A bear market is when the bull gets dragged through the mud by its tail.
A Lehman Brothers Broker Vanishes,
Leaving Questions, and Losses, Behind
By CHARLES GASPARINO and SUSANNE CRAIG
Staff Reporters of THE WALL STREET JOURNAL
On Jan. 12, Sarah Emamy found a chilling letter from her live-in boyfriend,
Frank Gruttadauria, a star stockbroker with Lehman Brothers Holdings Inc.
He hadn't come home the night before. "I am not the man you think," he wrote,
according to people familiar with the letter. "Remember Joe Black."
That much was true. Like the enigmatic character played by Brad Pitt in the
1998 movie "Meet Joe Black," Mr. Gruttadauria, the manager of Lehman's
Cleveland branch, wasn't at all who he appeared to be.
To clients and friends, he was a successful broker
and man-about-town. He handled the personal
accounts of developers and politicians and did
business with the Ohio treasurer's department,
often capitalizing on his contacts in Cleveland's
Italian-American community. He lived with Ms.
Emamy in a large Victorian home in the tony
Cleveland suburb of Gates Mills. He owned a
half-share of a private jet, according to Andrew
Rayburn, a wealthy Cleveland client who owned
the other half. And he belonged to exclusive clubs,
such as the Canterbury Golf Club in Shaker
Heights, another well-to-do suburb, where he
sometimes entertained clients.
Now, Mr. Gruttadauria, 44 years old, has vanished.
So have tens of millions of dollars from the accounts of more than two dozen
Lehman clients who trusted him with their life savings, people with knowledge
of the matter say. Federal authorities, Lehman and other brokerage firms are
investigating whether Mr. Gruttadauria stole $125 million or more from clients
over a 15-year period at a number of large Wall Street firms.
Mr. Gruttadauria is the target of a federal manhunt and the subject of separate investigations by the Federal Bureau
of Investigation, the Securities and Exchange Commission and other regulatory agencies. People familiar with the
investigation say the authorities think they are close to finding him and that he is in the U.S.
He was last seen on Jan. 11, when he showed up for work at Lehman's offices in a downtown Cleveland skyscraper.
Ms. Emamy, who didn't return phone calls seeking comment, reported his disappearance to the Gates Mills police
three days later, police records show.
For his part, Mr. Gruttadauria said in a letter he mailed to the FBI before he disappeared that he had improperly
traded client accounts since the late 1980s. "During the course of the past 15 years, I have caused
misappropriations through various methods," he wrote, according to people close to the FBI investigation. "It is a
complicated and substantial interwoven fabric of digression."
Initially, investigators thought the regretful tone of the letter indicated its author intended to kill himself. Recently,
however, his mother, Elvera Gruttadauria, 65, received a note from her son indicating he is still alive. "I don't know
how to live as a fugitive," that note said, according to a person familiar with it. "I'm really terrified, but please
remember me as a happy young boy."
It appears that Mr. Gruttadauria carried out an astonishingly simple ruse that enabled him to evade employers' rules
and hoodwink internal-compliance officials at a series of big Wall Street firms where he worked. The FBI is
investigating whether he siphoned money from client brokerage accounts into accounts he controlled, according to
people familiar with the probe. To cover his tracks, he allegedly diverted clients' actual account statements to
post-office boxes -- or to his personal accountant -- and then sent the clients bogus statements that inflated the
value of holdings he was actually draining.
Mr. Gruttadauria asserted in his letter to the FBI that he didn't take the money for personal gain. His actions "began
as an attempt to make up lost monies for customers and mushroomed over the course of time," he wrote. The broker
indicated in the note that he had had a crisis of conscience. "I am unwilling to continue, and I'm ashamed and sorry
for what I have done," he wrote.
While he generally didn't flaunt his wealth, according to those who knew him -- or thought they did -- Mr.
Gruttadauria didn't deprive himself, either. In addition to the jet, he was known to make use of a Manhattan
apartment and a ski chalet in Ellicottville, N.Y. He kept several cars at his suburban Cleveland home, including a
Mercedes.
In December, Mr. Gruttadauria obtained a $6 million credit line from National City Bank in Cleveland. He borrowed
more than $840,000 under the credit line, the bank says.
