The last tycoons: the secret history of Lazard Frères & Co (33 page)

But Felix's deification in Manhattan meant little in Washington. Not only had President Ford turned a cold shoulder to New York City's fiscal crisis, but Felix could not avoid the SEC's ongoing investigation of the Hartford deal, even of its most obscure details. In his final deposition in the second SEC investigation, on February 3, 1976, Felix started modestly by explaining to the SEC's lawyers that since his previous testimony, Governor Carey had asked him to get involved with the New York City financial crisis. There was a brief nod of recognition but little interest. The SEC lawyers were now all business.

For the first time, they were very focused on even the most minute details of the transaction, having by now dissected the whole series of events for more than four years. Of all things, the SEC now wanted to know what Felix knew of a small Italian auto parts company, Way-Assauto, which ITT bought rather unexpectedly in 1971. Seventy percent of Way-Assauto was owned by the Griffa family and 30 percent by an investment company controlled by the powerful Agnelli family, the principal owners of Fiat and close associates of both Cuccia and Andre. The sequence of events is complicated, but somehow ITT ended up buying the company for $22 million at the end of May 1971 (actually $20 million in cash from ITT and $2 million in cash Way-Assauto had on its books that ITT allowed the sellers to withdraw at closing) in a deal brokered by Lazard. Why Felix, Andre, or Lazard would have any involvement in a deal of this size in Italy is, of course, a good question. "It was just a relatively small acquisition that I had really little to do with," Felix said. "Nor did the firm really." How, then, does one explain Lazard's $300,000 fee? The simple answer no doubt is that the tiny deal involved not only the Mediobanca stock deal but also two of the firm's biggest and most important clients, ITT and the Agnellis--more than sufficient justification for Felix's and Andre's involvement. The SEC pressed Felix on whether he made any connection between Mediobanca's sale of 400,000 ITT series "N" shares at $55 per share, or $22 million, to IIA, an entity controlled by the Agnellis, and ITT's agreement to purchase, also for $22 million, Way-Assauto, a parts supplier to Fiat, all at exactly the same time in the first part of 1971. Felix demurred, but conceded there did seem to be a clear, indisputable relationship between the two deals.

The SEC lawyers were also quite curious about how another in-the-money option from Mediobanca to buy thirty thousand ITT series "N" shares ended up in the estate of the longtime Lazard client Charles Engelhard at the same time that Engelhard sold an investment company he owned a big stake in, named Eurofund, to ITT. Engelhard's equity partner in Eurofund? None other than Lazard Freres in New York. It turned out that Engelhard and Lazard controlled 28 percent of Eurofund through their limited partnership, Far Hills Securities. Perhaps the most curious testimony from any of the bankers at Lazard was that of Mel Heineman. At the time of Heineman's testimony before the SEC in September 1975, he was thirty-five years old and had ten months earlier been promoted to partner at Lazard, after six years as an associate. Although he graduated from both Harvard and Harvard Law School, it is doubtful his extraordinary education could have prepared him for his experience at Lazard. He had been part of the ITT team working on the Hartford exchange offer, literally counting the shares tendered. He recalled for the SEC having been sent to Mediobanca in Milan twice: first in November 1970 and then from January 12 to 17, 1971, to do something or other with regard to Mediobanca's resales of the ITT series "N" stock or perhaps something having to do with Way-Assauto; in any event he was not at all certain what he was doing in Italy in January 1971.

His testimony provides a rare--and often humorous--glimpse into the life of an associate at Lazard at that time. Heineman's description of his responsibilities as a young investment banker contrasted deliciously with the highfalutin role typically portrayed. But Heineman was quite serious about one thing: no matter what, he told many of his colleagues at the time, he had no intention of going to jail to protect Felix. "There was no reason for me to do anything for Felix," he said thirty years later, "because, Lord knows, Felix hasn't done anything for anyone else."

For the SEC, he recalled attending a meeting at Mediobanca's offices where eight or ten Mediobanca bankers, including Cuccia, were gathered. "The only recollection I have of that meeting," Heineman explained in his deposition, "is that it involved certain tax problems that had something to do with the Way-Assauto transaction. The meeting was populated by Italians, except for me. My recollection is that approximately 95 percent of the conversation was in Italian with an occasional lapsing into English for my benefit." He did recall reporting what he could about the meeting--which was very little indeed--to his client Stanley Luke at ITT. "The reason that I recall with such precision is that it interrupted a very nice dinner that I was having with my wife," he testified. "I remember that very concretely." He also remembered
not
reporting anything about his five days in Italy to Felix, who was his boss, although he said he had no idea if Felix was working on the Way-Assauto transaction. "The only recollection that I have, in terms of reporting after that meeting, is and you will understand, being an employee of Lazard, being very anxious to get home, having been in Italy for five or six days, I remember placing a call to Mr. Rohatyn, basically to tell him that there had been such a meeting and the extent to which I might have known what happened, and to ask him permission to come back. My recollection was that Mr. Rohatyn was not interested in any details of that meeting whatsoever, and merely suggested that the proper course for me would be to pass them on to Stanley Luke. Mr. Rohatyn said that after I reached Luke, I should come home."

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."