and Business Resources
DECEMBER 9, 2002
The Fallen Financier
Ken Lipper wanted to be a big wheel in Hollywood
and New York. But he may be remembered most for the collapse of
his hedge fund empire-and huge losses for the rich and famous
On the morning of Jan. 14, 2002, the Park Avenue
offices of Oscar-winning money manager Kenneth Lipper were uncannily quiet.
It was 9:30, the start of the trading day, but the fund manager and the
research director who ran Lipper & Co.'s $2.8 billion hedge fund, Lipper
Convertibles LP, were nowhere to be seen. Their desks, which stood just
a few feet from Lipper's own expansive, glass-walled office, were curiously
neat. Gone were the usual scribbled notes, crumpled papers, and half-filled
coffee cups. A phone emitted a constant, low-pitched buzz. The two men
had turned up early that morning, resigned, and left abruptly--without
any explanation. Lipper, a former New York deputy mayor, was out of the
office too that day, working in Hollywood on a film he was producing and
meeting with some of his hedge-fund clients.
Abraham Biderman, executive vice-president at the firm and Lipper's right-hand
man, was alarmed. Why had the traders, Edward Strafaci and Michael Visovsky,
jumped ship? He knew that Lipper & Co.'s longtime auditor, PricewaterhouseCoopers,
was planning its annual audit soon and would be questioning "the boys,"
as several co-workers called them, about trades they had made. Biderman
was also aware that Strafaci and Visovsky had pocketed their annual bonuses
just days before. Biderman started to panic. Soon, his worst fears were
Strafaci and Visovsky had left behind a trail of unanswered questions
about a securities portfolio that was in tatters.
It wasn't until a month later that Lipper dropped the bomb on his investors,
many of them his famous and powerful friends from the worlds of entertainment,
politics, and Wall Street--such as actor Julia Roberts, Walt Disney (DIS
) CEO Michael D. Eisner, Senator Ernest F. "Fritz" Hollings (D-S.C.),
the family of financier Henry Kravis, and publishing and real estate tycoon
Mortimer Zuckerman. In a Feb. 20 letter to investors, Lipper disclosed
that Lipper Convertibles had lost "in the neighborhood of 40%" of its
value, or about $315 million, in 2001, instead of the 7.7% gain the firm
had reported near the end of the year. The hit to Lipper's $4 billion
empire of money, hedge, and mutual funds was so serious that it would
eventually force the 16-year-old firm under.
Lipper & Co. is now liquidating all of its hedge funds and mutual funds.
It has also sold its $500 million high-yield-bond business because of
the debacle. The firm has acknowledged that it is being investigated by
the Securities & Exchange Commission. Sources say that the FBI is also
conducting an inquiry. If the government pursues a case, Lipper could
be charged with failure to supervise his traders or even with fraud--and
if he is found liable, it could cost him his career in the securities
industry. If criminal charges are upheld, he could possibly land in jail,
say sources close to the SEC probe.
Ken Lipper's fall epitomizes a tumultuous chapter on Wall Street. He was
a creature of the times--at home in the "greed is good" precincts of Wall
Street and comfortable running with a fast Hollywood and Manhattan crowd.
The ruddy-complexioned, fuzzy-haired Lipper may be best known to some
as an adviser on Oliver Stone's 1987 movie Wall Street. But he
has also carefully crafted the image of a Renaissance man with the Midas
touch. Lipper has flitted, almost Zelig-like, through the worlds
of investment banking, politics, money management, movie production, philanthropy,
and book publishing. In the mid-'80s, he was Edward I. Koch's deputy mayor.
In 1999, he even won an Academy Award for The Last Days, a documentary
about the Holocaust that he produced with Steven Spielberg.
The flashy pitchman with his fancy connections and wealth was a magnet
for investors who never questioned his ability to manage their money.
According to one investor: "He would say, `You're investing alongside
me and my family."' Recalls another: "I was told repeatedly that the fund
was like a `high-powered' savings account." The Hollywood crowd, especially,
trusted Lipper, a former partner at both Lehman Brothers Inc. (LEH
) and Salomon Brothers (C
). Says an insider: "These were rich--but largely financially ignorant--people
who were wowed by his blue-chip Wall Street credentials."