The Gruttadauria episode underscores a widespread concern on Wall Street that even the most prestigious
brokerage firms tend to hesitate before scrutinizing their big producers. Mr. Gruttadauria generated annual
commissions of nearly $6 million in 1999 -- compared with an industry average of about $485,500 -- and kept about
$3 million of that as his compensation, according to people with knowledge of the matter.
Mr. Gruttadauria himself suggested that his superiors didn't watch him closely enough. In his letter to the FBI, he
said: "The various firms' greed and lack of attention [to him] on a senior level contributed greatly" to his ability to
execute the alleged scam, according to people familiar with the letter. "I hardly believe that I could have done this
without detection for so long."
From to time to time, individual Wall Street traders are accused of bilking their employer's own accounts of large
sums. Just this week, Allied Irish Banks PLC said a rogue trader at its U.S. unit incurred losses of $750 million of
the bank's money through unauthorized transactions. But the Gruttadauria saga involves alleged pilfering of
individual client accounts.
Lehman spokesman William Ahearn says the firm has "been working with clients closely since we were alerted to
the situation, and continue to work with them and the authorities to get to the bottom of this matter." He declines to
discuss how the firm will settle with clients or how much money they may receive.
Mr. Gruttadauria's most recent previous employer, S.G. Cowen, a unit of French bank Societe Generale S.A. says in
a statement: "We have teams of experts looking at this very complex situation. We're working as hard as we can to
get to the bottom of this matter, but regrettably it's premature to comment further at this time." Some clients have
already filed suit against Mr. Gruttadauria, Lehman and S.G. Cowen in federal court in Cleveland, and more private
litigation is expected.
Meanwhile, some Lehman executives have been attempting to shift the blame to S.G. Cowen, where the broker
worked for more than a decade before joining Lehman in October 2000, after Lehman bought Cowen's brokerage
operations for about $60 million. "Ninety-nine percent of this occurred at Cowen," Edward M. Feigeles, Lehman's
head of private-client services, told Lehman's sales force at a meeting earlier this month, according to a person at the
meeting. Messrs. Fiegeles and Ahearn decline to comment.
Neal McGarity, an S.G. Cowen spokesman, says: "It would seem impossible for anyone to make a reasonable
determination about what happened in a situation of enormous complexity." He declines further comment.
All this has left many of Mr. Gruttardauria's clients embittered and confused. Until a couple of weeks ago, Golda
Stout, an 86-year-old grandmother in Elgin, Ill., near Chicago, says she believed her wealth had grown to nearly $2.5
million under Mr. Gruttardauria's care. That's what her account statements said. Now, Lehman has told her the
account is worth just $86,000.
'I Could Kill Him'
"I could kill him right this minute, but as I look back, he was always really, really nice to me," Ms. Stout says. Mr.
Gruttadauria kept in regular contact with her and sometimes took her to dinner at a country club near Chicago, she
says. He would escort her home, check her house for intruders and peck her on the cheek before leaving.
Mr. Gruttadauria had a diverse group of clients. Mr. Rayburn, the co-owner of the private jet, is a private-equity
investor in Cleveland and owner of two minor-league baseball teams: the Daytona Cubs in Florida and the
Hagerstown Suns in Maryland. He says he became a client in 1998, based largely on the impressive list of existing
customers Mr. Gruttadauria referred to. Mr. Rayburn won't comment on his estimated losses, but people familiar
with the situation say the amount could be tens of millions of dollars.
A second-generation Italian-American, Mr. Gruttadauria often tried to ingratiate himself with people who shared his
heritage. He liked to talk about the year he spent in Rome as a college student studying Italian, according to people
familiar with these contacts. The Visconsis, an Italian-American family that has developed shopping malls all over
Ohio, is believed to have lost $40 million from accounts managed by Mr. Gruttadauria, according to a person familiar
with the family's finances.
Raised in the Cleveland area, Mr. Gruttadauria was one of three children from a middle-class family. He "always
worked hard to get what he had," says Bill Mako, a childhood friend who was the best man at Mr. Gruttadauria's
wedding.
Family members are sticking by him. "This horrible incident in no way defines this man," says his mother, Elvera,
who sells real estate near Cleveland. "They don't match. He was a wonderful son."
Mr. Gruttadauria's parents divorced when he was in his late 20s. He remains close to his mother but doesn't see his
father very much, friends and relatives say. He delivered the Cleveland Plain Dealer as a boy and attended a private
high school, Gilmour Academy, in Gates Mills, graduating in 1976. He contributed to the $2,000 annual tuition by
working as a golf caddy at the exclusive Pepper Pike Country Club and another local course, according to relatives
and friends.
