The Provident Securities and Investment Company, a lender to a Steinberg family trust, whose trustees include Reliance Group Holdings Inc. chairman and former chief executive Saul Steinberg and his younger brother, Reliance vice chairman and former president Robert Steinberg, sold 1,040, 207 shares of Reliance Group Holdings between May 11 and May 15 of this year, just 11 to 15 days prior to a May 26 announcement that Reliance would be sold to Leucadia National Corporation for $293 million in stock and $735 million of assumed debt.
The shares of the beleaguered company, which were pledged by a Steinberg family trust as collateral for a loan on Sept. 17, 1999, were sold by the bank at a median price of $2.39 per share. They have since tanked to 19 cents per share in the wake of the announcement and subsequent cancellation of the Leucadia deal, as well as several ratings downgrades and a flurry of class-action lawsuits.
The fact that nearly $2.5 million of soon-to-be-nearly-worthless stock was unloaded onto the public market two weeks before the announcement of the Leucadia deal seems outrageous, if not plain stupid, and begs that old question-what did people know, and when did they know it?
With the Reliance shares valuedat$2.55 a piece in the Leucadia transaction announced May 26, it would seem that whoever knew about the deal knew that was about as much as they could expect to get for their stock, and that the share price had nowhere to go from there but down. This was, after all, not a good-news deal-the shares had once sold for as much as $19-but rather a last-resort fire sale, with no apparent upside.
Sure enough, after the Leucadia deal was announced on May 26, the Reliance shares, which had been hovering between $2.50 and $3.00 per share for weeks, rose to $2.56 on the day of the announcement-a penny higher than Leucadia was to pay-then immediately began a nine-week swan dive to their current price of 19 cents per share. While a May 10 earnings announcement that Reliance had had a bad first quarter caused its price to drop moderately, it partially recouped within a few days. But the Leucadia announcement precipitated a stock slide that didn’t turn around.
A Reliance spokesman maintains that since the shares were sold by a bank, not an insider, no insider trading could have occurred. But it seems strange that the bank would sell the shares so close to the announcement of the Leucadia sale. Did Provident simply sell the shares after the May 10 earnings announcement without talking to the trustees, or did the trustees, perhaps knowing about the imminent Leucadia deal, instruct the bank to sell the shares in order to reduce the amount they owed?
Forty percent of Provident, according to its chief financial officer, is owned by the Carl Lindner family. Carl Lindner, like Saul Steinberg, was a corporate raider who acquired an insurance company, then used it to assume major equity positions in other companies. Mr. Steinberg and Mr. Lindner’s relationship dates back to the 1970′s, when Mr. Lindner, through his holding company American Financial Corporation, was the second-largest shareholder of Mr. Steinberg’s Reliance. Both Mr. Steinberg and Mr. Lindner were early and devoted customers of the 80′s junk-bond king, Michael Milken.
Chris Carey, chief financial officer of Provident Financial Group, refused to comment on whether the Steinberg trustees instructed the bank to sell the shares. He said, “People pledge stocks for loans all the time and sometimes, as the stock goes down, the stock gets sold to pay off a loan. This happens every single day. It has nothing to do with Leucadia or anything else. We certainly wouldn’t be privy to any information like that.” The Reliance spokesman said that the trustees did not instruct the bank to sell the shares.
In any case, the Leucadia sale and its subsequent cancellation is a sad postscript to the even sadder story of a high-flying corporate raider forced to come down in the world. Saul Steinberg, who with his wife Gayfryd personified the excesses of the 80′s as the reigning king and queen of “nouvelle society,” has sold his home and his prized possessions as the company that helped make him a billionaire falls to pieces.
While some of his counterparts have started twilight careers in philanthropy and public service, Saul Steinberg has scrambled to stay afloat, trying to find a buyer for his company while hawking his Park Avenue triplex penthouse with 34 rooms and 15 wood-burning fireplaces. The penthouse, once the home of John D. Rockefeller, was sold with its contents for $37 million to the financier Stephen Schwarzman. Mr. Steinberg sold his collection of 61 Old Masters paintings-so vast that Gayfryd had reportedly once hired a Metropolitan Museum cataloguer to keep track of them-for $50 million. Mr. Steinberg was also faced with the loss of his Louis XV and XVI period furniture, Chinese export porcelain, Sèvres biscuit figures, Royal Copenhagen fish plates, a Regency silver tea service and scores upon scores of other furniture and knickknacks. Sotheby’s sold a collection of the Steinbergs’ belongings for a reported $12 million.