They should have taken a closer look. Documents obtained by BusinessWeek
show that Lipper Convertibles, an arbitrage fund set up to buy the convertible
bonds of companies and simultaneously sell their stock short as a hedge,
was marketed as a conservative investment. But it held a large number
of highly speculative securities and was heavily leveraged. Described
in the prospectus as a "market-neutral" fund that aimed to make money
whether the stock market rose or fell, it wasn't hedged properly. What's
more, although auditors PwC signed off on its accounts, Lipper & Co. had
probably been mispricing the fund as far back as 1995, according to an
Oct. 3 internal report by accountants BDO Seidman LLP. Nevertheless, Steven
Silber, a PwC spokesman, says the firm does not comment on client matters.
(Lipper & Co. is not related to the fund research company Lipper Inc.,
which is part of Reuters Group PLC. (RTRSY
Some investors allege that Ken Lipper may have known about the mispricing
for months before telling his clients. An affidavit filed by one investor
on May 15 in the New York State Supreme Court says that in late 2001 Lipper
called him at home in the evening, attempting to persuade him to switch
out of the troubled convertible arbitrage fund into a new distressed-securities
fund. "In my opinion, it's almost inconceivable that Lipper--who had millions
of his own dollars, as well as his family's money, tied up in the fund--didn't
know about any of this stuff sooner," says Leslie Akins, a lawyer for
one of Lipper's investors. Biderman says Lipper was "absolutely, categorically
unaware" of any mispricing prior to Strafaci's and Visovsky's departure
and the resulting internal investigation. Lipper had tens of millions
of his own money in the funds, say sources.
Lipper, who declined numerous interview requests by BusinessWeek,
has maintained his innocence in letters to investors, at first blaming
the demise of the fund on market woes and "the extraordinary combined
severity of 2001 events." But he also pointed a finger at his traders,
Strafaci and Visovsky, saying that their abrupt exit led the firm to conduct
its own investigation, which concluded that "a more cautious valuation
was warranted." In a follow-up letter on Mar. 26, Lipper told investors
the fund had fallen 47% since Dec. 31, 2000.
Some of Lipper's powerful friends support him. Says John H. Gutfreund,
former CEO of Salomon and Lipper's boss back in the late '70s: "I don't
think I would blame this on Kenny. He had the wrong guys running the fund."
Biderman says: "Lipper absolutely, categorically was not aware of any
of the fund's problems." However, one investor's lawyer sarcastically
labels Lipper's explanations as possibly "another Oscar-worthy performance."
And Strafaci rejects Lipper's claims. "We don't bear any responsibility
at all," he says. "Clients have to go to Ken Lipper if they're mad--he
was the CEO." Visovsky didn't return phone calls.
Many of his investors are furious. At least two--Race Rock Corp., a private
investment firm, and Mesorah Heritage Foundation, a Jewish charity--have
filed suits in the New York State Supreme Court and the U.S. Bankruptcy
Court in the Southern District of New York, respectively. Race Rock's
suit, which sought details of the fund's investments, alleged that in
the months after the valuation bomb was dropped, the company's strategy
was to "delay, evade, conceal, deceive, and finally refuse" to give out
information. Lipper & Co. subsequently supplied some of the requested
On Oct. 4, Lipper & Co. sent a distribution plan to investors for the
liquidation of Lipper Convertibles. Many are hopping mad because, they
say, the plan favors those who entered the fund recently over longer-term
clients. Investors have filed more than 20 letters of objection to the
plan. One of them, according to court filings, is Lipper's ex-wife, Evelyn
Gruss, a respected developmental pediatrician who had kept money with
Lipper after their divorce in 2000. A hearing in the New York State Supreme
Court, originally scheduled for Dec. 5, was postponed until Jan. 7. "You're
going to see more lawsuits fly after the hearing," says an insider. "This
could ruin Ken Lipper."
