The last tycoons: the secret history of Lazard Frères & Co (50 page)

ALL OF THESE criminal indiscretions stuck a dagger into the Lazard corpus, missing by mere inches the heart of the firm but badly damaging its sacred reputation for honesty and integrity. True, the firm tacked awfully close to the wind during the ITT scandals a decade earlier, but until Pondiccio, Wilkis, Cecola, and Grambling, no Lazard employee or former employee had been convicted of wrongdoing, let alone--according to the public record anyway--illegally profited from insider information or from forgeries.

Despite supposedly having been the target of a criminal grand jury investigation during the previous decade, Felix was not pleased. In March 1987, one month after Wilkis's sentencing, Felix wrote "The Blight on Wall Street" in the
New York Review of Books,
in which he denounced the increasing lack of morality in the investment banking profession. He warned, "As the revelations of illegality and excesses in the financial community begin to be exposed, those of us who are part of this community have to face a hard truth: a cancer has been spreading in our industry, and how far it will go will only become clear as the Securities and Exchange Commission and federal prosecutors pursue the various investigations currently under way. The cancer is greed." He pointed out to his readers that he had been an investment banker for more than thirty years. "It has been an honorable profession," he wrote. "I want it to stay that way." But lately, he added, "too much money is coming together with too many young people who have little or no institutional memory, or sense of tradition, and who are under enormous pressure to perform in the glare of Hollywood-like publicity. The combination makes for speculative excesses at best, illegality at worst. Insider trading is only one result. No firm, even my own, is immune from it, no matter how carefully it handles sensitive information. We have to rely on the ethics and the character of our people; no system yet invented will provide complete assurance that all of them will behave ethically." That was as close as Felix got then to any mention of his Lazard colleagues Pondiccio, Davis, Wilkis, Cecola, and Grambling.

More than twenty years later, Felix said he was "thunderstruck" when he realized one morning at breakfast, while reading the
Wall Street Journal,
that Lazard had been involved in many of the deals in which Levine had confessed to engaging in illegal trading. He said he immediately summoned Mullarkey to his office to figure out what had happened. Mullarkey quickly uncovered Wilkis's phone records indicating ongoing conversations with Levine. These records were turned over to the SEC. Felix also called the lawyer Marty Lipton, at Wachtell, Lipton, for advice, the firm's new go-to crisis adviser after the deaths of Sy Rifkind and Sam Harris. "And I just couldn't get over it," Felix said. "I mean, it was the worst thing that could happen, especially in a small firm."

WITH CRIMINAL BEHAVIOR rampant right under his nose, Michel's focus could not have been farther away. He had been busy, across the Atlantic Ocean in London, putting the final touches on one of the most important--and little appreciated--moves in the firm's history, that of wresting back control of Lazard Brothers in London from S. Pearson & Son and creating a unifying ownership umbrella for the three houses for the first time since 1919. The creation of Lazard Partners, the name given to the new entity created in May 1984, was the essential first step in Michel's personal mission to unify the firm. As Kate Bohner, a former Lazard junior banker turned journalist, so eloquently put it in
Forbes,
Lazard, like Caesar's Gaul, had always been divided into three parts: Lazard Freres, the largest, most high-profile, and generally most profitable, in New York; Lazard Brothers, the most insular, in London; and Lazard Freres & Cie, the smallest and most enigmatic, in Paris. Right from the start, the three houses had always been independently run to take full advantage of the indigenous quality that each firm possessed in its own country. Until 1919, some combination of the Lazard and Weill families had always owned the three firms, although the precise calculus of their equity splits is no longer known. In 1919, of course, the founding families brought in the industrialist Weetman Pearson to recapitalize Lazard Brothers in order to prevent its possible liquidation and to satisfy the Bank of England that the firm was no longer majority owned by Frenchmen. In the early 1930s, Pearson's ownership of Lazard Brothers had rocketed up to 100 percent in the wake of the trading scandal perpetrated out of the Brussels office. After the David-Weills paid off their accumulated debt to Pearson, the Pearson stake in Lazard Brothers returned to 80 percent.

The catalyst for the creation of Lazard Partners turned out to be Rupert Murdoch, the Australian press baron and powerful chairman and CEO of News Corporation, who had started buying shares of Pearson with the hope, no doubt, of obtaining the publishing assets. To combat the potential risk that Murdoch might get control of Pearson and that somehow, as a result, Lazard Brothers would fall into unfriendly hands, Michel told the Pearsons he would buy--with his own money--a sufficiently large stake in Pearson to thwart Murdoch's advances. In return, he wanted to be able to purchase enough of Pearson's stake in Lazard Brothers to ensure the firm's independence should Murdoch get control of Pearson. The resulting agreement, Lazard Partners, was Michel's exceedingly complex first step in regaining family control of Lazard Brothers from Pearson, with the hope of eventually uniting all three houses. The deal also successfully thwarted Murdoch. The new holding company was to own 100 percent of the stock of Lazard Brothers, 24 percent of the capital of Lazard in New York, and 12 percent of the capital of Lazard in Paris. (Lazard Partners would also receive 12 percent of the annual profits in both New York and Paris.) The basic idea of the plan, which required the approval of the Pearson public shareholders, was for Pearson to exchange its--by then--79.4 percent direct ownership stake in Lazard Brothers for equity positions in
each
of the three houses. Pearson's revamped ownership package constituted a 50 percent stake in Lazard Partners plus a direct 3.7 percent stake in the capital of Lazard New York and a direct 4 percent stake in the capital of Lazard Paris. When the direct and indirect stakes were collapsed together, Pearson ended up exchanging its 79.4 percent stake in Lazard Brothers for 50 percent of Lazard Brothers, 17.4 percent of Lazard in New York, and 10 percent of Lazard in Paris, plus a right to 10 percent of the annual profits of the New York and Paris partnerships. Not only did the Pearson shareholders have to approve the deal, which they did in June, but all the various valuations of the three houses, relative ownership stakes, and equalizing payments had to be blessed for "fairness" given the numerous conflicts of interest among the various shareholders (chiefly Michel)--a task that fell to the small and prestigious merchant bank Cazenove & Co., which signed off quickly.

