The Milstein Fight: Philip Sues Howard for Diverted Funds

The nasty power struggle between cousins Philip and Howard Milstein over their family’s real estate and banking empire is getting uglier, with new allegations that Howard Milstein used funds from family assets he controlled-the Douglas Elliman residential real estate brokerage and the Milford Plaza Hotel-to finance ventures into sports, real estate and the Internet.

On the heels of a court-ordered audit of Douglas Elliman’s books, which found more than $90 million in interest-free loans from the company to Howard Milstein’s private ventures, Philip Milstein has asked a Delaware judge to strip his cousin of ownership of the businesses, placing them in the hands of a family trust.

The lawsuit marks a dramatic escalation of the family feud, which has paralyzed one of the city’s richest families, with holdings worth a reported $5 billion. And along with recent filings in another case over the Milford Plaza, it gives the fullest answer yet to the questions that have lingered over the whole mess since it burst into public view last spring: What caused a long-standing division of power between the two sides of this powerful New York family, headed by brothers Paul and Seymour Milstein, to break down? And why now, with the family’s investments more profitable than ever?

Philip Milstein, Seymour’s son, says he has gone to war to keep Howard Milstein from doing to the rest of the family businesses what he did to Douglas Elliman. Philip Milstein says Howard Milstein has been attempting to liquidate pieces of the family assets he controls, freeing himself and his younger brother, Edward, to pursue their own business ventures. Howard Milstein sold Douglas Elliman last year for about $70 million, a substantial profit-but not with the permission of the company’s stockholders, all family members, and not before he used the company as a piggy bank, Philip Milstein says. An audit “confirmed Philip Milstein’s growing suspicion that the defendants had been engaged in systematic mismanagement, waste of corporate assets, self-dealing and appropriation of money belonging to the companies for their private ventures,” according to a complaint filed in Delaware Chancery Court in July. A lengthy auditor’s report, filed along with the lawsuit, purports to show that Howard Milstein raided the cash-rich business to finance, among other investments, his personal stake in the New York Islanders hockey franchise, his unsuccessful bids to buy the NFL’s Cleveland Browns and Washington Redskins, and his purchase of a half-share of the Chicago commercial brokerage, Miglin-Beitler.

Howard Milstein subsequently renamed the Chicago brokerage Douglas Elliman-Beitler and expanded into New York, operating free of his family’s control.

On paper, all the loans appear to have been paid back, though the auditors said Douglas Elliman’s bookkeeping was so sloppy that it was impossible to know for sure. Philip Milstein is not claiming that any money was stolen. But he has now turned his attention to the Milford Plaza Hotel, where he expects auditors to find similar “misconduct,” according to an affidavit filed in New York State Supreme Court in Manhattan.

“None of the allegations are true,” said James Quinn, an attorney for Howard Milstein. Mr. Quinn has yet to file an answer to Philip Milstein’s complaint and said he had no further comment. In response to previous suits, Howard Milstein has pointed to the flush balance sheets of the companies he controls, and has contended that Seymour and Philip Milstein have thwarted his efforts to sell, develop or otherwise profitably dispose of family assets.

The lawsuits, he suggests, are part of an effort to smear him and gain leverage in an overall dispute over the control of family assets, including a property on 42nd Street at Eighth Avenue, and Emigrant Savings Bank, which Philip Milstein heads. Howard Milstein and his father, Paul, are suing to have him removed for alleged mismanagement.

Paul and Seymour Milstein have been meeting periodically to work out a “global resolution” to the disputes, according to court documents. Several sources close to the Milstein family say John Zuccotti-a former deputy Mayor and family lawyer who is now a top developer himself-is mediating the talks.

Recent developments, however, make a resolution look unlikely. “You may not realize this,” Howard Milstein wrote in a June 21 letter to his cousin, “but two can play the same game you’re playing.”

Philip Milstein says his suspicions were first aroused in the spring of 1998, when Howard stopped passing on financial information about Douglas Elliman. He asked his cousin to call a board meeting and was ignored. At the end of the year, he says, the company failed to distribute profits to its shareholders.

The real estate market had just entered its current bull cycle, and Douglas Elliman had netted a profit of $10 million for the year. At the same time, “no doubt related to the increase in available cash,” Philip Milstein’s suit says, Howard and Edward Milstein began chasing their owner’s-box dreams. In February, 1998, they headed a group which bought the Islanders for $195 million. (He unloaded the team this year for a $5 million loss.) Through the spring and summer of 1998, they chased the Browns. Frustrated in Cleveland, they turned their attention late in the year to the Redskins, mounting a league-record $800 million bid for the team.

After Douglas Elliman was sold, Philip Milstein sued to get access to the company’s books. A Delaware judge ruled that his cousin had “stonewalled” him and ordered the books opened to a forensic audit.

Auditors from the firm of FTI/Kahn found that while Howard and Edward Milstein were chasing sports teams, they had advanced $24.6 million to the Islanders, $1.2 million to Cleveland Sports Ventures and $5.1 million to Washington Sports Ventures, all from Douglas Elliman accounts.

Hats and Vases

The company’s chief financial officer and its office manager were sent to work on these and other projects, the lawsuit says. Everything from travel expenses to Redskins hats to Tiffany vases-wedding presents for Islanders’ players Ken Belanger, Jason Dawe, Scott Lachance and Tom Chorske-were charged to Douglas Elliman, company records show.

According to the audit, Howard Milstein also loaned company money for a number of other personal business ventures: $23 million for various real estate developments; $5.4 million in venture capital financing for two Internet start-ups, News Alert and Data.bid; $4.8 million toward a now-stalled redevelopment initiative in Niagara Falls N.Y., along with $300,000 for a Boxing Hall of Fame he plans to put there; and $1.5 million towards Douglas Elliman–Beitler.