Already, Lipper is reeling from personal financial woes. His publishing
venture with Viking Books, the Lipper/Viking Penguin Lives Series, in
which renowned authors such as Larry McMurtry and Jane Smiley wrote biographies
of historical luminaries such as Crazy Horse and Charles Dickens, started
to unravel this summer when Lipper stopped funding it. His pal Roger Altman,
a former deputy Treasury secretary who now runs an investment banking
boutique, later stepped in as a white knight to keep the critically acclaimed
project going. Marshlands, Lipper's 30-acre spread in Southampton, N.Y.,
which he bought for around $9 million after his divorce, was put on the
block last summer for $18 million. The house--which Lipper was in the
middle of renovating and which has features such as a boat launch underneath
allowing direct access to a speedboat--later sold for $10 million.
Next to Lipper's sizable bank accounts, the glitterati he hobnobbed with,
such as Spielberg and Robert DeNiro, were his biggest assets. He adroitly
used his impressive credentials and fancy connections to attract big money
to his firm, some sources say. "His connections were like gold to him,"
says a longtime friend. Lipper's investors were strictly A-list, too.
Sources say that, in addition to Roberts, Eisner, Hollings, and Zuckerman,
the roster included Lipper's pal William J. McDonough, chairman of the
New York Federal Reserve; actor Danny Aiello; Italy's Agnelli family,
of Fiat fame; various entities of the Tisch family, owners of Loews Corp.
(LTR ); and some members
of the Rothschild banking family. Other than Kravis, who says he withdrew
from the fund before the losses occurred, none would comment. A lucky
few had invested in Lipper's offshore convertibles fund, which suffered
only 10% losses.
Hollywood retirement funds, such as the Motion Picture Industry Pension
Plan and the fund for Creative Artists Agency, had at one time invested
with Lipper, along with several religious charities and educational institutions,
according to marketing materials obtained by BusinessWeek. Trust
money for Lipper's four daughters is tied up in the fund, say sources.
Ed Koch, a former investor, says he was lucky enough to withdraw his money
before Armageddon came. "Clearly, there are people who have suffered large
losses. It's all very sad. I'm sure this has hurt Ken personally--his
pride as well as his finances," he says.
Critics say they believe Lipper, who pocketed a standard-yet-hefty 20%
hedge-fund performance fee, didn't seem sufficiently involved in whether
the money was properly invested. "It seems Lipper was basically asleep
at the wheel," says a fund-of-funds manager. Others are harsher. Says
Michael Ocrant, editor of MarHedge, a hedge-fund newsletter: "Lipper
most likely knew these traders were mispricing the portfolio and juicing
the returns all along. But he was so concerned with his reputation and
impressing his celebrity clients that he allowed it, until they just got
in too deep to recover. It was pure hubris." Biderman rejects that view.
"Lipper was absolutely, totally involved in the business on a daily basis,"
he says. Asked by BusinessWeek how this could have occurred, Biderman
says: "There will be an appropriate investigation that will deal with
Lipper, a 61-year-old, boyish-looking bon vivant, grew up in the South
Bronx, the bright son of a shoe salesman. Friends say "The Lip," as he
is sometimes called ("he loves to hear himself talk," says one), is a
consummate self-starter with a fiercely competitive spirit. He attended
both Columbia University, graduating Phi Beta Kappa, and Harvard Law School
on scholarships, topping his education off with a master's degree from
New York University's School of Law. He was then a Ford Foundation Fellow
at the University of Paris.
Despite his humble origins, he made a brilliant marriage. In 1966, he
wed the daughter of oil and gas magnate and philanthropist Joseph Gruss.
Her family was one of New York's richest, worth an estimated $500 million
when the patriarch died in 1993. The match hoisted Lipper onto the fast
track. In 1969, after brief stints at law firm Fried, Frank, Harris, Shriver
& Jacobson and the Dept. of Commerce, he joined Lehman, later becoming
one of the firm's youngest managing partners, at 32. Says writer Michael
Thomas, a former Lehman partner: "Ken has always had a knack for ingratiating
himself. Of course, Evy's money didn't hurt him, either."