Saul Steinberg was born in Brooklyn in 1939, the son of a Brooklyn plastics manufacturer. He enrolled in the University of Pennsylvania’s Wharton School of Management at 16. His grades weren’t good, but he was already starting to make money: During his senior year, he acquired 3 percent of a rubber company, threatening a proxy fight if its management did not diversify its holdings. The company bought his shares back at three times what he paid for it.
Mr. Steinberg bought Reliance in 1968, leveraged it with Michael Milken’s junk bonds, and used it to launch greenmailing attacks against the likes of the Walt Disney Company and Lomas & Nettleton Financial Corporation. He even owned a piece of the New York Times Company back in 1980. At that time, Times Company executives, worried that he might demand a seat on the board, invited him to lunch to politely express their displeasure with his 2 percent investment. In the course of the meal, during which Mr. Steinberg threw back two martinis, a Times Company attorney made the mistake of calling Mr. Steinberg “Mr. Silverman.” Mr. Steinberg reportedly left the dining room in a huff, and immediately bought 350,000 more shares-increasing his stake to more than 5 percent.
As Mr. Steinberg became increasingly feared in corporate boardrooms, he and his wife Gayfryd became forces to be reckoned with on the social scene as well. Mr. and Mrs. Steinberg embraced the Metropolitan Museum of Art, PEN and the United Cerebral Palsy Association as causes. Their parties became increasingly ostentatious: They spent $3 million on Mr. Steinberg’s daughter’s 1988 wedding to Jonathan Tisch at the Metropolitan Museum of Art. Mr. Steinberg flew in a specially outfitted 727 aircraft; they usually cost $5 million to run.
To feed this gluttonous lifestyle, Mr. Steinberg and his family systematically raped and pillaged Reliance, an old-line insurance company, over the course of 30 years. Mr. Steinberg took Reliance private in 1982, holding it until Reliance became a public company in 1986. It had a secondary offering in November 1993. Since then, the Steinbergs have taken salaries, bonuses and dividends of nearly $165 million-not to mention a range of services with significant fees. And in the face of Reliance’s deteriorating condition-for the most part the result of a corrupt, incompetent management-the Steinbergs appear to have sold more than four million shares of Reliance, netting at least $34 million.
Between February 1994 and March 2000, Mr. Steinberg unloaded at least 1.5 million shares for what looks to be $15 million based on median price points. His brother, Robert Steinberg, got rid of more than 2 million shares for an apparent $12 million; his sister Roni Sokoloff disposed of 550,000 for about $5 million; and his other sister, Lynda Jurist, unloaded 200,000 for approximately $1.5 million. Bruce Sokoloff, Roni’s husband and a senior vice president of the company, sold 100,000 shares for $350,000.
So while the Steinberg family-between the stock, the salaries and the dividends-came away with nearly $200 million, the shareholders are now left with practically nothing.
This latest sale of stock, by the bank on behalf of the trust, did not involve buying shares in advance of a buyout with the expectation that the stock would go up. If anything, it was an attempt to get out while there was still the chance to see a few dollars off of one’s holdings. Though the trust’s million shares were sold at a 6 percent discount to the Leucadia sale price of $2.55, this was simply a common-sense move: The loss of 16 cents per share is next to nothing compared to the risk of losing much more after the sale was announced.
Reliance had a net loss of $310 million in 1999 due to dwindling prices for commercial-property and casualty insurance and disputes over workers’ compensation policies. The company owes more than $700 million, including $237.5 million in bank debt due in August, $291.7 million in bond debt due in November, as well as $172 million in bond debt due in 2003. Mr. Steinberg stepped down as chief executive of Reliance in February after suspending the company’s cash dividend to shareholders and announcing plans to sell Reliance’s surety business-its most profitable enterprise-for $580 million to Travelers Property Casualty Corporation. The previous November, Mr. Steinberg fired his brother Robert as president of the company. There has been a rift between the two ever since.
Between Aug. 24, 1999 and Nov. 16, 1999, Saul Steinberg pledged 8.7 million Reliance shares as collateral for a loan from Provident. At the time, those shares were worth about $35 million. On June 23, 2000, the bank sold 3.35 million of those shares for approximately $5 million, and on July 7, the bank sold 580,000 of those shares for $544,500. Between June 2 and June 30, 2000, Roni Sokoloff sold nearly 1.5 million shares for about $1.6 million, while her husband, Bruce, sold 200,000 shares for about $380,000. A Reliance spokesman said that these shares, like the trust’s shares, were sold by a bank. And on June 19, the company announced it would sell its financial products, excess and surplus and inland marine business to Hartford Financial Services Group Inc. for an undisclosed amount.
