The last tycoons: the secret history of Lazard Frères & Co (48 page)

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 John'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.

Hopkyns called the Lazard main number. He asked for Corcoran. "Corcoran here," Corcoran said.

Hopkyns knew instantly upon hearing the
real
Peter Corcoran's voice that the Bank of Montreal, as Wilkis had said, had a problem, a big problem. Busuttil called Tom Mullarkey, the Lazard general counsel and chief firefighter, to find out what was going on. "No," Mullarkey responded, "Corcoran and Wilkis did not sign that document that you have in front of you." He asked Busuttil to messenger over a copy of the document.

On January 17, Lazard, through Mullarkey, provided Shearman & Sterling with its official response to the Grambling matter. "Dear Mr. Busuttil," Mullarkey wrote, "I have your letter dated January 16 enclosing a copy of a Consent and Agreement purportedly signed by Lazard Freres & Co. Before you sent the letter to me with its enclosure, I informed you that the Consent and Agreement was spurious. Manifestly, we have no intention of complying with its terms. Thomas F. X. Mullarkey." The Shearman attorneys and others would make much of Mullarkey's use of the word "spurious" instead of a more precise word, such as "a forgery" or "fraudulent," but clearly Mullarkey and Lazard had denied the authenticity of the consent form and would not comply with its terms.

Hopkyns called Grambling for an explanation. "I don't know what's happening at Lazard," Grambling asserted. "But it sounds like a technical error regarding whose signatures can technically bind the firm. Wilkis and Corcoran must have fouled up. Remember, Ivor, I worked there, so I know how they make these mistakes. Someone's trying to cover his ass. I'll make some calls and get to the bottom of this." Later that night, Grambling gave Hopkyns his explanation: "I just got off the phone with my wife. She read me the mail delivered to our home in Connecticut. E. F. Hutton remitted my Dr Pepper proceeds to my account at Coronado Bank in El Paso, Texas. The transmittal voucher was in today's mail. The stock had been cashed on the fifteenth, just like we expected, but it was sent to the wrong place."

According to a
Wall Street Journal
article from March 1987 summarizing the whole Grambling affair: "The truth was that Mr. Grambling didn't own a single share of Dr Pepper. The documents were forged; so were the signatures of Messrs. Corcoran and Wilkis. The Libman balance sheet was made out of whole cloth. The Peter Corcoran that Ivor Hopkyns had phoned in Florida was, in reality, Robert H. Libman doing an impersonation." Grambling and his Florida accomplice, Libman, had systematically set up a nationwide Ponzi scheme designed to defraud banks all across the country. The idea was to keep one step ahead of the old creditors by borrowing money from new ones and using the proceeds to repay the old. In the end, of course, that can go on for only so long. They tried to steal a total of $36.5 million and made off with $13.5 million "without pointing a gun at anybody," as the
Journal
put it.

Brian Rosner, then the Manhattan assistant district attorney, who successfully prosecuted Grambling and Libman, explained to the
Journal:
"It's called robbing Peter to pay Paul, and as long as it works, as long as the money comes in, no one knows he's being victimized.... No one is more complacent than a banker who has been repaid." In May 1987, after a lengthy investigation into Grambling's activities, which revealed that he had been stealing at least since college, the acting state Supreme Court justice Herman Cahn sentenced Grambling to between seven and two-thirds and twenty years in a state prison after he pleaded guilty to thirty-two counts of fraud. He had separately received a four-year sentence from a federal judge in San Diego for attempting to defraud a bank there as part of the overall scheme. The state prison time for Grambling began after the federal prison time was completed. Grambling's prison sentence, at the time, was one of the harshest ever for a white-collar criminal. (Libman received a six-month sentence after pleading guilty more rapidly than Grambling, who attempted to commit even more of these crimes while awaiting sentencing.)

What has remained less clear in the whole Grambling affair is the role of Wilkis. Shouldn't he have been aware of the implausibility of Grambling having more than $8 million worth of Dr Pepper stock when Forstmann Little had bought and paid for the company nearly a year before? Nobody, no matter how wealthy, leaves $8 million worth of stock lying around for eleven months when it could be turned into badly needed cash. Wilkis also admitted knowing that Grambling had asked their mutual secretary, Sheila, to send him a bunch of Lazard stationery, even though he no longer worked at Lazard. Wouldn't that have been a tip of odd behavior? At one point, as the fraud was being sorted out, Jon Greenblatt, a Shearman & Sterling litigator assigned to the case, told Rosner he thought Wilkis "was Grambling's accomplice" and that would be made clear after Rosner interviewed Greenblatt's clients at the Bank of Montreal. "But it sure looks like Grambling had Wilkis working for him," Greenblatt told Rosner. Lazard hired Martin Flumenbaum, a litigator at Paul, Weiss, to represent it and Wilkis--indicating that Lazard felt Grambling had taken advantage of Wilkis and Lazard did not need separate counsel. In his first discussion with Rosner about the matter, Flumenbaum told him, "Wilkis was duped by Grambling. He can fill in a lot of what you need to know to make your case." According to
Swindle,
Rosner's 1990 book on the Grambling case, by mid-February 1985, Flumenbaum had successfully negotiated with Rosner "full transactional immunity" for Wilkis. "That means you can't be prosecuted for any crimes derived from what you tell me," Rosner told Wilkis, unless he were to later lie in front of the grand jury, should he be asked to appear.