Mr. Milstein put a law firm, Wiel, Gotshal and Manges, on a $10,000 a month retainer, though it seems the firm never did any work for Douglas Elliman (before defending the company against Philip Milstein’s lawsuits), according to the audit. And the audit detailed $5.2 million in rent and lease payments on behalf of another law firm, Constantine and Partners, along with $200,000 in payments for unspecified legal services. Mr. Milstein’s wife is a founding partner in the firm. “It is unclear,” the auditors wrote, “how or if these obligations were retired.”

In fact, the auditors said, “unusual and unconventional accounting practices” made it difficult to figure out exactly who owed what to whom. Even if all the interest-free loans were repaid, however, the auditors estimate that Douglas Elliman could have made $10 million simply by investing the money in the stock market.

To put the size of the loans in perspective, the auditors noted that over three years, Douglas Elliman paid out a total of $90 million to the brothers’ private ventures. It spent $68 million on everything else.

Howard and Edward Milstein’s pursuit of the Washington Redskins collapsed in April 1999, amid questions about the solidity of their finances. Around the same time, the brothers’ debts to Douglas Elliman reached about $15 million.

That May, Howard Milstein closed the deal to sell Douglas Elliman to the Insignia Financial Group. Philip Milstein contends that his cousins lied to Insignia and perjured themselves in forms filed with the Delaware Secretary of State by stating that shareholders had agreed to the sale. He notes that the brokerage has seen a 25 percent increase in revenues since it was sold, and wonders whether it could have secured a higher price if shopped around longer. The sale, the lawsuit says, “had everything to do with [the] need to raise cash quickly.”

Afterwards, Howard Milstein held onto several million dollars, the auditors said-including Philip Milstein’s $10 million cut-which they continued to plow into their own ventures. In November, the amount of the outstanding loans reached close to $16 million. That’s when Philip Milstein filed suit to get access to the books.

“In the months subsequent to [Philip Milstein] filing suit in Delaware in November 1999, a novel event for the partnership occurred,” the report said. “The outstanding balances due from the [Howard Milstein] ventures to the partnership were reduced as a result of funds received from unknown sources.”

Philip Milstein isn’t sure of the source of the funds, but he’s trying to find out. If the Delaware lawsuit goes forward, Howard Milstein’s numerous private ventures will likely be subjected to audits themselves as part of the discovery process. And back in New York, Philip Milstein has sued to get access to the books of the Milford Plaza Hotel.

Philip Milstein has been trying to get a look at the hotel’s financial records for months, first by asking, then by suing. A scathing exchange of letters over the summer provides an unexpurgated view of the rancor between the two sides of the family.

Nasty Letters

“I am sorry you find it necessary to harass us with useless correspondence,” Howard Milstein wrote on June 21. He went on to note that the hotel had doubled in profitability over the past five years, pulling in $21 million a year. “I hope you will think better of this silliness and see if the current initiatives to resolve the friction between our families can bear fruit.”

On June 23, Philip Milstein responded: “It is not a question of profitability (bank versus hotel or otherwise) but rather a question of accountability to your partners.”

On July 20, Howard Milstein extended an invitation to review the records “anytime after Labor Day.” Soon after, Philip Milstein sued.

In an affidavit filed in connection with that suit, Philip Milstein made his suspicions clear. “Given Howard’s pattern of conduct, I am concerned that, absent scrutiny by his partners, he may misuse the partnership’s assets or engage in [unauthorized] transactions.”

Philip Milstein also elaborated on a series of clashes with his cousin, all of them following the same pattern: Howard trying to develop or divest, Seymour and Philip trying to thwart him. At 42nd Street, Howard’s negotiations with potential tenants for a 35-story office building were quickly followed by letters to the tenants from Seymour, saying Howard was not authorized to develop the site.

In 1998, Howard negotiated a sale of the Milford Plaza for $253 million to an undisclosed buyer. On Aug. 10 of that year, his father Paul sent a memo reminding him to consult his uncle. “I wouldn’t be in such a rush,” he wrote. The next day, Seymour Milstein sent a memo of his own, written in capital letters: “Please consider this as notice that you do not have my approval.”

Seymour later relented, but by that time the opportunity had slipped away, according to a counterclaim filed by Howard Milstein. In August 1999, Howard claims, his cousin scuttled another deal, this one to lease the hotel for $18 million a year.

Howard Milstein claims Philip “maliciously sought to interfere with [the] deal with the intent to harm the partnership and particularly his cousin, Howard Milstein.” He’s asking for $250 million in damages.

At a hearing held Aug. 10, Howard Milstein’s attorney questioned Philip Milstein’s motives in bringing the suit in the first place. “The purpose of these things is to get these things into the paper, to say negative things about our client,” he argued.

Supreme Court Justice Barry Cozier ordered that Philip Milstein be allowed access to the financial record within 30 days, but threatened sanctions if he brought more “unnecessary litigation.” Philip Milstein’s auditors are currently examining the hotel’s books. Their report is expected in a few months.

Barring an unexpected breakthrough, the family now faces a series of long and embarrassing court battles. The damages the fight has already caused the Milsteins are incalculable. The 42nd Street site, which Paul and Seymour long hoped to develop, will be auctioned off sometime soon in a bidding process overseen by an impartial referee, Manhattan attorney Judah Gribetz. The family name, which Howard Milstein had hoped to burnish with his sports-team purchases, has suffered.

Worse yet, the battle may have just begun.