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Investment Dealers Digest

"I needed a good strong trader. Lewie was not just a trader, though: He had the mentality and the will to create a market. He was tough-minded. He didn't mind hiding a million-dollar loss from a manager, if that's what it took. He didn't let morality get in the way. Well, morality is not the right word, but you know what I mean. I have never seen anyone, educated or uneducated, with a quicker mind. And best of all, he was a dreamer."

- Robert Dall, former partner at Salomon Brothers, as quoted in Liar's Poker

In 2004, American Financial Realty Trust, a Jenkintown. Pa.-based REIT, made a rather surprising real estate commitment, taking out a 3,500-square-foot lease on the 18th floor of 399 Park Avenue, one of New York's more prestigious office addresses.

Why was AFR, which is in the business of buying bank branch buildings and leasing them back to the banks, opening a pricey New York office?

"The clients are facilities departments at banks; none of these groups are located in New York City. The assets are in second and third-tier markets. The company owns nothing in New York City," wrote John Guinee, an analyst at Stifel Nicolaus, in a report entitled "Recommendations to the Board; Cut, Cut, Cut."

Published on May 19 of this year, Guinee's recommendations took on a certain urgency considering that AFR's total return from the time of its 2003 IPO had been just 1%, compared with 94% for the Morgan Stanley REIT index during the same period.

So, where was the board and why was it sanctioning these expenditures? According to one visitor, the answer might have been found in the very same suite at 399 Park. One office there had been claimed by the board's chairman, Lewis Ranieri, whose status as a Wall Street legend had been critical to AFR's success in raising money for its IPO.

Ranieri is best known as the man who made his way from the mail room at Salomon Brothers to the firm's storied trading floor, where he was instrumental in developing the mortgage-backed securities market in the late 1970s and early 1980s. Today, the securities no one wanted to buy are a seemingly unstoppable multi-trillion-dollar market.

But Ranieri, 59, left Salomon in 1987 and now sits on the boards of a number of companies, both public and private. Three of the public companies he serves find themselves the target of intense criticism by investors, analysts, investment bankers and governance experts lately, and many of these people point the finger at Ranieri, saying he has failed in his duties as a corporate overseer.

"When I look at these things, I apply what I call the Hansel and Gretel principle. In other words, follow the bread crumbs," says Barry Vinocur, CEO, founder and editor of REIT Zone Publications, a news service to the REIT industry. "There are just too many instances of fiduciarily challenged decisions at REITs Ranieri is involved with."

Are they right? Judging from the little-publicized travails of two REITs, AFR and Reckson Associates, and the widely known issues facing Computer Associates, Ranieri, who declined to be interviewed for this story, does have some explaining to do.

All in the Family at Reckson Associates

Reckson Associates, Long Island's largest commercial landlord, is an office REIT that grew out of the portfolio of the Rechler family. Ranieri - a Long Island resident -has held a seat on Reckson's board since 1997, during which time the company has made several questionable moves, one of the most contentious being a 2003 reorganization. That effort saw three Rechler family members resign from the company's board and take with them a portfolio of industrial assets that they bought for $315 million.

Jim Sullivan, analyst at Green Street Advisors, says Reckson sold those properties for about $50 million to $60 million less than they were worth. Indeed, the deal drew at least nine shareholder lawsuits for breach of fiduciary duty. Ranieri, as one of a six-member majority of board members who reviewed and approved the deal, was named as one of the defendants.

Scott Rechler, Reckson's CEO, counters by pointing out that the stock performed exceptionally well following the sale.

"[That's] because investors were so happy to get rid of the Rechlers and their inflated compensation that they were willing to overlook the bad deal they got on the portfolio sale," says one real-estate investment banker.

But investors felt considerably less happy after Reckson struck a deal earlier this year to be split up and sold. The proposed sale has been widely criticized because it allows an investor group led by Scott Rechler to walk away with all the company's Long Island assets for what many believe is a below-market price. Also involved in the sale is SL Green, a New York office REIT, which will get Reckson's Manhattan office assets as part of the deal.

Green Street's Sullivan believes Reckson could have gotten about $100 million more for the Long Island properties, chiefly because Reckson placed no value on a $1.6 billion redevelopment project of the Nassau Coliseum and the surrounding 77 acres.

Rechler says the project cannot be assigned a specific value because it has not yet received any zoning or legislative approvals and could be rejected. "It's like buying a $1 lottery ticket and saying it's worth millions before you've had the drawing."

Sullivan takes an opposing view. "Nassau Coliseum is a very hard-to-value asset: It's big, long-lived and complex. But when Scott was CEO, he loudly trumpeted the value opportunity it represented, while now, as a buyer, he has highlighted the uncertainty, the complexity, the difficulty... We trust what he said as a CEO."

Indeed, Jason Barnett, Reckson's general counsel, was quoted in Newsday Aug. 25 saying the company is "uniquely positioned" to resolve the expected opposition to the company's Coliseum proposal.

Another aspect of the Reckson sale that has drawn considerable criticism is management's plan to take a change-of-control fee. "Ironically, a portion of these payments will be used to buy back Reckson assets at a discounted price," Sullivan wrote in an Aug. 14 report.

REIT Zone Publications' Vinocur believes Reckson's board should have required management to follow the example of Lexington Corporate Properties Trust management, which is waiving its change-of-control rights in its planned merger with Newkirk Realty Trust. "A change-of-control payment should only exist when the platform goes away and I have no job," he says.

In addition to casting his assent on a second red-flag-laden deal by Reckson (Rechler says the Reckson sale received unanimous approval from Reckson's board), Ranieri appears to be uniquely positioned as a Long Island power broker. In an interesting coincidence, Reckson's partner on the proposed Coliseum development is Charles Wang, founder of Computer Associates, where Ranieri is chairman of the board. Hmmm...