In the mid-1970s, Lipper moved to Salomon, where his legal knowhow and
financial savvy made him a top dealmaker. One transaction involving Becton,
Dickinson & Co. (BD), the Franklin Lakes (N.J.) medical-products maker,
got him entangled with the SEC. In 1978, in what became known as the Midnight
Raid, Lipper and several colleagues organized a telephone stock-buying
blitz in an effort to get others to sell their BD stock at a premium,
according to SEC documents. The blitz, according to the SEC, amounted
to an undisclosed and illegal bid to take over the company. Lipper, along
with Salomon, was found by a Federal judge in the Southern District of
New York to have aided and abetted securities-law violations. The charge
could have resulted in Lipper's being permanently barred from the securities
industry. Lipper and Salomon, however, hammered out a settlement with
the SEC, without admitting or denying liability, with a promise to obey
the law in the future. The case was later terminated. In 1982, Lipper
cashed out, with an estimated $15 million, when Salomon went public.
Lipper was always fascinated by power. He once told Columbia students
that he had closely studied the literature about it, often rereading the
stories of Hadrian, Antigone, and Richard III. Politics was a natural
next step. In 1983, he became a deputy mayor, a position he held for three
years. Lipper got kudos for his tough negotiating style against various
Koch foes, such as the Port Authority of New York & New Jersey. But, says
a former political ally, "one of the things you're not supposed to do
in politics is remember personal problems with people. And people felt
that Kenny did."
For example, in 1985, allegedly owing to a personal vendetta, Lipper thwarted
real estate developer David Walentas' plans to develop the Brooklyn waterfront.
The story of Lipper's aggressive maneuvering against Walentas was the
subject of a riveting May, 1985, New York magazine cover called
"On the Waterfront." Lipper, say sources, blamed Walentas for the suicide
of a friend they had in common, J. Frederick Byers III. Byers and Walentas
had been business partners. But the sources also say Lipper may have been
using the situation in order to befriend Byers' widow, the daughter of
CBS chieftain William S. Paley, and her glitzy Park Avenue set, which
included Byers' sister-in-law Amanda Burden and her then-husband, Carter,
a businessman and Vanderbilt heir. Only since 1998 has Walentas been able
to develop the part of Brooklyn situated down under the Manhattan Bridge
overpass (DUMBO). Says Biderman: "Ken did what was in the city's best
interest, in terms of trying to keep as many manufacturing jobs in Brooklyn
Toward the end of his City Hall stint, Lipper got wind that Oliver Stone
was looking for a Masters of the Universe type to advise him on a movie
to be called Greed. Initially, he balked. But once he persuaded
Stone to be somewhat more sympathetic to the Street, he joined in with
gusto, penning some of the punchy dialogue for what became Wall Street.
He coached Michael Douglas and Charlie Sheen in their roles. He even got
to appear briefly toward the end of the film as a dealmaker in a boardroom
scene. Later, he wrote the novelization of the screenplay. (A myth has
somehow been perpetuated that he wrote the book on which the film was
Lipper fell in love with Hollywood, say friends. It was a busy time because
he had just started Lipper & Co., primarily to manage his family's fortune.
On weekends, he worked on a screenplay based loosely on his brief political
career. The movie, City Hall, which Lipper also produced, starred
Al Pacino, a boyhood friend, and John Cusack. It appeared in 1996 to tepid
reviews. That didn't deter Lipper, who was already building a bicoastal
life. Before long, he had opened an office in Los Angeles. He bought a
house in Santa Monica and hung out in Aspen, Colo. He also became a trustee
of Robert Redford's Sundance Institute in Utah, which funds and promotes
independent filmmakers. By the end of the decade, Lipper had more than
a toehold in Hollywood. He had won Tinseltown's ultimate honor--his Oscar.
Back in New York, Lipper's glitzy Hollywood lifestyle did not appeal to
his wife, say friends. Evelyn preferred a quieter existence. After the
divorce, Lipper moved from their uptown five-story house to edgier downtown.
He bought and began to redesign a multimillion-dollar West Village townhouse
(bragging that his architect was the son of I.M. Pei). Lipper quickly
became a man-about-town, dating starlets and hanging out with "the Robert
Niro crowd," according to one friend. "Here is a guy who had a midlife
crisis of epic proportions," says a longtime family friend, adding that
there is now an estrangement between Lipper and some family members.
