The last tycoons: the secret history of Lazard Frères & Co (29 page)

Despite not wanting to "run" anything at the firm, Felix was the head of the corporate finance group, which was essentially the M&A group. One week after his Church Committee testimony, Felix penned a rare and now infamous--inside Lazard anyway--memorandum to the thirteen bankers who worked for him in the M&A group. "I am still far from satisfied with the operation of this Department," he wrote. "Let me remind you of our objectives: 1) Coverage of existing corporate clients to protect existing positions and generate business. Performance: Poor. 2) Execution of transactions created by others within the firm. Performance: Satisfactory. 3) Creation and generation of new business ideas. Performance: Poor. Great scattering of effort. No intellectual discipline. No follow through. If it doesn't work the first time, forget it. Conversation is no substitute for business."

But Felix was just getting warmed up. "Every member of this Department, but especially the
Senior
members,
must
realize they have a direct P & L responsibility to the Firm," his memo continued.

This is even more acute in the kind of times our business is entering into. We can no longer afford the luxuries we have indulged in for the past 20 years of carrying unproductive senior personnel. It is unfair to the productive ones and demoralizing to the junior members. I am perfectly aware of the fact that performance requires both luck and perseverance. Nobody can force luck. Perseverance, however, requires a level of intellectual discipline that I find woefully lacking in the Department and that
has
to change. There will be clearer assignments, that is
my
responsibility. There will be better follow through, that is
your
responsibility. There will be less time wasted with unrealities. There will be
more profit
or there will be
less costs.
Our business is about to enter the
Dark Ages.
Because of the policies that Mr. Meyer has imposed on this Firm we have a chance of surviving and emerging stronger than ever when the bloodletting is over and many of our competitors fall by the wayside. We can only do it if we have no fat and if we perform. I leave you to reflect on this.

ON MARCH 6, 1974, just as depositions in the Herbst shareholder lawsuit were in full swing, the IRS decided to revoke, retroactively, its original two rulings that the ITT-Hartford merger was tax free to the Hartford shareholders--one month before the statute of limitations on the original ruling would have expired. The revocation was an unprecedented and highly embarrassing development for ITT, the IRS itself, and of course Lazard, since once again the shady nature of the deal was reiterated.

The IRS's 110-page ruling explained why the service had changed its mind. According to the IRS, though, the document has been destroyed, in keeping with its policy to shred all rulings that are more than three years old; all other copies seem to have disappeared. Therefore, the only insight into the ruling's content comes from some brief press reports at the time. "We believe," the IRS report stated, "the subsequently developed evidence establishes that the ITT-Mediobanca transaction was not consummated in accordance with the representations made to the Service in ITT's ruling application. Rather, ITT was aware that Mediobanca did not want to assume any risk and intended to sell the stock transferred to it. ITT then styled the transaction to take on the appearance of a sale to satisfy us, when in reality, Mediobanca was an agent, broker, or best efforts underwriter for the sale of the shares on behalf of ITT and did not acquire any interest in the shares."

In the wake of the IRS reversal, ITT moved quickly to try to assuage growing shareholder unrest related to the tax consequences of the Hartford merger. By letters dated March 11 and April 4, 1974, ITT agreed to reimburse the former Hartford shareholders: "In the unlikely event that the exchange is ultimately adjudicated to be taxable, ITT will reimburse any Hartford shareholder whose net overall tax liability with interest (taking into account any other years involved) is increased as a result of the imposition of tax liability on the exchange of his shares." Needless to say, the IRS's change of heart and ITT's immediate concession to the former Hartford shareholders began to make Hilde Herbst, the housewife from Queens, look like a very smart lady indeed. A couple of months before the IRS issued its new ruling, on January 16, 1974, Herbst added Lazard as a defendant to her shareholder suit. Following the revocation of the 1969 tax ruling, the IRS made tax claims against a number of the former Hartford shareholders. Consequently, these shareholders filed some 950 petitions against the IRS in U.S. Tax Court, seeking to fight these new tax bills.

As a result of ITT and the ITT board of directors being named a defendant in Herbst's original lawsuit, and then since Lazard had been added as a named defendant, Felix, Andre, and Tom Mullarkey all testified in the case. As Yogi Berra would say, it was deja vu all over again. Felix testified twice in the Herbst matter. On November 16, 1973--before the IRS's new ruling--he testified about the circumstances related to ITT's "sale" of the 1.7 million shares of the Hartford stock to Mediobanca. And once again, he stuck to his story of having no role whatsoever in the transaction between ITT and Mediobanca and that only Andre and Tom Mullarkey were even the slightest bit involved, and then only tangentially.

When Felix testified again in the Herbst matter, for two and a half hours on April 24, 1974, it was six weeks after the IRS had reversed its ruling. Felix's story did not change. "My recollection is of minimal involvement," he said.

Mullarkey also testified twice in the Herbst matter, immediately following Felix's testimony. This time around, he shed a little more light on how he had come to work in the back office--"this was receipts and deliveries of securities, payments, sales, all the trivia that makes a banking firm operate internally." It turns out that Andre had reassigned Mullarkey, then an associate, to work in the back office for the partner Walter Fried in late 1969. Fried had become ill in December 1969 and taken a leave of absence from the firm (before passing away in October 1972). He originally suffered from circulatory problems, and then had a nervous breakdown. Mullarkey described him as "a very sick man" and said that Andre had moved Mullarkey into the back office because of Fried's deteriorating health.