Though not a great deal for shareholders, the Leucadia transaction would have been a sweet deal for Saul Steinberg. At the time the deal was announced, Mr. Steinberg stood to see about $90 million from his 35 million share holdings. But on the day of the announcement Standard & Poor’s placed Reliance on “credit watch.” Then on June 8, A.M. Best Company downgraded its rating on Reliance, citing the company’s unfavorable operating trends, “worse-than-expected” performance and weak balance sheet; the downgrade raised concern over whether the Leucadia deal would be completed.
On July 14, Leucadia backed away from the transaction, and on the same day, S.&P., Fitch and A.M. Best further downgraded their ratings on the company, citing concerns about liquidity and the company’s ability to refinance its debt.
On July 19, Leucadia officially terminated the merger agreement with Reliance, with analysts speculating that Reliance’s asset situation was worse than Leucadia had anticipated or that the firm couldn’t garner enough reinsurance to cover Reliance’s mounting losses. The rating agencies subsequently downgraded the company even more.
Now Reliance could find itself facing bankruptcy in the not-so-distant future, with a $700 million debt on the parent company that needs to be paid down, and the threat of several costly class action lawsuits. Given its high debt load and the fact that the company’s most profitable business was recently sold, another bank loan would appear to be out of the question .
To make matters worse, Reliance and its directors are now facing class action lawsuits from shareholders represented by several firms, alleging that Reliance misrepresented the company’s financial position between February 8, 1999 and May 10, 2000, thereby inflating the price of the stock to as high as $11.00 per share before it crashed back down again.
According to a complaint filed in the United States District Court for the Southern District of New York by the law firm Milberg Weiss Bersh and Hynes & Lerach, the company issued a press release on February 8, 1999 announcing quarterly and annual results which, along with subsequently released financial statements, failed to reflect on the income statement expected losses in excess of $150 million related to business written through Unicover Managers Inc., a third-party manager of reinsurance pools with whom the company had entered into reinsurance arrangements as part of a workers’ compensation insurance facility. Under those arrangements, the company reinsured workers’ compensation policies, the occupational accident portion of which was in turn reinsured by other reinsurance companies.
According to the complaint, the company made false and misleading statements in S.E.C. filings, stating that its reinsurance contracts were valid and that it expected to recover the full amount of coverage from them, when letters from various life insurers to the company during that period indicated that this was not the case.
Even after Reliance did disclose the content of some of those letters in subsequent filings, the complaint alleges, the company failed to fully acknowledge the adverse affect on the company’s financial condition that the Unicover workers’ compensation issue implied. It wasn’t until May 10, 2000, the complaint alleges, when the company announced an operating loss of $36.5 million for the first quarter of 2000, that the whole truth came out. In the meantime, the complaint alleges, “Defendants’ publicly issued statements made were false and misleading, in that those statements failed to disclose that the Company’s business operations had become substantially impaired; that the Company had lost significant clients and personnel; that the Company’s cost of capital had increased; that the Company’s goodwill had been impaired; and that the defendants had reason to believe that the Company was sustaining a loss and that such loss would continue throughout the quarter.”
The complaint also alleges that between March 1 and March 3, 2000, “several Reliance insiders privy to the truth concerning the Company’s true financial condition sold thousands of shares of Reliance stock.” According to the complaint, between March 1 and March 3, Lynda Jurist, Mr. Steinberg’s sister, sold 100,000 shares of company stock for $500,000 and Howard Steinberg, the company’s chief operating officer who is not related to Saul Steinberg, sold 17,000 shares for $74, 740. According to the complaint, between March 6 and March 8, Howard Steinberg sold 10,000 for $41,300; Bruce Sokoloff, Mr. Steinberg’s brother-in-law, sold 100,000 shares for $350,000, and Mr. Steinberg’s sister Roni Sokoloff sold 100,000 shares for $350,000.
A Reliance spokesman said the “suit is without foundation and that the company’s disclosure with respect to Unicover was scrupulous.”
A Milberg Weiss spokesman said that the case probably won’t get underway until September. In the meantime, Reliance shareholders are left holding their two-bit shares, wondering if the company’s insiders ever had anyone’s interests at heart but their own.