The Shabby Side of the Street

The collapse of a 122-year-old brokerage firm opens a window
 on Wall Street's unseemly ways.

By Richard Behar
FORTUNE Magazine
March 3, 2003

Robert Rittereiser must have thought his nightmare was over when he rolled out of bed on the morning of Sept. 11, 2001. After years of fruitless negotiations, the CEO of Gruntal & Co., one of the country's oldest brokerages, was finally selling the troubled firm to Prudential. All summer Rittereiser had been seething at Zurich Financial Services, his reluctant partner in Gruntal, for dragging its feet on the deal. But the papers were finally drawn up Sept. 10 and ready for signatures. Ritt, as he is known to friends, would finally be out of a job that had worn him down during six years at Gruntal's helm.

When the second jet hit the World Trade Center, the impact blew out the windows of Ritt's corner office at One Liberty Plaza. When the towers collapsed, his car, parked in a garage 17 floors below, was crushed. So was the deal with Pru. It was a stroke of luck that Gruntal's new headquarters were still standing (albeit uninhabitable for months) and that its employees got out alive. But the century-old firm was as good as dead.

At its peak in the mid-1990s, Gruntal was the country's 14th-largest brokerage firm. It boasted 2,000 employees in 30 offices. Today ground zero for Gruntal is a pair of bankrupt shell companies with unlisted phone numbers, where Rittereiser ducks calls, even from an old friend. (Neither he nor his lawyers responded to inquiries from FORTUNE.) Last summer he unloaded Gruntal's best asset--a 600-broker force and its $15 billion of customer accounts--to Ryan Beck, a small New Jersey bond house. He dumped the rest of Gruntal, mainly liabilities, into the two shell companies, which filed for bankruptcy in October, leaving disgruntled creditors, employees, and investors to comb through the wreckage.

On the surface Gruntal looks like another casualty of Sept. 11 and the postbubble carnage on Wall Street. And to be sure, the collapse features the usual parade of victims, including the 73-year-old widow and the 89-year-old blind man who say they were mishandled by their brokers, even a quadriplegic with minimal brain function who lost her savings in a tech-heavy mutual fund. But the firm's demise tells another story--one as surprising as it is obvious. It's a tale that makes one look at the dismal state of Wall Street today and say, "No wonder!" Indeed, long before the Merrills and First Bostons grabbed headlines for tainted research and inside dealing, there was a substantial segment of the investment-banking and brokerage business that thrived near the gutters of Wall Street, skittering from crisis to crisis, barely raising eyebrows along the way. "For every Morgan Stanley," says Charles Geisst, a historian of the Street, "there's half a dozen firms nobody heard of that have been around for more than ten years and have more regulatory problems than Morgan has recorded in the last 20 years."

Despite its once-venerable name, Gruntal offers a window into that seamy realm. As interviews with former executives and board members and a review of thousands of pages of court documents make clear, Rittereiser's seven-year reign was only the final chapter in a sordid tale of greed, mismanagement, and questionable dealings that stretches back to the firm's early years.

For most of its life Gruntal was indistinguishable from any number of sleepy, mid-sized brokerages that dabble in everything--retail, investment banking, trading--yet aren't great at anything. Its roots go back to a partnership formed in 1880, at a time when Wall Street men were known as merchant bankers. Each morning they would visit the city's small businesses to purchase IOUs, which they would stick under their hats while strolling uptown to large banks to sell them. The firm's namesake, Benedict Gruntal, joined the operation as a clerk at age 17. Although his net worth was only $5,000, he married the boss's daughter and received the wedding gift of a lifetime: a $40,000 seat on the New York Stock Exchange.

The firm's nepotistic roots flowered again under Howard Silverman, who ran Gruntal with an iron fist from 1974 to 1995. Until Silverman's ouster, his two sons operated a company that cleared all the trading for Gruntal on the floor of the NYSE, while a son of Edward Bao, Silverman's deputy, handled all the Amex floor business. Those sweetheart deals, which have not been reported until now, were legal, but they may have helped create an anything-goes climate at Gruntal that nearly led regulators to shut down the firm in 1995. Three top managers in the back office (known as the "cage") were found to have been siphoning money to personal accounts for a decade. Bao himself went to prison for diverting dividends from Gruntal's "dead" accounts--by law they were supposed to go to the state--to falsely boost the firm's net profits. All told, $14 million was embezzled.