For the first time, Mullarkey acknowledged his own role, along with Cuccia's, in the creation of the November 3, 1969, side agreement between Lazard and Mediobanca with regard to ITT's "sale" of the Hartford shares. "Fried instructed me shortly before I went over there"--to Milan to meet with Cuccia on a Saturday in late September 1969--"to see what Cuccia wanted us to do because we had responsibilities under the basic ITT contract. We would be a courier, a custodian and we made some market valuations and it was really to find out how Cuccia wanted this handled, so I really went over with nothing but to talk to Cuccia about what he had in mind." He came back to New York with Cuccia's handwritten notes of the agreement, showed them to Fried--but, he testified, no one else at Lazard--and continued to work with Cuccia on drafting the document. He knew his place. "Because I was an associate in the firm at that time and I had no direct access to Mr. Meyer," he testified.

For the first time in the whole blessed ITT-Hartford matter, Andre Meyer was obliged to testify. He did so on four separate occasions in March and April 1974, in the Lazard offices at One Rockefeller Plaza. The transcripts showed him to be quite firm in his recollections, and often quite loquacious. He characterized his role as extremely minimal and restricted solely to his initial contacts with Harold Williams, the CEO of the Hartford, in the fall of 1968, and with Cuccia, the CEO of Mediobanca, in the summer of 1969.

Like Felix and Mullarkey, Andre put the responsibility for Lazard's role in the ITT-Mediobanca stock arrangement at the feet of Walter Fried, the dead man, an Austrian immigrant whom Andre described as a "self-made man," a very simple man, a very modest man who came to Lazard as an accountant. "Mr. Fried was in this firm 15 years before or 17 years before I came to this country, and I had before not the slightest idea about rules or regulations or tax or overall fiscal and administrative policy as it existed in the United States and I was relying and always relied and everybody in this firm was relying entirely on Mr. Walter Fried," he testified. "It was a great loss when he died. He was a tower of strength and had the full confidence of all the partners. He was the kind of young grandfather of everybody in this firm and everybody can tell you that."

At various times in the almost eight hours of testimony, Andre became quite irritated with Leon Silverman, Herbst's attorney. "Mr. Silverman, I am an old man and I have taken three pills this morning to be able to be with you, to be able to do the job of trying to answer properly but I am not going to speak of things that I don't know in which I have not been involved in." When Silverman asked Andre if he understood the inner workings of the Lazard mailroom, Andre could take it no more. "This firm has always been very carefully run. Its existence is 130 years and we never had any problem of any kind." He was then asked how the mail was routed around the firm, and he replied:

I have no idea. Really, I don't know. I have told you and I am prepared to repeat that my role in the firm has always been very clear. I would like to say something which may not please my counsel because I am doing more than answering the questions but I feel that I should tell you. I was a Frenchman and I flew from France in 1940, a few hours before the Gestapo came to my apartment to pick me up. I was not persona grata, and the best evidence is that I was denationalized by the Petain regime, and that same day as General de Gaulle was denationalized, I was on the first list. In the first week of August 1940, I arrived in this country with my wife and my two then young children and I was a refugee, in fact, I did not speak a word of English. I don't speak too well still, but I have never taken one lesson of English. For two years I was sick. The doctors said that there was a cancer of the pancreas; it was not so, and in 1943 I came to the firm with the minimum of knowledge and I learned but I relied on the people who were in this firm and with good people in whom I had confidence. I did not interfere with what they were doing because this firm never had any trouble and had a very clean balance sheet and was considered as a firm of high standing. Step by step I took responsibility of the firm and I am proud with what I did with it but I did not disrupt a lot of things. Among the things that I did not disrupt because I was very ignorant about it and I knew my limitations with such things was what we call the inside machinery and about Walter Fried, a man who was, I believe here since 1930, even before and who has been successful and a young employee and who has shown a lot of quality and who became the head of the accounting department and then his activities were broadened. I had to learn from him many things in many respects and I tried step by step to make of this firm, as I said, one of the most respected and one of the largest firms in this town in every respect but it has been a full time job. I was lucky enough to have competent and serious people who were following the machinery and I relied upon them. I thought that it might have been useful for me to give you that little bit of background. My role consisted of many things in this firm in respect to its policy, in connection with the kind of business that we are doing and more especially the one that we should not do but my principle also was, after a decision is made after the policy has been established, not to have interfered in the implementation of the things which were done. I have had in these 35 years enough to do in respect to that battle in that jungle of Wall Street, in doing a certain number of constructive things and in maintaining a tradition and this has been really my job, and I am even too old to pursue that job in my judgment, but when you ask me who was opening the mail, I will be ashamed to tell you I don't really know.

Finally, though, in the remaining moments of Andre's testimony, Silverman asked him about the critical unanswered mystery. How could Felix, the head of Lazard's mergers business, essentially eschew responsibility for one of the most crucial aspects of his most important client's most important deal at the most important time? "What department did the ITT-Hartford merger fall into or under?" Silverman asked.

"Rohatyn," Andre answered.

"That would be new business?" the lawyer wondered.

"Yes," Andre replied.

"What department did the ITT disposition of the Hartford stock fall under?" Silverman asked.

"I don't believe that we have created a special department for that," Andre answered.

"Would that be new business?" Silverman asked.

"Mr. Rohatyn was the director of ITT and he was the liaison in the matter of that kind between the Lazard firm and the ITT firm, and as I told you, this firm is a very compact firm, including the partners and messenger boys and which has between 200 and 240 people," Andre explained. "Things are not that compartmentalized as they would be in Merrill Lynch."