist financially in sums up to seven figures" in any effort the U.S. government may have been planning to prevent Allende from taking office.