Mr. Gruttadauria has misrepresented aspects of his academic past. In a resume he submitted to the Ohio treasurer's
office in 1999, in an attempt to gain state business, he said he had graduated from Wittenberg University, a small
liberal-arts school in Springfield, Ohio, with a bachelor of science degree in business finance, magna cum laude. A
university official says Mr. Gruttadauria did receive a bachelor of arts degree in business administration but didn't
graduate with any honors.
On the same resume, Mr. Gruttadauria also claimed to have graduated summa cum laude with a master's degree in
business administration from the prestigious Kellogg School of Management at Northwestern University near
Chicago. He misspelled the school's name, and an official at Kellogg says he didn't receive a degree there. It couldn't
be determined whether the broker had ever enrolled at Kellogg.
During the 1980s, he worked for a number of brokerage firms, including Dean Witter Reynolds, now a part of
Morgan Stanley & Co. Like many brokers, he jumped from firm to firm, including Camelot Securities and later,
Hambrecht & Quist, before settling at the predecessor of S.G. Cowen in the late 1980s, according documents filed
with the National Association of Securities Dealers.
That's when he met Robert Fazio, a member of a prominent Cleveland family that had built a small fortune in the
grocery business. Mr. Gruttadauria had been handling investments for Mr. Fazio's father, and over the years, the
younger men grew close. They dined in Cleveland's Little Italy and traveled together to New York and other places.
"It was not like I trusted my money to some stranger on the corner," Mr. Fazio says.
He credits Mr. Gruttadauria with helping him build what he thought was a nest egg of nearly $3.5 million, according
to a suit filed by the Fazio family against the missing broker, Lehman and S.G. Cowen last month in U.S. district
court in Cleveland. Mr. Fazio's 85-year-old father, Carl, a Gruttadauria client for more than a decade, talked to the
broker as often as two or three times a day, according to the suit. Carl Fazio thought he had nearly $10 million
invested with Mr. Gruttadauria, the suit says.
"My dad thought of Frank as a son," Bob Fazio says, and Mr. Gruttadauria used to tell Bob he thought of his father
"like a Dad." The elder Fazio wasn't available for comment.
Bob Fazio says the last time he saw his broker friend was at a Christmas party in mid-December at Mr. Gruttadauria's
home in Gates Mills. Mr. Gruttaduaria hired a private chef to serve veal chops and wine to a group of 15 friends and
clients, according to attendees.
On Jan. 9, just days before Mr. Gruttadauria disappeared, Bob Fazio was looking for his year-end account statement,
which hadn't arrived. He called Mr. Gruttadauria. "No problem," he recalls the broker saying. "It should arrive in a
couple of days." But it didn't.
Mr. Fazio called again on Jan. 16, but this time Michelle Yannerella, the broker's assistant, told him Mr. Gruttadauria
had left town for a ski trip, he recalls. When Mr. Fazio called back a few days later with the account information she
requested in order to access his account, he was given a different story. Ms. Yannerella couldn't be reached for
comment.
When he called back a few days later, Mr. Fazio was given a different story: "Frank is missing," said an employee
fielding calls from concerned investors. Later, Michael Smith, head of Lehman's Chicago brokerage operations, flew
into Cleveland to deal with the situation. He had bad news. "You have about $4,200 in your account," Mr. Fazio
recalls being told by Mr. Smith last month. His father had a similar amount. Mr. Smith didn't return calls seeking
comment.
In their suit, the Fazios are seeking more than $25 million they allege is missing from various accounts. The
defendants haven't yet responded in court. Mr. Ahearn says Lehman is working with the Fazios in an effort to settle
the dispute. S.G. Cowen declines to comment on the suit.
Mr. Gruttadauria allegedly swindled members of his own family as well. His aunt, Virginia LaPlaca of Gates Mills,
says she invested with him. "I'd rather not say how much money I am missing, but it's a lot," she says. "I am
shocked."
Ms. Stout, the Elgin, Ill., grandmother, says she met Mr. Gruttadauria 15 years ago through her sister, who owned a
funeral home outside of Chicago. Mr. Gruttadauria often confided in Ms. Stout about family problems, such as when
he said his mother had died, or another time, when he said his wife had a heart condition and his son had cancer.