Many people believe that Lipper's changed lifestyle, varied career, and
multiple roles had a bearing on his hedge fund's demise. "He was an absentee
landlord," says one investor. When the market continued to sour in 2001,
with numerous companies teetering on the brink of bankruptcy, Strafaci
and Visovsky--who had spent 13 years, almost their entire careers, working
for Lipper--started buying the distressed securities of companies such
as Global Crossing, Calpine (CPN
), and Kmart (KM ), according
to Race Rock's lawsuit. In particular, the two stocked up on convertible
preferreds, which can be converted into common stock at a set price. The
problem is that although those stocks act like junk bonds, paying high
dividends, their holders get little or nothing if a company goes bankrupt.
Meanwhile, Lipper's marketing materials stated that 70% of its securities
were investment grade. Some investors estimate that more than half of
the portfolio consisted of risky securities. Strafaci disagrees: "The
issues were all appropriate and standard for a U.S. convertibles portfolio."
Adds Biderman: "They may have been illiquid securities, but not speculative
in that they were fly-by-night companies."
The Strafaci-Visovsky duo had been lowering credit quality to pump up
the yield, according to Mark Friedman and Adam Stern, the managers called
in to take over the portfolio after they left. What's more, the fund's
stock hedges weren't nearly enough to offset losses on the bonds--especially
as interest rates and stock prices fell in tandem, according to sources.
Says Charles Gradante, president and CEO of Hennessee Group LLC, a hedge-fund
advisory and research firm: "Although [Lipper's fund was] classified as
a hedge fund, Lipper often didn't hedge his convertible bond exposure."
That wasn't all. Most fund managers use an independent third party to
value--or "mark to market"--the seldom-traded securities every day. But
the Lipper portfolio was rarely valued, and Strafaci and Visovsky did
it on their own. "Few legit players do this themselves. It's almost a
recipe for fraud," says the chairman of a respected money manager who
also runs a convertible arbitrage fund. Biderman, along with another executive
vice-president, Stephen Finkel, signed off on the valuations, according
to Strafaci. Biderman claims many hedge funds mark their securities internally.
Biderman and Lipper had met in the Koch Administration, where Biderman
was finance commissioner and later housing commissioner. Biderman was
the closest to what the traders were doing, say insiders, but he had scant
knowledge of convertible arbitrage. "It was the responsibility of Lipper,
Biderman, and Finkel to have the fund officially audited. Abe and Steve,
especially, were a very intimate part of the process," say Strafaci. Biderman
says the funds were officially audited. (Strafaci told BusinessWeek
that he and Visovsky were starting their own convertible arbitrage fund.)
Lipper's friends say the events of the early part of the year threw Lipper
into deep distress and that he dropped out of circulation. He was rarely
seen at favorite haunts, such as the Council on Foreign Relations or the
white-shoe Century Assn. "Kenny has been through emotional hell," says
an old friend. In the late summer, however, Lipper resurfaced, lunching
with Koch at Midtown Manhattan's San Pietro--known, as one critic puts
it, for its "noisy power lunch." Although Koch denies it, some speculate
Lipper had met up with his old mentor for some career advice.
He may need it. Some investors want to remove him as the liquidating trustee
of Lipper & Co. "How can someone who has possibly committed fraud and
almost certainly breached his fiduciary duty act in the best interest
of his investors?" asks one investor. Others are incensed that Lipper's
distribution plan doesn't require him to give back any of the millions
in performance fees, based on grossly inflated valuations, he collected
for years. "He's paying himself for losing investors' money," says Mark
Ressler, a lawyer for several investors. Other attorneys in the case say
there's little doubt that investors will file damage suits against Lipper
and possibly against PwC. Says PwC's Silber: "We see no reason why we
should be sued."
Worse for Lipper is that his painstakingly crafted image may be irrevocably
tarnished. As a broker in the movie Wall Street says, in a line
Lipper might well have written: "We're all just one trade away from humility."
By Marcia Vickers
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