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FEBRUARY 9, 2004
Dynasty In Distress Billionaire Leonard Stern played hardball building his Hartz empire. Now, one son has been nailed in the mutual-fund scandal. The other has blown a major real estate deal. No wonder Dad worries about his legacy Leonard N. Stern, a legendary tough guy in business, grips his third cup of coffee in less than an hour. He percolates with intensity. One of the 100 richest men in America, who built a $3 billion-plus fortune on doggie chews, birdseed, and real estate, he is edged slightly forward on a linen-covered couch. His antique-filled, oak-paneled offices on the 26th floor of 667 Madison Ave. have pricey views of Central Park and the Manhattan skyline. Rents in the exclusive building, which he owns, are as lofty as $120 a square foot, second only to the General Motors building. It is the domain of someone who has long since arrived. Still, Stern, 65, can't seem to skirt controversy. Long gone is the sign that used to hang in his office: "Once you've got them by the balls, their hearts and minds will follow." These days, it's Stern who's feeling the pain. Stern -- "call me Leonard" -- former chairman of pet-supply giant Hartz Mountain Inc., is eager to talk. His family just can't keep out of the headlines. In September, his younger son, Edward J., 38, who still oversees the family money, became embroiled in the spreading mutual-funds scandal. Eddie, who ran the Canary Capital Partners LLC hedge fund, was the first manager to be charged by New York Attorney General Eliot Spitzer for "fraudulent" late trading and market timing of mutual funds. He continues to meet with Spitzer, says a source close to the investigation, and is dishing the dirt about mutual-fund companies he dealt with. Last year, Leonard's 40-year-old elder son, Emanuel T., known as Manny, who runs the family's real estate business, lost a $1.3 billion deal to redevelop a sports and entertainment complex in New Jersey's Meadowlands. Because the Sterns are the largest real estate developers there, the loss was a major blow to the family's pride and pocketbook. And Leonard has had his own share of headaches in recent years. A director of drugstore chain Rite Aid Corp. (RAD ) during its devastating accounting scandal, he was the target of several lawsuits, including a class action that claimed, among other accusations, that the board breached its fiduciary duty to shareholders. "I'M A TOUCHER" For Stern, whose name adorns New York University's Leonard N. Stern School of Business, nothing less than his legacy is at stake. With his dynasty in distress, he seems determined to let the world know one thing: He is an "honest man," a man of the highest ethical standards. So, he insists with tears welling in his eyes, are his sons. "If I have taught my sons anything in life, it is to have integrity -- to always tell the truth, and I believe they have," he tells BusinessWeek in an exclusive interview, his first in five years. If he hasn't taught that, he says, he has failed. Both sons repeatedly declined to be interviewed. It's not that the family fortune is in jeopardy. Leonard is chairman and chief executive officer of Hartz Mountain Industries Inc., a private company that holds mainly real estate and financial investments. (The family sold the pet-supply company for an estimated $250 million in 2000.) Hartz is the country's largest private owner of commercial property. Most of it is located in New Jersey, where Hartz owns and operates some 38 million square feet of offices, hotels, malls, and other buildings. The Sterns' real estate holdings alone are estimated to be worth as much as $2 billion. They also have an investment portfolio worth more than $1 billion. Fighting back is the name of the game, and Leonard Stern still has a sharp left hook. Just 5 feet 6 inches tall, with a tawny, sculpted face and salt-and-pepper temples, he can morph from a seductively charming gentleman -- "I'm a toucher, emotionally and physically," he says -- into a shrewd, tough-talking businessman. Leonard is no stranger to scandal himself. In the 1970s, the Hartz pet-supply business was slammed with an antitrust suit and later a federal grand jury investigation. Although Leonard wasn't personally charged, the company pleaded guilty to bribery, perjury, and destruction of documents. Leonard explains that he has always been a business pioneer, routinely taking risks and forging into areas where rules are either nonexistent or murky. Says Leonard: "You don't build a fortune like this by being a pussycat." Now, grappling with his sons' missteps puts Leonard in a heart-wrenching bind. "I brought my sons into the business to extend my working life, so I could keep my hand in the business," says Leonard. "I have put them behind the eight ball. The thought that I might, at some time, have to at the very least correct their mistakes is very, very stressful." Then he quickly adds: "But I haven't. And I never would have brought them in if I hadn't believed in them 100% -- their ability, their intelligence, and above all...their integrity." Critics say Leonard's often hardball tactics and compulsion for control created an aggressive culture at Hartz that persists under his sons. "Eddie and Manny desperately want to please Leonard," says a family friend. "At the same time, they're terrified of him." Investigators say that may help explain why Eddie stepped over the line at Canary. Eddie settled with Spitzer for $40 million in September without admitting or denying wrongdoing. Leonard says he is particularly distressed about Eddie's involvement in the scandal. "It is a sad chapter for Canary," he says. "I'm very, very close to Eddie and as helpful to him as I can be emotionally." No matter how hard he's pressed, Leonard won't reveal exactly how or when he learned of Eddie's trading practices. ("I can't go there," he says.) But two former Hartz employees believe that little took place at the company that Leonard didn't know about. "I'm sure Leonard knew [how Eddie was trading], because they had legal opinions O.K.'ing late trading and market timing," according to James Nesfield, a former consultant at Canary. "Eddie Stern didn't go to the bathroom without Leonard knowing," says another. But Leonard says: "I had nothing to do with Canary." Still, Eddie wasn't shy about using the family fortune when it came to making deals with fund companies. An internal Banc of America Securities memo claims he dangled the prospect of financing opportunities with two of the family's ritziest hotels, along with other enticements, in exchange for trading in and out of their funds. BusinessWeek has learned from sources close to the mutual-fund investigation that Eddie was introduced to trading mutual funds in the mid-'90s by Robert Simpson, a brother-in-law who runs Simpson Capital Management Co., a small money-management firm. "Eddie was trading mostly his own money at the time and was hanging out with [Bob], who devised these market-timing algorithms and formulas," says a former co-worker of Eddie's. The Stern family also invested money with Simpson, according to former Hartz employees. Simpson's biggest deal was with PBHG Funds, managed by Pilgrim Baxter & Associates, which allowed him to do fast in-and-out trading of their mutual funds. When Eddie started Canary in 1998, he made his first mutual-fund trades through PBHG, using Simpson's connection. Soon after, there was a "big family rift," says a mutual-fund investigator, when the Sterns withdrew all their capital from Simpson and Eddie muscled Simpson out of PBHG. "Eddie said to the top brass at PBHG, 'I've got the $1 billion -- let me do all the trading,"' says the investigator. Simpson has not yet been named in the investigation. He did not return repeated phone calls. The Securities & Exchange Commission and Spitzer have filed a civil suit against Pilgrim Baxter and co-founders Gary Pilgrim and Harold Baxter alleging that they engaged in market timing, despite explicit restrictions in their fund prospectuses. For a time, at least, Eddie's market timing and late-trading strategy worked brilliantly. "During the bear market, mutual funds desperately needed new ways to make money," says Selva Roselli, a lawyer and hedge-fund expert. "For a hedge fund like Canary, [the strategy] was practically a no-lose proposition." In 1999, Canary showed an eye-popping 110% net gain, according to Spitzer's complaint. By 2002, Canary's assets had grown to $730 million and gained 15% that year, vs. a 23% drop in the Standard & Poor's 500-stock index.
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