AFR: Lightning Strikes Twice (Almost)

Management buyouts are quite unusual, and with good reason, says Nell Minow, editor and co-founder of The Corporate Library, a corporate governance watchdog. "If management is going to be involved in the purchase of a company, they need to pack up and leave and bid from the outside like everybody else. You can't be on both sides of the transaction. There is no way to make that work."

And yet, Lew Ranieri almost presided over two such deals at once. At about the same time Reckson was working out the sale of its Long Island assets to Rechler's group, AFR was also being shopped to buyers willing to invest alongside existing management.

Starwood Capital, a real estate private equity fund, and Morgan Stanley considered acquiring the company in a deal led by Starwood, according to REIT Zone Publications, but they ultimately walked away, according to an Aug. 10 report from Stifel Nicholas analyst Guinee. One real estate banker not involved in the discussions says Starwood's and Morgan Stanley's decision may be a signal that something was seriously wrong with the company, such as accounting issues or the outlook for the business. Calls to those firms were not returned, but Guinee wrote that the talks fell apart "as a result of due diligence, control and leadership issues," adding, "our opinion is that leadership issues usually translate to price."

This time, Ranieri was not merely a member of the board, but its chairman, and according to the report by Guinee, AFR and its adviser, Greenhill, initially said they were interested only in talking with buyers willing to work with Nicholas Schorsch, AFR's CEO at the time. (AFR announced Schorsch's resignation on Aug. 17, a week after Guinee's report.)

Richard Lieb, managing director at Greenhill, referred calls to AFR general counsel Ed Matey, who disputes Guinee's assertion that bidders were only allowed to bid with Schorsch. "All bidders were instructed by Greenhill that they could bid either with or without Nick and the management team," Matey says. A call to Schorsch's New York residence was not returned.

Matey says the company is still for sale through Greenhill, but declines to say how the sales effort is progressing. He also declines to discuss the reason for Schorsch's resignation.

Reformer, Reform Thyself

One of Ranieri's real estate industry critics concedes he is unfamiliar with Ranieri's work at Computer Associates. "Obviously they've had some governance issues, but for all I know, he's the White Knight who's come to the rescue," he says. According to a Computer Associates spokesman, Ranieri is just that. "Nearly all of the problems occurred before he joined the board. He is the White Knight. You can write that: He's the White Knight."

Ranieri joined Computer Associates in June 2001, just as Texas financier Sam Wyly, a major shareholder at the time, accused the company of mismanagement and launched a proxy battle. Controversy had already been swirling around the company following a report in The New York Times on April 29 of that year, and if one is to be judged by the company he keeps, then a look at Ranieri's CA cohorts raises additional questions.

In Spring 2002, about a year after he joined the board, Ranieri became lead independent director of CA. Two years later, he stepped into the chairman's role, vowing to clean up the company.

He told Newsday in 2002 that he joined at the invitation of two longtime friends - former US Senator Alfonse D'Amato and former NYSE chairman Richard Grasso (neither of whom is a stranger to scandal). Grasso was elected to CA's board on Jan. 19, 1994, a day before Sanjay Kumar, a 31-year-old Sri Lankan native who would become CEO six years later. In April of this year, Kumar pled guilty to a $2.2 billion accounting fraud, and Grasso has become a poster boy for excessive compensation. Much was made in the press of the fact that Grasso sat on the compensation committee in 1998 when Kumar, Wang and CA co-founder Russell Artzt shared a $1.1 billion stock bonus just months before the company warned of a drop-off in business that sent its share price tumbling.

The Corporate Library's Minow is not impressed with Ranieri's cleanup work so far. "I've heard it said about several of their new directors that they are fixing things, but all their promised improvements have been less than we'd hoped for," she says. The Corporate Library currently gives CA a "D" for corporate governance, and Glass Lewis, a consulting firm that advises companies on governance matters, recommended that shareholders vote to get rid of Ranieri as well as several other board members, including D'Amato, at their annual shareholder meeting last month. The entire board was re-elected.

CA spokesmen point to the re-election as proof that Ranieri is doing a good job for shareholders, but Minow disagrees. "It's very, very expensive to throw out a board member," she says. "The board gets to use the company's money to fight you, and securities laws make it very difficult for shareholders to communicate with each other."

The Devil's in the Details

Ranieri has plenty of defenders - even John Gutfreund, the former Salomon Brothers CEO who abruptly fired him in 1987. "I've known Lewie for 40 years, and he has always operated to the best of my knowledge within the law," Gutfreund says. "I suspect it's a witch hunt of the kind that often attaches itself to successful, wealthy, prominent people."

Sources say the rich portrait of Ranieri in Liar's Poker offers a few clues about what may have gotten him into his current mess. The book at one point describes Ranieri as "a great big picture guy" but "not a details guy."

This may be the answer, speculates one former business associate. "I've never seen him really dig into the kind of minutiae that can sometimes tell you a lot about what's really going on with a company. I'm not saying he can't do it, but I've never seen him do it."

The real estate investment banker quoted earlier argues that boards have plenty of access to attorneys, accountants and the like, who are detail-oriented.

"I don't know Ranieri, so I can only speculate," the investment banker says, "but my guess is he's very friendly with management in many cases, and he may just look the other way in the face of some of these abuses. I'm sure he has a very good idea of what the law is, and as long as he stays on the right side of it, he's okay. Some people in the boardroom are digging into every little nook and cranny. They are very concerned about standing up for the little guy who's not in the room. And some people - well, some people just aren't."

(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.

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