As Ms. Stout recently discovered, Mr. Gruttadauria's mother is still alive. Gruttadauria family friends say his wife,
Margo, from whom he is separated, and their three children are all healthy. Margo Gruttadauria couldn't be reached
for comment.
Mr. Gruttadauria first began acting strangely in connection with Ms. Stout's account in early January, according to
her son, Ronald, 59. She wanted to check her account online, but the broker told her Lehman didn't offer online
access, the son says. Mr. Stout says he then spoke to another Lehman employee, who told him the firm does offer
online trading, with the broker's approval. Confronted with this information, the broker said he wouldn't let Ms.
Stout have online access, Mr. Stout says.
If she had opened an online account, Ms. Stout would have seen her actual holdings -- about $86,000, mostly in
money-market funds and some illiquid penny stocks -- rather than the $2.5 million the broker had told her she had.
Where did her actual Lehman account statements end up? They were mailed to Mr. Gruttadauria's accountant,
Joseph DeGrandis of Cleveland, according to copies of the actual account statements reviewed by The Wall Street
Journal. Ralph Cascarilla, an attorney for Mr. DeGrandis, says his client received the statements and placed them in
a file in preparation for potentially handling Ms. Stout's tax work in the future. Mr. Gruttadauria, the lawyer says,
told Mr. DeGrandis that he was trying to persuade Ms. Stout to use the accountant for her tax work.
Other Gruttadauria clients' account statements were sent to Mr. DeGrandis, as well, the accountant's lawyer says.
But Mr. DeGrandis knew nothing of any alleged scam, and received many tax documents and other financial
paperwork concerning Gruttadauria clients because he was doing tax work for these people, the attorney says. The
lawyer asserts that Mr. DeGrandis himself is a victim because his family lost "in excess of $1 million" invested with Mr. Gruttadauria.
Investigators are looking at an account at Lehman that allegedly was controlled by Mr. Gruttadauria and listed under the name DH Strategic Partners Inc., according to people familiar with the probe. The investigators are trying to find out whether Mr. Gruttadauria used the account to funnel securities and cash taken from clients, these people say. DH Strategic is registered with the state of Ohio as a for-profit corporation, and the accountant, Mr. DeGrandis, is the entity's "registered agent," official documents show. Mr. DeGrandis's lawyer, Mr. Cascarilla, says his client knew nothing about any trading in this account, but he did some tax work for DH Strategic. The attorney says DH Strategic is "an investment vehicle" for Mr. Gruttadauria.
P.O. Box
While fake statements were sent out to at least some of Mr. Gruttadauria's clients, some of the real statements were sent to a post-office box in his hometown of Gates Mills, according to people familiar with the federal investigation. The box was listed under JYM Accounting, according to these people. This purported firm is not a registered business in Ohio and apparently has no corporate officers.
Mr. Gruttadauria printed account statements he sent to clients on official-looking Lehman and S.G. Cowen
letterhead. Several allegedly bogus statements reviewed by the Journal show that he often listed stocks with
accurate share prices.
Investigators theorize that Mr. Gruttadauria forged account-transfer documents, allowing him to siphon money out
of client accounts and into accounts he controlled at National City Bank, Lehman and other financial institutions.
For example, Ms. Stout, after reviewing copies of her statements recently, learned that in early October of last year, Mr. Gruttadauria transferred $25,000 out of her brokerage account and into the account of another client, Maria Grivas, according to Ms. Stout's son, Ronald.
When Ronald Stout recently asked some Lehman lawyers about the transfer, he says they responded that his
mother "must have signed some documents giving [the broker] authorization," but that they couldn't find the
document, he says. The Lehman spokesman says the lawyer told Ms. Stout that an authorization for the transfer
may have been forged. Ms. Grivas couldn't be reached for comment.
A Lehman official confirms Ms. Grivas is a client of the firm and received the $25,000 in question. Beyond that,
Lehman declines to comment.
Some of Mr. Gruttadauria's behavior in the office should have set off alarm bells. The broker often used his personal laptop at work, despite a company rule barring brokers from using personal computers on company property, other Lehman employees say. The policy is designed to prevent fraud and misuse of client information. The broker's computer is a key piece of evidence in the government's investigation, people familiar with the investigation say.
Write to Charles Gasparino at charles.gasparino@wsj.com1 and Susanne Craig at susanne.craig@wsj.com2 |