It's no mystery why the malfeasance went undetected for so long: Gruntal, which had been bounced around in a dizzying number of deals over the years, long suffered from dysfunctional management. After briefly going public in 1983, the firm was bought by Home Insurance, once one of the country's premier insurance firms. But Home itself was in dire straits and was tossed (along with all its baggage, including Gruntal) into the hands of a succession of foreign insurance giants. As one tentacle of a convoluted 1995 deal between Home and Zurich, the latter wound up holding a preferred interest in Gruntal, and three of seven board seats. While all this paper shuffling was going on, none of Gruntal's owners seemed to be paying much attention--until the back-office scandal erupted. "Those of us in the insurance company didn't have a clue really what was going on there," says a Home insider. "Home was preoccupied with saving itself."

Enter Rittereiser. The son of a Massachusetts truck driver, Rittereiser, 64, had cut an illustrious figure on Wall Street. He worked his way through the ranks at Merrill, earning a reputation as "Mr. Fix-It" for turning around a troubled division and eventually becoming chief financial officer in 1984. When it became clear he wouldn't get the top spot, he took a job running E.F. Hutton, which had been tainted by a check-kiting scandal. But Ritt, apparently, never fixed anything at Hutton. Critics say he was indecisive, risk-averse, and embroiled in power struggles he couldn't resolve. The Hutton board grew so impatient that it went behind his back to sell the foundering brokerage to Shearson in 1987.

All this was a prelude to his performance at Gruntal. His assignment was to keep regulators from shutting down the firm, rebuild it, and look for possible buyers. In exchange, Zurich was granted the right to the first $225 million from a sale, leaving Ritt and his team to pocket 60% of anything left over. But his dreams of turning Gruntal into a mini-Merrill required capital infusions that Zurich was loath to provide--particularly when Gruntal couldn't turn a profit, even in a raging bull market. Astonishingly, the firm, which reported earnings of $50 million in 1995, the last year of Silverman's reign, lost money every year Rittereiser was in charge, including $50 million in 2001.

Ritt fought with Zurich executives in New York who were assigned to keep an eye on Gruntal. "It wasn't a good relationship from day one," recalls one insider who witnessed the screaming matches. "It was loud, intense, personalized. It was not a relationship created because two people wanted to be together."

Zurich wasn't Rittereiser's only problem. He also had to deodorize Gruntal. The firm was battling sexual and racial harassment cases, as well as allegations by a Westchester synagogue that it had lost $630,000 in high-risk derivatives. Gruntal was an oasis for people who "weren't presentable enough" to work for the big houses, recalls San Francisco broker Don Jans, one of the firm's top earners. "One of our biggest producers was bipolar," Jans says. "My old sales assistant is a punk rocker with tattoos and piercings. Who would hire this guy? But he was the best salesman I ever had. Gruntal was the Island of the Misfit Toys. But they didn't care what was going on in our sick, dysfunctional office as long as we were making money. We had no manager, and it's illegal not to supervise brokers. I remember doing cartwheels down the hall, drinking beer at my desk, smoking pot, having sex in the stairwell. Whatever!"

Instead of taming this circus, Ritt added his own high-wire act, flooding Gruntal with talent from major firms and handing out seven-figure contracts. When those big egos inevitably clashed, they left with golden parachutes or settlements--an estimated $30 million paid out to some 20 executives over the past three years. "These guys were bonusing themselves with millions of dollars and extending their own contracts while the firm was losing money," says Leo Abbe, who quit Gruntal as a managing director in early 2000 and is still waiting to collect a $2.3 million breach-of-contract judgment. "They were greedy."

