Revenge of Solomon: Lazard Frères Fights His Bitter Lawsuit

With his Harvard Ph.D., his patrician manner and his partnership in Lazard Frères & Company, Arthur Solomon didn’t have trouble getting people to part with their money. As head of Lazard’s real estate fund group, he was something of a high priest to such blue-chip corporations as AT&T, Chrysler and General Motors, investing billions of their pension dollars in California strip malls, New Jersey office parks and senior housing projects.

But on April 8, Steven Rattner, Lazard’s deputy chief executive in charge of the firm’s U.S. operations, summoned Mr. Solomon into his office high above Rockefeller Center. It was the end of Mr. Solomon’s 11-year career at Lazard and the beginning of a legal battle so unseemly it has astonished many Wall Street observers.

Mr. Rattner was concerned about a $1.5 billion investment fund under Mr. Solomon’s management that suffered a $400 million decline in its first 11 months. He had tried to nudge his real estate chief quietly out the door. But Mr. Solomon spurned his overtures. Mr. Rattner had had enough. He informed Mr. Solomon that he was fired “for cause.” It was an abrupt departure that was toasted by some of Mr. Solomon’s former colleagues.

Mr. Solomon’s response: an arbitration suit crafted in tabloid-ready prose accusing the venerable 151-year-old Wall Street investment bank of breach of contract, defamation and other juicy charges. In legal papers filed with the New York Stock Exchange, Mr. Solomon says his “ouster from overseeing the funds that he has so carefully cultivated and groomed over the past decade is nothing short of a high-class hijacking.” He also dismisses Mr. Rattner, a former reporter for The New York Times , as “journalist-cum-investment banker” whose “unbridled personal ambition and elbows-up demeanor” has caused an exodus of other partners–an obvious reference to the resignation of the firm’s famed rainmaker, Felix Rohatyn, in 1997, after a much-publicized feud with Mr. Rattner. Mr. Rohatyn left Lazard to become U.S. Ambassador to France.

Lazard has been reluctant to shed much light on the reasons for Mr. Solomon’s ouster, citing only his differences with the firm over the management of the Lazard Frères Strategic Realty Investors II, his troubled investment fund. Mr. Rattner, who recently stepped down from his position as deputy chief executive officer as part of a major restructuring of Lazard’s New York, Paris and London houses, didn’t return calls.

A spokesman for Lazard declined to discuss the matter with The Observer , except to say its former partner’s claim is “without merit.” Mr. Solomon also declined to comment.

But clearly his firing is about more than just financial losses. After all, Mr. Solomon is not the only high-flying investment banker who crashed and burned after a dip in the stock market last August led many investors to seek safer places for their money than speculative office tower and shopping mall deals.

Mr. Solomon’s friends say Lazard treated him poorly. “For 30 years, he’s made people a lot of money,” said Bob Barnum, a member of the fund’s advisory committee and a longtime friend of Mr. Solomon. “You talk to anybody about Art. Integrity will always be a word they mention.”

Others were surprised by Mr. Solomon’s firing–but for entirely different reasons. A group of his former associates went out for drinks after the news circulated on Wall Street. This was no wake, however. As they sipped their cocktails and traded stories about Mr. Solomon, the celebrants agreed on one thing about his fall from grace. “We couldn’t believe it didn’t happen sooner,” said a former member of Lazard’s real estate department.

A Gold-Plated Résumé

One thing is sure: Mr. Solomon, 59, has a million-dollar résumé. After growing up in New Haven, Conn., he attended Brown University and received his doctorate from Harvard in economics and planning in 1971 after a stint in Washington, D.C., as intergovernmental affairs for the Johnson Administration.

Mr. Solomon spent the next decade at the Harvard-Massachusetts Institute of Technology Joint Center for Urban Studies where he served for a time as director. But it was clear to colleagues like Bernard Frieden, now an associate dean of the M.I.T. school of architecture and planning, that his heart lay elsewhere. “He said to me he really wanted to be on Wall Street,” Mr. Frieden recalled, “because that was where the action was.”

En route to Wall Street, Mr. Solomon labored for Sears Roebucks’ real estate group, the Federal National Mortgage Association, and the Krupp Companies, a Boston-based home builder and loan syndicator. Mr. Barnum worked with Mr. Solomon at all three places and marveled at his ability to explain difficult financing concepts to people who were less than experts.

In 1986, Mr. Solomon was hired as head of the real estate department at Drexel Burnham Lambert, where he continued to impress people with his smooth sales pitch and his hiring of talented young associates from the Ivy League. But the more some of his bright young hires listened, the more they wondered if there was less to Mr. Solomon than met the eye. A former Drexel employee recalled a meeting in which Mr. Solomon astonished everybody by misusing standard industry jargon. A Drexel associate suggested that the firm should finance a transaction only if it involved properties that were owned “fee simple”–a commonly used real estate phrase meaning the ownership of both a building and the land underneath it.