Not surprisingly, of course, this deal was not only about Pearson. It was also about Michel getting greater control of the three houses. He and his immediate family ended up with a 17.9 percent stake in Lazard Partners, in exchange for their 15 percent stake in Lazard Brothers and for a portion of their ownership of New York and Paris. In addition, Michel continued to own "substantial" stakes in New York and Paris. But that is not all. He also arranged for Eurafrance, a French private-equity firm controlled by him and his French partners, to invest $46.3 million for a 20.8 percent stake in Lazard Partners. A few of the partners in New York ended up owning 6 percent of Lazard Partners; an even smaller number of partners in Paris owned 5.3 percent of Lazard Partners. In the end, though, Michel and Pearson each controlled half the votes of Lazard Partners.

In addition to the economic arrangements, the deal sought to "establish procedures for encouraging co-operation between the Three Houses," a chronic unsolved problem in the firm's long history. There was little likelihood that Lazard Partners would quickly lead to international cooperation, but it did occasion the creation of a new, seven-member partnership committee, of which Michel installed himself as chairman.

The May 1984 Pearson prospectus provided another one of those rare glimpses into the profitability of the three Lazard firms. As on the other occasions, what was confirmed was how fabulously profitable the firms were--and had been for years. For instance, in 1983, New York earned PS55 million ($80 million) before distributions to partners and taxes, while Paris earned PS7 million (FF 83 million) before such distributions. London, which was not a partnership, earned PS13.4 million after paying its managing directors but before paying taxes.

Left unsaid in the Pearson public pronouncements about the deal was that Michel would now have, for the first time, effective control of the three separate houses of Lazard. The financial press, though, picked up on the import of the announcement.
BusinessWeek
viewed the deal as Michel "finally exorcising Meyer's ghost." What's more, the consensus seemed to be that Michel had accomplished something--the reunification with London--that Andre simply could not have or would have had no interest in trying given his general disdain for Lazard Brothers, despite his ownership stake and his board seat. Indeed he had been to London only once after World War II, convinced that the British had somehow been responsible for the collapse of France in 1940. "It was Michel's doing," Felix said at the time. "I don't think Andre could have done it." Added Michel: "Already I feel a fantastic current of interchange between the firms. It's rather amazing. There's much more openness and less secrecy."

But in a potential harbinger of trouble, Thomas Manners, then a vice chairman of Lazard Brothers, told
BusinessWeek
he had his doubts about how easy it would be for his colleagues in London to adapt to the fact that their firm was no longer a wholly owned subsidiary of a respected British institution but was instead under the control of a Frenchman, who also happened to be the last remaining scion of the founding families. "I wouldn't be telling the truth if I didn't [say I] have some concerns," he confided. "The American system involves a harder sell than I would like to adopt. Sometimes American attitudes work well in this country. Sometimes they don't."

Human beings instinctively resist change. And for M&A bankers, who are so heavily invested in maintaining the status quo, that instinct is calibrated at a level far higher than the norm. But there was no denying, by the mid-1980s, that Michel's leadership was transforming Lazard. Andre's stifling, autocratic style, which had led the firm to drift aimlessly during the final years of his long illness, had given way to Michel's reign of charmed and enlightened imperialism. "You kiss Michel's ring in this firm" is how one Lazard "insider" explained it to the
Wall Street Journal.
"He's as much an absolute ruler as the old man was, just in a different way. Michel has better manners. He's an iron fist in a velvet glove. Meyer was just an iron first." Michel had shown an eagerness to pursue new business lines--for instance, Mezzacappa's extremely profitable capital markets effort, Zarb's international advisory group, and municipal finance underwriting--and to revitalize older ones, such as asset management or two of Andre's favorite areas, investing in real estate and private equity. Waves of people were hired to run and staff these new efforts and to expand the older ones. This was all in addition to the bankers hired to help Felix grow the M&A advisory group, still Lazard's most important, most prestigious, and most profitable business. By 1984, the combined firm had some 1,350 employees--600 in London, 400 in New York, and 350 in Paris--a near doubling from when Michel took over in 1978.

As the firm grew and became more profitable, it was inevitable that from time to time, the press would shine a spotlight on some of the newer partners--to their ongoing peril, of course, as Felix's body language about anybody but him courting the press remained quite articulate. In July 1985,
M
, an affiliate of
W,
did a feature story with many photographs on Ward Woods, the former Lehman partner, who was becoming increasingly successful at Lazard. The article referred to Woods as "the sporty banker" and featured the preppy Andover grad hunting quail on a Texas prairie, helicopter skiing in Snowbird, Utah, and fly-fishing for silver salmon "150 miles from nowhere" in Alaska. And Michel himself began to speak of Mezzacappa in glowing terms. "I think very highly of him," he told the
Wall Street Journal
in a rare 1984 front-page profile of the firm. "When you speak of influence in the place, the greatest one is me, the next is Felix, but after that it's Mezzacappa." The fact that the same article quoted an unnamed Lazard "veteran" complaining about Mezzacappa's behavior--how he was "not above dressing down someone in public. He's a ranter, a screamer, a volatile, emotional guy"--seemed irrelevant because, this same person said, "Michel goes anywhere the dollar goes and Mezzacappa's operations have been extremely successful."