One of the bigger payouts was the roughly $4 million given to Lee Fensterstock, lured from Paine Webber to be Gruntal's president, only to wind up fighting with Ritt for control of the firm. "Rittereiser made unkept promises after promises to people," says William McSherry Jr., a securities lawyer who has won a string of cases against Gruntal. "It was poor judgment hiring and negotiating long-term agreements only to breach them."

As the situation deteriorated, Ritt became more distant. John Starr, a former board member, says he often encouraged Rittereiser to visit the trading desk. "You want to see the whites of everybody's eyes, every day," Starr says. "He didn't do that." One reason for Rittereiser's aloofness: Starting in 1998, former executives say, he spent large amounts of time away from Gruntal, trying to contain a scandal at CUC International (later acquired by Cendant), where he had served as a director since 1982 and a member of its audit committee. CUC was caught inflating its earnings by $500 million, and two top executives were indicted.

Rittereiser wasn't accused of any criminal wrongdoing, but his preoccupation with the scandal opened the door to a power vacuum at Gruntal. Fensterstock was feuding with retail chief Hank Gottmann, whom Ritt had hired away from Lehman Brothers. Joe Battipaglia, Gruntal's chief economic strategist and a relentless bull on CNBC, was at war with the investment-banking side. And no one seemed to notice the irony of "Joe the Bull" pounding the table on TV for the sizzling stock market as his employer was losing money hand over fist.

Much of those losses stemmed from out-of-control spending. Ritt expanded heavily into investment banking--he bought Hampshire Securities for about $20 million--only to scale back. And insiders say he blew as much as $40 million on a return to One Liberty Plaza, where Merrill once had its main office, leasing twice as many floors as needed. The lavish offices had a bond-execution system that never worked and a superfluous management-information system. "Hell, they built it and never used it," says Starr, "because this was not a firm of 80,000 people."

Ritt put Gruntal up for sale in 1999, but a series of potential buyers--Aetna, PacLife, and Fleet, among others--decided to pass. Anyone looking beneath the surface would have seen the problems. On the retail side, Gruntal never outgrew its old ways. "Brokers would brag they were making a half-million dollars a year on $3 million in assets," says a former executive. "I'd look at them like, 'How is that humanly possible?' The culture at Gruntal was to push as much product as possible, whether the client makes money or not."

According to Gruntal's bankruptcy filing, the firm left behind roughly 90 customer and employee arbitrations, as well as claims seeking awards in excess of $150 million. Lawyers are also looking closely at the compensation Rittereiser and his team received from bonuses, severance, and forgivable loans. In 2001, Ritt and his top people granted themselves $6.4 million in loans, forgivable after five years of service or a change in control of the company. Curiously, according to court documents, they forgave about $3 million in loans in January 2002, although apparently neither condition had been met. They pocketed another $2 million in severance and bonuses last May, within weeks of closing the Ryan Beck deal. Altogether, bankruptcy papers show, Ritt received $2.3 million in compensation last year.

While that may not seem excessive by Wall Street standards, it's eye-popping in light of Gruntal's performance. The firm had nearly $200 million in cash and liquid assets at the end of 1995, when Ritt took over, yet it managed to bleed through every penny despite the best bull run in history. "It's hard to believe the firm could lose that much money in such a short time," says Robert Sablowsky, a managing director of Gruntal until 1996. "I don't know whether anyone will ever know how it happened."

While Gruntal's creditors fight over the remains, Rittereiser is keeping a low profile, commuting from his home on Butternut Drive in Franklin Lakes, a tony New Jersey suburb, to an office in Manhattan. He shades his eyes behind rose-tinted glasses, according to one attorney who has seen him at meetings. But not even Ritt's glasses can hide the dark stain that Gruntal leaves behind. "They lived on the shabby side of the Street," says Harvard Business School professor Samuel Hayes. "There have always been firms that creep in between the slats, and there always will be. Where there's easy entry and a buck to be made, firms with flexible ethical standards will be there to grab it."

That's not likely to change anytime soon. So say farewell to Gruntal--and hold on to your wallets.

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