“Art turned to my colleague,” recalled the former Drexel employee, “and said, ‘Yes, it’s good that we are going to keep Drexel’s fee simple, but why don’t you explain to him how the deal’s going to work.'”

“He was viewed as a buffoon,” said another member of Drexel’s real estate department.

By 1989, the criminal investigation of Michael Milken was tearing Drexel apart. Mr. Solomon surprised his detractors by leaping to Lazard, where he prospered in a more rarefied atmosphere.

He certainly played the part of a Lazard potentate with his tasteful gray comb-over and aloof manner. But there were still uncomfortable moments when Mr. Solomon seemed to be shooting from the hip–and missing. Said a former member of the Lazard real estate department: “I remember him talking about the ‘Nordstern’ shopping center they were buying. I said, ‘What the hell are you talking about, Art?’ It was Nordstrom’s. But he didn’t know what the hell he was talking about.”

It didn’t much matter. Along with doing some high-profile merger and acquisition deals, Mr. Solomon launched a group of investment funds when the real estate market was still in the doldrums and there were bargains to be had. When the market rebounded, Mr. Solomon was able to generate healthy returns–in some cases, 30 percent–for his investors. So it wasn’t particularly surprising last April when he announced he had raised $1.5 billion for the Lazard Strategic Realty Investors II from such clients as the I.B.M. Retirement Fund, the General Motors Investment Management Corporation, the New York State Common Retirement Fund and the Government of Singapore. Suddenly, though, everything seemed to go terribly wrong.

Mr. Solomon bet heavily on underperforming publicly traded strip mall and office park companies just as the market for such stocks went south. Worse, he got caught up in the hype emanating from the “assisted living” industry, an increasingly popular housing alternative for elderly people.

Lazard sank nearly $200 million into ARV Assisted Living Inc. of Costa Mesa, Calif., and installed a new chief executive officer. But then their chosen chief executive ended up suing Lazard when he discovered the firm was also investing millions in two potential competitors–Kapson Senior Quarters Corporation and Atria Communities Inc.–and planning to merge the two. As Lazard slugged it out in court with ARV in California and Delaware, the assisted living company’s stock plunged nearly 80 percent.

Then there are the problems that are just coming to light concerning the $1 billion Kapson-Atria merger. In May, Glenn Kaplan, Kapson’s chairman, filed a Federal lawsuit against Lazard to keep the firm from pursuing a plan that he alleges would minimize his role in the combined companies. Naturally, there were tensions between Mr. Solomon and his Lazard superiors over the fund’s management. Mr. Solomon’s solution: He approached Lazard in January with a plan to take the funds out of the firm. However, Lazard’s response was somewhat frosty.

Nor was the firm thrilled when Mr. Solomon took the unorthodox position that his fund’s performance should be based not on the depressed stock prices of its investments, but on the value of each company’s real estate holdings and other assets. That, of course, would have boosted the fund’s sagging numbers and saved him some embarrassment.

But sources have told The Observer that John Moore, the real estate group’s chief financial officer, would have none of it.

For his part, Mr. Solomon says in his legal papers that the Strategic Realty Investors’ investments were approved by Lazard’s investment committee and accuses the firm of concocting the valuation issue to keep him from leaving with his funds: “In fact, several members of the real estate group were specifically instructed ‘to make the performance numbers look as bad as possible.'” A spokesman for Mr. Solomon said he also disagrees that the fund is down $400 million.

As those issues festered, Mr. Solomon’s relationship with Lazard continued to unravel. In April, the firm fired one of Mr. Solomon’s key lieutenants and accepted another’s resignation. Mr. Rattner scheduled an April 8 meeting with Mr. Solomon to discuss an amicable separation that would allow Mr. Solomon to stay until the end of the year.

Mr. Solomon had a surprise for his boss. He invited along some unannounced guests who were not pleased with the personnel turmoil in the fund: Tom Dobrowski of the G.M. Investment Management Corporation, John Lane of the Pennsylvania Public School Employees Retirement System, and Barbara Cambon, an influential pension fund investment adviser.

The meeting did not go well. According to Mr. Solomon’s suit, the investors barraged Mr. Rattner with “pointed questions” about the upheaval in the real estate department. Mr. Rattner did not appreciate being ambushed. Immediately after, he told Mr. Solomon he was through at Lazard. But Mr. Solomon wasn’t about to go quietly. He hired white-collar defense attorney Stanley Arkin.

The question is, however, will the legal case blacken Mr. Solomon’s reputation or restore it? Friends say his phone is ringing off the hook with job offers. But the former Lazard partner has other things on his mind. He’s out for blood.